================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 25, 1999
NAI TECHNOLOGIES, INC.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 0-3704 11-1798773
- ---------------------------- ------------------------- -------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or Identification No.)
organization)
282 NEW YORK AVENUE
HUNTINGTON, NEW YORK 11743
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 271-5685
------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS
On January 25, 1999 the Securities and Exchange Commission declared
effective DRS Technologies, Inc.'s Registration Statement on Form S-4 with
respect to the issuance, upon effectiveness of the merger of DRS Merger Sub,
Inc., a direct wholly-owned subsidiary of DRS Technologies, Inc., with and into
NAI Technologies, Inc. (the "Company" or "NAI"), with NAI being the surviving
corporation and continuing as a direct wholly-owned subsidiary of DRS, of shares
of DRS common stock, par value $0.01 per share, in exchange for shares of NAI
common stock, par value $0.10 per share, outstanding at the effective time of
the merger, including those shares of NAI common stock issuable upon conversion
of at least 90% of the aggregate principal amount of NAI 12% Convertible
Subordinated Promissory Notes due 2001 outstanding as of August 26, 1998.
Reference is made to Amendment No. 2 to Registration Statement on Form S-4
of DRS Technologies, Inc. which is attached hereto as Exhibit 1, which is
incorporated herein by reference for all its terms and conditions.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NAI TECHNOLOGIES, INC.
By: /s/ RICHARD A. SCHNEIDER
------------------------
Richard A. Schneider
Title: Executive Vice President
and Chief Financial Officer
Date: January 29, 1999
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99.1 Amendment No. 2 to Registration Statement on Form S-4 of DRS
Technologies, Inc., effective as of January 25, 1999.
As filed with the Securities and Exchange Commission on January 25, 1999
Registration No. 333-69751
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
DRS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------
DELAWARE 3812 132632319
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
----------
5 SYLVAN WAY NINA LASERSON DUNN, ESQ.
PARSIPPANY, NEW JERSEY 07054 EXECUTIVE VICE PRESIDENT, GENERAL
(973) 898-1500 COUNSEL AND SECRETARY
DRS TECHNOLOGIES, INC.
5 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(973) 898-1500
(Address, Including Zip Code, and (Name, Address, Including Zip Code,
Telephone Number, Including Area Code, of and Telephone Number, Including
Registrant's Principal Executive Offices) Area Code, of Agent For Service)
----------
Copies of all Communications to:
VIJAY S. TATA, ESQ. DAVID F. KROENLEIN, ESQ.
ARNOLD & PORTER WHITMAN BREED ABBOTT & MORGAN LLP
399 PARK AVENUE 200 PARK AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10166
(212) 715-1000 (212) 351-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and the effective time of the merger (the "Merger") of DRS Merger Sub,
Inc., a direct wholly-owned subsidiary of the Registrant ("Merger Sub"), with
and into NAI Technologies, Inc. ("NAI"), as described in the Agreement and Plan
of Merger, dated as of August 26, 1998, among the Registrant, Merger Sub and
NAI, attached as Annex A-I to the Joint Proxy Statement/Prospectus forming a
part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
[LOGO] DRS [LOGO] NAI
TECHNOLOGIES TECHNOLOGIES, INC.
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of DRS Technologies, Inc., and NAI Technologies,
Inc. have agreed to a strategic merger in which NAI will become a wholly-owned
subsidiary of DRS.
If the merger is completed, DRS will pay NAI shareholders 0.25 of a share
of DRS common stock for each share of NAI common stock. This exchange ratio is
subject to a possible adjustment depending on the price of DRS common stock
prior to the merger. DRS common stock is quoted on the AMEX under the symbol
"DRS."
DRS will also assume the NAI warrants to purchase common stock at an
exercise price of $2.50 per share. This means that DRS will take on NAI's
obligations under these warrants. If you hold these warrants and the exchange
ratio is fixed at 0.25, you will have the right to receive 0.25 of a share of
DRS common stock for each share of NAI common stock that you have the right to
receive under your NAI warrant for an exercise price of $10.00 per share.
We believe that the combined company will have greater financial strength,
operational efficiencies, earning power and business growth potential than
either company would have on its own. Thus, we unanimously urge you to vote.
We cannot complete the merger without the approval of shareholders and
stockholders of both corporations. We have scheduled special meetings for our
shareholders and stockholders to vote on the merger. YOUR VOTE IN FAVOR OF THE
MERGER IS VERY IMPORTANT.
Paste-up Signature
Mark S. Newman
Chairman, President and Chief Executive Officer
DRS Technologies, Inc.
Whether or not you plan to attend a meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. This will not prevent
you from voting in person, but will assure that your vote is counted if you are
unable to attend the meeting.
The dates, times and places of meetings are as follows:
FOR DRS STOCKHOLDERS:
February 11, 1999
Thursday, 9:00 a.m.
399 Park Avenue
New York, New York 10022
FOR NAI SHAREHOLDERS:
February 11, 1999
Thursday, 9:00 a.m.
200 Park Avenue
New York, New York 10166
This document provides you with detailed information about the proposed
merger. We encourage you to read the entire document and consider carefully the
section entitled "Risk Factors." For additional information about DRS and NAI on
file with the Securities and Exchange Commission, please see "Where You Can Find
More Information."
Paste-up Signature
Robert A. Carlson
Chairman and Chief Executive Officer
NAI Technologies, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR STATE SECURITIES
REGULATORS HAVE APPROVED THE DRS COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus, dated January 25, 1999, was first
mailed to stockholders on or about January 25, 1999.
<PAGE>
DRS TECHNOLOGIES, INC.
5 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 11, 1999
To the Stockholders of
DRS TECHNOLOGIES, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of DRS
Technologies, Inc., a Delaware corporation, will be held on Thursday, February
11, 1999, at the offices of Arnold & Porter, 399 Park Avenue, 34th Floor, New
York, New York 10022, commencing at 9:00 a.m., local time, for the following
purposes:
(1) To consider and vote upon a proposal to approve and authorize the
transactions contemplated by the Agreement and Plan of Merger, dated as of
August 26, 1998, among DRS, DRS Merger Sub, Inc., a New York corporation and a
direct wholly-owned subsidiary of DRS, and NAI Technologies, Inc., a New York
corporation, including, without limitation:
(a) the merger of DRS Merger Sub, Inc. with and into NAI, with NAI
being the surviving corporation and continuing as a direct wholly-owned
subsidiary of DRS;
(b) the issuance, upon effectiveness of the merger, of shares of DRS
common stock, par value $0.01 per share, in exchange for shares of NAI
common stock, par value $0.10 per share, outstanding at the effective time
of the merger, including those shares of NAI common stock issuable upon
conversion of at least 90% of the aggregate principal amount of NAI 12%
Convertible Subordinated Promissory Notes Due 2001 outstanding as of August
26, 1998;
(c) the assumption by DRS of NAI warrants to purchase common stock at
an exercise price of $2.50 per share outstanding at the effective time of
the merger and the conversion of such NAI warrants into DRS warrants to
purchase common stock;
(d) the conversion into rights with respect to DRS common stock of (i)
up to 10% of the aggregate principal amount of NAI convertible notes
outstanding as of August 26, 1998 and (ii) NAI employee and director stock
options to purchase NAI common stock outstanding, whether vested or
unvested, at the effective time of the merger;
(e) the election of C. Shelton James, who is a director of NAI, as a
director of DRS for a three-year term;
(2) To amend DRS' 1996 Omnibus Plan to increase the number of shares of DRS
common stock reserved for issuance under DRS' plan by 900,000 shares of DRS
common stock; and
(3) To transact such other business as may properly come before this
meeting or any adjournment or postponement thereof.
A copy of the merger agreement is attached as Annex A-I and a copy of each
of the amendments to the merger agreement is attached as Annexes A-II and A-III
to the accompanying joint proxy statement/prospectus.
Only stockholders of record at the close of business on December 31, 1998
are entitled to notice of and to vote at this meeting or at any adjournment or
postponement thereof.
All stockholders are cordially invited to attend in person. However, to
ensure your representation at the meeting, you are urged to complete, sign and
return the enclosed proxy card as promptly as possible in the enclosed
postage-prepaid envelope.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE
ABOVE-MENTIONED PROPOSALS. THESE PROPOSALS AND OTHER INFORMATION RELATING TO
THIS MEETING ARE DESCRIBED IN DETAIL IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS.
<PAGE>
By Order of the Board of Directors
DRS Technologies, Inc.
/s/ NINA LASERSON DUNN
-----------------------------------
NINA LASERSON DUNN
Secretary
Parsippany, New Jersey
January 25, 1999
================================================================================
YOUR VOTE IS IMPORTANT
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE, EVEN IF YOU ARE CURRENTLY PLANNING
TO ATTEND THIS MEETING. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON, BUT
WILL ASSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND THIS MEETING.
================================================================================
<PAGE>
NAI TECHNOLOGIES, INC.
282 NEW YORK AVENUE
HUNTINGTON, NY 11473
----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 11, 1999 AT 9:00 A.M.
To the Shareholders of
NAI Technologies, Inc.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of NAI
Technologies, Inc., a New York corporation, will be held on Thursday, February
11, 1999, at 9:00 a.m., local time, at the offices of Whitman Breed Abbott &
Morgan LLP, 200 Park Avenue, 28th Floor, New York, New York 10166, for the
following purposes:
(1) To consider and vote upon a proposal to approve the transactions
contemplated by the Agreement and Plan of Merger, dated as of August 26, 1998,
among NAI, DRS Technologies, Inc., a Delaware corporation, and DRS Merger Sub,
Inc., a New York corporation and a direct wholly-owned subsidiary of DRS,
including, without limitation:
(a) the merger of DRS Merger Sub, Inc. with and into NAI, with NAI being
the surviving corporation and continuing as a direct wholly-owned
subsidiary of DRS;
(b) the sale of all issued and outstanding shares of the capital stock of
Wilcom, Inc., a New York corporation and wholly-owned subsidiary of
NAI, to Wilcom Acquisition Corp., a Delaware corporation in which
Charles S. Holmes, a current director of NAI, owns a majority of
capital stock and Dennis McCarthy, another current director of NAI,
owns the remaining outstanding shares of capital stock; and
(2) To transact such other business as may be properly brought before this
meeting or any adjournment or postponement thereof.
Upon the merger becoming effective, each share of NAI common stock, par
value $0.10 per share, will be converted into the right to receive, and become
exchangeable for, 0.25 of a share of DRS common stock, par value $0.01 per
share, or 0.23 of a share of DRS common stock under certain circumstances as set
forth in the merger agreement and as described in the accompanying joint proxy
statement/prospectus.
Only holders of record of NAI common stock at the close of business on
December 31, 1998 are entitled to notice of and to vote at this meeting. The
affirmative vote of the holders of two-thirds of NAI common stock then
outstanding is required to approve the merger. Holders of approximately 13.4% of
the outstanding shares of NAI common stock have agreed to vote their shares in
favor of the merger. A complete list of shareholders entitled to vote will be
available at the offices of Whitman Breed Abbott & Morgan LLP, 200 Park Avenue,
New York, New York 10166, Attention: David F. Kroenlein, Esq., for ten days
prior to this meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THIS NAI MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ASSURE REPRESENTATION OF YOUR SHARES AT THIS NAI MEETING. NO POSTAGE
NEED BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES. THE GIVING OF SUCH
PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON. YOU MAY REVOKE YOUR PROXY AT
ANY TIME BEFORE IT IS VOTED. PROPERLY EXECUTED PROXIES WILL BE VOTED IN THE
MANNER DIRECTED BY THE SHAREHOLDER. IF NO SUCH DIRECTION IS MADE, THE PROXY WILL
BE VOTED "FOR" THE MERGER.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ RICHARD A. SCHNEIDER
---------------------------------
Richard A. Schneider
Secretary
Dated: January 25, 1999
<PAGE>
NAI TECHNOLOGIES, INC.
282 NEW YORK AVENUE
HUNTINGTON, NY 11473
----------
NOTICE TO WARRANTHOLDERS
To the Warrantholders of
NAI Technologies, Inc.
NOTICE IS HEREBY GIVEN that in connection with the transactions
contemplated by the Agreement and Plan of Merger, dated as of August 26, 1998,
among DRS Technologies, Inc., a Delaware corporation, DRS Merger Sub, Inc., a
New York corporation and a direct wholly-owned subsidiary of DRS, and NAI
Technologies, Inc., a New York corporation, each NAI warrant to purchase common
stock at an exercise price of $2.50 per share outstanding and unexercised as of
the effective time of the merger will be assumed by DRS and, in accordance with
Section 5(a) of each NAI warrant, deemed to be immediately converted into and
constitute a warrant issued by DRS fully and to the same extent as if such DRS
warrant had been initially executed and delivered by DRS.
Section 5(a) of each NAI warrant provides, in relevant part, that if NAI is
merged into or with another corporation, then, as a condition of such merger,
lawful and adequate provision shall be made whereby the holder of each NAI
warrant thereafter shall have the right to receive upon the exercise thereof in
lieu of the shares of NAI common stock, par value $0.10 per share, immediately
theretofore issuable upon the exercise of such NAI warrant, such shares of DRS
common stock, par value $0.01 per share, as may be issued in exchange for a
number of outstanding shares of NAI common stock equal to the number of shares
of NAI common stock immediately theretofore issuable upon the exercise of such
NAI warrant had such merger not taken place. Section 5(a) of each NAI warrant
also provides, in relevant part, that the terms of such NAI warrant shall be
applicable to the shares of DRS common stock upon the exercise of such DRS
warrant after the consummation of the merger.
Accordingly, pursuant to Section 3.1(f) of the merger agreement, each DRS
warrant shall constitute rights with respect to DRS common stock on
substantially the same terms and conditions as contained in such NAI warrant,
such that:
(1) each DRS warrant may be exercised solely for shares of DRS common
stock;
(2) the number of shares of DRS common stock subject to such DRS warrant
shall be equal to the product of 0.25 of a share of DRS common stock (or 0.23 of
a share of DRS common stock under certain circumstances as set forth in the
merger agreement and as described in the accompanying joint proxy
statement/prospectus) and the number of shares of NAI common stock subject to
each former NAI warrant represented by such DRS warrant; and
(3) the per share exercise price of such DRS warrant shall be equal to the
aggregate exercise price for the shares of NAI common stock subject to such
former NAI warrant represented by such DRS warrant divided by the number of full
shares of DRS common stock, as provided above, purchasable pursuant to such DRS
warrant.
The number of shares of DRS common stock that may be purchased upon
exercise of each DRS warrant, however, shall not include any fractional shares
and, upon such exercise of such DRS warrant, a cash payment shall be made for
any fractional share based upon the per share average of the highest and lowest
sale prices of a share of DRS common stock as reported on the American Stock
Exchange, Inc. on the date of such exercise. Each DRS warrant and the underlying
DRS common stock with respect thereto shall be registered on the registration
statement on Form S-4 of which the accompanying joint proxy statement/prospectus
forms a part.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ RICHARD A. SCHNEIDER
------------------------------------
Richard A. Schneider
Secretary
Dated: January 25, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER ................................... 1
SUMMARY .................................................................. 3
The Companies ............................................................ 3
What You Will Receive in the Merger ...................................... 3
Other Interests in the Merger that NAI Officers and Directors May Have ... 3
The Merger ............................................................... 4
Other Information ........................................................ 5
Selected Financial Data .................................................. 6
Recent Events ............................................................ 12
Comparative Per Share Market Prices and Absence of Dividends ............. 13
RISK FACTORS ............................................................. 15
Risks Relating to the Merger ............................................. 15
DRS Company Risks ........................................................ 16
THE PROPOSED MERGER ...................................................... 21
Background of the Merger; Material Contacts Between the Parties .......... 21
DRS Reasons for the Merger; Recommendation of the DRS Board of Directors . 25
Opinion of DRS Financial Advisor ......................................... 26
NAI Reasons for the Merger; Recommendation of the NAI Board of Directors . 30
Opinion of NAI Financial Advisor ......................................... 34
Material U.S. Federal Income Tax Consequences ............................ 39
Fiscal Year .............................................................. 40
Accounting Treatment ..................................................... 41
U.S. Antitrust Filing .................................................... 41
Resales of DRS Common Stock, DRS Warrants and Amended NAI Convertible
Notes Received in the Merger ............................................ 41
Appraisal Rights ......................................................... 41
Operation of NAI Following the Merger .................................... 41
INTERESTS OF CERTAIN PERSONS IN THE MERGER ............................... 42
NAI Shareholder's Agreements ............................................. 42
Sale of Wilcom, Inc. ..................................................... 42
NAI Employment Agreements ................................................ 43
NAI Stock Option Plans ................................................... 44
DRS Directorship ......................................................... 45
DRS Indemnity Arrangements ............................................... 45
NAI Outside Director Payments ............................................ 45
INFORMATION CONCERNING THE DRS SPECIAL MEETING ........................... 46
Purpose .................................................................. 46
Record Date; Quorum; Vote Required ....................................... 46
Proxies .................................................................. 47
INFORMATION CONCERNING THE NAI SPECIAL MEETING ........................... 48
Purpose .................................................................. 48
Record Date; Quorum; Vote Required ....................................... 48
Proxies .................................................................. 49
THE MERGER AGREEMENT ..................................................... 50
Closing; Effective Time .................................................. 50
Surviving Corporation's Certificate of Incorporation ..................... 50
Surviving Corporation's Bylaws ........................................... 50
Surviving Corporation's Directors and Officers ........................... 50
Consideration to be Received in the Merger ............................... 50
i
<PAGE>
Warrants, Convertible Notes and Options .................................. 51
Exchange of Certificates; Fractional Shares .............................. 53
Representations and Warranties ........................................... 54
Certain Covenants ........................................................ 54
No Solicitation .......................................................... 55
Board Representation ..................................................... 56
Director and Officer Indemnification ..................................... 56
Conditions ............................................................... 56
Termination; Termination Fees and Expenses ............................... 59
Amendment and Waiver ..................................................... 60
MERGER RELATED TRANSACTION ............................................... 61
INFORMATION ABOUT DRS .................................................... 62
General .................................................................. 62
Recent Event ............................................................. 62
INFORMATION ABOUT NAI .................................................... 64
Rugged Systems Segment ................................................... 64
Systems Integration Segment .............................................. 66
Telecommunications Segment ............................................... 67
Marketing and Service .................................................... 68
Customers ................................................................ 68
Foreign Sales ............................................................ 68
Backlog .................................................................. 69
Competition .............................................................. 69
Research and Development ................................................. 69
Patents and Trademarks ................................................... 69
Government Regulation .................................................... 69
Manufacturing and Suppliers .............................................. 70
Employees ................................................................ 70
Properties ............................................................... 70
Legal Proceedings ........................................................ 70
Market for NAI Common Stock and Related NAI Shareholder Matters .......... 70
Security Ownership of Certain Beneficial Owners and Management ........... 71
Selected Consolidated Financial Data of NAI .............................. 73
NAI Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 73
DESCRIPTION OF DRS CAPITAL STOCK FOLLOWING THE MERGER .................... 81
DRS Common Stock ......................................................... 81
DRS Warrants ............................................................. 81
Amended NAI Convertible Notes ............................................ 81
Resales of DRS Common Stock and DRS Warrants ............................. 83
Transfer Agent and Registrar ............................................. 83
Stock Exchange Listing; Delisting and Deregistration of NAI Common Stock . 83
COMPARISON OF STOCKHOLDER RIGHTS ......................................... 84
Authorized Capital Stock ................................................. 84
Voting Rights ............................................................ 84
Preemptive Rights; Cumulative Voting ..................................... 84
Notice of Stockholder Meetings ........................................... 84
Action by Written Consent of Stockholders ................................ 85
Special Meetings of Stockholders ......................................... 85
Quorum and Voting Requirements for Stockholder Meetings .................. 85
Stockholders' Proposals .................................................. 85
Proxy Representation ..................................................... 86
Board of Directors ....................................................... 87
ii
<PAGE>
Vacancies and Newly-Created Directorships ............................... 87
Limitation on Director's Liability ...................................... 87
Removal of Directors .................................................... 88
Indemnification ......................................................... 88
Amendments to Charter and Bylaws ........................................ 88
NAI DESIGNEE ............................................................ 89
DRS PROPOSAL 2: AMENDMENT OF DRS' 1996 OMNIBUS PLAN ..................... 90
General ................................................................. 90
Administration .......................................................... 91
Awards Under the Plan ................................................... 91
Other Features of the Plan .............................................. 93
New Plan Benefits ....................................................... 93
Certain Federal Income Tax Consequences ................................. 94
LEGAL MATTERS ........................................................... 96
EXPERTS ................................................................. 96
STOCKHOLDERS' PROPOSALS ................................................. 96
DRS ..................................................................... 96
NAI ..................................................................... 97
OTHER BUSINESS .......................................................... 97
WHERE YOU CAN FIND MORE INFORMATION ..................................... 97
INDEX TO FINANCIAL STATEMENTS ........................................... F-1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION ............................................................ F-2
INDEPENDENT AUDITORS' REPORT ............................................ F-11
NAI FINANCIAL STATEMENTS ................................................ F-12
Annex A-I Agreement and Plan of Merger, dated as of
August 26, 1998, among DRS Technologies, Inc.,
DRS Merger Sub, Inc. and NAI Technologies, Inc. ............ A-I-1
Exhibit A Form of Company Affiliate Letter
Annex I Form of Compliance Letter
Exhibit B Form of Stock Purchase Agreement among Wilcom
Acquisition Corp., NAI Technologies, Inc.
and Wilcom, Inc.
Annex A-II Amendment to Agreement and Plan of Merger, dated as of
December 22, 1998, among DRS Technologies, Inc.,
DRS Merger Sub, Inc. and NAI Technologies, Inc.............. A-II-1
Annex A-III Amendment to Agreement and Plan of Merger, dated as of
January 21, 1999, among DRS Technologies, Inc.,
DRS Merger Sub, Inc. and NAI Technologies, Inc. ............A-III-1
Annex B-I Opinion of McFarland Dewey & Co., LLC, dated July 21, 1998.. B-I-1
Annex B-II Letter of McFarland Dewey & Co., LLC,
dated January 25, 1999...................................... B-II-1
Annex C Opinion of Commonwealth Associates ......................... C-1
Annex D 1996 Omnibus Plan of DRS Technologies, Inc. ................ D-1
iii
<PAGE>
================================================================================
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHY SHOULD NAI BECOME A SUBSIDIARY OF DRS?
DRS and NAI believe the merger will create value for DRS stockholders and NAI
shareholders. This value is made possible by the opportunities for DRS and NAI
to take advantage of the complementary strategic fit of their respective
businesses. The merger will enable DRS and NAI to compete more effectively in
the defense industry with new growth opportunities not available to either
company on its own.
To review the background and reasons for the merger in greater detail, as
well as the risks of the merger and opinions of the financial advisors, see
"The Proposed Merger."
WHAT DO THE BOARDS OF DIRECTORS OF DRS AND NAI RECOMMEND?
Each of the Boards of Directors of DRS and NAI has unanimously approved the
merger and recommends that you vote FOR the merger agreement and the
transactions contemplated by the merger agreement, including the merger.
WHAT DO I NEED TO DO NOW?
Just mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the applicable special
meeting for DRS stockholders or NAI shareholders. At these special meetings, the
DRS stockholders and NAI shareholders will consider, among other things, whether
to approve the merger. The special meetings will take place on Thursday,
February 11, 1999.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker cannot vote your shares without your instructions. You should
instruct your broker to vote your shares, following the directions your broker
provides. If you are a DRS stockholder who fails to instruct your broker
effectively and, as a consequence, your shares of DRS common stock are not
voted, then your non-vote will not affect the vote regarding approval of the
merger. If you are, however, an NAI shareholder who fails to instruct your
broker effectively and, as a consequence, your shares of NAI common stock are
not voted, your non-vote will have the same effect as a vote against the merger.
However, if you submit a properly executed proxy to your broker but fail to
direct the proxies to vote your shares of DRS or NAI common stock for or against
or to abstain from voting your shares on the merger proposal, your shares of DRS
or NAI common stock will be voted to approve the merger.
CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You can change your vote at any time before your proxy is voted at the
applicable special meeting. You can do this in one of three ways. First, you can
send a written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these two
methods, you must submit your notice of revocation or your new proxy card to the
appropriate Secretary at the appropriate address as follows:
IF YOU ARE A DRS STOCKHOLDER:
DRS TECHNOLOGIES, INC.
5 Sylvan Way
Parsippany, New Jersey 07054
Attention: Nina Laserson Dunn
IF YOU ARE AN NAI SHAREHOLDER:
NAI TECHNOLOGIES, INC.
282 New York Avenue
Huntington, New York 11473
Attention: Richard A. Schneider
Third, you can attend your stockholder meeting and vote in person. However, your
attendance alone will not revoke your proxy. If you have instructed a broker to
vote your shares, you must follow directions received from your broker to change
those instructions.
WHEN SHOULD NAI SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES?
After the merger is completed, you will receive written
instructions for exchanging your NAI common stock certificates for certificates
representing shares of DRS common stock (and your cash payment in lieu of any
fractional share of DRS common stock).
WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
The merger is intended to be a tax-free reorganization and will not
trigger tax recognition of a gain or loss for DRS or NAI. The exchange of shares
by NAI shareholders will be tax-free for federal income tax purposes, except for
taxes on cash received for a fractional share.
For more information regarding the tax consequences of the merger, see "The
Proposed Merger -- Material U.S. Federal Income Tax Consequences."
================================================================================
<PAGE>
================================================================================
WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
We hope to complete the merger by February 17, 1999. The merger must first be
approved by a majority of votes cast by the holders of all shares of DRS common
stock outstanding as of December 31 1998 and by the affirmative vote of holders
of two-thirds of the shares of NAI common stock outstanding as of December 31,
1998.
DO ANY DRS STOCKHOLDERS OR NAI SHAREHOLDERS HAVE APPRAISAL RIGHTS?
No holders of DRS common stock or NAI common stock are entitled under applicable
law to dissenters' appraisal rights in connection with the merger.
For more information regarding dissenters' appraisal rights, see "The
Proposed Merger -- Appraisal Rights."
WHO CAN VOTE AT THE DRS MEETING?
Holders of DRS common stock at the close of business on December 31, 1998 can
vote at the special meeting. As of such date, there were 6,359,503 shares of DRS
common stock outstanding, each of which is entitled to one vote on each matter
to be acted upon or that may properly come before the special meeting. In
addition, there were approximately 346 DRS stockholders of record, as shown on
the records of DRS' transfer agent.
WHO CAN VOTE AT THE NAI MEETING?
Holders of NAI common stock at the close of business on December 31, 1998 can
vote at the special meeting. At such date, there were 9,179,567 shares of NAI
common stock outstanding, each of which is entitled to one vote on each matter
to be acted upon or that may properly come before the special meeting. In
addition, there were approximately 571 NAI shareholders of record, as shown on
the records of NAI's transfer agent.
Charles S. Holmes, C. Shelton James and the Charles S. Holmes 1997 Trust
have each agreed to vote all their shares of NAI common stock in favor of the
merger. Mr. Holmes, Mr. James and the Charles S. Holmes 1997 Trust will have
approximately 13.4% of the aggregate voting power that can be voted on the
merger.
================================================================================
2
<PAGE>
================================================================================
SUMMARY
This following summary highlights selected information from this document
and may not contain all of the information that is important to you. To better
understand the merger and its legal terms, you should read carefully this entire
document and those additional documents to which we refer you. In addition, you
should pay special attention to the risk factors described under the heading
"Risk Factors." For more information regarding the additional documents to which
we refer you, see "Where You Can Find More Information."
THE COMPANIES:
DRS
DRS develops and manufactures a broad range of defense electronics products
critical to military missions. These products include: computers and
workstations adapted to rugged military environments and systems and components
for data storage, digital imaging, electro-optics, flight safety and other
communication needs.
DRS' customers include the U.S. government, international governments and a
wide range of national and international commercial industries. DRS offers a
full complement of technical support and advanced manufacturing services. DRS
was incorporated in 1968.
DRS' principal executive office is located at 5 Sylvan Way, Parsippany, New
Jersey 07054, and its telephone number is (973) 898-1500.
NAI
NAI designs, manufactures and markets defense electronics products. These
products include: rugged computer systems, advanced peripheral products,
intelligent terminals, high performance work stations, TEMPEST computer systems
(which suppress certain radiation to prevent external detectors from reading the
data being transcribed) and telecommunications test equipment and transmission
products. NAI was incorporated under the laws of the state of New York in 1954.
The principal executive office of NAI is located at 282 New York Avenue,
Huntington, New York 11473, and its telephone number is (516) 271-5685.
WHAT YOU WILL RECEIVE IN THE MERGER:
IF YOU ARE A DRS STOCKHOLDER
DRS stockholders will not receive any shares as a result of the merger. You will
continue to hold the shares of DRS common stock that you currently own. After
the merger, these shares will represent an ownership interest in the combined
businesses of DRS and NAI.
IF YOU ARE AN NAI SHAREHOLDER
Based on the recent price of DRS common stock, we expect that NAI shareholders
will receive 0.25 of a share of DRS common stock for each share of NAI common
stock. This means that, for example, if you own 100 shares of NAI common stock,
you will be entitled to receive 25 shares of DRS common stock.
IF YOU ARE AN NAI WARRANTHOLDER
If the merger is completed, DRS will assume the NAI warrants so that you will
have the right to receive DRS common stock rather than NAI common stock. We
expect that you will have the right to receive 0.25 of a share of DRS common
stock for each share of NAI common stock that you have the right to receive
under your NAI warrant at an exercise price of $10.00 per share. In all other
respects, the rights of NAI warrantholders will remain substantially the same.
After the merger is completed, you will receive written instructions for
exchanging your NAI warrants for DRS warrants.
IF YOU HOLD NAI OPTIONS
If the merger is completed, your right to receive NAI common stock will be
converted into the right to receive DRS common stock. We expect that you will
have the right to receive 0.25 of a share of DRS common stock for each share of
NAI common stock that you have the right to receive under your NAI option.
Assuming the 0.25 ratio, your per share exercise price for DRS common stock will
be four times the current per share exercise price of NAI common stock under
your NAI option. In all other respects, the rights of holders of NAI options
will remain substantially the same.
EXAMPLE (assuming a 0.25 ratio):
If you own an NAI option to purchase 101 shares of NAI common stock at an
exercise price of $1.00 per share, then after the merger, you will be
entitled to purchase 25 shares of DRS common stock at an exercise price of
$4.00 per share (four times the original exercise price of $1.00) and
receive the market value of 0.25 of a share of DRS common stock minus $1.00
(i.e., 0.25 of the per share exercise price of $4.00) in cash.
NOTE: NO FRACTIONAL SHARES OF DRS COMMON STOCK WILL BE ISSUED
DRS will not issue fractional shares of DRS common stock. Instead, the total
number of shares of DRS common stock that you will receive in the merger will be
rounded down to the nearest whole number, and DRS will pay cash equal to the
market value of any fractional share of DRS common stock that you would
otherwise receive. This method of paying cash for fractional shares applies to
all DRS common stock that you receive pursuant to the
================================================================================
3
<PAGE>
================================================================================
merger, including any DRS common stock you will receive upon the exercise or
conversion of NAI warrants, NAI options and NAI convertible notes.
Please see "The Merger Agreement -- Consideration to be Received in the
Merger" and "--Warrants, Convertible Notes and Options" for more details on
the merger's effects on holders of NAI common stock, NAI warrants, NAI
options and NAI convertible notes.
OTHER INTERESTS IN THE MERGER THAT NAI
OFFICERS AND DIRECTORS MAY HAVE:
The officers and directors of NAI may have interests in the merger that differ
from the interests of NAI shareholders generally. For example, if the merger is
completed:
o options to purchase NAI common stock held by NAI's officers and directors
will be automatically converted into options to acquire shares of
DRS common stock adjusted to account for the exchange ratio in the merger;
o it is anticipated that DRS and Robert A. Carlson, the current Chairman and
Chief Executive Officer of NAI, will enter into a consulting arrangement.
Under this anticipated consulting arrangement, DRS will pay Mr.
Carlson $125,000 on each April 1, 1999, 2000 and 2001;
o it is expected that DRS and Richard A. Schneider, the current Executive
Vice President, Chief Financial Officer, Secretary and Treasurer of NAI,
will enter into an employment arrangement. Under this anticipated
employment arrangement, DRS will pay Mr. Schneider an annual salary of
$220,000;
o some existing indemnification arrangements for NAI's officers and directors
will be continued after the merger;
o C. Shelton James, a director of NAI, will be elected as a director of DRS
for a three-year term;
o NAI will have sold all of the capital stock of its wholly-owned subsidiary
Wilcom, Inc. to Wilcom Acquisition Corp. Wilcom Acquisition, Corp. is a
newly formed corporation in which Charles S. Holmes, a current NAI
director, owns a majority of capital stock and Dennis McCarthy, another
current NAI director, owns the remaining outstanding shares of capital
stock. Wilcom Acquisition Corp. will purchase all of the capital stock of
Wilcom, Inc. for a purchase price of $150,000 and the surrendering of
1,700,000 NAI warrants and 300,000 warrants to purchase shares of NAI
common stock at an exercise price of $3.00 per share held by Mr. Holmes;
and
o NAI will pay each of its non-employee directors payments due to these
directors through December 31, 1998.
Please see "Interests of Certain Persons in the Merger" for more
information regarding the other interests of NAI officers and directors in
the merger.
THE MERGER:
CONSENT SOLICITATION OF HOLDERS OF NAI CONVERTIBLE NOTES
It is a condition to the merger that NAI obtain consents from holders of a
specified percentage of the aggregate principal amount of NAI 12% Convertible
Subordinated Promissory Notes Due 2001 outstanding as of August 26, 1998 to
certain actions. NAI is concurrently soliciting these consents from holders of
convertible notes.
Please see "Merger Related Transaction" for more information regarding this
consent solicitation.
CIRCUMSTANCES ALLOWING WITHDRAWAL FROM THE MERGER
Under several specific circumstances, either DRS or NAI may withdraw from the
merger.
If NAI or DRS terminates the merger agreement, NAI may be required to
reimburse DRS up to $300,000 for DRS' out-of-pocket expenses and may be required
to pay DRS a termination fee of $1,500,000.
Please see "The Merger Agreement--Termination; Termination Fees and
Expenses" for more details regarding the circumstances under which the
merger may be terminated and the effects of any termination.
Also, we do not intend to complete the merger unless we receive legal
opinions confirming that the merger will be treated as a tax-free reorganization
under the Internal Revenue Code. The legal opinions will not, however, bind the
Internal Revenue Service, which could take a contrary position.
IF NAI RECEIVES A BETTER OFFER
NAI's Board of Directors can withdraw from the merger if it determines prior to
the special meeting, consistent with its fiduciary duties to the NAI
shareholders, that NAI should enter into an acquisition agreement the NAI board
deems superior to the merger. In this event, NAI must reimburse DRS for its
out-of-pocket expenses up to a maximum of $300,000, and may have to pay a
$1,500,000 termination fee.
================================================================================
4
<PAGE>
================================================================================
AMENDING OR WAIVING TERMS OF THE MERGER AGREEMENT
We may by mutual consent amend the merger agreement before the completion of the
merger. However, after DRS stockholders and NAI shareholders approve the merger,
the law may require that we obtain your approval before amending the merger
agreement. If so, then we will not amend the merger agreement without your
approval. Also, either DRS or NAI can waive circumstances that, under the merger
agreement, would permit it to withdraw from the merger.
Neither DRS nor NAI expects to waive any material condition to the merger.
ACCOUNTING TREATMENT
The merger will be accounted for under the "purchase" method of accounting in
accordance with generally accepted accounting principles.
For more information regarding the accounting treatment of the merger,
please see "The Proposed Merger -- Accounting Treatment."
OTHER INFORMATION:
MARKETS AND MARKET PRICES
The DRS common stock that will be issued in the merger will be listed on the
AMEX.
April 7, 1998 was the last full trading day prior to the public
announcement by DRS that it had executed a letter of intent to enter into a
merger with NAI. On this date, the last reported sale price of DRS common stock
on the AMEX was $13.38 per share, and the last reported sale price of NAI common
stock on the NASDAQ was $2.38 per share.
August 25, 1998 was the last full trading day prior to the public
announcement of the signing of the merger agreement. On this date, the last
reported sale price of DRS common stock on the AMEX was $10.44 per share, and
the last reported sale price of the NAI common stock on the NASDAQ was $1.81 per
share.
On December 31, 1998, the most recent practicable date prior to the
printing of this joint proxy statement/prospectus, the last reported sale price
of DRS common stock on the AMEX was $10.94 per share, and the last reported sale
price of NAI common stock on the NASDAQ was $1.81 per share.
VALUE OF DRS COMMON STOCK TO BE EXCHANGED
Based on the number of shares of NAI common stock outstanding on December 31,
1998, the aggregate value of the DRS common stock to be exchanged for the NAI
common stock in the merger will be approximately $25.1 million. This assumes
that the value of a share of DRS common stock will equal its last reported sale
price on the AMEX on December 31, 1998 and that the exchange ratio is 0.25.
OTHER MATTERS TO BE CONSIDERED DURING THE SPECIAL MEETINGS
At the DRS meeting, DRS stockholders will also consider whether to approve a
proposal to amend DRS' 1996 Omnibus Plan to increase the number of shares of DRS
common stock reserved for issuance under this plan by 900,000 shares. DRS' 1996
Omnibus Plan provides appropriate incentives and rewards, such as stock options,
to DRS' officers, other employees, consultants and directors. This amendment
must be approved by a majority of the votes cast by the holders of all
outstanding shares of DRS common stock entitled to vote at this meeting.
For more information regarding this proposal, see "DRS Proposal 2:
Amendment of DRS' 1996 Omnibus Plan."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have each made forward-looking statements in this document and in documents
incorporated by reference in this joint proxy statement/prospectus. These
statements are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations of DRS and NAI. Also, when we used words such as "believes,"
"expects," "anticipates" or other similar expressions, we are making
forward-looking statements. You should note that many factors could affect the
future financial results of DRS and NAI expressed in this document. Examples of
these factors include operating, legal and regulatory risks and economic,
consumer and competitive forces affecting our businesses.
For more information regarding some factors that could affect the future
performance of DRS and NAI, see "Risk Factors."
================================================================================
5
<PAGE>
================================================================================
SELECTED FINANCIAL DATA
The following tables show selected historical financial information of DRS
and NAI, pro forma combined financial information of DRS before the merger and
pro forma combined financial information of DRS after the merger as if DRS and
NAI had been combined for the periods shown. Because DRS recently completed
significant acquisitions, we include the pro forma financial information of DRS
before the merger. This information shows selected financial results of DRS as
if DRS had been combined with its acquired companies for the periods shown. The
pro forma combined financial information of DRS after the merger was then
prepared by combining the DRS pro forma financial information before the merger
with NAI's historical information and making any necessary adjustments. You
should not assume that DRS and NAI would have achieved the pro forma results if
they and the other companies acquired by DRS had actually been combined during
the periods shown.
Both DRS' and NAI's annual historical financial information are derived
from financial statements audited by KPMG LLP. KPMG's reports relating to the
December 31, 1997 financial statements of NAI and relating to the March 31, 1998
financial statements of DRS are included elsewhere or incorporated by reference,
respectively, in this joint proxy statement/prospectus.
The financial information for interim periods are unaudited. But, DRS and
NAI each believes that its own interim financial information reflect all normal
recurring adjustments necessary for a fair presentation of the financial
positions and results of operations for those periods. You should not assume
that results in an interim period are necessarily indicative of results for a
full year.
The selected financial data should be read in conjunction with the:
o pro forma financial statements;
o DRS' historical consolidated financial statements and the related notes
incorporated by reference in this joint proxy statement/prospectus; and
o NAI's historical consolidated financial statements and the related notes
included elsewhere in this joint proxy statement/prospectus.
================================================================================
6
<PAGE>
================================================================================
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA OF
DRS TECHNOLOGIES, INC.--HISTORICAL
(IN THOUSANDS EXCEPT PER SHARE DATA, RATIOS AND NUMBER OF EMPLOYEES)
No cash dividends have been distributed in any of the years in the
five-year period ended March 31, 1998, or through September 30, 1998.
The figures on the line item entitled "Employees" indicate the number of
employees at March 31 or September 30 for each of the fiscal periods presented.
Included in fiscal 1998, 1997, 1996 and 1995 are approximately 428, 188, 155 and
46 employees, respectively, from new operations. Included in the six-months
periods ended September 30, 1998 and 1997 are approximately 0 and 92 employees,
respectively, from new operations. See Note 11 of Notes to DRS' Consolidated
Financial Statements.
Revenues per employee is based on the average number of employees in the
relevant time period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
YEAR ENDED MARCH 31, SEPTEMBER SEPTEMBER
--------------------------------------------------------- 30, 30,
1998 1997 1996 1995 1994 1998 1997
--------- -------- -------- -------- -------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ........................ $ 190,854 $143,578 $101,454 $ 69,930 $ 57,820 $ 92,114 $ 77,735
Cost and expenses ............... 176,595 130,996 92,907 64,836 54,372 88,299 71,551
--------- -------- -------- -------- -------- -------- ---------
Operating Income .............. 14,259 12,582 8,547 5,094 3,448 3,815 6,184
Interest and related expenses ... (5,098) (3,592) (2,681) (1,372) (1,574) (3,113) (1,802)
Interest and other income, net .. 1,377 698 971 655 802 328 691
Minority Interest ............... (874) (404) (110) (121) 32 (425) (612)
--------- -------- -------- -------- -------- -------- ---------
Earnings before income taxes .. 9,664 9,284 6,727 4,256 2,708 605 4,461
Income taxes .................... 3,292 3,621 2,624 1,652 1,093 224 1,651
--------- -------- -------- -------- -------- -------- ---------
Net Earnings .................. $ 6,372 $ 5,663 $ 4,103 $ 2,604 $ 1,615 $ 381 $ 2,810
========= ======== ======== ======== ======== ======== =========
Per Share Data:
Basic earnings per share ........ $ 1.13 $ 1.03 $ 0.75 $ 0.51 $ 0.30 $ 0.06 $ 0.50
Diluted earnings per share ...... 0.93 0.84 0.69 0.50 0.30 0.06 0.42
Book value per share ............ 7.16 5.90 4.86 4.16 3.70 7.21 6.41
Summary of Financial Position:
Working Capital ................. $ 42,126 $ 32,838 $ 33,990 $ 20,317 $ 19,803 $ 48,230 $ 31,486
Net property, plant and Equipment 22,972 19,987 16,191 9,849 8,893 22,661 20,573
Total assets .................... 163,473 97,673 97,251 64,590 58,836 163,130 103,176
Long-term debt, excluding
Current installments ........... 56,532 30,801 32,608 11,732 14,515 57,819 25,507
Net stockholders' equity ........ 44,335 32,987 26,566 22,509 19,759 45,725 35,999
Financial Ratios:
Pretax return on revenues ....... 5.1% 6.5% 6.6% 6.1% 4.7% 0.7% 5.7%
After tax return on revenues .... 3.3% 3.9% 4.0% 3.7% 2.8% 0.4% 3.6%
Supplemental Information:
Capital expenditures ............ $ 6,570 $ 5,228 $ 6,331 $ 2,543 $ 988 $ 2,301 $ 2,440
Depreciation and amortization ... 7,059 5,027 3,170 2,480 2,558 4,405 2,940
Internal research and
Development .................... 4,049 3,852 649 795 537 1,194 2,095
Employees ....................... 1,470 1,107 809 565 548 1,644 1,312
Revenues per employee ........... $ 124 $ 129 $ 137 $ 130 $ 137 $ 55 $ 60
--------- -------- -------- -------- -------- -------- ---------
</TABLE>
================================================================================
7
<PAGE>
================================================================================
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA OF
NAI TECHNOLOGIES, INC.--HISTORICAL
(IN THOUSANDS EXCEPT PER SHARE DATA)
On July 7, 1998 NAI's Board of Directors passed a resolution to discontinue
the operations comprising its telecommunications business, which was comprised
of one subsidiary, Wilcom, Inc. All figures for prior years have been
reclassified where necessary to reflect the operating results and net assets of
Wilcom, Inc. as discontinued operations.
Operating loss and net loss in 1994 include $7,321 in restructuring costs.
Prior period per share data has been restated to reflect 4% stock dividends
declared in February 1993 and 1994 and a three-for-two stock split declared in
August 1993.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
YEAR ENDED DECEMBER 31, SEPTEMBER SEPTEMBER
------------------------------------------------------------ 26, 27,
1997 1996 1995 1994 1993 1998 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Continuing Operations
Data:
Net sales ............................ $ 47,758 $ 61,131 $ 51,813 $ 46,330 $ 71,202 $ 34,744 $ 36,658
Operating earnings (loss) ............ 688 4,613 (8,142) (14,077) 8,200 1,854 20
Net earnings (loss) .................. (1,650) 1,719 (10,886) (11,251) 5,001 37 (1,846)
Per share data:
Basic earnings (loss) ................ $ (0.18) $ 0.21 $ (1.47) $ (1.64) $ 0.75 $ 0.00 $ (0.20)
Diluted earnings (loss) .............. (0.18) 0.21 (1.47) (1.64) 0.73 0.00 (0.20)
Weighted average common shares
Basic .............................. 9,099 8,268 7,382 6,850 6,640 9,162 9,079
Diluted ............................ 9,099 8,466 7,382 6,850 6,857 9,164 9,079
Cash dividends ....................... -- -- -- -- -- -- --
Balance Sheet Data (at end of Period):
Working capital ...................... $ 10,930 $ 14,241 $ 10,044 $ 16,665 $ 19,105 $ 6,055
Total assets ......................... 35,215 40,905 46,984 52,589 60,084 32,585
Current installments of long-term
debt ................................ 311 158 2,177 2,179 4,224 6,500
Long-term debt ....................... 9,747 12,224 15,573 13,990 10,797 4,782
Shareholders' equity ................. 13,748 15,980 10,086 20,296 30,593 11,008
</TABLE>
================================================================================
8
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF
DRS TECHNOLOGIES, INC. (BEFORE THE MERGER)
These selected pro forma combined financial data reflect the pro forma
effects of DRS' acquisition of (a) the Applied Systems Division of Spar
Aerospace Limited and Spar Aerospace (U.K.) Limited, which took place on October
29, 1997, and (b) the Second Generation Ground Based Electro Optics and Focal
Plane Array businesses of Raytheon Company, which took place on October 20,
1998.
On October 20, 1998, DRS acquired certain assets of the Second Generation
Ground Based Electro Optics and Focal Plane Array businesses of Raytheon Company
and its subsidiaries. DRS paid approximately $45 million in cash for this
acquisition. The parties may adjust this purchase price upon the receipt of
recent audited financial statements for the acquired businesses. However, the
parties may not adjust this purchase price upward by more than $7 million.
In connection with this acquisition, DRS and certain of its subsidiaries
entered into a $150 million secured credit facility with Mellon Bank, N.A. If
the merger is completed, DRS intends to use a portion of this credit facility to
pay down NAI's entire outstanding indebtedness under a credit agreement, dated
as of April 12, 1995, as amended, among NAI, The Bank of New York and The Chase
Manhattan Bank. DRS' $150 million secured credit facility amends, restates and
replaces DRS' existing $60 million secured credit facility pursuant to a credit
agreement, dated as of October 29, 1997, with, among others, Mellon Bank, N.A.,
as agent and lender.
For more information regarding DRS' acquisition of the Second Generation
Ground Based Electro Optics and Focal Plane Array businesses of Raytheon
Company, please see "Information about DRS--Recent Event."
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended September 30,
March 31, 1998 1998
-------------- -------------
(in thousands except per share data)
<S> <C> <C>
Statement of Operations Data:
- -----------------------------
Revenues ................................................................ $ 235,668 $ 112,109
Cost and expenses ....................................................... (224,945) (110,112)
--------- ---------
Operating Income ........................................................ 10,723 1,997
Interest and related expenses ........................................... (12,600) (5,788)
Interest and other income, net .......................................... 1,842 328
Minority Interest ....................................................... (874) (425)
--------- ---------
Earnings (loss) before income taxes ..................................... (909) (3,888)
Income tax expense (benefit) ............................................ (794) (1,439)
--------- ---------
Earnings (loss) from continuing operations before extraordinary item .... $ (115) $ (2,449)
========= =========
Per Share Data:
- ---------------
Basic earnings (loss) before extraordinary item per share ............... $ (0.02) $ (0.39)
Diluted earnings (loss) before extraordinary item per share ............. (0.02) (0.39)
Book value per share .................................................... N/A 6.83
- -------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF
DRS TECHNOLOGIES, INC. (AFTER THE MERGER)
(IN THOUSANDS EXCEPT PER SHARE DATA)
These selected pro forma combined financial data reflect the pro forma
effects of acquisitions by DRS since April 1, 1997, including the merger.
For information regarding DRS' recent acquisition of the Second Generation
Ground Based Electro Optics and Focal Plan Array businesses of Raytheon Company,
please see "Information about DRS--Recent Event."
In connection with the NAI board's decision on July 7, 1998 to dispose of
Wilcom, Inc., Wilcom, Inc. is treated as discontinued operations in the
historical financial statements of NAI. In addition, the sale of Wilcom, Inc., a
wholly-owned subsidiary of NAI, before the closing date of the merger is a
condition of the merger.
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended September 30,
March 31, 1998 1998
-------------- -------------
<S> <C> <C>
Statement of Continuing Operations Data:
- ----------------------------------------
Revenues ...................................................... $ 283,426 $134,033
Cost and expenses ............................................. (272,716) (131,449)
----------- ---------
Operating Income .............................................. 10,710 2,584
Interest and related expenses ................................. (13,483) (6,227)
Interest and other income, net ................................ 1,903 349
Minority Interest ............................................. (874) (425)
----------- ---------
Earnings (loss) before income taxes ........................... (1,744) (3,719)
Income tax expense (benefit) .................................. 120 (925)
----------- ---------
Earnings (loss) from continuing operations (before the
operating loss of Wilcom) before extraordinary item ......... $ (1,864) $ (2,794)
=========== =========
Per Share Data:
- ---------------
Basic earnings (loss) before extraordinary item per share ..... $ (0.22) $ (0.31)
Diluted earnings (loss) before extraordinary item per share ... (0.22) (0.31)
Book value per share .......................................... N/A 8.22
- --------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
COMPARATIVE UNAUDITED PER SHARE DATA
With the exception of the historical NAI year ended data, the per share
data is for the year ended March 31, 1998. The historical NAI year ended data is
for the year ended December 31, 1997.
With the exception of the historical NAI six months ended data, the per
share data is for the six months ended September 30, 1998. The historical NAI
six months ended data is for the six months ended June 27, 1998.
With the exception of the year ended March 31, 1998 historical period for
DRS, basic and diluted net income per share amounts are the same for the periods
presented.
Combined per share information assumes each NAI share has been converted at
a 0.25 exchange ratio into DRS shares. Pursuant to the merger agreement, the
exchange ratio is subject to adjustment to 0.23.
The equivalents of NAI's historical per share amounts are calculated by
multiplying the combined pro forma per share amounts by the exchange ratio of
0.25 of a share of DRS common stock for each share of NAI common stock. As set
forth in the merger agreement, the exchange ratio is subject to adjustment to
0.23.
Year Ended Six Months
Data Ended Data
---------- ----------
HISTORICAL DRS:
Net Income per share-diluted .......................... $ 0.93 $ 0.06
Book value per common share ........................... 7.16 7.21
HISTORICAL NAI:
Net Income (loss) per share ........................... $(0.26) $(0.26)
Book value per common share ........................... 1.50 1.20
PRO FORMA DRS (BEFORE THE MERGER):
Income (loss) per share-diluted ....................... $(0.02) $(0.39)
Book value per common share ........................... N/A 6.83
PRO FORMA COMBINED DRS AND NAI (AFTER THE MERGER):
Income (loss) per share ............................... $(0.22) $(0.31)
Book value per common share ........................... N/A 8.22
HISTORICAL NAI PER SHARE EQUIVALENT:
Income (loss) per share ............................... $(0.05) $(0.08)
Book value per common share ........................... N/A 2.06
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
RECENT EVENTS
DRS
For information regarding DRS' recent acquisition of the Second Generation
Ground Based Electro Optics and Focal Plan Array businesses of Raytheon Company,
see "Information about DRS -- Recent Event."
NAI
In connection with the review of NAI's Quarterly Report on Form 10-Q for
the period ended June 30, 1998, NASDAQ notified NAI that NAI no longer complied
with the net tangible asset requirement for continued listing on NASDAQ.
NAI responded by sending a letter to NASDAQ which discussed the merger and
the disposition of Wilcom, Inc., NAI's wholly-owned subsidiary. In the letter,
NAI also explained that it is a condition to the merger that the holders of at
least 90% of the aggregate principal amount of NAI convertible notes outstanding
as of August 26, 1998 agree to convert their notes into shares of NAI common
stock immediately prior to the effective time of the merger. If 90% or more of
the notes are converted into shares of NAI common stock, NAI may be in
compliance with the net tangible asset requirement for continued listing.
NASDAQ notified NAI in a letter dated September 8, 1998 that the staff of
NASDAQ would be unable to grant an exception to the net tangible asset
requirement. In the letter, however, the representative indicated that NAI would
be given until October 15, 1998 to complete the conversion of the NAI
convertible notes and make a Form 8-K filing with the SEC and NASDAQ
demonstrating compliance with the minimum net tangible asset requirements. In a
letter to NASDAQ dated September 22, 1998, Whitman Breed Abbott & Morgan LLP,
counsel for NAI, explained that the conversion of the NAI convertible notes
could not be effected until immediately prior to the closing of the merger.
Counsel for NAI also argued that it would be in the best interests of the NAI
shareholders to permit the listing of NAI common stock on NASDAQ to continue
until the special meetings of DRS stockholders and NAI shareholders are held.
On December 10, 1998, NAI appeared in a hearing before the NASDAQ review
board in connection with the proposed delisting and asked that the NAI common
stock remain listed until the special meetings of the DRS stockholders and NAI
shareholders are held. As of the date of this joint proxy statement/prospectus,
no decision has yet been made by the NASDAQ review board and the NAI common
stock remains listed on the NASDAQ. There can be no assurance, however, that
NASDAQ will permit the NAI common stock to remain listed until these meetings
are held. In addition, the NAI board believes that if the merger does not occur,
then the NAI common stock will be delisted and that it will take several years
for NAI to rebuild its capital structure to allow relisting on the NASDAQ.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
COMPARATIVE PER SHARE MARKET PRICES AND ABSENCE OF DIVIDENDS
COMPARATIVE PER SHARE MARKET PRICES
DRS common stock is traded on the AMEX under the symbol "DRS." DRS common
stock has been traded on the AMEX since 1983. NAI common stock is traded on the
NASDAQ under the symbol "NATL." NAI common stock has been traded on the NASDAQ
since 1975.
Prior to April 1, 1996, DRS had two classes of common stock: Class A common
stock and Class B common stock. At April 1, 1996, the Class A common stock and
the Class B common stock were reclassified into a single class of stock, the DRS
common stock. The information in the table below regarding the reported high and
low sales prices of DRS common stock on the AMEX represents the weighted
averages of such prices for both the Class A common stock and the Class B common
stock for those calendar quarters.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sales prices of DRS common stock and NAI common stock on
the AMEX and NASDAQ, respectively, as compiled by published sources:
DRS Common Stock NAI Common Stock
------------------- -----------------
Market Price Market Price
------------------- -----------------
Calendar Period* High Low High Low
- ---------------- ------ ------ ----- -----
1996 First Quarter $ 8.69 $ 7.44 $2.38 $1.44
Second Quarter $11.63 $ 7.25 $3.88 $2.00
Third Quarter $11.63 $ 8.38 $4.00 $3.13
Fourth Quarter $12.50 $ 9.25 $3.94 $2.75
1997 First Quarter $13.00 $10.13 $5.38 $3.38
Second Quarter $11.38 $ 9.63 $5.69 $4.38
Third Quarter $15.13 $10.25 $5.75 $2.94
Fourth Quarter $14.81 $11.88 $3.75 $1.69
1998 First Quarter $14.88 $11.25 $2.81 $1.69
Second Quarter $15.38 $11.63 $3.25 $1.94
Third Quarter $12.06 $ 9.13 $2.25 $1.25
Fourth Quarter $11.00 $ 7.00 $2.12 $1.19
* Please note that DRS' fiscal year ends March 31, and NAI's fiscal year ends
December 31.
EQUIVALENT PER SHARE DATA
The information presented in the table below represents closing sale prices
reported on the AMEX and NASDAQ for shares of DRS common stock and NAI common
stock, respectively, on August 25, 1998, the last full trading day prior to the
public announcement of the signing of the merger agreement, as well as the
"equivalent per share price" of shares of NAI common stock on this date. The
"equivalent per share price" of shares of NAI common stock represents the
product of the closing sale price per share reported on the AMEX for shares of
DRS common stock on August 25, 1998 and the exchange ratio of 0.25.
DRS NAI NAI Equivalent
Common Stock Price Common Stock Price Per Share Price
------------------ ------------------ ---------------
August 25, 1998 ...... $10.44 $1.81 $2.61
=====================================================================
DRS STOCKHOLDERS AND NAI SHAREHOLDERS ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR DRS COMMON STOCK AND NAI COMMON STOCK.
=====================================================================
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
ABSENCE OF DIVIDENDS
Neither NAI nor DRS anticipates paying any dividends on its shares of
common stock in the foreseeable future. DRS has not paid any cash dividends on
the DRS common stock since 1976. DRS intends to retain future earnings for use
in its business and does not expect to declare cash dividends on the DRS common
stock in the foreseeable future. The indentures relating to DRS' 9% Senior
Subordinated Convertible Debentures due October 1, 2003 and DRS' bank lines of
credit restrict DRS' ability to pay dividends or make other distributions on the
DRS common stock.
NAI did not declare or pay any cash dividends on the NAI common stock for
its past five fiscal years. NAI is restricted from paying cash dividends on the
NAI common stock by certain debt covenants contained in NAI's credit agreement,
but is permitted to effect stock splits and declare and pay dividends payable
solely in shares of any class of its capital stock.
- --------------------------------------------------------------------------------
14
<PAGE>
RISK FACTORS
In considering whether to approve and authorize the merger agreement, you
should consider, in addition to the other information contained and incorporated
by reference in this joint proxy statement/prospectus, the following risk
factors:
RISKS RELATING TO THE MERGER
ONCE THE EXCHANGE RATIO IS SET, THE NUMBER OF SHARES OF DRS COMMON
STOCK THAT NAI SHAREHOLDERS WILL RECEIVE WILL BE FIXED, BUT THE VALUE
OF THESE SHARES MAY INCREASE OR DECREASE BEFORE THE MERGER IS
COMPLETED
Once the ratio for the exchange of shares of DRS common stock for shares of
NAI common stock is set, it will not be adjusted in the event of any increase or
decrease in the price of either DRS common stock or NAI common stock. The prices
of DRS common stock and NAI common stock at the completion of the merger may
vary from their respective prices at the date of this joint proxy
statement/prospectus and the date of the special meetings.
Fluctuations in the market prices of DRS common stock and NAI common stock
may result from changes in various factors. Many of these factors are beyond the
control of DRS and NAI. Examples of such factors include:
o business, operations or prospects of DRS or NAI;
o market assessments of the likelihood that the merger will be
consummated;
o market assessments of when the merger will be consummated;
o market assessments regarding the prospects of the merger and
post-merger operations; and
o general market and economic conditions.
Because of the fluctuations in the market prices, the value of the shares
of DRS common stock that NAI shareholders will receive may increase or decrease
prior to the completion of the merger. Moreover, the value of the shares of NAI
common stock that NAI shareholders will surrender may increase or decrease prior
to the completion of the merger. DRS stockholders and NAI shareholders are urged
to obtain current market quotations for DRS common stock and NAI common stock.
IF WE DO NOT SUCCESSFULLY INTEGRATE THE OPERATIONS OF OUR TWO COMPANIES
AFTER COMPLETION OF THE MERGER, OUR FINANCIAL RESULTS MAY BE ADVERSELY
AFFECTED
The success of the merger and acquisition of NAI depends on the successful
and efficient integration of the administrative, finance, sales and marketing
organizations and procedures of NAI and DRS and obtaining cost savings following
the merger. Because DRS' and NAI's management teams believe that the strategic
fit between the companies is strong, they also believe that the integration of
DRS' and NAI's operations should proceed smoothly and efficiently. Although both
management teams intend to work diligently to integrate operations and obtain
cost savings following the completion of the merger, there can be no assurance:
o that the integration of operations of the two companies will be
successful;
o when, if ever, the operations of the two companies will be
successfully integrated;
15
<PAGE>
o that significant efficiencies and cost savings will be achieved; and
o when, if ever, efficiencies and cost savings will be achieved.
The possible inability to integrate successfully the operations of the two
companies could have a material adverse effect on the combined enterprise. In
addition, if the process of integration takes longer than expected, the
resources of the combined enterprise may be diverted from other strategic
opportunities and operational matters for an extended period of time. This
possible diversion of resources could also have a material adverse effect.
DRS DOES NOT EXPECT TO PAY DIVIDENDS
DRS has not paid any cash dividends on the DRS common stock since 1976. DRS
intends to retain future earnings for use in its business and does not expect to
declare cash dividends on the DRS common stock in the foreseeable future. In
addition, DRS' ability to pay cash dividends on its common stock is restricted
by some of its indebtedness. The indenture relating to DRS' 9% Senior
Subordinated Convertible Debentures and DRS' bank lines of credit restrict DRS'
ability to pay dividends or make other distributions on the DRS common stock.
DRS COMPANY RISKS
If you are considering an investment in DRS common stock, you should
consider the following risk factors:
DRS MAY BE UNABLE TO ACHIEVE YEAR 2000 COMPLIANCE
DRS has begun the process of organizing its Year 2000 Project in order to
evaluate the issue of computer software databases and embedded computer chips
that are not able to distinguish between the year 1900 and the year 2000. DRS'
Year 2000 Project aims to achieve Year 2000 compliance among DRS and its
subsidiaries. After completion of the merger, NAI will be a subsidiary of DRS
and included in DRS' Year 2000 Project.
DRS' Year 2000 Project is divided into three major sections:
o IT Systems (which examines operating systems and business application
software used by DRS and its subsidiaries);
o External Agents (which examines third-party suppliers and customers of
DRS and its subsidiaries); and
o Product Issues (which examines Year 2000 issues inherent in products
sold by DRS and its subsidiaries).
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. This process is currently on
schedule. DRS estimates that if this process stays on schedule, IT Systems
activities 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 of DRS and its subsidiaries 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 DRS' 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. As a result, DRS cannot currently estimate to what
extent the future operating results of DRS may be adversely affected by the
failure of these third parties to address successfully their Year 2000 issues.
Failure by critical suppliers and customers, however, to achieve Year 2000
compliance in a timely manner could have a material adverse effect on DRS'
operations. In particular, failure by the U.S. government to achieve Year 2000
compliance in a timely manner could have a material adverse effect on DRS'
operations because DRS is materially
16
<PAGE>
dependent on the U.S. government's business. Detailed evaluations of the most
critical third parties have not been initiated but should commence and 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 and its subsidiaries which may not be Year 2000 compliant,
determining a corrective course of action and disseminating information about
the corrective course of action to customers. Many of DRS' products that have
integrated software are Year 2000 compliant, but there can be no assurances that
all of DRS' products are currently Year 2000 compliant. DRS' 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. Completion of this phase of DRS' 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.
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'
compliance costs with respect to its Year 2000 Project will be included in
establishing prices for DRS' products and services. Therefore, these costs will
be reflected in DRS' revenues and costs and expenses. Uncertainties exist,
however, as to DRS' ability to detect in a timely manner all Year 2000 problems
and 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' Year 2000 Project. As a result, the effect of
this cost on the consolidated results of operations, cash flows or financial
position of DRS cannot be predicted.
REDUCTION IN AMOUNT OF GOVERNMENT BUSINESS MAY HAVE AN ADVERSE EFFECT ON
DRS' REVENUES
A reduction in the purchases of DRS' products by domestic and foreign
government agencies (and principally by the U.S. Navy) may have a material
adverse effect on DRS' business because a significant portion of all DRS'
revenues are derived from contracts or subcontracts with these government
agencies. In the fiscal years ended March 31, 1998, 1997 and 1996, approximately
74%, 71% and 78% of DRS' revenues were derived directly or indirectly from
defense-industry contracts with the U.S. government. In addition, in the fiscal
years ended March 31, 1998 and 1997, approximately 9% of DRS' revenues were
derived directly or indirectly from sales to foreign governments; in the fiscal
year ended March 31, 1996, approximately 10% of DRS' revenues were derived
directly or indirectly from sales to foreign governments. Therefore, the
development of DRS' business in the future will depend upon the continued
willingness of the U.S. government to commit substantial resources to defense
programs and, in particular, upon continued purchases of DRS' products.
The risk that governmental purchases of DRS' products may decline stems
from the nature of DRS' business with the U.S. government, in which the U.S.
government may:
o terminate contracts at its convenience;
o terminate, reduce or modify contracts or subcontracts if its
requirements or budgetary constraints change;
o cancel multi-year contracts and related orders if funds for contract
performance for any subsequent year become unavailable;
o shift its spending priorities; and
o adjust contract costs and fees on the basis of audits done by its
agencies.
17
<PAGE>
Upon the termination of a contract with the U.S. government, a defense
contractor is entitled to reimbursement for allowable costs and an allowance for
the proportionate share of fees or earnings for the work completed if the
contract was not terminated due to the contractor's default. Foreign defense
contracts generally also contain comparable provisions relating to termination
at the convenience of the foreign government.
In addition, DRS, as a defense business, is subject to the following risks:
o the frequent need to bid on programs prior to completing the necessary
design, which may result in unforeseen technological difficulties
and/or cost overruns; and
o if DRS is a subcontractor, the failure or inability of the primary
contractor to perform its prime contract, which may result in the
inability of DRS to obtain payment of its fees and contract costs.
REDUCTION IN U.S. GOVERNMENT'S SPENDING FOR DEFENSE PRODUCTS MAY ADVERSELY
AFFECT DRS' EARNINGS
The U.S. government may reduce its expenditures for defense products in the
coming years, and, if so, this reduction may have an effect on DRS' programs. In
the event expenditures for products of the type manufactured by DRS are reduced
and not offset by greater foreign sales or other new programs or products, there
will be a reduction in the volume of contracts or subcontracts awarded to DRS.
Unless this reduction is offset, it would adversely affect DRS' earnings.
INABILITY TO OBTAIN RENEWAL OR FOLLOW-ON CONTRACTS WITH THE U.S. GOVERNMENT
MAY RESULT IN LOSS OF REVENUES FOR DRS
The possible failure of DRS to obtain a renewal or follow-on contract with
respect to any significant contract or a number of lesser contracts with the
U.S. government would result in a loss of revenues. If revenues from the award
of new contracts failed to offset this loss, it could have a material adverse
effect on DRS' results of operations and financial position.
Renewal and follow-on contracts are important because DRS' contracts with
the U.S. government are for fixed terms. These terms may vary from less than one
year to more than five years, particularly for contracts with options, and the
average term of DRS' contracts with the U.S. government is generally between one
and three years.
The loss of revenues from the possible failure of DRS to obtain a renewal
or follow-on contract may be significant because some of DRS' U.S. government
contracts account for a substantial portion of DRS' revenues. For example, in
the fiscal year ended March 31, 1998, the AN/UYQ-70 advanced display system
program accounted for approximately 25% of DRS' total revenues. In the fiscal
years ended 1997 and 1996, the AN/UYQ-65 tactical workstation program accounted
for approximately 26% and 13%, respectively, of DRS' total revenues. Current
projections for the current fiscal year indicate that the AN/UYQ-70 program
could account for approximately 27% of DRS' total projected revenues.
In addition, DRS sometimes enters into U.S. government contracts with a
fully funded backlog. This means that the U.S. government has appropriated funds
sufficient to cover all the sales orders represented by these contracts at the
time of award. The price per unit of DRS' product, however, may not be
determined at the time of award. If the price per unit is ultimately determined
to be significantly less than anticipated by DRS, DRS' net revenues would be
adversely affected.
DRS' SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT DRS
DRS has indebtedness that is substantial in relation to its stockholders'
equity. In the fiscal years ended March 31, 1998, 1997 and 1996, DRS' debt to
equity ratio was 1.6, 1.1 and 1.3, respectively. Based on current projections
for the current fiscal year, DRS expects that its debt to equity ratio at March
31, 1999 will be approximately 1.6. DRS' high degree of leverage could:
o impair DRS' future ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate
purposes or other purposes;
18
<PAGE>
o hinder DRS' ability to adjust rapidly to changing market conditions;
and
o make DRS more vulnerable if a downturn in general economic conditions
or DRS' business occurs.
In addition, a substantial portion of DRS' cash flow from operations must
be dedicated to the payment of principal and interest on its indebtedness.
During the fiscal year ended March 31, 1998, DRS used approximately $6.2
million, or 233% of cash flow from operations, for principal and interest
payments on its debt obligations. Based on current projections for the current
fiscal year, DRS expects that approximately $14.1 million, or 281% of cash flow
from operations, will be used for principle and interest payments on its debt
obligations. This use of DRS' cash flow reduces the funds available for other
purposes, which may adversely affect the continued success of DRS' business.
Significant operating and financial restrictions are also imposed on DRS
by:
o the Mellon credit agreement (i.e., a $150 million secured credit
facility with Mellon Bank, N.A.); and
o the indenture relating to DRS' 9% Senior Subordinated Convertible
Debentures.
These restrictions affect, and often significantly limit or prohibit, DRS'
ability to incur additional indebtedness and pay dividends. The Mellon credit
agreement also contains covenants limiting, for example:
o borrowings by DRS and its subsidiaries;
o liens on assets of DRS and its subsidiaries;
o fundamental changes, such as a merger or sale of substantially all of
DRS' assets; and
o guaranties by DRS.
INABILITY OF DRS TO COMPETE EFFECTIVELY IN THE MILITARY ELECTRONICS
INDUSTRY MAY ADVERSELY AFFECT DRS' BUSINESS
DRS participates in the military electronics industry. This industry is
highly competitive and characterized by rapid technological change. The possible
inability of DRS to compete effectively and to keep pace with advancements in
technology could adversely affect DRS' business. For example, the potential
inability of DRS to improve existing product lines and develop new products and
technologies could adversely affect DRS' business. In addition, the introduction
by competitors of new products with greater capabilities could also adversely
affect DRS' business.
There are many competitors in the markets in which DRS sells its products.
Many of these competitors are substantially larger than DRS, devote
substantially greater resources to research and development and generally have
greater resources. Consequently, these competitors may be better positioned than
DRS to take advantage of economies of scale and develop new technologies. Some
of these competitors are also suppliers to DRS.
In addition, DRS believes that its future growth and success will depend on
its ability to attract, train and retain qualified technical personnel. If DRS
has an insufficient number of personnel to develop new products for DRS and
perform DRS' contracts, DRS would be at a disadvantage in comparison to its
competitors.
Because there is a continuing demand in the military electronics industry
for qualified technical personnel, there can be no assurance that DRS will be
able to maintain a sufficient number. This possibility could have a material
adverse effect on DRS' contract performance or its ability to capitalize on
market opportunities.
In the military sector, DRS competes with many first- and second-tier
defense contractors on the basis of product performance, cost, overall value,
delivery and reputation. There can be no assurance that DRS will continue to
compete effectively in this sector.
DRS MAY EXPERIENCE PRODUCTION DELAYS IF SUPPLIERS FAIL TO DELIVER MATERIALS
TO DRS
DRS' manufacturing process for certain of its products consists primarily
of the assembly of purchased components and testing of the product at various
stages in the assembly process.
19
<PAGE>
Although materials and purchased components generally are available from a
number of different suppliers, several suppliers are DRS' 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. DRS has not experienced significant production delays attributable to
supply shortages, but occasionally experiences procurement problems with respect
to certain components, such as semiconductors and connectors. In addition, with
respect to DRS' electro-optical products, certain materials, such as germanium,
zinc sulfide and cobalt, may not always be readily available.
IF DRS LACKS SUFFICIENT FUNDS TO PAY AMOUNTS DUE AT MATURITY OR MAKE
REQUIRED REPURCHASE OF 9% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES, THE
VALUE OF DRS COMMON STOCK MAY BE ADVERSELY AFFECTED
The source of funds for any payment at maturity or earlier repurchase of
DRS' 9% Senior Subordinated Convertible Debentures will be DRS' available cash
or cash generated from operating or other sources. Examples of other sources
include borrowings or sales of assets or equity securities of DRS. There is no
sinking fund with respect to these debentures.
The amount that DRS may be required to pay at either maturity or earlier
repurchase may be significant because:
o the entire outstanding principal amount of these debentures will
become due and payable at maturity; and
o upon the occurrence of certain events, DRS will be required to
repurchase all or a portion of these debentures.
Consequently, there can be no assurance that DRS will have sufficient funds
either to:
o pay the principal due at the maturity of these debentures; or
o repurchase these debentures upon the occurrence of an event triggering
a repurchase requirement.
FUTURE SALES OF SHARES OF DRS COMMON STOCK THAT MAY BE TRADED IN THE PUBLIC
MARKET MAY LOWER THE PRICE OF DRS COMMON STOCK
The sale, or availability for sale, of substantial amounts of DRS common
stock in the public market could adversely affect the prevailing market price of
the DRS common stock and could impair DRS' ability to raise additional capital
through the sale of its securities. As of December 31, 1998, there was an
aggregate of 6,359,503 shares of DRS common stock outstanding (excluding 385,164
shares held in treasury). Of such shares, 520,768 are "restricted" under the
Securities Act of 1933, and are resalable pursuant to the limitations of Rule
144 under the Securities Act. DRS' 9% Senior Subordinated Convertible Debentures
are convertible at any time prior to maturity, unless previously redeemed or
repurchased, into shares of common stock, at a conversion price of $8.85 per
share, subject to adjustment under certain circumstances.
THE MARKET FOR DRS COMMON STOCK MAY NOT BE SUFFICIENTLY LIQUID
At present, DRS common stock is primarily owned by a small number of
institutional investors. DRS common stock, DRS' 9% Senior Subordinated
Convertible Debentures and the shares of DRS common stock issuable upon
conversion of these debentures are listed on the AMEX. The markets for these
listed securities have historically been characterized by limited trading volume
and a limited number of holders. Therefore, there can be no assurance that a
more active trading market for the DRS common stock will develop.
20
<PAGE>
THE PROPOSED MERGER
At separate meetings, the DRS stockholders and NAI shareholders will vote
on a proposal to approve and adopt an Agreement and Plan of Merger, dated as of
August 26, 1998, among DRS, DRS Merger Sub, Inc., a direct wholly-owned
subsidiary of DRS recently incorporated solely to effect the merger, and NAI,
and the related transactions. In addition, at the DRS meeting, the DRS
stockholders will vote upon a proposal to amend DRS' 1996 Omnibus Plan. For
convenience, when we refer to the merger subsidiary DRS Merger Sub, Inc. in this
joint proxy statement/prospectus, we will use the abbreviation "Merger Sub."
The merger agreement provides, for the merger of Merger Sub with and into
NAI with NAI continuing as the surviving corporation and a direct wholly-owned
subsidiary of DRS. In the merger:
o each share of NAI common stock issued and outstanding immediately
before the effective time of the merger, without any action by its
holder, will be exchanged into the right to receive either 0.25 or
0.23 shares of DRS common stock, depending on the average reported
closing price for each share of DRS common stock on AMEX for the
consecutive 60-trading day period ending two business days before the
effective date, with cash being paid for fractions of shares;
o each NAI warrant outstanding and unexercised as of the effective time
will be assumed by DRS and will become the right to purchase a number
of shares of DRS common stock equal to the product of the exchange
ratio and the number of shares of NAI common stock subject to such
assumed NAI warrant at a per share price equal to $10.00 or $10.87
(depending on whether the exchange ratio is 0.25 or 0.23,
respectively), with cash being paid for fractions of shares;
o each NAI option outstanding as of the effective time shall be
exchanged for and become the right to purchase a number of shares of
DRS common stock equal to the product of the exchange ratio and the
number of shares of NAI common stock subject to such NAI option at a
per share price equal to the aggregate exercise price for the shares
of NAI common stock subject to such NAI option divided by the number
of full shares of DRS common stock purchasable pursuant to such NAI
option, with cash being paid for fractions of shares; and
o each NAI convertible note outstanding as of the effective time shall
be amended, as set forth in the consent solicitation dated January
25, 1999, and deemed to represent rights with respect to DRS common
stock such that it shall be exchangeable into the number of shares of
DRS common stock equal to the product of the exchange ratio and the
number of shares of NAI common stock subject to such NAI convertible
note at a per share conversion price equal to $8.00 or $8.70
(depending on whether the exchange ratio is 0.25 or 0.23,
respectively), with cash being paid for fractions of shares.
For more information regarding what will happen to each NAI shareholder, see
"The Merger Agreement--Consideration to be Received in the Merger." For more
information regarding what will happen to each holder of NAI warrants, NAI
options and NAI convertible notes, see "The Merger Agreement--Warrant,
Convertible Notes and Options."
In order for the merger to be completed, the shares of DRS common stock
that will be issued to the NAI shareholders in the merger must be approved for
listing on the AMEX, subject to official notice of issuance, before the
effective time. An application will be filed for listing the shares of DRS
common stock on the AMEX.
BACKGROUND OF THE MERGER; MATERIAL CONTACTS BETWEEN THE PARTIES
In October 1994, the NAI board began considering various strategic
alternatives in order to deal with NAI's current and anticipated cash flow
difficulties. NAI's current and anticipated cash flow difficulties resulted from
increased expenditures related to the closing of its Hauppauge facility,
shipping delays at its Codar facility, operating losses at its Lynwood and
Systems Division facilities and large principal reduction requirements under its
existing debt agreement. In late 1994, NAI retained Needham & Co., Inc. as its
financial advisor to assist in the evaluation of NAI's strategic alternatives,
which included a private placement of securities, a merger with a third party or
a sale of NAI. In
21
<PAGE>
early 1995, NAI and DRS began discussing the possibility of a merger between the
two companies. On May 23, 1995, the NAI board approved the signing of a letter
of intent and the negotiation of a definitive merger agreement. Under this
original letter of intent, NAI shareholders were to receive 0.6 shares of DRS
Class B common stock in exchange for each share of NAI common stock. The parties
then began negotiating a definitive merger agreement and continued their due
diligence, or investigation of each company's records. In connection with this
transaction, McFarland Dewey & Co., LLC acted as financial advisor to DRS. On
June 13, 1995, NAI and DRS announced that DRS had decided not to continue to
pursue a merger between the two companies under the terms and conditions
provided for in this original letter of intent. Although executives of NAI and
DRS continued to discuss the possibility of a merger under alternative
conditions, these negotiations ended without an agreement.
In particular, the representatives of DRS identified three reasons why DRS
decided not to pursue the merger with NAI in 1995. One reason was that NAI was
facing a class action lawsuit at the time. TDA Trading Corp., individually and
on behalf of a class of persons similarly situated, commenced a securities fraud
class action in the United States District Court for the Eastern District of New
York against Robert A. Carlson, Richard A. Schneider and NAI. This case went to
trial and it was resolved in favor of NAI and the other defendants. NAI incurred
no liability in connection with the case.
Another reason that DRS decided to terminate the negotiations was the
substantial losses incurred by NAI's Codar subsidiary. Primarily in response to
the termination of Navy Standard Teleprinter production, NAI announced in April
1994 that it would close its two New York facilities in September 1994 and
transfer its New York military products operations and certain key personnel to
Codar's Colorado location by the end of September 1994. Codar attempted to
integrate three different lines of business into its Colorado facility, which
had not historically produced the products being introduced in any significant
quantities. Codar subsequently reported substantial losses.
In addition, DRS was concerned about possible claims by the U.S. government
in connection with a post-award audit. The audit was concluded without any
material adjustments being required.
Although NAI had some preliminary discussions with other potential merger
partners, no agreement could be reached with any of these parties. All of the
discussions that took place with these potential partners were only exploratory
in nature. None of the discussions continued to a point where the parties
considered entering into a letter of intent.
In late 1995, NAI had discussions with Charles S. Holmes regarding his
possible investment in NAI. Mr. Holmes and NAI discussed the possibility of NAI
conducting an offering of warrants and convertible notes of NAI. The NAI board
subsequently determined that NAI should conduct a private placement of NAI
warrants and NAI convertible notes. In December 1995, Mr. Holmes was appointed a
director of NAI. In February 1996, NAI completed the private placement, in which
Mr. Holmes was the principal investor.
In the fall of 1997, Mr. Holmes spoke with Mark S. Newman, Chairman of the
Board, President and Chief Executive Officer of DRS, to determine if DRS had
continued interest in exploring alternatives involving DRS and NAI. McFarland
Dewey, which had served as financial advisor to DRS during the earlier
discussions and negotiations with NAI, again served as financial advisor to DRS.
On November 28, 1997, DRS and NAI signed a confidentiality agreement. In late
December 1997, Mr. Holmes and Mr. Newman discussed possible exchange ratios for
a merger involving DRS and NAI. On March 20, 1998, DRS delivered to NAI a draft
non-binding letter of intent providing for such a merger, in which shareholders
of NAI would receive 0.25 shares of DRS common stock for each share of NAI
common stock.
On April 8, 1998, NAI and DRS entered into a new letter of intent. Each
company issued a press release announcing the signing of this letter of intent.
This letter of intent provided for a merger of NAI and DRS where:
o NAI shareholders would receive 0.25 of a share of DRS common stock for
each share of NAI common stock;
o holders of NAI warrants would receive DRS warrants on substantially
the same terms for the right to purchase DRS common stock based on
this exchange ratio; and
22
<PAGE>
o holders of NAI convertible notes would receive DRS convertible notes
on substantially the same terms, which would be convertible into
shares of DRS common stock based on this exchange ratio.
In connection with the letter of intent, each of Mr. Holmes, C. Shelton
James, a current director of NAI, and the Charles S. Holmes 1997 Trust agreed to
enter into an NAI shareholder's agreement. Each party began conducting a due
diligence review of the other party. Pursuant to the letter of intent, the
parties intended that a definitive agreement would be signed by May 8, 1998, and
the merger would be consummated before August 15, 1998. The parties decided that
the transaction would involve the merger of Merger Sub with and into NAI, with
NAI being the surviving corporation.
Although the current exchange ratio of 0.25 of a share of DRS common stock
for each share of NAI common stock appears to be substantially lower than the
exchange ratio that was originally negotiated in 1994, the difference is due in
large part to the fact that more shares of NAI common stock are currently
outstanding than in 1994. As of March 19, 1995, there were 7,195,567 shares of
NAI common stock outstanding. By comparison, there were 9,179,567 shares of NAI
common stock outstanding on December 31, 1998. Moreover, the NAI convertible
notes and the NAI warrants did not exist when NAI and DRS first discussed a
possible merger in 1994. The existence of the NAI convertible notes and the NAI
warrants results in the further reduction of the exchange ratio since the notes
and warrants can be converted into additional shares of NAI common stock.
As of January 13, 1999, the aggregate principal amount of NAI convertible
notes outstanding totaled $5,059,500. The NAI convertible notes are convertible
into shares of NAI common stock at a conversion price of $2.00 per share. As of
January 13, 1999, the NAI convertible notes may be converted into 2,529,750
shares of NAI common stock.
In addition, NAI has issued and outstanding NAI warrants to purchase
4,412,700 shares of NAI common stock; these 4,412,700 shares of NAI common stock
include 2,000,000 shares of NAI common stock that Charles S. Holmes would be
entitled to purchase upon the exercise of his NAI warrants. Mr. Holmes will
surrender these NAI warrants in connection with the purchase of Wilcom, Inc.
Assuming all of the existing NAI convertible notes and NAI warrants are
converted into shares of NAI common stock as of December 31, 1998, the total
number of outstanding shares of NAI common stock would be 16,134,517.
Another factor which explains the decrease in the current exchange ratio
from the exchange ratio negotiated in 1994 is the substantial change in the
respective per share prices of DRS common stock and NAI common stock. On
December 30, 1994, the closing price for DRS common stock, Class A was $4.25 per
share and the closing price for DRS common stock, Class B was $4.00 per share.
DRS has since combined the classes into one class of common stock. The closing
price for the NAI common stock on December 30, 1994 was $2.813 per share. During
the three-year period between negotiations, the price for DRS shares increased
substantially. The closing price for DRS common stock on August 26, 1998, the
date that the merger agreement was signed, was $10.00 per share; the closing
price for NAI shares on August 26, 1998 was $1.813 per share.
On May 20, 1998, a meeting of the DRS board was held at which DRS'
management and financial advisors reviewed the merger transaction as proposed in
the letter of intent. McFarland Dewey made an oral presentation to the DRS
board, including a discussion of valuation methodologies and analyses used in
evaluating the proposed merger. In this oral presentation, McFarland Dewey
opined that, as of May 20, 1998, the merger consideration to be paid by DRS was
fair, from a financial point of view, to DRS stockholders. Although satisfied
with most of the terms of the proposed merger transaction, the DRS board was
dissatisfied with the condition of the operations and assets of Wilcom, Inc.,
one of NAI's subsidiaries, and DRS informed NAI of its concerns. The parties
then initiated discussions as to the various alternative approaches that could
be used to address DRS' concerns regarding Wilcom, Inc., including the
disposition of Wilcom, Inc. prior to the consummation of the merger, as well as
to the completion of due diligence by both sides.
During the course of the past four years, NAI tried to sell Wilcom, Inc. as
a separate entity. In 1994, NAI hired Needham & Co., Inc. to explore possible
strategic alternatives. Needham & Co., Inc. prepared a separate information
package concerning Wilcom, Inc. Although some preliminary discussions did take
place with a few potential acquirers, negotiations never continued after some
exploratory discussions.
23
<PAGE>
Since no purchaser for Wilcom, Inc. could be found, Mr. Newman and Mr.
Holmes discussed the possible alternative approaches to the merger that could be
taken to address DRS' concerns regarding Wilcom, Inc. In their discussions, DRS
and NAI proposed that:
o Mr. Holmes would purchase Wilcom, Inc. for a purchase price of:
o $150,000; and
o the surrender of:
o 300,000 warrants to purchase shares of NAI common stock at a
purchase price of $3.00 per share; and
o 1,700,000 NAI warrants to purchase shares of NAI common
stock at a purchase price of $2.50 per share; and
o NAI shareholders would receive 0.25 shares of DRS common stock for
each share of NAI common stock.
Subsequently, Mr. Newman and Mr. Holmes again discussed the proposed terms of
the merger. On May 28, 1998, they discussed a revised proposal with NAI, where
NAI shareholders would receive 0.23 shares of DRS common stock for each share of
NAI common stock, but in the event that the average reported closing prices per
share of DRS common stock for the consecutive 60-trading day period ending two
business days before the effective date of the merger fell below $12.00 per
share, NAI shareholders would receive 0.25 shares of DRS common stock for each
share of NAI common stock.
There was no real decrease in the exchange ratio as a result of DRS'
decision not to acquire Wilcom, Inc., because Wilcom, Inc. was not a significant
factor in the calculation of the exchange ratio. DRS' management did not assign
any significant value to Wilcom, Inc. when negotiating the merger.
On May 28, 1998, after discussions between DRS and NAI on this revised
proposal, NAI decided to continue its due diligence of DRS' operations and the
negotiation of a definitive merger agreement. On May 28, 1998, NAI sought to
retain Commonwealth Associates to determine the fairness, from a financial point
of view, to the holders of NAI common stock, NAI warrants and NAI convertible
notes of the merger consideration to be received by such holders in the merger.
On June 19, 1998, various representatives and legal advisors of DRS and NAI
met in New York to discuss certain outstanding issues relating to the revised
proposal.
On July 7, 1998, the NAI board met to evaluate the proposed transaction
with DRS. At this meeting, Commonwealth made an oral presentation of its written
report that was distributed to NAI's directors. Based upon and subject to
certain matters stated in Commonwealth's report, Commonwealth delivered an
opinion that each of the exchange ratio and the consideration to be received by
NAI in connection with the sale of Wilcom, Inc. was fair, from a financial point
of view, to the NAI shareholders. The NAI board voted to approve the merger,
subject to the satisfactory resolution of certain unresolved issues and the
receipt of a final fairness opinion from Commonwealth. During the NAI board
meeting, Richard A. Schneider, NAI's Executive Vice President and Chief
Financial Officer, informed the NAI board that both revenues and earnings at
Wilcom, Inc. were substantially behind the projected targets. The NAI board
opted to sell or liquidate Wilcom, Inc. and treat Wilcom, Inc. as a discontinued
operation. This election requires NAI to segregate the operating performance of
Wilcom, Inc., both past and future, and classify such results as "earnings
(loss) from discontinued operations."
On July 21, 1998, a meeting of the DRS board was held at which DRS'
management and financial advisors reviewed the revised proposal. McFarland Dewey
provided its final fairness opinion to the DRS board, which included a
discussion of valuation methodologies and analyses used in evaluating the
proposed merger. In this opinion, McFarland Dewey opined that, as of July 21,
1998, the merger consideration to be paid by DRS was fair, from a financial
point of view, to DRS stockholders. The DRS board approved the merger, subject
to the satisfactory resolution of certain unresolved issues.
24
<PAGE>
Following the meetings of the DRS board and NAI board, the parties
continued to negotiate and resolve open issues with respect to the proposed
merger and the sale of Wilcom, Inc.
The definitive merger agreement (to which the form of Wilcom stock purchase
agreement is attached as Exhibit B) and NAI shareholder's agreements were
executed on August 26, 1998. Later that day, DRS and NAI issued a joint press
release to announce publicly the transaction.
On September 21, 1998, NAI, Wilcom and Wilcom Acquisition Corp. executed
the Wilcom stock purchase agreement.
On December 22, 1998, DRS, Merger Sub and NAI executed an amendment to the
merger agreement extending the "deadline" for completion of the merger from
December 31, 1998 to February 4, 1999. A copy of this amendment to the merger
agreement is attached as Annex A-II to this joint proxy statement/prospectus.
On January 21, 1999, DRS, Merger Sub and NAI executed another amendment to
the merger agreement further extending the "deadline" for completion of the
merger from February 4, 1999 to February 17, 1999. A copy of this amendment to
the merger agreement is attached as Annex A-III to the joint proxy
statement/prospectus.
Other than as discussed above with respect to the negotiations regarding
the merger agreement, there have been no material contracts, arrangements,
understandings, relationships, negotiations or transactions between DRS and NAI
in the last two fiscal years or in 1999. Prior to entering into the merger
agreement, DRS and NAI have occasionally been contracted to work on the same
projects but have not been employed by or for each other pursuant to any
material contracts. Since the merger agreement was signed, DRS and NAI have been
exploring joint business opportunities and other means of mutually supporting
each other's businesses in anticipation of the merger being successfully
consummated.
DRS REASONS FOR THE MERGER; RECOMMENDATION OF THE DRS BOARD OF DIRECTORS
As part of its long-term growth strategy, DRS has been seeking to expand
its core businesses into new markets. DRS viewed the merger as an opportunity to
increase its domestic and international customers.
Before deciding to approve the merger, the DRS board consulted with DRS'
management, as well as its financial and legal advisors, and considered a number
of factors, including, without limitation, the following potential benefits:
o its belief that the merger presents DRS with an opportunity to
increase its critical mass to attract and retain better management and
to grow domestically and internationally in line with ongoing trends
in the defense industry and the world economy as a whole;
o its belief that the potential increase in DRS' critical mass due to
the merger will enable DRS to attract and retain not only better
management, but also better employees generally;
o the opportunity to integrate NAI's highly compatible product lines
into DRS
o its assessment of cost-saving synergies that will be realized by the
merger by:
o eliminating certain duplicative overhead positions and expenses;
and
o providing an enhanced credit profile for the refinancing of NAI's
outstanding indebtedness;
o its belief that the merger will enable DRS and NAI to serve the needs
of their customers more efficiently and effectively;
o the size of the combined equity base of the two companies relative to
the capacity for future issuances of securities, both debt- and
equity-related;
o its belief that the consideration to be paid by DRS to acquire NAI is
fair from a financial point of view to DRS stockholders based on:
25
<PAGE>
o the current financial conditions and historical results of the
operations of DRS and NAI;
o the current and historical market prices of and trading
information regarding DRS common stock and NAI common stock;
o the value of NAI based on analyses of its business segments and
based on comparisons with other defense electronics companies;
o other information concerning the business, assets, capital
structure, financial performance and condition and prospects of
NAI and DRS;
o the structure and terms of the merger and the terms and
conditions of the merger agreement, including the exchange ratio
and the intended tax and accounting treatment; and
o the financial presentation of McFarland Dewey and the opinion of
McFarland Dewey as to the fairness to DRS stockholders from a
financial point of view of the consideration to be paid by DRS;
and
o its belief that NAI could obtain approval of the merger from the NAI
shareholders efficiently because some NAI shareholders entered into
agreements to vote their shares of NAI common stock in favor of the
merger.
The DRS board also considered a number of potentially negative factors in
its deliberations concerning the merger, including, without limitation:
o the inherent challenges to combining the business of two corporations,
the difficulty of fully realizing synergies from the merger, including
cost savings and operating efficiencies, and the attendant risk that
management resources may be diverted from other strategic
opportunities and from operational matters for an extended period of
time;
o the poor recent performance of and financial difficulties experienced
by NAI, including a net loss of approximately $2,400,000 in its fiscal
year ended December 31, 1997;
o the dilutive effect of issuing shares of DRS common stock to NAI
shareholders on DRS stockholders' holdings; and
o the market's perception of the combined companies may not be as
favorable as currently anticipated.
The previous discussion of the information and factors discussed by the DRS
board includes all material factors considered by the DRS board. The DRS board
did not quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the merger is in the best
interests of DRS and its stockholders, and individual directors may have given
different weights to different factors.
FOR THE REASONS DESCRIBED ABOVE, THE DRS BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE DRS
STOCKHOLDERS VOTE "FOR" THE APPROVAL AND AUTHORIZATION OF THE MERGER AGREEMENT
AND THE MERGER.
OPINION OF DRS FINANCIAL ADVISOR
BACKGROUND INFORMATION ON THE OPINION
At the meeting of the DRS board on May 20, 1998, McFarland Dewey delivered
its oral opinion that the merger consideration to be paid by DRS was fair, from
a financial point of view, to DRS stockholders. On July 21, 1998, following the
change in some of the terms of the transaction, McFarland Dewey confirmed such
opinion in writing. McFarland Dewey subsequently confirmed such opinion in
writing on January 25, 1999.
26
<PAGE>
THE FULL TEXT OF THE WRITTEN OPINION OF MCFARLAND DEWEY, DATED JULY 21,
1998, AND THE LETTER OF MCFARLAND DEWEY SUBSEQUENTLY CONFIRMING THIS OPINION AS
OF JANUARY 25, 1999 ARE ATTACHED AS ANNEXES B-I and B-II, RESPECTIVELY, TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AND ARE INCORPORATED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS BY REFERENCE. THE OPINION SETS FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN IN
CONNECTION WITH SUCH OPINION. THE DRS BOARD DID NOT IMPOSE ANY LIMITS UPON
MCFARLAND DEWEY WITH RESPECT TO THE INVESTIGATIONS MADE OR THE PROCEDURES
FOLLOWED IN RENDERING SUCH OPINION. DRS STOCKHOLDERS ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY.
The exchange ratio was determined through negotiations between NAI and DRS
and was approved by the DRS board. McFarland Dewey provided advice to DRS during
the course of such negotiations.
The summary set forth below does not purport to be a complete description
of the analyses underlying the opinion of McFarland Dewey or the presentation
made by McFarland Dewey to the DRS board. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances.
In arriving at its final fairness opinion, McFarland Dewey did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, McFarland Dewey believes that its analyses
must be considered as a whole and that selecting portions of its analyses,
without considering all analyses, would create an incomplete view of the process
underlying its opinion.
In performing its analyses, McFarland Dewey made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
McFarland Dewey, DRS or NAI. Any estimates contained in the analyses performed
by McFarland Dewey are inherently subject to substantial uncertainty and may not
reflect actual values or future results. In addition, the DRS board considered
several factors in its decision to approve the merger. Thus, you should not view
the opinion of McFarland Dewey as the determinative factor in DRS' management's
evaluation of the fairness of the exchange ratio.
In arriving at its opinion, McFarland Dewey, among other things:
o reviewed certain publicly available business and financial information
relating to DRS and NAI which McFarland Dewey deemed to be relevant;
o reviewed certain information, including financial forecasts furnished
to McFarland Dewey by DRS and NAI, relating to the business, earnings,
cash flow, assets, liabilities and prospects of each of DRS and NAI,
as well as the amount and timing of the expected expense reduction
from the merger (i.e., any cost and related expense savings expected
to result from the merger) without giving any effect to any additional
operating synergies resulting from the combined entity;
o conducted discussions with members of senior management and
representatives of DRS and NAI concerning the matters described in the
first two bullet points above, as well as their respective businesses
and prospects before and after giving effect to the merger, and the
expected expense reduction from the merger;
o reviewed the market prices and valuation multiples for DRS common
stock and NAI common stock and compared them with those of certain
publicly traded companies which McFarland Dewey deemed to be relevant;
o reviewed the results of operations of DRS and NAI and compared them
with those of certain publicly traded companies which McFarland Dewey
deemed to be relevant;
o compared the proposed financial terms of the merger with the financial
terms of certain other transactions which McFarland Dewey deemed to be
relevant;
o participated in certain discussions and negotiations among
representatives of DRS and NAI and their financial, accounting and
legal advisors;
o reviewed the impact of the merger on the combined company which
reflected the impact of purchase accounting and the associated
goodwill upon the projected DRS earnings and balance sheet;
27
<PAGE>
o reviewed a draft of the merger agreement dated July 20, 1998; and
o reviewed such other financial studies and analyses and took into
account such other matters as McFarland Dewey deemed necessary,
including McFarland Dewey's assessment of general economic, market and
monetary conditions.
In preparing its opinion, McFarland Dewey assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to McFarland Dewey and did not assume any responsibility for
independently verifying such information. McFarland Dewey has not undertaken or
received an independent evaluation or appraisal of any of the assets or
liabilities of DRS or NAI. In addition, McFarland Dewey did not assume any
obligation to conduct any physical inspection of the properties or facilities of
DRS or NAI.
With respect to the financial forecast information and the expected expense
reduction from the merger furnished to or discussed with McFarland Dewey by DRS
or NAI, McFarland Dewey assumed that they have been reasonably prepared or
reviewed and reflect the best currently available estimates and judgment of DRS'
or NAI's management. McFarland Dewey further assumed that the merger will be
accounted for as a purchase under generally accepted accounting principles and
that it will qualify as a tax-free reorganization for U.S. federal income tax
purposes. McFarland Dewey also assumed that the final form of the merger
agreement would be substantially similar to the last draft reviewed by McFarland
Dewey.
McFarland Dewey based its opinion upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of such
opinion. McFarland Dewey assumed that for the merger, no restrictions, including
any divestiture requirements or amendments or modifications, will be imposed
that will have a material adverse effect on the contemplated benefits of the
merger.
McFarland Dewey expressed its opinion to the DRS board based upon an
exchange ratio of 0.25. Although an exchange ratio of 0.23 would have applied in
July, an exchange ratio of 0.25 is expected as of the date of this joint proxy
statement/prospectus, and McFarland Dewey does not expect the exchange ratio to
change unless there is a material change in general market conditions. Based on
a closing price of $13.00 per share of DRS common stock on the AMEX on April 1,
1998 (the date of the initial negotiation), the 0.25 exchange ratio resulted in
an implied price of $3.25 per share of NAI common stock; and based on a closing
price of $11.38 per share of DRS common stock on the AMEX on July 21, 1998 (the
last trading day prior to the preparation of materials for McFarland Dewey's
presentation to the DRS board), the 0.25 exchange ratio resulted in an implied
price of $2.84 per share of NAI common stock. Based on the 52-week high and the
52-week low of the closing price per share of DRS common stock on the AMEX for
the period ended July 20, 1998, the 0.25 exchange ratio resulted in an implied
price of $3.84 and $2.56, respectively, per share of NAI common stock.
Regardless of the market price of DRS common stock, after giving effect to the
merger, shareholders of NAI in the aggregate would have a fully diluted common
stock ownership interest of approximately 25% of the total common stock
ownership of the pro forma combined company, based on an exchange ratio of 0.25.
SUMMARY OF THE MATERIAL ANALYSES
The following is a brief summary of the material analyses presented by
McFarland Dewey to the DRS board in connection with the rendering of its
opinion.
DISCOUNTED CASH FLOW ANALYSIS
McFarland Dewey calculated, using a discounted cash flow methodology, a
range of per share equity values for NAI based on projections prepared by the
management of NAI for the years 1998 to 2002, using a range of 2002 terminal
values based on net income multiples from 10x to 14x and a range of discount
rates from 12% to 16%. Based on its analysis, McFarland Dewey derived a summary
reference range of implied per share equity values of NAI common stock of $2.86
to $4.49.
28
<PAGE>
STOCK PRICE HISTORY
To provide contextual data and comparative market data, McFarland Dewey
examined the history of the trading prices and their relative relationships for
both NAI common stock and DRS common stock for the latest five years and
compared such prices to the S&P 500 Index and Russell 2000 Index. This
information was presented solely to provide the DRS board with background
information regarding the stock prices of DRS and NAI over the periods
indicated.
COMPARISON OF SELECTED COMPARABLE COMPANIES
McFarland Dewey compared the trading multiples for NAI to corresponding
multiples of a selected group of defense electronic companies consisting of DRS,
ESCO Corporation, Cubic Corporation, L-3 Communications, Nicholas Research
Corporation, Analysis & Technology, Inc. and Miltope Group, Inc. The ratio of
NAI's price to earnings, excluding non-recurring and unusual items ("P/E ratio")
for projected next fiscal year's net income was 8.2x, based on the closing price
of NAI common stock on July 21, 1998 of $1.81. McFarland Dewey calculated the
mean of the P/E ratios for the above defense technology group for such period to
be 15.0x, and the median of the P/E ratios to be 12.7x. Based on its analysis,
McFarland Dewey derived a summary reference range of implied per share equity
values of NAI common stock of $2.20 to $3.30, which suggests that the
appropriate price to be paid for NAI common stock of $2.84 falls within the
price range implied by comparable companies.
No company in the defense technology group selected is identical to NAI.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading value of NAI and the companies in the defense technology
group.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS
McFarland Dewey reviewed certain publicly available information regarding
ten selected defense technology related acquisitions and calculated historical
and forward (to the extent of available information) revenues, EBIT (i.e.,
earnings before interest and taxes) and EBITDA (i.e., earnings before interest,
taxes, depreciation and amortization) multiples for such transactions.
These ten selected defense technology related acquisitions were:
o SPD Technologies/L-3 Communications (July 6, 1998);
o Tracor/GEC, PLC (April 21, 1998);
o Ocean Systems/L-3 Communications (March 29, 1998);
o ILEX/L-3 Communications (April 4, 1998);
o Satellite Transmission Systems/L-3 Communications (February 5, 1998);
o Stellex Microwave/Mentmore Holdings (October 31, 1997);
o Spar/DRS Technologies (October 29, 1997);
o Husky Company/WPI (June 27, 1997);
o Hazeltine/GEC-Marconi (May 23, 1996); and
o AEI Industries/Tracor (February 22, 1996).
The mean and median of transaction values as multiples of LTM revenues
(i.e., revenues in the last twelve months) for the comparable transactions were
1.0x. The mean and median of transaction values as multiples of LTM EBIT (i.e.,
EBIT in the last twelve months) for the comparable transactions were 12.5x and
20.8x, respectively. The mean and median transaction values as multiples of LTM
EBITDA (i.e., EBITDA in the last twelve months) for the comparable transactions
were 8.5x and 5.8x, respectively. Based on its analysis of such multiples,
McFarland Dewey calculated a summary reference range of implied per share equity
values of NAI common stock of $3.47 to $3.88.
No company or transaction used in the above analysis as a comparison was
identical to DRS or NAI or this transaction, except DRS was a party involved in
the Spar/DRS Technologies transaction. Accordingly, an analysis of
29
<PAGE>
the results of the comparison is not purely mathematical; rather it involves
complex considerations and judgments concerning differences in historical
projected financial and operating characteristics of the comparable acquired
companies and other factors that could affect the acquisition value of such
companies and NAI.
RELATIVE CONTRIBUTION ANALYSIS
McFarland Dewey compared the projected pro forma diluted aggregate equity
ownership interest of 25% for the shareholders of NAI to the pro forma percent
contributions of NAI to the operating income of the pro forma combined company
(including the impact of the expected expense reductions from the merger) of 23%
and 25% in 1999 and 2000 fiscal years, respectively. McFarland Dewey also
compared the pro forma diluted aggregate equity ownership interest of 25% for
the shareholders of NAI to the pro forma percent contributions of NAI to the
EBITDA of the pro forma combined company (including the impact of expected
expense reductions from the merger) of 21% and 22% in 1999 and 2000 fiscal
years, respectively. McFarland Dewey noted to the DRS board that NAI's operating
contribution, on a relative basis, was less than the equity received. This
contribution analysis is based on certain assumptions, such as the expected
expense reductions from the merger, which may occur or be greater or less than
initially anticipated. No effect was given for the expected revenue
opportunities generated by combining the two companies.
EARNINGS PER SHARE ANALYSIS AND BALANCE SHEET EFFECT
McFarland Dewey estimated the accretion or dilution that the merger would
have on pro forma EPS of DRS indicated by the projections prepared by the
managements of DRS and NAI and estimated expense reduction from the merger of
$400,000 for the remainder of fiscal year 1999, and $1.2 million in fiscal year
2000 and thereafter, resulting from the merger and McFarland Dewey also
estimated the impact that the merger would have on the otherwise projected pro
forma balance sheet of DRS, including a substantial charge relating to the
goodwill resulting from purchase accounting. The analysis indicated that the
merger would result in pro forma EPS dilution for the stockholders of DRS for
the 1999 and 2000 fiscal years of approximately 5%, and a reduction in DRS'
ratio of debt to total capitalization assuming all convertible debt is converted
from 29% to 20%. This small earnings dilution is subject to certain assumptions
believed by DRS' management to be conservative, in particular, the expected
expense reduction from the merger which could be greater than DRS' management
anticipates. Also, DRS' management's projections do not include any revenue
increases due to the combining of the two companies. Should any of the above
occur, the earnings per share dilution would be negligible. If, however, the
actual expense reductions resulting from the merger are less than expected by
DRS' management, then the earnings per share dilution may be somewhat greater
than expected.
COMPENSATION TO MCFARLAND DEWEY
Pursuant to a letter agreement, dated April 4, 1995, between DRS and
McFarland Dewey, DRS agreed to pay McFarland Dewey a monthly retainer advisory
fee and a success fee based upon completion of certain advisory assignments
including a potential merger acquisition of NAI. During 1995 and 1996, McFarland
Dewey worked as financial advisor to DRS in connection with a potential merger
transaction with NAI as well as in connection with other transactions. Such
agreement was modified on December 10, 1996 and again on February 10, 1998,
pursuant to which DRS agreed to pay McFarland Dewey a cash fee of $250,000, upon
the consummation of the merger. No separate fee is payable for the fairness
opinion of McFarland Dewey.
Additionally, DRS agreed to reimburse McFarland Dewey for its reasonable
out-of-pocket expenses, including, without limitation, reasonable fees and
disbursements of its legal counsel. DRS has also agreed to indemnify McFarland
Dewey and certain related persons for certain liabilities related to or arising
out of its engagement, including liabilities under the federal securities laws.
NAI REASONS FOR THE MERGER; RECOMMENDATION OF THE NAI BOARD OF DIRECTORS
In 1994, the NAI board retained Needham & Co., Inc. to explore strategic
alternatives available to NAI and to identify possible merger partners or
acquirers for NAI. Needham & Co., Inc. was also asked to prepare a separate
information package for NAI's subsidiary Wilcom, Inc. in connection with the
possible sale of the subsidiary. The representatives of Needham & Co., Inc.
prepared two separate books for distribution to interested parties. Although
30
<PAGE>
there were some exploratory conversations with potential acquirers, the only
serious negotiations involved DRS. During the three years since the initial
negotiations with DRS were discontinued, no potential acquirer expressed any
interest in doing a transaction with NAI. In addition, NAI's financial condition
has deteriorated over the course of the last three years. During the period that
NAI was looking for a strategic partner, NAI always considered the possibility
of selling Wilcom Inc. separately, but NAI has not been able to find a purchaser
for Wilcom, Inc.
The NAI board believes the need to locate a strategic partner continues to
become more immediate as a result of the serious financial conditions facing
NAI. These concerns include the following:
o Weakness in operating results.
NAI is currently experiencing financial difficulties. During 1994 and
1995 NAI experienced severe financial difficulties and incurred
substantial losses, including net losses of approximately $11,619,000.
In 1996 NAI reported a profit of $2,413,000 but in 1997 a net loss of
$2,369,000 was reported. For the first nine months of 1998 NAI
incurred a net loss of $2,900,000. The 1997 loss was principally due
to a reduction in sales (before intercompany eliminations) of NAI's
direct wholly-owned subsidiary, Codar Technology, Inc., from
$32,727,000 in fiscal year 1996 to $14,579,000 in fiscal year 1997 and
a reduction in sales (before intercompany eliminations) of Wilcom,
Inc. from $7,076,000 in fiscal year 1996 to $4,106,000 in fiscal year
1997. During its 1998 second quarter, NAI recorded a loss on disposal
of its discontinued Telecommunications segment of $2,692,000,
including $192,000 for the loss during the phase-out period. There is
no guarantee that NAI will return to profitability.
o NAI's substantial secured indebtedness.
In 1999, NAI's cash flow was inadequate to meet its balloon payment of
$6,500,000 under NAI's credit agreement due on January 15, 1999.
Although NAI has had preliminary discussions with its two principal
bank lenders regarding the need to refinance the payment, no
commitment is in place. Substantially all of NAI's domestic assets
have been pledged to secure the indebtedness outstanding under NAI's
credit agreement. It is not certain that NAI will ever return to
profitability and there is no guarantee that NAI will have enough cash
flow in the future to pay its debts, including the NAI convertible
notes. The NAI convertible notes are unsecured and subordinate in
right of payment to all Senior Indebtedness (as defined in the NAI
convertible notes) of NAI.
o Inability to obtain additional financing.
NAI's estimated cash payments for principal and interest under NAI's
credit agreement, the NAI convertible notes and other agreements over
the remainder of 1999 and the next year are summarized as follows:
1999 2000
---------- --------
Principal on NAI's credit agreement $6,500,000 $ -0-
Principal on NAI convertible notes -0- -0-
Interest on NAI's credit agreement
(assuming repayment on
January 15, 1999) 22,000 -0-
Interest on NAI convertible notes 607,140 607,140
Other interest -0- -0-
---------- --------
$7,129,000 $607,140
As of December 31, 1998 (unless otherwise noted), NAI has outstanding:
o NAI warrants to purchase up to a maximum of 4,112,700 shares of
NAI common stock at an exercise price of $2.50 per share;
o additional warrants to purchase up to a maximum of 300,000 shares
of NAI common stock at an exercise price of $3.00 per share;
o on January 13, 1999 NAI convertible notes convertible into a
maximum of 2,529,750 shares of NAI common stock at a conversion
price of $2.00 per share; and
31
<PAGE>
o NAI options to purchase 637,419 shares of NAI common stock in the
aggregate under the NAI's stock option plans at exercise prices
ranging from $1.875 to $8.33 as of December 31, 1998 and 30,000
shares to certain ex-directors at an exercise price of $2.50 per
share.
If NAI tries to obtain additional financing while NAI warrants,
additional warrants, NAI options and NAI convertible notes are
outstanding, NAI may be subject to harsh terms.
o Possible adverse effects of delisting on NAI stock price.
After reviewing NAI's Quarterly Report on Form 10-Q for the period
ended June 30, 1998, NASDAQ notified NAI that NAI no longer met the
net tangible asset requirement for continued listing on NASDAQ. The
possible delisting of NAI common stock from NASDAQ could cause the
price of the NAI common stock to decline significantly because, among
other things, some institutional holders of NAI common stock may be
required to sell their holdings upon this delisting.
o Possible loss of military business.
Approximately 14% of NAI's backlog of orders which totaled $26.4
million at December 31, 1997 were U.S. military and U.S. government
sales orders. During the years ended December 31, 1996 and 1997, sales
under contracts with the U.S. government made up approximately 38% and
28% of NAI's sales from continuing operations, respectively. NAI
expects that 34% of its business in 1998 will result from military
orders. While Congress continues to debate additional military budget
cuts, we cannot be certain if and how NAI will be affected. Military
orders can be terminated at the convenience of the U.S. government.
When this happens, NAI can seek negotiated settlements to recover its
costs and a reasonable profit. There is no guarantee that NAI will
recover its costs or will earn any profit on any orders terminated by
the U.S. government.
o Industry consolidation.
Consolidation is occurring within the industry involving other public
and private companies. Major consolidation of the defense industry
over the past six years has resulted in a growing need for NAI to
become part of a larger company in order to survive in a healthy
growing manner. NAI competes in a business where technology changes
rapidly and products and equipment become obsolete quickly. NAI has
reduced its spending on independent research and development over the
past few years and further expects to reduce its spending for
independent research and development in 1999.
o Inability to sell Wilcom.
At the NAI board meeting held on July 7, 1998, the NAI board passed a
resolution to sell or liquidate Wilcom, Inc. Accordingly, for
financial reporting purposes, Wilcom, Inc. has been treated as a
discontinued operation. This election requires NAI to segregate the
operating performance of Wilcom, both past and future. NAI's financial
statements have been reclassified to present the Telecommunications
segment as a discontinued operation with a provision in the second
fiscal quarter of 1998 of $2,692,000 for the estimated loss on the
disposition, including $192,000 for operating losses during the
phase-out period. The attendant reduction in tangible net worth caused
NAI to fall below the minimum net tangible asset requirements to
maintain a NASDAQ listing which would disqualify NAI for trading on
the Nasdaq National Market System. NAI has tried several times to sell
Wilcom, Inc., but no serious potential acquirers were ever located.
o Possible foreign currency risk.
As of December 31, 1997, the total assets of NAI were $35,215,000. Of
this amount $10,055,000 or approximately 29% were located outside of
the United States, primarily in the United Kingdom. NAI's foreign
sales (which are comprised of export sales from the U.S. and foreign
revenues from its direct wholly-owned subsidiary, Lynwood Rugged
Systems Limited) in 1997 were $16,784,000, which accounted for
approximately 35% of NAI's total sales. During the fiscal year ended
December 31, 1997, approximately:
o 48% of NAI's foreign sales were to customers in the United
Kingdom;
o 28% of NAI's foreign sales were to customers in Norway; and
o 10% of NAI's foreign sales were to customers in Australia.
32
<PAGE>
All of NAI's sales to customers in the United Kingdom are payable
in British currency. Therefore, fluctuations in exchange rates
between the U.S. dollar and the British pound will impact NAI's
operating results. All export sales from the U.S. are payable in
U.S. dollars, and, therefore, settlement amounts do not fluctuate
with changes in exchange rates. As a result of the political and
economic stability of the United Kingdom, NAI does not believe
that there is serious risk from its foreign operations. However,
there is no guarantee that this will continue to be the case.
When DRS once again expressed interest in a possible merger of NAI and DRS,
the NAI board considered whether or not the interests of the NAI shareholders
would be better served if the companies did not merge. The NAI board considered
all of the financial concerns set forth above that threaten NAI's continued
existence. The NAI board, in consultation with NAI's management, as well as its
financial and legal advisors, considered the benefits that would result from a
merger with DRS and decided that NAI would be better served if NAI pursued the
merger with DRS.
The factors that the NAI board considered include the following:
o Fairness of merger consideration.
The NAI board believes that the consideration that DRS is paying to
NAI shareholders is fair, from a financial point of view. In
evaluating the offer, the NAI board also considered DRS' stock
performance in recent years.
o Ability to pay outstanding debt.
NAI was unable to make the $6,500,000 payment that was due on January
15, 1999 under NAI's credit agreement. In order to prevent its
creditors from exercising their rights against NAI's assets, the
company needs an immediate solution to pay this debt.
The merger will enable NAI to meet its obligations under NAI's credit
agreement by either restructuring its financing on terms more
favorable to NAI or by satisfying the outstanding balance due under
NAI's credit agreement and obtaining its working capital requirement
from DRS' financing arrangements. DRS intends to use part of its
Mellon credit facility to pay the outstanding principal and interest
due uner NAI's credit agreement upon completion of the merger.
o Strategic objectives.
The merger will assist NAI in achieving strategic objectives already
established independently by the two companies. These objectives
include:
o increased revenues;
o increased services to clients of both companies;
o broader geographic coverage both domestically and
internationally; and
o increased sales and marketing resources and expansion into
markets that the companies on their own would find difficult to
accomplish without the merger.
o Administrative efficiencies and cost savings.
The combination will result in administrative efficiencies and cost
savings by consolidating certain overlapping expenses.
o Sale of Wilcom. Inc.
In order to complete the merger, Wilcom, Inc. must be sold. NAI has
entered into the Wilcom stock purchase agreement with Wilcom
Acquisition Corp. in which NAI will sell all of the capital stock of
Wilcom, Inc. to Wilcom Acquisition Corp. Wilcom Acquisition Corp. is a
newly-formed corporation in which Charles S. Holmes and Dennis
McCarthy, current directors of NAI, own all the outstanding shares of
capital stock; Mr. Holmes is the majority stockholder of Wilcom
Acquisition Corp. It is expected that the closing of this sale will
occur immediately before the completion of the merger. As a condition
to completion of the sale of Wilcom, Inc., the Wilcom stock purchase
agreement requires that the merger and the related transactions have
received the required approval from the DRS stockholders and NAI
shareholders. If this approval is not obtained, NAI
33
<PAGE>
believes that the Wilcom stock purchase agreement will be terminated.
If the Wilcom stock purchase agreement is terminated and the sale of
Wilcom, Inc.'s capital stock does not occur, there is no guarantee
that NAI will be able to sell Wilcom, Inc. to another buyer. The fact
that the merger transaction with DRS includes an immediate opportunity
to sell Wilcom is another reason that the proposed merger is
attractive to the NAI board.
o Cost efficiencies.
Cost efficiencies available in combining both companies that should
result in improved earnings performance and therefore an increase in
shareholder value.
The previous discussion of the information and factors discussed by the NAI
board includes all material factors considered by the NAI board. The NAI board
considered the above factors in light of its knowledge of the business, the
industry in general and information provided by NAI's management and
Commonwealth. In view of the number and complexity of factors considered, the
NAI board did not assign a relative weight to any of the factors considered, and
individual directors may have given different weights to different factors.
- --------------------------------------------------------------------------------
FOR THE REASONS DESCRIBED ABOVE, THE NAI BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE NAI
SHAREHOLDERS VOTE "FOR" THE APPROVAL AND AUTHORIZATION OF THE MERGER AGREEMENT
AND THE MERGER.
- --------------------------------------------------------------------------------
OPINION OF NAI FINANCIAL ADVISOR
BACKGROUND INFORMATION ON THE OPINION
In connection with its consideration of the merger, NAI requested that
Commonwealth advise the NAI board with respect to the fairness, from a financial
point of view, of the exchange ratio to the NAI shareholders. Commonwealth's
opinion does not address the fairness of the merger, from a financial point of
view, to holders of NAI convertible notes, NAI options or NAI warrants. On July
7, 1998, Commonwealth delivered to the NAI board an oral presentation based on
its written report, which was distributed at the NAI board meeting on July 7,
1998, and confirmed such opinion in writing, that, as of July 7, 1998, and based
upon and subject to certain matters stated therein, the exchange ratio was fair,
from a financial point of view, to the NAI shareholders. The NAI board also
requested and received from Commonwealth its opinion that the consideration to
be received by NAI in connection with the Wilcom, Inc. sale was fair to the
shareholders of NAI from a financial point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF COMMONWEALTH, DATED JULY 7, 1998,
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW
UNDERTAKEN IN CONNECTION WITH SUCH OPINION. THE FULL TEXT IS ATTACHED AS ANNEX C
TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS BY THIS REFERENCE. WE URGE NAI SHAREHOLDERS TO READ SUCH
OPINION IN ITS ENTIRETY.
No limitations were imposed by the NAI board on the scope of Commonwealth's
investigation or the procedures to be followed by Commonwealth in rendering its
opinion except that the NAI board did not authorize Commonwealth to, and
Commonwealth did not, solicit third-party indications of interest with respect
to a business combination or other extraordinary transaction involving the
purchase of NAI or any of its subsidiaries or assets. In arriving at its
opinion, Commonwealth, among other things:
o reviewed certain publicly available historical financial and operation
data concerning NAI, including its Annual Report to Shareholders and
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
o reviewed certain publicly available historical financial and operating
data of DRS, including its Annual Report to Stockholders and Annual
Report on Form 10-K for the fiscal year ended March 31, 1998 and
Quarterly Reports on Form 10-Q for the quarters ended December 31,
1997 and September 30, 1997;
o interviewed certain members of senior management of NAI to discuss the
prospects for NAI's business;
34
<PAGE>
o interviewed certain members of senior management of DRS to discuss the
prospects for DRS' business;
o reviewed certain information of NAI, including financial forecasts
relating to the business, earnings, cash flow, assets and prospects of
NAI prepared by the management of NAI;
o reviewed certain publicly available financial, operating and stock
market data concerning certain companies engaged in business which
NAI's management deemed relatively comparable to those of NAI;
o inquired as to the financial terms of certain recent transactions
NAI's management deemed relevant;
o reviewed the historical market prices and trading volumes of the NAI
common stock;
o reviewed the historical market prices and trading volumes of the DRS
common stock;
o reviewed a draft, dated April 27, 1998, of the merger agreement;
o reviewed a draft, dated April 27, 1998, of the Wilcom stock purchase
agreement;
o reviewed a draft of this joint proxy statement/prospectus, dated June
26, 1998; and
o conducted such other financial studies, analyses and investigations as
it deemed appropriate. In addition, Commonwealth took into account the
manner in which the financial terms of the merger were negotiated by
DRS and NAI.
In its review and analysis and in formulating its opinion, Commonwealth
assumed and relied upon, without independent verification, the accuracy and
completeness of all information supplied or otherwise made available to it by
NAI and DRS or obtained by Commonwealth from other publicly available sources.
Commonwealth also relied upon the assurance of NAI's and DRS' respective
managements that they were not aware of any information or facts that would make
the information provided by it to Commonwealth incomplete or misleading.
Commonwealth did not conduct a physical inspection of the properties and
facilities of NAI or DRS and did not undertake or receive an independent
appraisal of the assets or liabilities (contingent or otherwise) of NAI or DRS.
With respect to financial forecasts and projections for NAI and DRS,
Commonwealth was advised by NAI and DRS, and assumed without independent
investigation, that such forecasts and projections had been reasonably prepared
and reflected the best currently available estimates and judgments as to the
expected future financial performance of NAI and DRS.
Commonwealth noted that its opinion was necessarily based upon financial,
economic, market and other conditions as they existed and could be evaluated by
Commonwealth on, and the information made available to it as of, the date of its
opinion. Commonwealth has disclaimed any undertaking or obligation to advise any
person of any change in any fact or matter affecting its opinion that is brought
to its attention after the date of its opinion. Although Commonwealth evaluated
the exchange ratio from a financial point of view, Commonwealth was not asked
to, and did not, recommend the specific consideration payable in the merger,
which was determined through negotiations between NAI and DRS in which
Commonwealth did not participate.
The opinion of Commonwealth is for the information of the NAI board for its
use in evaluating the fairness from a financial point of view of the exchange
ratio to the public shareholders of NAI and the terms of the sale of Wilcom,
Inc. Such opinion does not constitute a recommendation as to any action the NAI
board or any shareholder of NAI should take in connection with the merger, the
sale of Wilcom, Inc. or any aspect thereof. Commonwealth's opinion is not an
opinion as to the structure, terms or effect or any other aspect of the merger
or of any of the related transactions or as to merits of the underlying decision
of NAI to enter into the merger or any such transaction.
In preparing its opinion, Commonwealth performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying its opinion or of the presentation by Commonwealth to the NAI board.
The preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Commonwealth did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgements as to the significance and relevance of
each analysis and factor. Accordingly, Commonwealth believes that its analyses
must
35
<PAGE>
be considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying the preparation of its opinion.
In its analyses, Commonwealth made numerous assumptions with respect to NAI and
DRS, industry performance, general business, economic market and financial
conditions and other matters, many of which are beyond the control of NAI and
DRS. The estimates contained in such analyses and the valuation ranges resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. The opinion and analyses of Commonwealth were only one of many
factors considered by the NAI board in its evaluation of the merger and the sale
of Wilcom, Inc. and should not be viewed as determinative of the view of the NAI
board or management of NAI with respect to the exchange ratio, the proposed
merger or the sale of Wilcom, Inc.
SUMMARY OF THE MATERIAL ANALYSES
The following is a summary of certain analyses performed by Commonwealth in
connection with its opinion with respect to the fairness, from a financial point
of view, of the exchange ratio to the shareholders of NAI.
NAI DISCOUNTED CASH FLOW ANALYSIS
Commonwealth calculated, using a discounted cash flow methodology, a range
of per share equity values for NAI common stock based on projections prepared by
NAI's management for the years 1998 through 2002 (excluding Wilcom, Inc.), using
a range of 2002 terminal values from 3x to 6x and a range of discount rates from
20% to 25%. Based on its analysis, Commonwealth derived a summary reference
range of implied per share equity values of NAI common stock of $0.59 to $1.42.
NAI DISCOUNTED EBITDA ANALYSIS
Commonwealth calculated, using a discounted EBITDA methodology, a range of
per share equity values for NAI common stock based on projections prepared by
NAI's management for the years 1998 through 2002 (excluding Wilcom, Inc.), using
a range of 2002 terminal values based on EBITDA multiples from 3x to 6x and a
range of discount rates from 20% to 25%. Based on its analysis, Commonwealth
derived a summary reference range of implied per share equity values of NAI
common stock of $2.19 to $2.93.
STOCK PRICE HISTORY
To provide contextual data and comparative market data, Commonwealth
examined the history of the trading prices and their relative relationships for
both NAI common stock and DRS common stock for the latest three years. This
information was presented to provide the NAI board with background information
regarding the prices of NAI common stock and DRS common stock over the periods
indicated.
ANALYSIS OF OFFER PREMIUM TO NAI'S HISTORICAL AVERAGE TRADING PRICES
To provide contextual data and comparative market data, Commonwealth
examined the effective premium of the DRS offer to the share price of NAI common
stock at certain historical periods (assuming a price of $11.50 per share of DRS
common stock and an exchange ratio of 0.25). Such premium ranged from -28% to
53%. This information was presented to provide the NAI board with background
information regarding the comparative offer premium to NAI common stock over the
periods indicated, which provided the NAI board with the information necessary
to compare the premium represented by the DRS offer to the premium paid by the
acquiror in other acquisition transactions.
COMPARISON OF SELECTED COMPARABLE COMPANIES
Commonwealth compared the trading multiples for NAI to corresponding
multiples of a selected group of defense electronics companies consisting of
DRS, Planar Systems, Inc., Titan Corp., Aydin Corp., Miltope Group, Inc. and
Symetrics Industries. Commonwealth calculated various trading ratios for the
above companies, including
36
<PAGE>
TEV/EBITDA. TEV/EBITDA is a commonly used valuation technique which measures the
total enterprise value (i.e., TEV) of an entity as a function of its operating
profit. The total enterprise value of an entity is the entity's equity market
value plus the market value of its debt, less cash. The range for such metric as
applied to the above companies (excluding one company with negative EBITDA), was
1.2x to 118.3x implying a value range of $0.23 to $7.31 for NAI common stock.
The mean of such values was 10.8x, implying an equity value of $2.14 for NAI
common stock.
No company in the defense technology group described above is identical to
NAI. Accordingly, an analysis of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of NAI and the companies in the above-described defense technology
group.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS
Commonwealth reviewed certain publicly available information regarding the
following three selected defense technology related acquisitions:
o Strategic Technologies' acquisition of Base Ten Systems;
o Benchmark Electronics' acquisition of Lockheed Commercial Electronics;
and
o Stellex Industries' acquisition of Watkins-Johnson.
Commonwealth then calculated historical multiples for these transactions.
Based upon the Price/Sales multiples implied by these transactions, Commonwealth
calculated a summary range of implied per share equity values of NAI common
stock of $1.32 to $2.19.
No company or transaction used in the above-described analysis as a
comparison was identical to NAI or DRS or this transaction. Accordingly, an
analysis of the results of the comparison is not purely mathematical; rather, it
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the
comparable acquired companies and other factors that could affect the
acquisition value of NAI.
ANALYSIS OF FAIRNESS OF WILCOM SALE
The NAI board also requested, and Commonwealth provided, its opinion on the
fairness, from a financial point of view, to the shareholders of NAI of the
proposed terms of the sale of Wilcom, Inc. as of the date of the opinion. In
connection with its fairness opinion, Commonwealth, among other things, analyzed
Wilcom, Inc.'s net present value to NAI as a function of Wilcom, Inc.'s
projected cash flows and operating budget using discount rates of 20% to 25%.
This analysis yielded a range of values for Wilcom, Inc. of between ($529,000)
and $1,076,000. Commonwealth also considered Wilcom, Inc.'s book value and
management's estimated value (i.e., the value of NAI's inventory, property,
plant and equipment as provided by NAI's management) which were approximately
$3,866,000 and $1,650,000, respectively. Commonwealth also considered the value
of the warrants surrendered in connection with the Wilcom, Inc. sale.
Commonwealth Associates calculated the value of the warrants being paid for
Wilcom by Wilcom Acquisition Corp. using four different valuation methodologies.
The following table identifies the book value and management's estimated value
of Wilcom as well as the four methodologies used by Commonwealth Associates and
the respective values attributed to the non-cash consideration being paid for
Wilcom based on such methodologies:
================================================================================
Book Value................................................ $3,866,000
Management's Estimated Value.............................. $1,650,000
- --------------------------------------------------------------------------------
TOTAL VALUE
OF NON-CASH CASH TOTAL
VALUATION METHODOLOGY CONSIDERATION CONSIDERATION CONSIDERATION
- --------------------------------------------------------------------------------
Black-Scholes--NAI warrants $2,447,000 $150,000 $2,597,000
Black-Scholes--NAI warrants
converted into DRS warrants $2,093,725 $150,000 $2,243,725
Intrinsic Value $1,517,243 $150,000 $1,667,243
Traded Value $ 990,000 $150,000 $1,140,000
- --------------------------------------------------------------------------------
* Management's estimated value means the value of Wilcom's inventory, property,
plant and equipment as provided by Wilcom's management.
================================================================================
37
<PAGE>
The Black-Scholes methodology is a commonly used method of valuing
derivative securities which is a function of the current market value of the
underlying security, the exercise price of the derivative security, the
volatility of the underlying security (which is a function of the trading
history of such security relative to other securities) and the rate of return on
risk free investment.
Commonwealth applied the Black-Scholes model in two different ways. First,
Commonwealth applied the model to the NAI warrants and arrived at a value of
$2,447,000. When applying the Black-Scholes model to the NAI warrants, the
consideration for the purchase of Wilcom is considered to be the 1,700,000 NAI
warrants exercisable at $2.50 and the 300,000 NAI warrants exercisable at $3.00
that Charles Holmes will surrender. This valuation methodology resulted in an
aggregate value of $2,447,000 for the warrants. Next, Commonwealth applied the
Black-Scholes methodology in order to value the NAI warrants being surrendered
by Mr. Holmes based on the value of those warrants in the event that they were
exchanged for DRS warrants. This calculation values such NAI warrants as though
they were exchanged for 425,000 DRS warrants exercisable at $10.00 and 75,000
DRS warrants exercisable at $12.00. The value attributed to the NAI warrants
using this methodology came to $2,093,725.
The Intrinsic Value derived for the warrants was determined by adding the
publicly traded value of the warrants themselves plus the time value of the
warrant attributable to the value of the warrant. For the non-publicly traded
$3.00 warrants, a total value of $.467 per warrant was calculated by taking the
average value of three hypothetically derived values for the warrant calculated
using the Black-Scholes model and two more esoteric methods: the binomial option
pricing model and the Constant Elasticity of Variance (CEV) Model. The average
of these three values was $.787 for the $3.00 warrants. In calculating the $.467
intrinsic value, Commonwealth applied the same discount to the average value of
the three valuation methodologies for the $3.00 warrants that was applied to the
publicly traded $2.50 warrants in the marketplace to the average value that
those three methodologies derived for the $2.50 warrants. This discount equated
to 59.35% to the then current bid price of the $2.50 warrants. Applying this
59.35% discount to the $.787 derived values equated to the $.467 price per
warrant. This gave a value to the 300,000 $3.00 warrants that were being
surrendered of $140,243 dollars. The Binomial Option Pricing Model is an option
pricing model in which the underlying asset can take on only two possible,
discrete values in the next time period for each value that it can take on in
the preceding time period. The Constant Elasticity of Variance (CEV) Model
essentially adjusts for a decrease in volatility as the price of the measured
stock increases. Due in part to the various assumptions required, Commonwealth
attributed relatively little value to the result of this Intrinsic Value
calculation in making its determination.
The traded value for the warrants was derived by taking the actual traded
value of the $2.50 warrants at the time of the opinion, $.50 per warrant, and
multiplying it by the number of warrants being contributed, 1,700,000 and adding
it to the value of $.467 price per warrant for the $3.00 warrants multiplied by
the 300,000 of warrants contributed for a total non-cash value of $990,220. This
number plus the $150,000 cash equated to the $1,140,00 total value.
In light of the foregoing and other factors, including the recent
historical decline in Wilcom, Inc.'s sales and earnings, NAI's inability to find
any other buyer for the business, the fairness, from a financial point of view,
of the consideration to be received by the shareholders of NAI in the merger and
DRS' unwillingness to proceed with the merger unless Wilcom, Inc. was sold,
Commonwealth concluded that the terms of the proposed disposition of Wilcom,
Inc. were fair, from a financial point of view, to the shareholders of NAI.
COMPENSATION TO COMMONWEALTH
NAI has agreed to pay Commonwealth for its services in connection with
rendering its fairness opinion the sum of $125,000, of which $25,000 was paid
upon execution of the engagement letter relating to such opinion, $37,500 was
paid upon delivery of such opinion and the balance of which became payable in
connection with the reference to such opinion in this joint proxy
statement/prospectus. No portion of Commonwealth's fee is contingent on
consummation of the merger. NAI has also agreed to reimburse Commonwealth for
reasonable out-of-pocket expenses incurred by Commonwealth in performing its
services, including the reasonable fees and expenses of its outside legal
counsel, and to indemnify Commonwealth and related persons against certain
liabilities relating to or arising out of its engagement, including certain
liabilities under the federal securities laws.
Commonwealth, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
38
<PAGE>
private investments. NAI selected Commonwealth because it has substantial
experience in transactions similar to the merger and because of its familiarity
with NAI. Commonwealth has previously provided investment banking services
to NAI for which it has received customary fees. In February 1996, Commonwealth
served as placement agent in connection with the placement of $8.3 million of
NAI convertible notes for which it received customary fees. Commonwealth has
also provided investment banking services for two other companies in which
Charles S. Holmes serves as an officer or director and in which he is a
significant shareholder.
Commonwealth, in the normal course of its business, trades in securities of
NAI for its own account and for the accounts of its customers and, accordingly,
may from time to time hold a long or short position in such securities. In
addition, Commonwealth and certain of its partners and employees own an
aggregate of $650,000 principal amount of the NAI convertible notes and an
aggregate of 554,200 NAI warrants.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the merger. This summary is not a complete description of all of
the consequences of the merger and, in particular, may not address U.S. federal
income tax considerations relevant to particular NAI shareholders in light of
each NAI shareholder's individual facts or circumstances or to NAI shareholders
subject to special treatment under the Internal Revenue Code, including, without
limitation, an NAI shareholder that is not a U.S. person (as defined below), is
a tax-exempt entity, securities dealer, broker-dealer, insurance company or
financial institution or an individual who acquired NAI common stock pursuant to
an employee stock option or otherwise as compensation. In addition, no
information is provided herein with respect to the tax consequences of the
merger under applicable foreign, state or local laws. The following discussion
is based on the Internal Revenue Code, U.S. Treasury regulations promulgated
thereunder, and judicial and administrative interpretations thereof, all as in
effect on the date of this joint proxy statement/prospectus, and all of which
are subject to any change (possibly with retroactive effect) after such date.
EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGES
IN ANY APPLICABLE TAX LAWS.
39
<PAGE>
DEFINITION OF U.S. PERSONS
A "U.S. person" means a holder of NAI common stock that is:
o a citizen or resident of the United States;
o a corporation created in or organized under the laws of the United
States or any political subdivision thereof;
o a domestic partnership within the meaning of the Internal Revenue Code
(i.e., a partnership created or organized in or under the laws of the
United States of any political subdivision thereof, unless future
Treasury regulations provide otherwise);
o an estate the income of which is subject to U.S. federal income tax
regardless of its source; or
o a trust if a U.S. court can exercise primary supervision over the
administration of such trust and one or more U.S. persons have the
authority to control all of the substantial decisions of such trust.
THE MERGER
Whitman Breed Abbott & Morgan LLP, NAI's counsel, has rendered an opinion
to DRS and NAI regarding certain federal income tax consequences of the merger.
This opinion is described below. DRS stockholders and NAI shareholders should be
aware that this opinion will be based on current law and certain representations
regarding factual matters and certain covenants as to future actions by DRS and
NAI. If these representations are incorrect in certain material respects or the
covenants are not complied with, the conclusions reached by counsel in its
opinion might be jeopardized. Based on such representation, facts and
assumptions, in the opinion of Whitman Breed Abbott & Morgan LLP, the material
federal income tax consequences of the merger will be as follows:
o the merger will constitute a reorganization within the meaning of
section 368(a) of the Internal Revenue Code.
o no gain or loss will be recognized by DRS, Merger Sub or NAI as a
result of the merger;
o no gain or loss will be recognized by an NAI shareholder upon the
exchange of all of such NAI shareholder's shares solely for DRS common
stock, except that an NAI shareholder who receives cash proceeds in
lieu of a fractional share interest in DRS common stock will recognize
gain or loss equal to the difference between such proceeds and the tax
basis allocated to the fractional share interest, and such gain or
loss will constitute capital gain or loss if such shareholder's shares
with respect to which gain or loss is recognized are held as a capital
asset at the effective time of the merger;
o the tax basis of the DRS common stock received by an NAI shareholder
who exchanges his or her NAI common stock for DRS common stock will be
the same as such shareholder's tax basis in the NAI common stock
surrendered in exchange therefor less the portion of such basis, if
any, allocable to fractional shares;
o the tax holding period of the DRS common stock (including any
fractional share interest) received by an NAI shareholder will include
the period during which the NAI common stock surrendered in exchange
therefor was held (provided, that such NAI common stock was held by
such shareholder as a capital asset at the effective time of the
merger); and
o no gain or loss will be recognized by a holder of NAI warrants on the
exchange of NAI warrants for DRS warrants.
NO RULING HAS BEEN REQUESTED FROM THE INTERNAL REVENUE SERVICE WITH RESPECT
TO ANY OF THE MATTERS DISCUSSED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE
OPINION OF COUNSEL DESCRIBED ABOVE ARE NOT BINDING ON THE INTERNAL REVENUE
SERVICE. THERE CAN BE NO GUARANTEE THAT FUTURE LEGISLATION, REGULATIONS,
ADMINISTRATIVE RULINGS OR COURT DECISIONS WILL NOT NEGATIVELY AFFECT THE
ACCURACY OF THE STATEMENTS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
FISCAL YEAR
NAI's fiscal year currently is the year ended December 31. When the merger
is completed, NAI intends to change its fiscal year to the year ended March 31.
Accordingly, pro forma information includes NAI's fiscal year ended
40
<PAGE>
December 31, 1997 and DRS' fiscal year ended March 31, 1998, which year is
referred to as the fiscal year ended March 31, 1998 in this joint proxy
statement/prospectus.
ACCOUNTING TREATMENT
The merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles. Under this method
of accounting, the aggregate consideration paid by DRS in connection with the
merger will be allocated to NAI's assets and liabilities based on their fair
market values, with any excess being treated as goodwill. Goodwill from an
acquisition is generally amortized in equal annual installments over a period of
time and is not deductible for federal income taxes. The assets and liabilities
and results of operations of NAI will be consolidated into the assets and
liabilities and results of operations of DRS after the effective time.
U.S. ANTITRUST FILING
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and regulations promulgated under this act, the merger may not be
consummated unless certain waiting period requirements have expired or been
terminated. On October 13, 1998, DRS and NAI filed a Premerger Notification and
Report Form pursuant to the Hart-Scott-Rodino Act with the Antitrust Division of
the United States Department of Justice and the Federal Trade Commission. The
waiting period expired on November 14, 1998 allowing consummation of the merger
under the Hart-Scott-Rodino Act.
At any time before or after the consummation of the merger, the FTC,
Antitrust Division or others could take action under the antitrust laws with
respect to the merger, including seeking to enjoin the consummation of the
merger, to rescind the merger or to require divestiture of certain assets of DRS
or NAI. Based on information available to them, DRS and NAI believe that the
merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the merger on antitrust
grounds will not be made or, if such challenge is made, that it would not be
successful.
RESALES OF DRS COMMON STOCK, DRS WARRANTS AND AMENDED NAI CONVERTIBLE NOTES
RECEIVED IN THE MERGER
For information regarding resales of DRS common stock and DRS warrants
received in the merger, see "Description of DRS Capital Stock Following the
Merger--Resales of DRS Common Stock and DRS Warrants." For information regarding
resales of amended NAI convertible notes after the merger, see "Description of
DRS Capital Stock Following the Merger--Amended NAI Convertible Notes--Resales
of Amended NAI Convertible Notes."
APPRAISAL RIGHTS
PURSUANT TO THE NEW YORK BUSINESS CORPORATION LAW, HOLDERS OF NAI COMMON
STOCK DO NOT HAVE ANY DISSENTERS' APPRAISAL RIGHTS, WHICH WOULD GIVE THEM THE
RIGHT TO OBTAIN THE PAYMENT OF CASH IN EXCHANGE FOR THEIR SHARES OF NAI COMMON
STOCK AS A RESULT OF THE MERGER, BECAUSE THE NAI COMMON STOCK IS LISTED ON THE
NASDAQ AND CONTINUED TO BE SO LISTED AS OF DECEMBER 31, 1998, NAI'S RECORD DATE.
PURSUANT TO THE DELAWARE GENERAL CORPORATION LAW, HOLDERS OF DRS COMMON STOCK
ARE NOT ENTITLED TO DISSENTERS' APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER
BECAUSE DRS IS NOT A CORPORATION PARTY TO THE MERGER.
OPERATION OF NAI FOLLOWING THE MERGER
DRS expects that it will operate NAI as a subsidiary of DRS. NAI's
operating subsidiaries will be integrated into DRS' principal operating
segments. For example, Lynwood Rugged Systems Limited, one of NAI's operating
subsidiaries, based in the United Kingdom, will join certain subsidiaries of DRS
to comprise DRS' Electro-Optical Systems Group.
It is expected that DRS and Robert A. Carlson, the current Chairman and
Chief Executive Officer of NAI, will enter into a consulting arrangement. It is
also expected that DRS and Richard A. Schneider, the current Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of NAI, will enter
into an employment arrangement.
For more information regarding the consulting and employment arrangements
with Mr. Carlson and Mr. Schneider, respectively, see "Interests of Certain
Persons in the Merger--NAI Employment Agreements."
41
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
If you are an NAI shareholder considering the recommendation of the NAI
board, you should be aware that certain members of NAI's management and the NAI
board may have interests in the merger that are different from, or in addition
to, your interests as an NAI shareholder. Accordingly, these other interests in
the merger may create potential conflicts of interest, and you should consider
the other interests of certain members of NAI's management and the NAI board
described below.
Except as described below, such persons have, to our knowledge, no material
interest in the merger apart from you as an NAI shareholder.
NAI SHAREHOLDER'S AGREEMENTS
In connection with the merger agreement and in consideration of DRS'
entering into the merger agreement and the transactions contemplated in the
merger agreement, Charles S. Holmes, C. Shelton James and the Charles S. Holmes
1997 Trust, who collectively owned approximately 13.4% of the then outstanding
shares of NAI common stock, each entered into an NAI shareholder's agreement.
Pursuant to the NAI shareholder's agreements, each of Mr. Holmes, Mr. James and
the Charles S. Holmes 1997 Trust has agreed, among other things, that he or it
will vote his or its NAI common stock:
o in favor of the merger;
o in favor of the merger agreement; and
o against any amendment of the NAI's Restated Certificate of
Incorporation or Amended and Restated Bylaws, as amended, which would
in any manner interfere with, or result in a breach of any agreement
with respect to, the merger, the merger agreement or any related
transactions.
Pursuant to the NAI shareholder's agreements, if there is any change in the
NAI common stock due to any stock dividend, split-up, recapitalization,
combination, exchange of shares or the like, each of Mr. Holmes', Mr. James' and
the Charles S. Holmes 1997 Trust's NAI common stock shall also include in kind
stock dividends or other distributions of any shares into which or for which any
or all NAI common stock may be changed or exchanged.
The NAI shareholder's agreements shall terminate upon the consummation of
the merger or termination of the merger agreement by any of the parties to the
agreement, whichever is earlier.
SALE OF WILCOM, INC.
In connection with, and as a condition to the consummation of the merger,
NAI has entered into the Wilcom stock purchase agreement with Wilcom Acquisition
Corp., which provides for the sale of Wilcom, Inc. by NAI to Wilcom Acquisition
Corp. The Wilcom stock purchase agreement provides that either party may
terminate the agreement by written notice to the other party if the transaction
is not consummated by December 31, 1998. Neither party has notified the other of
any intention to terminate the agreement. Wilcom Acquisition Corp. is a newly
formed company in which Charles S. Holmes and Dennis McCarthy, two current
directors of NAI, own all the outstanding capital stock; Mr. Holmes is the
majority stockholder of Wilcom Acquisition Corp. Pursuant to the Wilcom stock
purchase agreement, NAI will sell all of the common stock of Wilcom, Inc. for a
purchase price of:
o $150,000; and
o the surrendering of:
o 300,000 warrants to purchase shares of NAI common stock at an
exercise price of $3.00 per share held by Mr. Holmes; and
o 1,700,000 NAI warrants held by Mr. Holmes.
42
<PAGE>
The closing of the sale of Wilcom, Inc. will occur immediately prior to the
consummation of the merger, unless the parties to the merger agreement otherwise
agree. The Wilcom stock purchase agreement provides that, among other things, it
is a condition of the closing of this sale that the merger and the transactions
contemplated thereby shall have received the necessary approval of the
stockholders of DRS and shareholders of NAI, respectively. In the event that the
merger does not receive the approval of DRS stockholders and NAI shareholders,
NAI believes that the Wilcom stock purchase agreement will be terminated. If the
Wilcom stock purchase agreement is terminated and the sale of Wilcom, Inc. does
not occur, there can be no assurance that NAI will be able to find and
consummate the sale of Wilcom, Inc. with a subsequent purchaser. Consummation of
this sale on terms and conditions satisfactory to DRS is a condition to DRS'
obligation to consummate the merger. It is also a condition to each of DRS' and
NAI's obligations to consummate the merger that NAI shall have obtained all
necessary consents of holders of NAI convertible notes to this sale of Wilcom,
Inc.
For more information regarding the background to the sale of Wilcom, Inc.,
see "The Proposed Merger--Background of the Merger; Material Contacts Between
the Parties."
NAI EMPLOYMENT AGREEMENTS
NAI entered into an employment agreement with Robert A. Carlson as of
January 1, 1997. This agreement, which provided Mr. Carlson with the option to
extend the term of his employment beyond the end of its original term ending
December 31, 1997, was extended by Mr. Carlson for a period of one year and may
be further extended for an additional year ending December 31, 1999 at Mr.
Carlson's option. Pursuant to this agreement, NAI is required to pay to Mr.
Carlson an annual salary of $286,000. Assuming that NAI attains certain annual
targets, NAI will also pay Mr. Carlson an annual bonus equal to 50% of his
salary. This agreement also provides that NAI will pay Mr. Carlson an executive
bonus consisting of $50,000 on January 15, 1999 if Mr. Carlson agrees to
continue to serve as NAI's Chairman until December 31, 1999 and an additional
$50,000 on January 15, 1999 if Mr. Carlson agrees to continue to serve as NAI's
Chief Executive Officer until December 31, 1999. Mr. Carlson will be eligible to
participate in all employee benefit programs. Under this agreement, if NAI
terminates Mr. Carlson's employment without cause, or if Mr. Carlson resigns for
"good reason," he is entitled to a severance payment, which includes:
o accrued salary up to and including the effective date of such
termination or resignation;
o a payment of a pro rata share of unused vacation for the full year;
o a pro rata share of his bonus under the Bonus Plan, if the NAI board
so determines; and
o a payment of the executive bonus on the dates he would otherwise be
entitled to receive the executive bonus.
Under this agreement, "good reason" means:
o a material diminution or limitation of Mr. Carlson's position, duties
or responsibilities with NAI;
o any failure by NAI to pay, or any reduction by NAI of, the base salary
of Mr. Carlson as currently in effect; or
o NAI making Mr. Carlson ineligible to participate, on terms no less
favorable than those existing on the date of such agreement, in any
benefit or welfare plans in effect on the date of such agreement,
unless any reduction in such benefit by NAI is in response to a change
in the law affecting such benefit or welfare plans or is done on an
NAI-wide basis.
This agreement provides that any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business or assets of NAI shall assume and agree to perform this agreement in
the same manner and to the same extent that NAI would be required to perform it
if no such succession had taken place. Therefore, the merger will not release
the surviving corporation from its obligations to Mr. Carlson under this
agreement. It is anticipated, however, that DRS and Mr. Carlson will enter into
a consulting arrangement.
This consulting arrangement is expected to begin after the merger is
completed. In consideration of his services as a consultant to DRS, DRS would
pay Mr. Carlson $125,000 on each April 1, 1999, 2000 and 2001. In addition,
it is
43
<PAGE>
expected that DRS would provide under this consulting arrangement some group
health care coverage to Mr. Carlson and his family.
NAI entered into an employment agreement with Richard A. Schneider on
October 16, 1995, as amended on August 8, 1996 and January 1, 1997, which
expired on October 16, 1997. Pursuant to this agreement, NAI paid Mr. Schneider
an annual salary of $180,000. Mr. Schneider was eligible to participate in all
employee benefit programs, and in 1995 was granted options to purchase 125,000
shares of common stock at a per share exercise price of $2.50. After the term of
this agreement ended, NAI and Mr. Schneider entered into a letter agreement,
dated October 24, 1997, which provides that in the event of Mr. Schneider's
"involuntary termination," Mr. Schneider would be entitled to a severance
payment which includes:
o a continuation of his salary for a period of one year at the rate in
effect at the time of his "involuntary termination"; and
o a continuation of Mr. Schneider's medical and life insurance benefits
for a period to end the sooner of one year or until Mr. Schneider
obtains some other form of similar coverage.
Under this letter agreement, "involuntary termination" means:
o any termination at the convenience of NAI;
o a material diminution or limitation of Mr. Schneider's position,
duties or responsibilities with NAI;
o any failure by NAI to pay, or any reduction by NAI of, the base salary
of Mr. Schneider as currently in effect;
o a material reduction in Mr. Schneider's existing benefits without Mr.
Schneider's prior consent, unless such reduction is made in the
benefits of other employees of similar senior positions in NAI; or
o NAI's requirement, without Mr. Schneider's prior agreement, that Mr.
Schneider's position be based primarily outside of the Long Island,
New York Metropolitan area.
This letter agreement does not provide for an expiration date. It is expected
that DRS and Mr. Schneider will enter into an employment arrangement.
This employment arrangement is expected to begin after the merger is
completed. It is expected that Mr. Schneider would join DRS as Executive Vice
President and Chief Financial Officer of DRS. In consideration of his services,
DRS would pay Mr. Schneider an annual salary of $220,000. Under this employment
arrangement, Mr. Schneider also would be eligible to participate in all employee
benefit programs. In addition, it is expected that Mr. Schneider would receive
under this employment arrangement:
o a guaranteed bonus of $50,000 on or about July 1,1999; and
o a grant of DRS stock options. After completion of the merger, Mr.
Schneider may exercise these DRS stock options and his NAI options to
purchase a total of 50,000 shares of DRS common stock.
NAI STOCK OPTION PLANS
1991 STOCK OPTION PLAN
Under the 1991 Stock Option Plan, NAI is authorized to issue options to
purchase an aggregate of 583,870 shares of NAI common stock. Options to purchase
526,898 shares of NAI common stock were outstanding at December 31, 1998. Any
NAI option under the 1991 Stock Option Plan outstanding and not exercised as of
the effective time shall be assumed by DRS and converted into rights with
respect to DRS common stock based on the exchange ratio pursuant to the merger.
The vesting of any unvested options under the 1991 Stock Option Plan will not
accelerate as a result of the merger, and NAI shall not grant any NAI options
under such plan after August 26, 1998. See "The Merger Agreement--Warrants,
Convertible Notes and Options" and "--Conditions."
44
<PAGE>
1993 STOCK OPTION PLAN FOR DIRECTORS
Under the 1993 Stock Option Plan for Directors, NAI is authorized to issue
options to purchase an aggregate of 156,000 shares of NAI common stock. Options
to purchase 40,521 shares of NAI common stock were outstanding at December 31,
1998. Any NAI option under the 1993 Stock Option Plan for Directors outstanding
and not exercised as of the effective time shall be assumed by DRS and converted
into rights with respect to DRS common stock based on the exchange ratio
pursuant to the merger. The vesting of any unvested options under the 1993 Stock
Option Plan for Directors will not accelerate as a result of the merger, and NAI
shall not grant any NAI options under such plan after August 26, 1998. See "The
Merger Agreement--Warrants, Convertible Notes and Options" and "--Conditions."
1996 STOCK OPTION PLAN
Under the 1996 Stock Option Plan, NAI is authorized to issue options to
purchase an aggregate of 400,000 shares of NAI common stock. Options to purchase
70,000 shares of NAI common stock were outstanding at December 31, 1998. Any NAI
option under the 1996 Stock Option Plan outstanding and not exercised as of the
effective time shall be assumed by DRS and converted into rights with respect to
DRS common stock based on the exchange ratio pursuant to the merger. The vesting
of any unvested options under the 1996 Stock Option Plan will not accelerate as
a result of the merger, and NAI shall not grant any NAI options under such plan
after August 26, 1998. See "The Merger Agreement--Warrants, Convertible Notes
and Options" and "--Conditions."
DRS DIRECTORSHIP
The merger agreement provides that C. Shelton James, a director of NAI,
will be elected as a director of DRS for a three-year term. Approval of the
merger agreement and the merger and consummation of the merger will effect the
election of Mr. James as a director of DRS in the director class expiring in
2001. If the merger is not approved, Mr. James will not be elected as a director
of DRS.
For more information regarding Mr. James and his nomination for election as
a director of DRS, see "NAI Designee."
DRS INDEMNITY ARRANGEMENTS
Pursuant to the merger agreement, DRS has agreed to maintain directors' and
officers' liability insurance in effect for not less than three years from the
effective time for any persons who were directors or officers of NAI or a
subsidiary of NAI prior to the effective time with respect to any act or failure
to act by any such persons prior to the effective time, and the surviving
corporation will indemnify such directors and officers to the fullest extent
that they would have been indemnified prior to the effective time. See "The
Merger Agreement--Director and Officer Indemnification."
NAI OUTSIDE DIRECTOR PAYMENTS
The merger agreement provides that NAI may make to its non-employee
directors honorarium payments not to exceed $10,000 in the aggregate to each
non-employee director. NAI intends to pay all non-employee directors any amounts
due to such directors through December 31, 1998.
45
<PAGE>
INFORMATION CONCERNING THE DRS SPECIAL MEETING
PURPOSE
This joint proxy statement/prospectus is being furnished to the
stockholders of DRS in connection with the solicitation of proxies by the DRS
board for use at DRS' special meeting. At this meeting, DRS stockholders will
consider and vote upon:
o a proposal to approve and adopt the merger agreement and the
transactions contemplated by the merger agreement, including the
merger;
o a proposal to amend DRS' 1996 Omnibus Plan to increase the number of
shares of DRS common stock reserved for issuance under the plan; and
o such other matters as may properly be brought before the DRS meeting.
For more information regarding the amendment to DRS' plan, see "DRS
Proposal 2: Amendment of DRS' 1996 Omnibus Plan."
RECORD DATE; QUORUM; VOTE REQUIRED
The DRS board has fixed the close of business on December 31, 1998 as the
record date for determining the DRS stockholders entitled to notice of, and to
vote at, the DRS meeting or at any and all adjournments or postponements of the
DRS meeting. Only holders of record of DRS common stock at the close of business
on DRS' record date will be entitled to notice of, and to vote at, the DRS
meeting. At the close of business on DRS' record date, 6,359,503 shares of DRS
common stock were issued and outstanding and were held by approximately 346
holders of record. The DRS common stock constitutes the only outstanding class
of voting securities of DRS. Each holder of record of shares of DRS common stock
on DRS' record date is entitled to one vote per share on each matter to be acted
upon or which may come before the DRS meeting. Votes may be cast at the DRS
meeting in person or by proxy. See "--Proxies."
The presence at the DRS meeting, either in person or by proxy, of the
holders of a majority of the issued and outstanding shares of DRS common stock
entitled to vote is necessary to constitute a quorum to transact business at the
DRS meeting. In the event that a quorum is not present at the DRS meeting, it is
expected that such meeting will be adjourned or postponed in order to solicit
more proxies.
The approval and adoption of the merger agreement and the transactions
contemplated in the merger agreement, including the merger, and approval of the
amendment to DRS' 1996 Omnibus Plan will require the affirmative vote of holders
of a majority of votes cast by holders of all of the shares of DRS common stock
outstanding on DRS' record date. Approval of the merger agreement and
consummation of the merger will constitute the election of C. Shelton James,
NAI's designee, as a director of DRS. Abstentions and "broker non-votes" (i.e.,
shares of DRS common stock which are not voted because the nominee-broker lacks
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners of the shares) will be counted for purposes of determining
the presence of a quorum. But, abstentions and broker non-votes will be
disregarded and have no effect on the vote regarding approval of the merger or
the amendment to DRS' 1996 Omnibus Plan.
As of the close of business on DRS' record date, all of DRS' directors and
executive officers owned an aggregate of 130,044 shares of DRS common stock,
representing approximately 2% of the total votes entitled to be cast at the DRS
meeting. Each of such directors and executive officers has indicated that he or
she intends to vote for the approval and adoption of the merger agreement and
the amendment to DRS' 1996 Omnibus Plan.
- --------------------------------------------------------------------------------
THE DRS BOARD HAS APPROVED THE MERGER AGREEMENT, HAS DETERMINED THAT THE
MERGER IS FAIR AND IN THE BEST INTERESTS OF DRS AND ITS STOCKHOLDERS AND
RECOMMENDS THAT DRS STOCKHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE MERGER AND "FOR" THE APPROVAL OF THE
AMENDMENT TO DRS' 1996 OMNIBUS PLAN.
- --------------------------------------------------------------------------------
46
<PAGE>
PROXIES
Shares of DRS common stock represented by properly executed proxies
received in time for the DRS meeting will be voted at the DRS meeting in the
manner specified on such proxies. Proxies which are properly executed but which
do not contain voting instructions will be voted FOR approval of the merger
agreement and the amendment to DRS' 1996 Omnibus Plan. It is not expected that
any matter other than those contemplated in this joint proxy
statement/prospectus will be brought before the DRS meeting; however, if other
matters are properly presented, the persons named in such proxy will have the
authority to vote in accordance with their judgment on any other such matter,
including, without limitation, any proposal to adjourn or postpone the meeting
or otherwise concerning the conduct of the meeting.
Proxy cards for use at the DRS meeting accompany this joint proxy
statement/prospectus. The grant of a proxy on the enclosed proxy card does not
preclude a stockholder from voting in person at the DRS meeting. A stockholder
may revoke a proxy at any time before it is exercised by:
o delivering, prior to the DRS meeting, to the Secretary of DRS (by any
means, including facsimile), a written notice of revocation bearing a
later date than the date of the proxy;
o delivering, prior to the DRS meeting, to the Secretary of DRS a duly
executed proxy relating to the same shares of DRS common stock bearing
a later date than the revoked proxy; or
o attending the DRS meeting and electing to vote in person. Attendance
at the DRS meeting will not, by itself, revoke a proxy.
DRS will bear the cost of the solicitation of proxies from its
stockholders, except that DRS and NAI intend to share equally the cost
associated with this joint proxy statement/prospectus, including related filing
fees. Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation materials to the
beneficial owners of shares held of record by such persons, and DRS will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection with the forwarding of these solicitation
materials. In addition to solicitation by mail, directors, officers and
employees of DRS may solicit proxies from DRS stockholders personally or by
telephone, telecopy or telegram or other forms of communication. Such directors,
officers and employees will not be additionally compensated for such
solicitation but may be reimbursed for out-of-pocket expenses in connection with
such solicitation.
In addition, DRS has retained Morrow & Co., Inc. to assist DRS in the
solicitation of proxies from DRS stockholders in connection with the DRS
meeting. Morrow & Co., Inc. will receive a fee of $7,500 as compensation for its
services, a fee of $5.00 per holder to solicit holders of record as well as
non-objecting beneficial owners of DRS common stock and reimbursement of its
out-of-pocket expenses in connection with its services.
47
<PAGE>
INFORMATION CONCERNING THE NAI SPECIAL MEETING
PURPOSE
This joint proxy statement/prospectus is being furnished to the NAI
shareholders in connection with the solicitation of proxies by the NAI board for
use at NAI's special meeting. At the NAI meeting, NAI shareholders will consider
and vote upon:
o a proposal to approve and adopt the merger agreement and the
transactions contemplated by the merger agreement, including the
merger and the sale of all of the capital stock of Wilcom, Inc.; and
o such other matters as may properly be brought before the NAI meeting.
RECORD DATE; QUORUM; VOTE REQUIRED
The NAI board has fixed the close of business on December 31, 1998 as the
record date for determining the holders of NAI common stock entitled to notice
of, and to vote at, the NAI meeting. Only holders of record of NAI common stock
at the close of business on NAI's record date will be entitled to notice of, and
to vote at, the NAI meeting. At the close of business on NAI's record date,
9,179,567 shares of NAI common stock were issued and outstanding and were held
by approximately 571 holders of record. The NAI common stock constitutes the
only outstanding class of voting securities of NAI, and each share of NAI common
stock is entitled to one vote per share on each matter to be acted upon or which
may come before the NAI meeting. Votes may be cast at the NAI meeting in person
or by proxy. See "--Proxies."
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of NAI common stock entitled to vote is
necessary to constitute a quorum to transact business at the NAI meeting. In the
event that a quorum is not present at the NAI meeting, it is expected that such
meeting will be adjourned or postponed in order to solicit additional proxies.
The approval and adoption of the merger agreement and the transactions
contemplated in the merger agreement, including the merger and the sale of all
of the capital stock of Wilcom, Inc., by NAI shareholders is required by the New
York Business Corporation Law and NAI's charter. Such approval will require the
affirmative vote of the holders of two-thirds of the shares of NAI common stock
outstanding on NAI's record date. In determining whether the proposal to approve
and adopt the merger agreement has received the requisite number of affirmative
votes, abstentions will be counted and have the same effect as a vote against
the proposal. Brokers who hold shares of NAI common stock as nominees will not
have discretionary authority to vote such shares in the absence of instructions
from the beneficial owners of the shares. "Broker non-votes" (i.e., shares which
are not voted because the nominee-broker lacks such discretionary authority)
will be counted and have the same effect as a vote against the proposal.
Charles Holmes and C. Shelton James, each a director of NAI, and the
Charles S. Holmes 1997 Trust, who or which together owned and were entitled to
vote in the aggregate approximately 13.4% of the outstanding NAI common stock as
of NAI's record date, have each entered into an NAI shareholder's agreement with
DRS pursuant to which, among other things, each has agreed to vote his or its
shares of NAI common stock in favor of the merger agreement and the transactions
contemplated in the merger agreement. As of the close of business on NAI's
record date, all of NAI's directors and executive officers, including Mr. Holmes
and Mr. James, owned an aggregate of 1,163,136 shares of NAI common stock,
representing approximately 13.4% of the total votes entitled to be cast at the
NAI meeting. Each of such directors and executive officers has indicated that he
or she intends to vote for the approval and adoption of the merger agreement and
the transactions contemplated in the merger agreement, including, without
limitation, the merger and the sale of all of the capital stock of Wilcom, Inc.
If the shares beneficially owned by all such persons, including the shares
subject to the NAI shareholder's agreements, are voted in favor of the merger,
then an additional 4,889,268 affirmative votes, representing approximately
53.23% of the votes entitled to be cast in respect of shares not owned by such
persons, will be required for the approval of the merger. See "Interests of
Certain Persons in the Merger--NAI Shareholder's Agreements."
48
<PAGE>
- --------------------------------------------------------------------------------
THE NAI BOARD HAS APPROVED THE MERGER AGREEMENT, HAS DETERMINED THAT THE
MERGER IS FAIR AND IN THE BEST INTERESTS OF NAI AND ITS SHAREHOLDERS AND
RECOMMENDS THAT NAI SHAREHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE MERGER.
- --------------------------------------------------------------------------------
PROXIES
Shares of NAI common stock represented by properly executed proxies
received in time for the NAI meeting will be voted at the NAI meeting in the
manner specified on such proxies. Proxies which are properly executed but which
do not contain voting instructions will be voted FOR approval of the merger
agreement. It is not expected that any matter other than those contemplated in
this joint proxy statement/prospectus will be brought before the NAI meeting;
however, if other matters are properly presented, the persons named in such
proxy will have the authority to vote in accordance with their judgment on any
other such matter, including, without limitation, any proposal to adjourn or
postpone the meeting or otherwise concerning the conduct of the meeting.
Proxy cards for use at the NAI meeting accompany this joint proxy
statement/prospectus. The grant of a proxy on the enclosed proxy card does not
preclude a shareholder from voting in person at the NAI meeting. A shareholder
may revoke a proxy at any time before it is exercised by:
o delivering, prior to the NAI meeting, to the Secretary of NAI (by any
means, including facsimile), a written notice of revocation bearing a
later date than the date of the proxy;
o delivering, prior to the NAI meeting, to the Secretary of NAI a duly
executed proxy relating to the same shares of NAI common stock bearing
a later date than the revoked proxy; or
o attending the NAI meeting and electing to vote in person. Attendance
at the NAI meeting will not, by itself, revoke a proxy.
NAI will bear the cost of the solicitation of proxies from its
shareholders, except that DRS and NAI intend to share equally the cost
associated with this joint proxy statement/prospectus, including related filing
fees. Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation materials to the
beneficial owners of shares held of record by such persons, and NAI will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection with the forwarding of these solicitation
materials. In addition to solicitation by mail, directors, officers and
employees of NAI may solicit proxies from NAI shareholders personally or by
telephone, telecopy or telegram or other forms of communication. Such directors,
officers and employees will not be additionally compensated for such
solicitation but may be reimbursed for out-of-pocket expenses in connection with
such solicitation.
NAI SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
CERTIFICATES FOR NAI COMMON STOCK WILL BE MAILED BY DRS TO FORMER NAI
SHAREHOLDERS AS SOON AS PRACTICABLE AFTER THE CONSUMMATION OF THE MERGER.
49
<PAGE>
THE MERGER AGREEMENT
The merger agreement contemplates the merger of Merger Sub with and into
NAI, with NAI continuing as the surviving corporation and a direct wholly-owned
subsidiary of DRS. Each share of Merger Sub's common stock issued and
outstanding immediately prior to the effective time will remain outstanding
after the merger and represent one share of common stock of the surviving
corporation. This section of this joint proxy statement/prospectus describes
material provisions of the merger agreement, as amended. The description of the
merger agreement contained in this joint proxy statement/prospectus does not
purport to be complete and is qualified in its entirety by reference to the
merger agreement, a copy of which is attached as Annex A-I to this joint proxy
statement/prospectus and is incorporated in this joint proxy
statement/prospectus by reference, and the amendment to the merger agreement, a
copy of which is attached as Annex A-II to this joint proxy statement/prospectus
and is incorporated in this joint proxy statement/prospectus by reference. You
are urged to read carefully the merger agreement in its entirety.
CLOSING; EFFECTIVE TIME
The closing of the merger will take place at 9:00 a.m. on the closing date,
which will be held as soon as practicable after the satisfaction or waiver of
the conditions set forth in the merger agreement. The closing will be held at
the offices of Arnold & Porter, 399 Park Avenue, New York, New York or at such
other place as is agreed to by the parties to the merger agreement.
Subject to the provisions of the merger agreement, the parties will
consummate the merger simultaneously with the closing, by filing a certificate
of merger or other appropriate documents with the Secretary of State of New
York. The merger will become effective at such time as the certificate of merger
is duly filed with the Secretary of State of New York.
SURVIVING CORPORATION'S CERTIFICATE OF INCORPORATION
Pursuant to the merger agreement, NAI's charter, as in effect immediately
prior to the effective time, will be the certificate of incorporation of the
surviving corporation until amended or changed as provided in NAI's charter or
by applicable law.
SURVIVING CORPORATION'S BYLAWS
Pursuant to the merger agreement, NAI's bylaws, as in effect immediately
prior to the effective time, will be the bylaws of the surviving corporation
until amended or changed as provided in NAI's bylaws or by applicable law.
SURVIVING CORPORATION'S DIRECTORS AND OFFICERS
Pursuant to the merger agreement, the directors of Merger Sub immediately
prior to the effective time will be the directors of the surviving corporation,
in each case until his or her successor is elected and qualified or until his or
her earlier death, resignation or removal. As of the date of this joint proxy
statement/prospectus, the directors of Merger Sub are Mark S. Newman and Nina
Laserson Dunn.
Pursuant to the merger agreement, the officers of NAI immediately prior to
the effective time will continue as the officers of the surviving corporation,
in each case until removed or until his or her successor is duly elected or
appointed and qualified in the manner provided in the surviving corporation's
certificate of incorporation and bylaws, or as otherwise provided by law.
CONSIDERATION TO BE RECEIVED IN THE MERGER
As of the effective time, by virtue of the merger and without any action on
the part of the holder of any shares of NAI common stock, each outstanding and
issued share of NAI common stock will be converted into the right to receive
0.25 duly authorized, validly issued, fully paid and non-assessable shares of
DRS common stock; however, if the average of the reported closing prices per
share of DRS common stock on the AMEX for the consecutive 60-trading day period
ending two business days before the effective time is greater than or equal to
$12.00, then each outstanding
50
<PAGE>
and issued share of NAI common stock will be converted into the right to receive
0.23 duly authorized, validly issued, fully paid and non-assessable shares of
DRS common stock.
As of the effective time, all shares of NAI common stock exchanged for DRS
common stock will no longer be outstanding and will automatically be cancelled
and retired and will cease to exist, and each holder of a stock certificate
representing shares of NAI common stock will cease to have any rights with
respect to such common stock, except the right to receive the shares of DRS
common stock in accordance with the exchange ratio and any cash in lieu of
fractional shares of DRS common stock to be issued or paid in consideration
therefor upon surrender of such certificate in accordance with the terms of the
merger agreement.
Based upon the number of outstanding shares of DRS common stock and NAI
common stock as of August 26, 1998, and assuming an exchange ratio of 0.25
(based upon the assumption that the average market price of DRS common stock
over a period of 60-trading days is less than $12.00 per share), the NAI
shareholders immediately prior to the consummation of the merger would own
immediately following the consummation of the merger approximately 25% of the
outstanding shares of DRS common stock and, assuming the exercise of the DRS
warrants to be issued in exchange for the NAI warrants, exercise of the NAI
options to be assumed by DRS and conversion of the NAI convertible notes, up to
approximately 37% of the outstanding shares of DRS common stock.
WARRANTS, CONVERTIBLE NOTES AND OPTIONS
NAI OPTIONS
At the effective time, each NAI option granted by NAI under NAI's stock
option plans then outstanding, whether vested or unvested, as of the effective
time shall be converted into and become rights with respect to DRS common stock,
and:
o NAI and a committee of the NAI board, which shall be under the
supervision of DRS and its compensation committee, shall be
substituted in each of NAI's stock option plans as the "committee"
authorized to administer each of NAI's stock option plans;
o each NAI option may be exercised solely for shares of DRS common
stock;
o the number of shares of DRS common stock subject to each such NAI
option shall be equal to the product of the exchange ratio and the
number of shares of NAI common stock subject to such NAI option; and
o the per share exercise price of each NAI option shall be equal to the
aggregate exercise price for the shares of NAI common stock subject to
such NAI option divided by the number of full shares of DRS common
stock, as provided above, purchasable pursuant to such NAI option.
The number of shares of DRS common stock that may be purchased upon exercise of
each such NAI option, however, shall not include any fractional shares. Upon the
exercise of such an NAI option, a cash payment shall be made for any fractional
share based upon the per share average of the highest and lowest sale prices of
a share of DRS common stock as reported on the AMEX on the date of such
exercise.
No NAI options shall be granted under any of NAI's stock option plans after
August 26, 1998, and NAI shall not accelerate the vesting of any NAI option. The
provisions of any other benefit plan or option agreement of NAI providing for
the issuance, transfer or grant of any capital stock of NAI, or any interest in
respect of any capital stock of NAI, shall be terminated as of the effective
time, and NAI shall ensure that following the effective time, no holder of an
NAI option and no participant in any of NAI's stock option plans or any other
benefit plan shall have any right under such plan to acquire any capital stock
of NAI or the surviving corporation. Furthermore, NAI shall terminate, prior to
the effective time, NAI's 1992 Employee Stock Purchase Plan.
51
<PAGE>
NAI WARRANTS
Each NAI warrant to purchase shares of NAI common stock at an exercise
price of $2.50 per share issued by NAI and outstanding and unexercised as of the
effective time, whether or not exercisable, shall be assumed by DRS, and shall
constitute rights with respect to DRS common stock, on substantially the same
terms and conditions as contained in such NAI warrant such that:
o each assumed NAI warrant may be exercised solely for shares of DRS
common stock;
o the number of shares of DRS common stock subject to each assumed NAI
warrant shall be equal to the product of the exchange ratio and the
number of shares of NAI common stock subject to such assumed NAI
warrant; and
o the per share exercise price of each assumed NAI warrant shall be
equal to the aggregate exercise price for the shares of NAI common
stock subject to such assumed NAI warrant divided by the number of
full shares of DRS common stock, as provided above, purchasable
pursuant to such assumed NAI warrant.
The number of shares of DRS common stock that may be purchased upon exercise of
each assumed NAI warrant, however, shall not include any fractional shares. Upon
the exercise of such assumed NAI warrant, a cash payment shall be made for any
fractional share based upon the per share average of the highest and lowest sale
prices of a share of DRS common stock as reported on the AMEX on the date of
such exercise.
DRS shall offer to exchange for the assumed NAI warrants appropriate DRS
warrants representing rights with respect to DRS common stock on substantially
the same terms and conditions as contained in the NAI warrants (subject to any
adjustments) to reflect the foregoing and deliver DRS warrants to holders of
assumed NAI warrants at the effective time, upon surrender of the assumed NAI
warrants.
For more information regarding the DRS warrants, see "Description of DRS
Capital Stock Following the Merger--DRS Warrants."
NAI CONVERTIBLE NOTES
Each NAI convertible note outstanding and not converted as of the effective
time (and representing 10% or less of the aggregate principal amount of all NAI
convertible notes outstanding as of August 26, 1998) shall, in accordance with
Section 6(a) of such NAI convertible note, be deemed to represent rights with
respect to DRS common stock such that:
o each such NAI convertible note may be exercised solely for shares of
DRS common stock;
o the number of shares of DRS common stock subject to each such NAI
convertible note shall be equal to the product of the exchange ratio
and the number of shares of NAI common stock subject to such NAI
convertible note; and
o the per share exercise price of each such NAI convertible note shall
be equal to the aggregate conversion price for the shares of NAI
common stock subject to such NAI convertible note divided by the
number of full shares of DRS common stock, as provided above,
purchasable pursuant to such NAI convertible note.
The number of shares of DRS common stock that may be purchased upon the
conversion of each such NAI convertible note, however, shall not include any
fractional shares. Upon the conversion of such NAI convertible note, a cash
payment shall be made for any fractional share based upon the per share average
of the highest and lowest sale prices of a share of DRS common stock as reported
on the AMEX on the date of such conversion. Each such NAI convertible note shall
have been duly amended pursuant to the merger agreement.
DRS shall offer to exchange for the NAI convertible notes, which remain
outstanding after the effective time, amended NAI convertible notes
representing, among other things, rights with respect to DRS common stock to
reflect
52
<PAGE>
the foregoing and reflecting all amendments to the notes and deliver these
amended NAI convertible notes to holders of such notes at the effective time,
upon surrender of such notes.
For more information regarding the amendments to the NAI convertible notes
that remain unconverted after the effective time, see "--Conditions." For more
information regarding these notes after the effective time of the merger, See
"Description of DRS Capital Stock Following the Merger--Amended NAI Convertible
Notes."
DRS has agreed to reserve for issuance a sufficient number of shares of DRS
common stock for delivery upon exercise of the NAI options and exercise of the
assumed NAI warrants or issued DRS warrants as described above. DRS shall file a
registration statement on Form S-8, with respect to the DRS common stock subject
to such NAI options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement for so long as such NAI options
remain outstanding.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
NAI COMMON STOCK
At the effective time, DRS will deposit, or cause to be deposited, with
Continental Stock Transfer & Trust Company, as exchange agent, for the benefit
of the holders of certificates of NAI common stock, certificates representing
the shares of DRS common stock (and cash in lieu of fractional shares of DRS
common stock, if applicable) to be issued in the merger.
As soon as practicable after the effective time, the exchange agent will
mail a form of transmittal letter to the holders of certificates representing
shares of NAI common stock. The form of transmittal letter will contain
instructions with respect to the surrender of such certificates in exchange for
shares of DRS common stock (and cash in lieu of fractional shares of DRS common
stock, if applicable).
Upon surrender of a certificate (representing shares of NAI common stock)
for cancellation to the exchange agent, together with such letter of
transmittal, duly executed, and any other required documents, the holder of such
certificate will be entitled to receive in exchange a certificate representing
that number of whole shares of DRS common stock which such holder has the right
to receive pursuant to the provisions of the merger agreement and cash in lieu
of any fractional share of DRS common stock as described below, and the
surrendered certificate will be canceled.
No certificates or scrip representing fractional shares of DRS common stock
will be issued upon the surrender for exchange of NAI common stock certificates
and such fractional share interests will not entitle the owner of such interests
to vote or to any rights of a DRS stockholder. As promptly as practicable
following the effective time, the exchange agent will determine the excess of
(1) the number of whole shares of DRS common stock delivered to the exchange
agent by DRS pursuant to the merger agreement over (2) the aggregate number of
whole shares of DRS common stock to be distributed to former holders of NAI
common stock pursuant to the merger agreement. Following the effective time, the
exchange agent will sell these excess shares at the prevailing prices on the
AMEX. The exchange agent will determine the portion of the net proceeds from the
sale of these excess shares to which each former holder of NAI common stock is
entitled, if any, by multiplying the amount of the aggregate net proceeds by a
fraction, the numerator of which is the amount of the fractional share interest
to which such former holder of NAI common stock is entitled (after taking into
account all shares of NAI common stock held of record at the effective time by
such holder) and the denominator of which is the aggregate amount of fractional
share interests to which all former holders of NAI common stock are entitled.
NAI WARRANTS AND NAI CONVERTIBLE NOTES
At the effective time, DRS will deposit, or cause to be deposited, with
Continental Stock Transfer & Trust Company, as warrant agent, for the benefit of
holders of certificates of NAI warrants, certificates representing DRS warrants
to be issued in the merger. At the effective time, DRS will cause NAI to deposit
with U.S. Bank National Association (formerly First Trust National Association),
as trustee, for the benefit of holders of NAI convertible notes remaining after
the merger, certificates representing the amended NAI convertible notes to be
issued following the
53
<PAGE>
completion of the merger; the aggregate principal amount of these amended NAI
convertible notes will not exceed 10% of the aggregate principal amount of NAI
convertible notes outstanding as of August 26, 1998.
Upon surrender of the NAI warrant or any residual NAI convertible note
(which remains outstanding after the effective time of the merger because the
holder of this note did not consent to convert the note) for cancellation or
transfer to the warrant agent or trustee, together with such other documents as
may be reasonably required by the warrant agent or trustee, as the case may be,
the holder of such NAI warrant or NAI convertible note will be entitled to
receive and shall receive a certificate representing the DRS warrant or amended
NAI convertible note, respectively. The surrendered certificate will be
canceled.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties relating to, among other things:
o due organization, valid existence and good standing of each of DRS and
NAI and certain similar corporate matters;
o the capital structure of each of DRS and NAI;
o the authorization, execution, delivery and enforceability of the
merger agreement, the consummation of the transactions contemplated by
the merger agreement and related matters;
o conflicts under charters or bylaws, required consents or approvals and
violations of any instruments or law;
o documents and financial statements filed by each of DRS and NAI with
the SEC and the accuracy of information contained in such documents
and financial statements;
o the absence of certain material adverse changes or events;
o undisclosed liabilities of NAI;
o litigation involving each of DRS and NAI;
o NAI's compliance with laws;
o intellectual property of NAI;
o NAI environmental matters;
o government contracts of NAI; and
o the accuracy of information supplied by each of DRS and NAI in
connection with the registration statement and this joint proxy
statement/prospectus.
CERTAIN COVENANTS
Pursuant to the merger agreement, NAI has agreed that, during the period
from the date of the merger agreement until the effective time, except as
otherwise expressly consented to in writing by DRS or as contemplated by the
merger agreement, it and each of its respective subsidiaries will carry on its
business in the ordinary course in substantially the same manner as previously
conducted. Specifically, NAI has agreed not to:
o amend NAI's charter or NAI's bylaws;
o issue or sell any shares of capital stock or securities convertible
into shares of capital stock, subject to certain exceptions;
54
<PAGE>
o effect a stock split or declare or make any dividends or other
distribution on any shares of its capital stock;
o incur or assume any new debt or make any loans or capital investments
in any other person or entity;
o adopt or amend any employee benefit plan or severance arrangement or
increase the compensation of its directors or officers or employees
generally, subject to certain exceptions;
o enter into, amend, modify or relinquish any material rights under, any
material contract;
o sell, lease, mortgage, pledge or otherwise dispose of any assets or
property other than in the ordinary course of business;
o make or commit to make any material capital expenditure;
o change its accounting methods;
o settle any material claim; and
o make any election under the Internal Revenue Code that would have a
material adverse effect on NAI or the merger.
Pursuant to the merger agreement, DRS and NAI have agreed to use their
respective best efforts to take all actions and to do all things necessary,
proper or advisable to consummate the transactions contemplated by the merger
agreement.
NO SOLICITATION
Pursuant to the merger agreement, NAI has agreed that it will not, and it
will not permit any of its subsidiaries (other than Wilcom, Inc.), officers,
directors, employees, representatives and agents to, directly or indirectly:
o solicit any NAI Takeover Proposal (as defined below); or
o participate in any discussions or negotiations regarding any NAI
Takeover Proposal.
If at any time prior to the NAI meeting, however, the NAI board determines in
good faith, after consultation with outside counsel, that it is necessary to
solicit or participate in discussions or negotiations regarding any NAI Takeover
Proposal in order to comply with its fiduciary duties to the NAI shareholders
under applicable law, NAI may, in response to an NAI Takeover Proposal that was
not solicited, furnish confidential information with respect to NAI and
participate in negotiations regarding such NAI Takeover Proposal. Moreover, if
NAI responds to an NAI Takeover Proposal, NAI shall within two business days of
such response reimburse DRS for all of DRS' out-of-pocket expenses not to exceed
$300,000 in the aggregate.
"NAI Takeover Proposal" means:
o any inquiry, proposal or offer from any person relating to any direct
or indirect acquisition or purchase of 15% or more of the assets of
NAI or its subsidiaries (other than Wilcom, Inc.) or 15% or more of
any class of equity securities of NAI or any of its subsidiaries
(other than Wilcom, Inc.);
o any tender offer or exchange offer or exchange offer that if
consummated would result in any person beneficially owning 15% or more
of any class of equity securities of NAI or any of its subsidiaries
(other than Wilcom, Inc.);
o any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving NAI or any
of its subsidiaries (other than Wilcom, Inc.), other than the
transactions contemplated by the merger agreement; or
55
<PAGE>
o any other transaction the consummation of which could impede,
interfere with, prevent or materially delay the merger or which could
dilute materially the benefits to DRS of the transactions contemplated
by the merger agreement.
In the event that prior to the NAI meeting the NAI board determines in good
faith, after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to the NAI shareholders under
applicable law, the NAI board may (subject to this and the following sentences)
(x) withdraw or modify its approval or recommendation of the merger and the
merger agreement or (y) approve or recommend a Superior Proposal (as defined
below) or terminate the merger agreement (and concurrently with or after such
termination, if it so chooses, cause NAI to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement with
respect to a Superior Proposal), but in each of the cases set forth in this
clause (y), no action shall be taken by NAI pursuant to clause (y) until a time
that is after the fifth business day following DRS' receipt of written notice
advising DRS that the NAI board has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
person making such Superior Proposal, to the extent such identification of the
person making such proposal does not breach the fiduciary duties of the NAI
board as advised by outside legal counsel; provided, that if the NAI board takes
any action pursuant to the foregoing clauses (x) and (y), NAI shall within two
business days of such action reimburse DRS for all of DRS' out-of-pocket
expenses not to exceed $300,000 in the aggregate.
A "Superior Proposal" means any bona fide proposal made by a third party to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of NAI
common stock then outstanding or all or substantially all the assets of NAI and
otherwise on terms that the NAI board determines in its good faith judgment to
be more favorable to the NAI shareholders than the merger.
BOARD REPRESENTATION
The merger agreement provides that C. Shelton James, as designee of NAI,
who is currently a director of NAI, will be elected a director of DRS for a
three-year term. Approval of the merger agreement and consummation of the merger
will constitute election of Mr. James as a director of DRS.
For more information regarding Mr. James and his nomination for election as
a director of DRS, see "NAI Designee."
DIRECTOR AND OFFICER INDEMNIFICATION
The merger agreement provides that for a period of not less than three
years from the effective time, DRS will cause the surviving corporation to
maintain in effect a directors' and officers' liability insurance policy
covering those persons who are currently covered by NAI's directors' and
officers' liability insurance policy or policies with respect to actions taken
in their capacities as directors and officers of NAI with coverage in an amount
at least equal to NAI's existing coverage; provided, that in the event that any
claim against such policy or policies is asserted or made within the three years
from the effective time, such insurance shall be continued in respect of such
claim until the final disposition of any and all such claims; provided, further,
that DRS shall not be required to expend on an annual basis in excess of one
hundred percent (100%) of the annual premium currently paid by NAI for such
coverage.
CONDITIONS
The respective obligations of DRS and NAI to effect the merger are subject
to the satisfaction (or waiver) of the following conditions:
o the merger agreement and the transactions contemplated in the merger
agreement, including the merger, shall have been approved by the
stockholders of DRS and the shareholders of NAI;
o the waiting period applicable to the consummation of the merger under
the Hart-Scott-Rodino Act shall have expired or been terminated;
o the registration statement shall have become effective and shall not
be the subject of a stop order or proceedings seeking a stop order;
56
<PAGE>
o no order, injunction or judgment, or statute, rule or regulation,
shall be in effect preventing the consummation of the merger;
o no action or proceeding shall have been instituted by any governmental
authority seeking to prevent consummation of the merger or seeking
material damages in connection with the transactions contemplated by
the merger agreement and continue to be outstanding;
o the shares of DRS common stock to be issued in the merger shall have
been approved for quotation on the AMEX; and
o NAI shall have obtained all necessary consents of holders of NAI
convertible notes to the sale of Wilcom, Inc.
In addition, the obligations of DRS to effect the merger are subject to the
satisfaction of the following conditions, among others:
o the representations and warranties of NAI in the merger agreement
shall be true and complete as of the date of the merger agreement and
(except to the extent such representations and warranties speak as of
an earlier date) as of the closing date as though made on and as of
the closing date;
o NAI shall have performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior
to the closing date;
o there shall not have occurred at any time after December 31, 1997 any
material adverse change, in the reasonable judgment of DRS, in the
general affairs, business, management, operations, assets and
liabilities or prospects of NAI, Codar Technology, Inc., Lynwood
Rugged Systems Limited and NAI Technologies-Systems Division
Corporation;
o DRS shall have received a written agreement substantially in the form
attached as Exhibit A to the merger agreement from each of the
affiliates of NAI for purposes of Rule 145 under the Securities Act;
o NAI shall have obtained all necessary consents and approvals;
o the NAI shareholder's agreements shall be in full force and effect;
o the sale of Wilcom, Inc. shall have occurred:
o on terms and conditions negotiated at arm's-length
satisfactory to DRS;
o the representations and warranties of NAI set forth in the
Wilcom stock purchase agreement (the form of which is
attached as Exhibit B to the merger agreement) shall be true
and correct both when made and on and as of the closing date
thereunder (except to the extent expressly made as of an
earlier date, in which case, as of such date);
o NAI shall have received an opinion from Commonwealth
stating, as of its date, that the terms and conditions of
the sale of Wilcom, Inc. are fair to the NAI shareholders
from a financial point of view; and
o NAI shall take such actions as may be reasonably requested
by DRS with respect to the treatment of the sale of Wilcom,
Inc. for federal income tax purposes;
o NAI shall have:
o obtained the consent of holders of at least 90% of the
aggregate principal amount of the NAI convertible notes
outstanding as of August 26, 1998 to convert all of their
NAI convertible notes to NAI common
57
<PAGE>
stock immediately prior to the effective time and
successfully completed such conversion immediately prior to
the effective time; provided, that in connection with this
consent solicitation, NAI may offer an additional payment
with respect to each NAI convertible note of no more than
the present value of the interest that would have accrued to
February 15, 1999 on the outstanding principal amount of
each such NAI convertible note discounted at 9.5%;
o obtained the consents of holders of at least 75% of the
aggregate principal amount of the NAI convertible notes
outstanding as of August 26, 1998 in accordance with the
terms of the NAI convertible notes and the indenture
relating to the NAI convertible notes to (i) eliminate as of
the effective time certain provisions in the NAI convertible
notes, and (ii) amend Section 8.1 of the indenture relating
to the NAI convertible notes; and
o obtained the consents of at least a majority of the holders
of the aggregate principal amount of the NAI convertible
notes outstanding as of August 26, 1998 to permit the
removal of the NAI convertible notes from the registration
requirements under the securities laws of the United States
and the scope of the Trust Indenture Act of 1939, as
amended;
o DRS shall have obtained all necessary consents of certain lenders
under the Mellon credit agreement;
o NAI shall have terminated, without liability to NAI or any of its
subsidiaries, the eligibility of NAI's officers and their spouses,
children and dependents to retiree medical benefits; provided, that
NAI shall provide medical benefits for Malcolm D. Widenor and Walter
Lipkin (and each of their respective spouses until such spouse becomes
eligible for Medicare); and
o DRS shall have received an opinion from Arnold & Porter to the effect
that the merger will constitute a reorganization for federal income
tax purposes within the meaning of Section 368(a) of the Internal
Revenue Code.
In addition, the obligations of NAI to effect the merger are subject to the
satisfaction of the following conditions, among others:
o the representations and warranties of DRS in the merger agreement
shall be true and correct as of the date of the merger agreement and
(except to the extent such representations and warranties speak as of
an earlier date) as of the closing date as though made on and as of
the closing date;
o DRS and Merger Sub shall have performed in all material respects all
obligations required to be performed by them under the merger
agreement at or prior to the closing date;
o there shall not have occurred at any time after March 31, 1998 any
material adverse change, in the reasonable judgment of NAI, in the
general affairs, management, business, operations, assets, condition
(financial or otherwise) or prospects of DRS and its subsidiaries;
o NAI shall have obtained all necessary consents and approvals; and
o NAI shall have received an opinion from Whitman Breed Abbott & Morgan
LLP to the effect that:
o the merger, when consummated in accordance with the terms of
the merger agreement, will constitute a reorganization for
federal income tax purposes within the meaning of Section
368(a) of the Internal Revenue Code;
o no gain or loss will be recognized by an NAI shareholder,
who exchanges all of such NAI shareholder's shares of NAI
common stock solely for DRS common stock (except with
respect to cash received in lieu of a fractional share
interest in DRS common stock);
o the tax basis of the DRS common stock received by an NAI
shareholder, who exchanges all of such NAI shareholder's
shares of NAI common stock solely for DRS common stock in
the merger, will be the
58
<PAGE>
same as the tax basis of the shares of NAI common stock
surrendered in exchange for such DRS common stock (reduced
by any amount allocable to a fractional share interest for
which cash is received);
o the holding period of the shares of DRS common stock to be
received by an NAI shareholder will include the period
during which such NAI shareholder held the shares of NAI
common stock surrendered in exchange for such DRS common
stock; provided, that the NAI common stock surrendered is
held as a capital asset at the effective time; and
o no gain or loss will be recognized by a holder of NAI
warrants who exchanges such NAI warrants for DRS warrants.
Such opinion will be based in part on the truth and accuracy
of certain representations and statements of fact upon which
Whitman Breed Abbott & Morgan LLP will rely.
TERMINATION; TERMINATION FEES AND EXPENSES
The merger agreement may be terminated at any time prior to the effective
time, whether before or after approval of the matters presented in connection
with the merger by the DRS stockholders and NAI shareholders:
(1) by mutual written consent of DRS and NAI;
(2) by either DRS or NAI
(a) if the merger shall not have been consummated by February 17, 1999,
unless the merger has not occurred by such time solely by reason of the
failure by the SEC to give timely approval to the joint proxy
statement/prospectus or the registration statement or by reason of any
governmental consent or approval having not been obtained. In the case that
timely approval by the SEC is not obtained, the merger shall be consummated
as soon as possible after the SEC has approved this joint proxy
statement/prospectus if consented to by DRS (such consent not to be
unreasonably withheld);
(b) if the approval of the shareholders of NAI shall not have been obtained
at the NAI meeting; or
(c) if any injunction or legal restraint in effect preventing the
consummation of the merger shall have become final and nonappealable;
(3) by NAI, if DRS shall have breached or failed to perform in any material
respect any of its representations, warranties, covenants or other
agreements contained in the merger agreement;
(4) by NAI, if it elects to terminate the merger agreement in accordance with
Section 8.6(b) of the merger agreement (as described above in "--No
Solicitation"); provided, that NAI has complied with all provisions of the
merger agreement, including the notice provisions, and that NAI complies
with applicable requirements relating to the payment (including the timing
of any payment) of DRS' expenses and the $1,500,000 termination fee
described below;
(5) by DRS, if NAI shall have breached or failed to perform in any material
respect any of its representations, warranties, covenants or other
agreements (other than Section 8.6 of the merger agreement (as described
above in "--No Solicitation")) contained in the merger agreement;
(6) by DRS, if (a) Section 8.6 of the merger agreement shall be breached by NAI
or any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative of NAI, and
NAI shall have failed promptly to terminate the activity giving rise to
such breach and use best efforts to cure such breach upon notice of such
breach from DRS, or (b) NAI shall breach Section 8.6 of the merger
agreement by failing to notify DRS promptly of its actions as required
under this Section 8.6; provided, that, in the case of clause (a), NAI
shall comply with applicable requirements relating to payment (including
the timing of any payment) of DRS' expenses and the $1,500,000 termination
fee described below;
59
<PAGE>
(7) by DRS, if (a) the NAI board or any committee of the NAI board shall have
withdrawn or modified in a manner adverse to DRS its approval or
recommendation of the merger or the merger agreement, or failed to
reconfirm its recommendation within fifteen business days after a written
request to do so, or approved or recommended any NAI Takeover Proposal or
(b) the NAI board or any committee of the NAI board shall have resolved to
take any of the foregoing actions; provided, that NAI shall comply with
applicable requirements relating to payment (including the timing of any
payment) of DRS' expenses and the $1,500,000 termination fee described
below; or
(8) by NAI, if the DRS board or any committee of the DRS board shall have
withdrawn or modified in a manner adverse to NAI its approval or
recommendation of the merger or the merger agreement, provided, that no
event giving rise to DRS' right to terminate the merger agreement
described above in paragraphs (5), (6) and (7) shall have occurred.
In the event of any termination of the merger agreement by either DRS or
NAI, as provided above, the merger agreement will become void and there will be
no liability or obligation (with limited exceptions) on the part of DRS, NAI,
Merger Sub or their respective officers, directors, stockholders or affiliates,
except as provided below with respect to expense reimbursements and termination
fees.
Except as set forth below, whether or not the merger is consummated, all
fees, costs and expenses incurred in connection with the merger agreement and
the transactions contemplated in the merger agreement shall be paid by the party
incurring such expenses.
NAI shall reimburse DRS for DRS' out-of-pocket expenses (including, without
limitation, fees and expenses of outside professionals) not previously
reimbursed (in any case all such expenses not to exceed $300,000 in the
aggregate) within two business days of the termination of the merger agreement
by DRS or NAI under the circumstances described in paragraphs (4), (6) and (7)
above and promptly pay DRS the termination fee if DRS becomes entitled to such
termination fee as provided in the following paragraph.
NAI shall pay DRS a termination fee of $1,500,000 within two business days
of NAI's entering into a definitive letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to an NAI Takeover
Proposal prior to six months after the termination of the letter of intent
between DRS and NAI or the merger agreement with any third party that was in
contact with NAI during the period that the letter of intent between DRS and NAI
was in effect, and NAI shall promptly reimburse DRS for DRS' out-of-pocket
expenses not previously reimbursed as described above; provided, that the
termination fee shall not be payable if (1) stockholders of DRS or shareholders
of NAI shall not have approved the merger, the waiting period applicable to the
consummation of the merger under the Hart-Scott-Rodino Act shall not have
expired or been terminated and NAI shall not have obtained all necessary
consents and approvals to consummate the merger by February 17, 1999, unless
such conditions were not satisfied due to NAI's failure to use its best efforts
or (2) the merger agreement was terminated pursuant to the circumstances
described in paragraph (3) above.
AMENDMENT AND WAIVER
The merger agreement may be amended at any time prior to the effective time
by DRS and NAI, but after approval by the DRS stockholders and NAI shareholders
of the merger, no amendment shall be made that by law requires further approval
by such DRS stockholders and NAI shareholders, without such further approval.
DRS and NAI may extend the time for performance of the obligations or other acts
of the other parties to the merger agreement, may waive inaccuracies in the
representations or warranties contained in the merger agreement and may waive
compliance with any agreements or conditions contained in the merger agreement.
60
<PAGE>
MERGER RELATED TRANSACTION
The NAI convertible notes were issued by NAI in a private placement of the
NAI convertible notes and a warrant to purchase common stock at a purchase price
of $1,000 per unit on February 15, 1996, February 23, 1996, February 29, 1996
and May 2, 1996. On August 26, 1996 NAI filed a registration statement with the
SEC in connection with the sale of $6,342,000 of the NAI convertible notes,
4,112,700 of these warrants and 8,904,336 shares of the NAI common stock.
Pursuant to the merger agreement, NAI is required to obtain the consents of
at least 90% of the aggregate principal amount of the NAI convertible notes
outstanding as of August 26, 1998 to convert all of such holders' NAI
convertible notes to NAI common stock immediately prior to the effective time.
NAI will approach the holders of the NAI convertible notes about the conversion
of such notes into shares of NAI common stock at the same time as this joint
proxy statement/prospectus and other proxy materials are distributed to the
shareholders of NAI. See "The Merger Agreement--Conditions."
In the event that holders representing at least 90% of the aggregate
principal amount of NAI convertible notes outstanding as of August 26, 1998 do
not agree to convert their NAI convertible notes into shares of NAI common stock
as described in the consent solicitation, DRS will have no obligation to effect
the merger.
The merger agreement also requires that the holders of NAI convertible
notes approve:
o certain amendments to the NAI convertible notes and the related
indenture which would eliminate or modify the restrictive covenants,
events of default and other provisions in the NAI convertible notes
and the related indenture;
o the sale of all of the issued and outstanding capital stock of Wilcom,
Inc., pursuant to the terms of the Wilcom stock purchase agreement;
and
o the removal of the registration requirement of the NAI convertible
notes.
In the event that the holders of the NAI convertible notes do not approve
all of these proposals, DRS will have no obligation to effect the merger.
61
<PAGE>
INFORMATION ABOUT DRS
GENERAL
DRS was incorporated in 1968 and provides leading edge products and
services to government and commercial markets worldwide. Focused on defense
electronics, 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. DRS offers a full complement of technical support and advanced
manufacturing services.
DRS believes that the nature of modern warfare has changed, dictating
increasing reliance on real-time, accurate battlefield information derived from
increasingly sophisticated defense systems and electronics. Additionally, the
nature of military procurement programs has changed, requiring suppliers to
become more efficient and adaptable to current and future market needs. In
recent years, DRS has implemented strategies to exploit the changing nature of
military procurement programs brought on by the end of the Cold War and military
budget constraints. In response to a 1992 mandate by the Joint Chiefs of Staff,
DRS focuses on "Commercial-Off-The-Shelf" ("COTS") product designs, whereby
commercial electronic components are integrated, adapted, upgraded and
"ruggedized" for application in harsh military environments. In addition to
winning contracts for new programs and supporting existing military programs,
DRS' strategies include:
o designing new products and adapting existing products for use by all
branches of the military;
o transferring technologies developed in the defense sector to
commercial and industrial markets; and
o acquiring businesses that provide a strategic complement to DRS'
existing products, services and technological capabilities in both the
defense and commercial marketplaces.
To effect these strategies, DRS has:
o made several acquisitions in recent years, adding complementary
military and commercial products and technologies;
o entered into strategic relationships with other defense suppliers such
as Lockheed Martin Tactical Defense Systems and Northrop-Grumman,
among others;
o emphasized the development of COTS-based products, as well as products
and systems that are easily adapted to similar weapons platforms used
by all branches of the military; and
o implemented cost reduction initiatives to reduce its fixed-cost base
to allow for growth and to maintain the flexibility of its operations.
RECENT EVENT
On October 20, 1998, DRS acquired, through certain of its subsidiaries,
certain assets of the Second Generation Ground Based Electro Optics and Focal
Plane Array businesses of Raytheon Company and certain of its subsidiaries,
pursuant to an asset purchase agreement, dated as of July 28, 1998, between DRS
and Raytheon, as amended. DRS paid approximately $45 million in cash for this
acquisition on October 20, 1998; the purchase price is subject to certain
post-closing adjustments to be based on audited financial statements, as of
October 20, 1998, for the Second Generation Ground Based Electro Optics and
Focal Plane Array businesses when available. Any upward adjustment may not
exceed $7 million. The acquisition of the Second Generation Ground Based Electro
Optics and Focal Plane Array businesses will be accounted for using the purchase
method of accounting.
The Second Generation Ground Based Electro Optics and Focal Plane Array
businesses design, manufacture and market products that allow human operators
and missiles to detect, recognize, identify and/or reach military targets based
on the targets' infrared signatures, regardless of ambient light conditions.
62
<PAGE>
The Second Generation Ground Based Electro Optics business, to be known as
DRS Sensor Systems, Inc., designs and manufactures second generation
forward-looking infrared systems for use on certain military ground vehicles,
including the M1 Abrams Main Battle Tank, M2 Bradley Fighting Vehicle and High
Mobility Multi Wheel Vehicle scout vehicle. The Second Generation Ground Based
Electro Optics business currently operates primarily in El Segundo, California,
with certain operations in LaGrange, Georgia. Certain activities conducted in
LaGrange will be relocated to another DRS facility. The Second Generation Ground
Based Electro Optics business in El Segundo will be physically partitioned from
Raytheon's other operations there and will lease 17,444 square feet of space
from Raytheon. DRS anticipates moving the El Segundo operation to another
location in the same geographic area. The Second Generation Ground Based Electro
Optics business has 47 employees who accepted offers of employment with DRS
after October 20, 1998.
The Focal Plane Array business, to be known as DRS Infrared Technologies,
LP, produces infrared scanning focal plane arrays. Focal plane arrays are two
dimensional assemblies of electro-optical detecting pixels used to generate
night vision capability. The Focal Plane Array business operates primarily in
Dallas, Texas. Focal plane arrays are also used in heat-seeking missile guidance
systems and missile warning systems, in which no pictorial image is required. In
addition to its scanning and staring arrays business, the Focal Plane Array
business is the leading worldwide merchant supplier of cryogenic linear coolers
for infrared devices.
The Focal Plane Array business is subleasing space for its operations from
Raytheon at two facilities in Dallas, Texas: one stand-alone 48,000 square foot
research facility and a partitioned portion measuring 61,600 square feet of a
neighboring Texas Instruments building. The Focal Plane Array business has 186
employees who accepted offers of employment with DRS after October 20, 1998.
In connection with the acquisition of the Second Generation Ground Based
Electro Optics and Focal Plane Array businesses, DRS and certain of its
subsidiaries entered into a $150 million secured credit facility with Mellon
Bank, N.A. The Mellon credit agreement consists of two term loans, the first in
the principal amount of $30 million and the second in the principal amount of
$50 million, and a revolving line of credit in an amount up to $70 million. The
maturity dates of the first term loan and the second term loan are October 20,
2003 and October 20, 2005, respectively. The termination date for the $70
million revolving line of credit is October 20, 2003. The Mellon credit
agreement amends, restates and replaces DRS' existing $60 million secured credit
facility. The second term loan was used to finance a portion of the acquisition
of the Second Generation Ground Based Electro Optics and Focal Plane Array
businesses. The first term loan and the revolving line of credit are available
for working capital, general corporate purposes and acquisitions. The Mellon
credit agreement contains certain covenants and restrictions, including a
restriction on the payment of dividends on the capital stock of DRS, a
limitation on the issuance of additional debt and certain other restrictions.
63
<PAGE>
INFORMATION ABOUT NAI
NAI, through its wholly-owned subsidiaries, designs, manufactures and
markets rugged computer systems, advanced peripheral products, intelligent
terminals, high performance workstations, TEMPEST computer systems (which
suppress certain radiation to prevent external detectors from reading the data
being transcribed) and telecommunications test equipment and transmission
products. NAI operates in two distinct operating segments: a Rugged Systems
segment and a Systems Integration segment.
The Rugged Systems segment provides rugged computer products specifically
designed for deployment in harsh environments that require special attention to
system configurations. This segment's customer base includes the U.S. and
foreign armed services and some commercial applications.
The Systems Integration segment provides custom packaged, integrated
computer systems and peripherals and sells primarily to the U.S. intelligence
agencies.
NAI operates a Telecommunications segment pending the closing of the
merger. The Telecommunications segment provides transmission enhancement
products and rugged, hand-held test equipment for analog, digital and
fiber-optic communications and data-interchange networks. This segment's
customer base includes the regional Bell operating companies and independent
telephone companies. On July 7, 1998, the NAI board passed a resolution to
discontinue the operations comprising the Telecommunications segment, which
solely consists of a direct wholly-owned subsidiary, Wilcom, Inc. On September
21, 1998, NAI and Wilcom, Inc. entered into the Wilcom stock purchase agreement
with Wilcom Acquisition Corp., in which Charles S. Holmes, a current director of
NAI, owns a majority of shares of capital stock and Dennis McCarthy, another
current director of NAI, owns the remaining outstanding shares of capital stock,
which provides for the sale of all the capital stock of Wilcom, Inc. to Wilcom
Acquisition Corp. immediately prior to the effective time of the merger. It is a
condition of the merger that Wilcom, Inc. be disposed of prior to the closing.
NAI's strategy is to be a leading supplier of high quality, innovative
products, systems and services to satisfy specialized customer requirements in
niche information technology markets, especially in environments with harsh
operating requirements.
RUGGED SYSTEMS SEGMENT
The Rugged Systems segment is comprised of two operating subsidiaries as
follows:
Codar Technology, Inc., located in Longmont, Colorado; and
Lynwood Rugged Systems Limited, based in Farnham, United Kingdom.
CODAR
Codar is a leading supplier of rugged computer systems to the U.S.
Department of Defense (DOD), primarily through the major U.S. prime contractors,
as well as to various overseas defense establishments. Providing rugged system
solutions requires Codar to maintain design, manufacturing and integration
capabilities "in house" so as to be able to respond to unique customer
requirements. These custom and semi-custom designs are deployed throughout the
full spectrum of defense platforms and applications.
Codar's technology/product lines are predominantly focused on high
performance computer workstations and displays using the latest
commercial-off-the-shelf (which has been defined as COTS) technologies. The
computer processor technology incorporated into Codar products ranges from
Intel's Pentium/Pentium Pro to DEC's Alpha to Sun Microsystems' UltraSPARC II.
The high performance display products use the latest in CRT and LCD flat panel
technologies.
In order to address the defense market employing COTS electronics, Codar
designs into each product the basic capability to survive in the hostile
environments that normally exist in most defense related platforms. Codar's
designs
64
<PAGE>
allow the COTS electronics to survive in harsh environments that include
temperature and humidity extremes, sand, dust, high shock and severe vibration.
Because of their frequent use in command, control, communication, computer and
intelligence (C4I) applications, all of Codar's systems are also designed to
provide Electromagnetic Interference (EMI) protection. Additional requirements
for specific applications are addressed through modification to existing designs
or through new designs. In 1997, Codar designed a sunlight readable flat panel
monitor to meet a U.S. submarine requirement that would allow it to operate
while temporarily submerged.
Codar has developed families of equipment to allow for the flexible
development of integrated solutions, an approach now being embraced by the
leading commercial computer manufacturers. An excellent example of this approach
is Codar's offerings under the U.S. Army's Common Hardware/Software (CHS-2)
program, a contract which provides the basic hardware/software infrastructure
for the Force XXI "digitization of the battlefield" initiative.
"Force XXI" is the U.S. Army's initiative to increase the use of
information technology in the Army's Battlefield Command and Control structure
down to and including the individual foot soldier. During 1997, this initiative
was phased into task force, division and corps level Advanced Warfighting
Experiments (AWEs). These are now followed by initial deployments of equipment
and software to an entire division (First Digitized Division-FDD). This
deployment will be expanded to additional divisions over an extended period of
time as future budgets allow. Different technology segments are being handled as
separate programs, but are being coordinated through the U.S. Army's
Communications-Electronics Command's (CECOM) Command, Control and Communications
Systems (C3S) Program Executive Office (PEO) headquartered at Fort Monmouth, New
Jersey. Current estimates exceed $4,000,000,000 to complete the deployment of
equipment to targeted units by 2005. The primary acquisition avenues include the
Common Hardware Software 2 (CH-2) and the Force XXI Battle Command Brigade and
Below (FBCB2) programs. Currently fielded programs and platforms have included
the incorporation of information technology into their respective upgrade
planning.
Codar provides eight different pieces of rugged equipment, all qualified to
one well-defined set of specifications. The equipment includes three different
rackmounted computer chassis, a rackmounted mass memory expansion chassis, three
different displays (one CRT and two LCD flat panels) as well as a fully
integrated portable workstation with keyboard and display. Each computer and
expansion chassis can be populated with an approved "menu" of configurations and
options. This wide assortment of equipment allows U.S. Army users to select
system configurations that truly address their identified needs in the field.
LYNWOOD
Lynwood is a supplier of rugged COTS computer hardware products, systems
and services to the defense market. Each piece of commercial hardware is
adapted, protected and presented in a rugged form that enables it to meet
individual customer requirements and/or specific military tests and standards.
Typically, these standards relate to satisfactory performance in extremes of
temperature, humidity, altitude, vibration and shock, together with
environmental and electromagnetic criteria.
A specialist in the design, development and implementation of rugged COTS
hardware for land, sea and airborne forces, Lynwood is based in the UK and
actively represented in Europe, Scandinavia, Australia and Southeast Asia, where
it also provides a gateway to these markets for Codar and NAI's direct
wholly-owned subsidiary, NAI Technologies-Systems Division Corporation.
In 1997, Lynwood established an Australian subsidiary, Lynwood Rugged
Systems Australia Pty. Limited ("Lynwood RSA"), in response to a growing demand
for rugged equipment for existing and new programs in the region. During 1997,
Lynwood RSA received two significant orders: one for a maintenance contract in
support of the Australian Army Tactical Command Support System (AUSTACSS), which
Lynwood has supplied since 1995, and a second order from a leading U.S. defense
company for the manufacture of Explorer II workstations.
During 1997, Lynwood continued to upgrade its capabilities by expanding the
Engineering Division's in-house environmental test facilities and by installing
secure facilities for the special testing of secure communication systems. These
investments extend Lynwood's ability to deliver rugged systems and to undertake
a comprehensive range of specialized services, including requirements analysis,
system design, prototyping and cabling, installation and
65
<PAGE>
commissioning of secure and TEMPEST sites. A founding member of the UK
Industrial TEMPEST Scheme, Lynwood works to specified procedures and operates a
quality system accredited to ISO 9001.
Versatility and superior performance are the hallmarks of Lynwood's
successful rugged systems solutions, which are incorporated into many high
profile defense programs. Examples include the MC60/VME rugged computer system
and FPR 16I rugged flat panel display, which form the rugged hardware element of
the RAF Harrier Jet portable data preparation stations. Lynwood is the rugged
hardware systems integrator for the British Army Attack Helicopter (Apache)
ground support system (GSS) and it also supplies the integrated rugged hardware
solution in support of the RAF Chinook Helicopter Fleet's generic health and
usage monitoring system (GHUMS). Contract awards during 1997 have solidified
Lynwood's status as 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 FPR 20" rugged flat panel 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 within sixteen months under
contract to BAeSEMA. During 1997 the Directorate General of Information and
Communication Services (DGICS) of the Ministry of Defense established an
enabling agreement with Lynwood for services relating to a variety of specialist
secure communications systems across all MOD sectors and locations.
In response to market needs, several new products are in development for
launch in 1998. These include the EXPLORER NT rugged portable workstation, a new
variant of the Explorer II supporting Digital's Alpha and Intel's Pentium II
processors. The Explorer II is in service around the world, used in applications
ranging from army tactical command support systems to aircraft portable
maintenance aids.
The Explorer (often referred to as the CCU, Compact Computer Unit) was
added to the contract in 1989 as a complimentary unit to the range of desktop
and shelter based systems. The Explorer allows the army to have the full
capabilities of the CHS2 products in a portable, self-contained unit with its
own power source and an integral flat panel display. The unit uses the same
exchangeable media (hard disks and tape units) as the rest of the range
providing total compatibility of all information and system security. The unit
shares its design with the Lynwood Explorer 2 and is currently being
complimented with an upgraded version with a larger display and greater upgrade
capabilities. To date on the CHS2 contract over 6000 units have been shipped
with a contract value in excess of $27,000,000.
The GENESIS 300 rugged multi-platform computer, a variant of the Genesis SR
(short rack), will feature an integral 12" 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 programs in Europe, Scandinavia and the Far East. The OPUS 16 rugged flat
panel with computer, a 16" flat panel display with single board Intel computer
housed in a rugged rackmount or portable enclosure, will join the extensive FPR
range of rugged flat panel color displays. Lynwood's fixed, rackmount or
portable FPR panels, with 12", 13", 16" and 20" displays, currently operate in a
variety of land, airborne, surface vessel and submarine environments.
SYSTEMS INTEGRATION SEGMENT
The Systems Integration segment currently consists of one operating
company: NAI Technologies-Systems Division Corporation, based in Columbia,
Maryland ("Systems Division"). The core business of Systems Division is
providing 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.
Systems Division's products are also designed to withstand a wide variety
of adverse environmental conditions, including high levels of shock and
vibration, temperature and humidity extremes, limitations on electromagnetic
emissions and operation at high altitudes. Also, because the systems are often
deployed in remote field sites, many of them are designed for unattended
operation, and all are designed for fast, easy maintenance in the field.
Systems Division markets directly to various U.S. government agencies,
primarily in the intelligence community. In addition to its direct relationships
with government customers, Systems Division also works in partnership with
leading prime contractors such as Lockheed Martin, General Telephone and
Electronics and Booz-Allen. These
66
<PAGE>
partnerships include a variety of contractual relationships ranging from
subcontractor to teammate, depending on the nature of the work involved and the
scope and term of the contract.
Systems Division's technical expertise includes "industry standard"
computer architectures such as ISA/EISA, PCI, Multibus, VME and S Bus. Software
experience includes DOS/Windows, Unix and Real-time operating systems. All of
Systems Division's products are designed around COTS components. Consequently,
Systems Division actively develops and maintains partnerships with key
technology vendors in the computer industry, such as Intel Corporation, Sun
Microsystems, Motorola, Hewlett Packard, Ross Technologies and many others.
Systems Division not only provides general-purpose computer systems for
deployment in unique environments, but also designs and integrates special
purpose systems configured specifically for a variety of target applications.
Among these application specialties are communications processing; data
acquisition, storage and forwarding; digital signal processing; client/server
systems and embedded processing. Systems Division also provides specially
packaged monitors, keyboards, printers and peripheral subsystems that are used
in conjunction with its computer systems.
As a result of budget pressures and downsizing, many government agencies
have begun to outsource some of the support services that had previously been
performed in-house. Systems Division, as a trusted supplier with an installed
base of several thousand systems, has been well positioned to provide these
services. In addition to the deployable computer platforms that represent its
core business, Systems Division now also provides support services such as
configuration management, testing, sparing, maintenance and life cycle support.
TELECOMMUNICATIONS SEGMENT
NAI also maintains a Telecommunications segment which consists of one
operating company: Wilcom, Inc., located in Laconia, New Hampshire. Wilcom, Inc.
designs, manufactures and markets products for use in the worldwide telephone
industry. The majority of Wilcom, Inc.'s business come from the Regional Bell
Operating companies and the larger independent telephone companies around the
world.
The product line of Wilcom, Inc. is focused on two market segments: (1)
test instrumentation for testing analog, optical and digital transmission
systems over fiber and copper cable and (2) telephone transmission products that
are used primarily to enhance and improve the quality and/or speed of voice,
video and digital data transmission over copper cables.
The test equipment product line was historically focused on the analog and
digital technology, but in recent years fiber optics has been the fastest
growing segment. Wilcom, Inc. continues to expand the fiber optic product line
with a focus on rugged portable hand-held products offering reliability and ease
of use. The 1997 additions includes the FM8515C High Power optical meter, the
FS8514 Dual Wavelength optical source and the F6230SC Visual Fault locator.
Wilcom, Inc. also introduced a range of application specific fiber optic Test
Kits for optical loss testing and optical fault locating.
Wilcom, Inc.'s telephone transmission enhancement products, which includes
the analog line treatment equipment ("LTE") and the enhanced line powered
amplifier ("ELPA"), are purchased for the expressed purpose of improving voice
quality, increasing data transmission speeds when using dial-up analog modems
and, under certain conditions, enhancing the utilization of copper wire lines
for broadband signal transmission applications. The proliferation of high-speed
analog modems has made the need for better quality phone lines an important
issue in the increasingly competitive communications industry. Wilcom, Inc.'s
products provide the telephone companies with the opportunity to offer
additional services in voice, data and video transmissions over their existing
copper networks until broadband digital systems become more readily available.
During the course of negotiations between the representatives of DRS and
NAI in connection with the merger, the representatives of DRS indicated that DRS
was not interested in acquiring Wilcom, Inc. Although NAI previously tried to
sell Wilcom, Inc., no purchasers were found. It is anticipated that all of the
issued and outstanding shares of Wilcom, Inc. will be sold to Wilcom Acquisition
Corp. pursuant to the Wilcom stock purchase agreement. Wilcom Acquisition Corp.
is a Delaware corporation in which Charles S. Holmes, a current director of NAI,
owns a majority of the capital stock and Dennis McCarthy, another current
director of NAI, owns the remaining outstanding shares of
67
<PAGE>
capital stock. Wilcom Acquisition Corp. will purchase Wilcom, Inc. for a
purchase price of (1) $150,000 and (2) Mr. Holmes' surrender of (a) 300,000
warrants to purchase shares of NAI common stock at an exercise price of $3.00
per share and (b) 1,700,000 NAI warrants with an exercise price of $2.50 per
share held by Mr. Holmes. If the merger is not completed for any reason, Wilcom
Acquisition Corp. will not be required to purchase Wilcom, Inc.
MARKETING AND SERVICE
NAI sells its products directly to customers and through distributors and
serves as a subcontractor to larger prime contractors serving the same customer
base. NAI's products are marketed to customers through sales personnel,
manufacturer's representatives and distributors. NAI maintains sales offices and
sales support in Columbia, Maryland; Westlake Village, California; Longmont,
Colorado; Australia; England; and Israel.
NAI provides maintenance and field service for its products through its
customer service departments located at each of its manufacturing facilities and
at certain customer sites. Some distributors also perform field service for
printers. NAI's representatives in Australia, Denmark, England, France, Germany
and Israel perform most overseas service.
CUSTOMERS
During 1997 and 1996, sales under contracts with the U.S. government were
approximately 28% and 34%, respectively, of NAI's net sales. The U.S. government
and GTE Corporation each accounted for more than 10% of NAI's sales in 1997 and
1996. Sales to GTE Corporation in 1997 and 1996 were $7,971,000 and $9,516,000,
respectively, which represented 17% and 16% respectively, of NAI's sales. NAI's
sales are affected by the U.S. defense budget. With continuing discussions on
budget cuts, it is difficult to assess what the impact of budget cuts, if any,
will be on NAI. It appears that defense outlays will be reduced from past
levels. NAI is unaware of any targeted cuts specifically affecting programs
using its products. NAI's products are utilized in many different programs.
However, changed U.S. government spending levels could impact NAI's future sales
levels. No single U.S. government contract accounted for greater than 10% of
NAI's sales in 1997 or 1996.
FOREIGN SALES
Foreign sales in 1997 and 1996 accounted for approximately 35% and 25%,
respectively, of total sales. Such sales, which exclude products sold to the
U.S. government and resold by the U.S. government for foreign military use, are
made primarily to customers in Australia, Canada, Hong Kong, Israel, the United
Kingdom, Norway and Western Europe.
NAI's foreign sales are comprised of export sales from the U.S. and foreign
revenues from Lynwood. All export sales from the U.S. are payable in U.S.
dollars, and therefore, settlement amounts do not fluctuate with changes in
exchange rates. All of Lynwood's sales are payable in British currency.
Fluctuations in exchange rates between the U.S. dollar and the British pound
will impact NAI's operating results. No single country, with the exception of
the United Kingdom (48% in 1997 and 70% in 1996), Australia (10% in 1997 and 18%
in 1996) and Norway (28% in 1997 and less than 5% in 1996), accounted for more
than 5% of NAI's foreign sales in any of these past two years.
Foreign sales for the past three years have been as follows:
APPROXIMATE
TOTAL PERCENT OF
YEAR FOREIGN SALES NAI SALES
---- ------------- ---------
1997 $16,784,000 35%
1996 $15,521,000 25%
1995 $12,232,000 24%
68
<PAGE>
BACKLOG
NAI's backlog of orders was $26.4 million as of December 31, 1997. Of this
amount, 14% represents orders for U.S. military sales. Such orders are subject
to termination at the convenience of the U.S. government with negotiated
settlements in which NAI seeks to recover its costs and a reasonable profit.
Certain other orders, when subject to cancellation or return, are handled with a
restocking charge or by negotiated settlement.
While NAI's backlog is not subject to seasonal factors, it does fluctuate
due to timing of orders. NAI expects to produce and ship approximately 48% of
its current backlog of orders before the end of 1998.
COMPETITION
NAI's business is highly competitive. Many suppliers in NAI's markets are
significantly larger than NAI in terms of total sales and assets, and many
devote significantly more resources to the development of new products than does
NAI. NAI searches for certain market niches where it has expertise and can
compete successfully. Competition for NAI's products is based principally on
reliability, performance, price and diversity of the products offered.
RESEARCH AND DEVELOPMENT
NAI's technological base is characterized by rapid change. As a result,
maintenance and expansion of NAI's businesses are partially dependent upon the
success of NAI's programs to develop new products and upgrade existing products.
NAI's engineering resources have been devoted to the development of new products
in every major category of its business.
During the years 1997, 1996 and 1995, NAI's total engineering expenditures
were $2,762,000, $3,304,000 and $6,495,000, respectively. Due to the extensive
use of COTS-based equipment in NAI's products, NAI's cost of independent
research per year in pursuit of new products and improvements to existing
products has declined from 1995 to 1997; during the years 1997, 1996 and 1995
such cost was approximately $947,000, $1,014,000 and $1,038,000, respectively.
Customer-funded engineering, included in cost of sales or inventory, as a
contract cost was $1,815,000 in 1997, $2,290,000 in 1996 and $5,457,000 in 1995.
PATENTS AND TRADEMARKS
NAI owns patents and trademarks and seeks patent protection for its
products in cases where NAI believes the technology involved is sufficiently
innovative to warrant such protection. NAI seeks trademark protection for its
products in cases where NAI believes for marketing reasons such protection is
warranted. NAI seeks to protect its proprietary information through its reliance
on patent, copyright, trademark and trade secret laws, non-disclosure agreements
with its employees and confidentiality provisions in licensing arrangements with
its customers. There is no assurance that such agreements will be effective to
protect NAI or that the proprietary information deemed confidential by NAI will
be adequately protected by the laws respecting trade secrets. Consequently, it
may be possible for unauthorized third parties to copy certain portions of NAI's
products or to "reverse engineer" or otherwise obtain NAI's proprietary rights.
Moreover, the laws of some foreign countries do not afford the same protection
provided by U.S. laws to NAI's proprietary rights.
GOVERNMENT REGULATION
NAI is subject to the federal acquisition statutes and regulations
governing the award and performance of government contracts, FTC statutes and
regulations governing its advertising and trade practices, Department of
Commerce statutes and regulations, as well as Department of State Defense Trade
Control statutes and regulations with respect to goods it imports and exports.
In connection with its U.S. government contracts, NAI is subject to U.S.
government audit rights that provide for the examination by the U.S. government
of cost and pricing records to determine whether current, accurate and complete
cost and pricing information was disclosed in connection with bids and proposals
for government contracts. To date, such statutes and regulations have not had a
material adverse effect on NAI's business. NAI in the normal course of business
is subject to DOD audits with respect to its government contracts, some of which
may result in pricing adjustments.
69
<PAGE>
NAI's manufacturing operations are subject to various federal, state and
local laws that regulate the discharge of materials into the environment, or
otherwise relating to the protection of the environment. To date, compliance
with such government regulations has not had a material adverse effect on NAI's
business.
MANUFACTURING AND SUPPLIERS
Production of NAI's products requires assembly and testing of components,
printed circuit boards and other purchased parts. Quality control, testing and
inspection are performed at various steps throughout the manufacturing process.
NAI purchases certain materials and components used in its systems and
equipment from independent suppliers. These materials and components are not
normally purchased under long-term contracts. NAI purchases minicomputers,
workstations, personal computers, mass storage subsystems, high-resolution
monitors and keyboards under OEM agreements. NAI believes that most of the items
it purchases may be obtained from a variety of suppliers, and it normally
obtains alternative sources for major items. NAI is dependent on a single
supplier or a few suppliers for some items from time to time. NAI believes it is
in good standing with all of its vendors.
EMPLOYEES
As of December 31, 1997, NAI had approximately 194 employees. NAI has never
experienced a work stoppage, and none of its employees are represented by
unions. NAI believes its relationship with its employees is good.
PROPERTIES
NAI's facilities, which are believed to be adequate to meet NAI's
foreseeable needs, are set forth in the following table.
<TABLE>
FACILITIES
<CAPTION>
APPROXIMATE
DIVISION OR FLOOR AREA (IN
SUBSIDIARY LOCATION SQUARE FEET) EXPIRATION DATE
---------- -------- ------------ ---------------
<S> <C> <C> <C>
Rugged Systems Segment
- ----------------------
Codar Longmont, Colorado 42,000 (leased) November 1, 1999
Lynwood Farnham, England 26,000 (leased) December 25, 2014
Systems Integration Segment
- ---------------------------
Systems Division Columbia, Maryland 25,000 (leased) November 30, 2001
</TABLE>
NAI also leases several small sales offices. NAI's corporate office located
in Huntington, New York is leased on a short-term basis. NAI pays approximately
$1,072,000 per annum for the rental of all its facilities.
LEGAL PROCEEDINGS
None
MARKET FOR NAI COMMON STOCK AND RELATED NAI SHAREHOLDER MATTERS
As of December 31, 1998, there were approximately 571 record holders of NAI
common stock, as determined from the records of the transfer agent, American
Stock Transfer & Trust Company. Street names are included collectively as a
single holder of record. NAI's management estimates that NAI has approximately
2,000 additional shareholders holding stock in street names.
For information regarding the market for and dividends paid on NAI common
stock, see "Summary-- Comparative Per Share Market Price and Absence of
Dividends."
70
<PAGE>
NAI WARRANTS
As of December 31, 1998, NAI has issued and outstanding the NAI warrants to
purchase 4,112,700 shares of NAI common stock at an exercise price of $2.50 per
share, subject to adjustment, exercisable on or prior to February 15, 2002. The
NAI warrants trade on the Nasdaq SmallCap Market under the symbol "NATLW." As of
July 10, 1998, there were approximately 40 record holders of NAI warrants, as
determined from the records of the warrant agent, American Stock Transfer &
Trust Company. On November 6, 1998, the NAI warrants were traded at $0.2969 per
warrant. On June 2, 1997, the NAI warrants traded as high as $3.50 per warrant.
On December 21, 1997, the NAI warrants traded as high as $2.125.
NAI CONVERTIBLE NOTES
NAI has issued and outstanding the NAI convertible notes, in the aggregate
principal amount of $5,059,500 as of January 13, 1999. The NAI convertible notes
are convertible into shares of NAI common stock at a conversion price of $2.00
per share, subject to adjustment. The NAI convertible notes are quoted on the
Yellow Sheets of the National Quotations Bureau under the symbol "NAI TECH INC
12-2001." As of November 10, 1998, there were approximately twenty-seven record
holders of the NAI convertible notes, as determined from the records of the
trustee, U.S. Bank National Association (formerly First Trust National
Association).
NAI issued the NAI warrants and the NAI convertible notes in a private
placement on February 15, 1996, February 23, 1996, February 29, 1996 and May 2,
1996. On August 26, 1996, NAI filed a registration statement to register the
sale of 4,112,700 NAI warrants, $6,342,000 aggregate principal amount of the NAI
convertible notes and 8,904,336 shares of NAI common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning persons or groups who
are known by NAI to be the beneficial owners of more than 5% of the NAI common
stock as of December 4, 1998. The information in the table below is based upon
information furnished to NAI by such persons and statements filed with the SEC.
To the knowledge of NAI, beneficial owners named in this table have sole voting
power with respect to the shares of NAI common stock listed opposite their
names.
NUMBER OF SHARES OF
NAME AND ADDRESS NAI COMMON STOCK PERCENT OF NAI
OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
------------------- ------------------- --------------
Charles S. Holmes 3,431,000 29.6%
P.O. Box 2850
Southampton, NY 11969
Pioneering Management Corporation 850,000 9.3%
60 State Street
Boston, MA 02114
Fundamental Management Corporation 1,079,336 11.0%
4000 Hollywood Boulevard
Suite 610N
Hollywood, FL 33021
INFORMATION REGARDING THIS TABLE:
Charles S. Holmes is a director of NAI. These shares of NAI common stock
are comprised of 1,000,000 shares of NAI common stock; 5,000 NAI options
exercisable at $3.44 per share; 1,750,000 shares of NAI common stock underlying
certain NAI warrants exercisable at $2.50 per share and 300,000 shares of NAI
common stock underlying the warrants to purchase NAI common stock at $3.00 per
share owned by Mr. Holmes; and 219,000 shares of NAI common stock and 157,000
shares of NAI common stock underlying NAI warrants exercisable at $2.50 per
share owned by an irrevocable trust for the benefit of a child. The ownership
percentage is calculated as if such NAI options,
71
<PAGE>
NAI warrants and NAI convertible notes had been converted as of December 4,
1998. It is anticipated that Mr. Holmes will surrender to NAI all of the NAI
warrants and warrants to purchase NAI common stock at $3.00 per share owned by
him in connection with the sale of Wilcom, Inc. See "Interests of Certain
Persons in the Merger--Sale of Wilcom, Inc."
The shares of NAI common stock listed opposite Pioneering Management
Corporation are reportedly owned by a passive investor. Pioneering Management
Corporation is the investment company advisor of such investor and is registered
under Section 203 of the Investment Advisers Act of 1940.
The shares of NAI common stock listed opposite Fundamental Management
Corporation are reportedly owned by various limited partnerships, of which
Fundamental Management Corporation is the general partner. C. Shelton James, a
director of NAI, is the President and a director of Fundamental Management
Corporation. These shares of NAI common stock are composed of 400,636 shares of
NAI common stock; 178,700 shares of NAI common stock underlying certain NAI
warrants exercisable at $2.50 per share and 500,000 shares of NAI common stock
underlying $1,000,000 of NAI convertible notes convertible into shares at $2.00
per share. These shares of NAI common stock excludes 14,793 shares of NAI common
stock owned by Mr. James as to which shares Fundamental Management Corporation
disclaims beneficial ownership. The ownership percentage is calculated as if
such NAI warrants and NAI convertible notes had been converted as of December 4,
1998 by Fundamental Management Corporation.
Shares of NAI common stock beneficially owned as of December 4, 1998 by
each director and executive officer of NAI and by all directors and executive
officers of NAI as a group are set forth in the following table. This table is
based upon information furnished to NAI by such persons and statements filed
with the SEC. Directors and executive officers have sole voting power and sole
investment power with respect to the shares of NAI common stock listed opposite
their names.
BENEFICIAL OWNERSHIP OF SHARES
NUMBER OF SHARES OF
NAI COMMON STOCK PERCENT OF NAI
NAME BENEFICIALLY OWNED COMMON STOCK
- ---- ------------------ ------------
Robert A. Carlson 100,467 1.1%
Stephen A. Barre 17,654 --
Edward L. Hennessy, Jr. -0- --
Charles S. Holmes 1,000,000 10.9%
C. Shelton James 14,793 --
Dennis McCarthy -0- --
Richard A. Schneider 30,042 --
All directors and officers as a
group (7 persons) 1,163,136 12.7%
- ----------
- -- = Less than 1%.
INFORMATION REGARDING THIS TABLE:
The number of shares of NAI common stock beneficially owned by each
director and executive officer excludes options exercisable within 60 days of
February 25, 1998 for such persons as follows: Mr. Carlson, 250,000; Mr. Barre,
13,120; Mr. Hennessy, 10,000; Mr. Holmes, 5,000; Mr. James, 12,401; Mr.
McCarthy, 10,000; Mr. Schneider, 100,000; and all directors and officers as a
group, 400,521.
The percentage of NAI common stock beneficially owned by each director and
officer is based on 9,180,000 shares outstanding on December 4, 1998.
The number of shares NAI common stock beneficially owned by Charles S.
Holmes excludes NAI warrants to purchase 2,050,000 shares of NAI common stock
owned by Mr. Holmes, and 219,000 shares of NAI common stock
72
<PAGE>
and warrants to purchase 157,000 shares of NAI common stock at $3.00 per share
owned by an irrevocable trust for which Mr. Holmes disclaims beneficial
ownership. See "Information About NAI--Security Ownership of Certain Beneficial
Owners and Management" and "Interests Of Certain Persons In The Merger--Sale of
Wilcom, Inc."
The number of shares of NAI common stock beneficially owned by C. Shelton
James excludes 400,636 shares of NAI common stock, NAI warrants to purchase
178,700 shares of NAI common stock and NAI convertible notes convertible into
500,000 shares of NAI common stock owned by various limited partnerships of
which Fundamental Management Corporation, an investment company of which Mr.
James is President and a director, as to which shares Mr. James shares voting
and dispositive power.
SELECTED CONSOLIDATED FINANCIAL DATA OF NAI
For selected historical financial information of NAI for the fiscal years
1993 through 1997 and the nine months ended September 27, 1997 and September 26,
1998, see "Summary--Selected Financial Data--Summary of Selected Consolidated
Financial Data of NAI Technologies, Inc.--Historical."
NAI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On July 7, 1998, the NAI board passed a resolution to discontinue the
operations comprising NAI's Telecommunications segment, which consists of one
wholly-owned subsidiary, Wilcom, Inc. It is anticipated that all of the issued
and outstanding shares of Wilcom, Inc. will be sold to Wilcom Acquisition Corp.
pursuant to the Wilcom stock purchase agreement. The operating results for
Wilcom, Inc. are accounted for as discontinued operations. Accordingly, its
operations are segregated in the accompanying financial statements. The
financial statements for all prior reporting periods and all figures in the
NAI's management's discussion and analysis of financial condition and results of
operations have been reclassified for amounts associated with Wilcom, Inc. The
second quarter 1998 results include a provision of $2,692,000 which is the
estimated loss on disposal including an estimate of future losses to be incurred
prior to the actual disposal of Wilcom, Inc. of $192,000. The disposition of
Wilcom, Inc. will proceed whether or not the merger with DRS is consummated.
Wilcom Acquisition Corp. is a Delaware corporation in which Charles S. Holmes
and Dennis McCarthy, two current directors of NAI, own all the outstanding
capital stock; Mr. Holmes is the majority stockholder of Wilcom Acquisition
Corp. Wilcom Acquisition Corp. will purchase Wilcom, Inc. for a purchase price
of (1) $150,000 and (2) Mr. Holmes' surrender of (a) 300,000 warrants to
purchase shares of NAI common stock at an exercise price of $3.00 per share and
(b) 1,700,000 NAI warrants with an exercise price of $2.50 per share held by Mr.
Holmes.
NINE MONTHS 1998 COMPARED WITH NINE MONTHS 1997
The nature of NAI's business is such that year to year changes in sales
levels are predominantly due to changes in shipping volume or product mix rather
than changing sales prices. Net sales for the nine months of 1998 were $34.7
million, a 5% decrease when compared with $36.7 million for the same period in
1997.
73
<PAGE>
The following chart provides the sales breakdown by subsidiary:
IN THOUSANDS OF DOLLARS 1998 1997 % CHANGE
- ----------------------- ------- ------- --------
RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $11,875 $10,977 8%
Lynwood Rugged Systems Limited 16,261 13,278 22%
Inter-company (272) (456) --
------- -------
Total Rugged Systems Segment 27,864 23,799 17%
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 7,531 12,967 (42)%
Inter-company (651) (108) --
------- -------
Total Systems Integration Segment 6,880 12,859 (46)%
Total $34,744 $36,658 (5)%
======= =======
Sales in the Rugged Systems segment (net of intercompany eliminations)
increased 17% to $27.9 million from $23.8 million for the same period in 1997.
The increased sales were attributable to a 22% sales increase at Lynwood and a
8% sales increase at Codar.
The sales increase at Lynwood was attributable to strong bookings and
increased export sales from the United Kingdom. New orders for the first nine
months of 1998 were more than double the comparable figure in 1997. Lynwood
attributes its strong booking performance to:
o establishment of a high profile in the major European markets of
France, Germany, Italy, Spain, Norway and Sweden and the high degree
of collaboration now taking place between the major defense companies
in these countries and the UK defense base;
o an increased focus within the United Kingdom to take advantage of
Lynwood's rugged COTS capabilities by targeting a number of vertical
product areas such as "embedded avionics computers," "combat system
consoles" and "battle management systems"; and
o increased emphasis on opportunities in the Far East to take advantage
of Lynwood's ability to satisfy contractual off-set requirements now
that it has established a manufacturing presence in Australia.
Codar's sales increase was attributable to higher sales on the CHS II contract
in the first nine months of 1998 as compared to the first nine months of 1997.
The CHS II contract is an IDIQ (indefinite delivery indefinite quantity) and
revenue will vary in each quarter.
Sales in the Systems Integration segment (net of intercompany eliminations)
decreased 46% to $6.9 million from $12.9 million for the same period in 1997.
The decrease in sales at the Systems division is attributable to a delay in
anticipated orders from the National Security Agency. The delay in orders is
believed to be due to changes in the Agency's fiscal 1998 budget as a result of
priority modifications by the Agency. The National Security Agency is the major
customer (in excess of 90% of segment sales) of the Systems Integration segment.
If it were to stop awarding business to this segment, the impact on
profitability would be significant both to the segment and NAI and most likely
would result in a significant reduction in size in the NAI Systems Division.
Because the Agency's work is custom work, no inventory is procured in advance of
receipt of contract awards. Therefore, a significant decline in future agency
orders would not necessitate any inventory adjustments. As of December 9, 1998,
only $1,146,000 of the $11,000,000 in orders that were expected to be placed in
the near term have been booked. It is believed that some additional delays in
placing the orders have resulted from the fact that several agencies are waiting
for authorization to
74
<PAGE>
make 1999 expenditures. Although delayed, NAI believes the anticipated orders
will be forthcoming now that the U.S. government fiscal 1999 budget is approved.
However, there can be no assurance that such orders will be received.
In recent years NAI has reduced its dependency on the United States defense
budget by expanding its non-military and export business operations. However,
NAI still expects approximately 35% of 1998 sales to be directly to the U.S.
military or through prime contractors to the U.S. military. NAI is not aware of
any programs in which it participates that are specifically targeted for a
termination or curtailment. NAI's products are utilized in many different U.S.
government programs, which reduces the adverse impact of the cancellation of a
single specific program. However, changes in future U.S. defense spending levels
could impact NAI's future sales volume.
The gross margin percentage for the nine months of 1998 was 24.4%, as
compared with 18.2% in the comparable period of 1997. The following chart
provides the gross margin percentage by subsidiary.
1998 1997
------ ------
Codar Technology, Inc. 19.9% (8.6)%
NAI Systems Division 23.0% 24.8%
Lynwood Rugged Systems Limited 26.9% 33.3%
The improved margins at Codar are attributable to better cost absorption
associated with higher sales, continued cost reduction efforts, as well as an
emphasis on competing for higher margin work. Codar's 1997 margin was adversely
impacted by a $3.0 million charge substantially related to an inventory
write-down which resulted from lower than expected sales along with the final
withdrawal from electronic printer products and the addition of certain more
advanced Codar products on the CHS II program.
The lower gross margin percentage at NAI Systems Division is primarily
attributable to decreased shipping volumes and the consequent under absorption
of fixed overhead expenses. Lynwood's margins were lower due to an unfavorable
product mix and higher engineering expenditures associated with recent new
contract awards. Margins at Lynwood should improve as these contracts evolve
into mature production work.
Selling expense for the nine months of 1998 was $2.4 million as compared to
$2.3 million for the same period in 1997.
General and administrative expenses for the nine months of 1998 were $3.4
million as compared to $3.2 million in the same period in 1997. This increase is
primarily attributable to merger related expenses of $0.47 million.
NAI-sponsored research and development expenditures for the nine months of
1998 were $0.4 million as compared with $0.7 million for the same period in
1997, which represents a decrease of 44%. The decrease is attributable to a
change in the mix between NAI-sponsored research and development and customer
funded engineering.
For the nine months of 1998, NAI reported operating income of $1.9 million
as compared with operating income of $0.02 million for the same period in 1997.
Interest expense and amortization of deferred debt costs, net of interest
income, was $1.3 million and $1.4 million for the nine months of 1998 and the
nine months of 1997, respectively.
75
<PAGE>
For the nine months of 1998 and 1997, NAI recorded income tax expense of
$0.5 million. The entire tax expense in both periods pertains to NAI's Lynwood
subsidiary located in the U.K. The apparent high effective tax rate is due to
the profitability of the NAI foreign operations in the U.K which are accruing
tax expense while the U.S. domestic operations are incurring losses for which no
tax benefit is being recognized in accordance with applicable accounting rules.
For this reason, NAI is accruing tax expense even though the consolidated
operations are showing a pre-tax loss. The figures for the nine months ended
September 26, 1998 are as follows:
TAXABLE INCOME* TAX EXPENSE EFFECTIVE RATE
--------------- ----------- --------------
Domestic ($1,114,000) $ -0-
Foreign $1,665,000 $514,000 31%
---------- --------
$ 551,000 $514,000 93%
========== ========
*Before loss from discontinued operations
1997 COMPARED WITH 1996
The nature of NAI's business is such that year to year changes in sales
levels are predominantly due to changes in shipping volume or product mix rather
than changing sales prices. Net sales in 1997 were $47.8 million, a 22% decline
when compared with $61.1 million for the same period in 1996.
The following chart provides the sales breakdown by segment and subsidiary
for 1997 and 1996.
IN THOUSANDS OF DOLLARS 1997 1996 % CHANGE
- ----------------------- ------- ------- --------
RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $14,579 $32,727 (55)%
Lynwood Rugged Systems Limited 16,845 14,621 15%
Inter-company (520) (434) --
------ ------ ---
Total Rugged Systems Segment 30,904 46,914 (34)%
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 17,217 14,330 20%
Inter-company (363) (113) --
------ ------ ---
Total Systems Integration Segment 16,854 14,217 19%
------ ------ ---
Total $47,758 $61,131 (22)%
======= ======= ===
Sales in the Rugged Systems segment (net of intercompany eliminations)
declined 34% to $30.9 million from $46.9 million in 1996. A 15% increase in
shipments at Lynwood was more than offset by a 55% revenue decline at Codar.
The sales decline at Codar is attributable to several factors, most notably
a decline in booking additional orders for the CHS 2 product line and rugged
work station products. Codar had reduced its ongoing operating expenses
throughout 1997 in order to mitigate the potential adverse impact of continuing
lower sales. Although Codar believes the bookings decline to be temporary, Codar
will continue to report less than optimum financial results until the bookings
rate increases. Codar does not anticipate reaching the sales level achieved in
1996 for several years. The 1996 sales level was favorably impacted by delays in
shipments from prior years.
The sales increase at Lynwood is attributable to increased exports to
foreign markets, particularly in Australia and Scandinavia.
Sales in the Systems Integration segment (net of intercompany eliminations)
increased 19% to $16.9 million from $14.2 million in 1996. Systems Division
reported its third consecutive year to year sales increase. In 1997 the Systems
Division was awarded several IDIQ (indefinite delivery indefinite quantity)
contracts that have the potential to
76
<PAGE>
provide significant business to NAI in 1998 and thereafter. However, the nature
of IDIQ contracts is such that there can be no assurance of future business.
In recent years NAI has reduced its dependency on the United States defense
budget by expanding its non-military business operations. However, NAI still
expects approximately 25% of 1998 sales to be directly to the U.S. military or
through prime contractors to the U.S. military compared to 27% in 1997. NAI is
not aware of any programs in which it participates that are specifically
targeted for termination or curtailment. NAI's products are utilized on many
different U.S. government programs, which reduces the adverse impact of
cancellation of any single specific program. However, changes in future U.S.
defense spending levels could impact NAI's future sales volume.
The gross margin percentage for 1997 was 19.7%, as compared to 21.0% for
1996. The following chart provides the gross margin percentage by subsidiary.
1997 1996
---- -----
Codar Technology, Inc. ............................... (1.1)% 14.4%
Lynwood Rugged Systems Limited ....................... 33.4% 34.0%
NAI Systems Division ................................. 23.0% 20.9%
Codar's gross margin was adversely impacted by a $2.0 million charge
related to an inventory write-down that was necessitated by lower than expected
revenues at Codar, the final withdrawal from electronic printer products and the
anticipated decline in sales of certain of Codar's products on the CHS II
program due to the replacement of those products with new more advanced Codar
products.
Systems Division's gross margins improved in 1997 because NAI received
favorable pricing on certain key components that were purchased during the year.
It is not likely that the favorable pricing will occur in 1998, and therefore,
the gross margin percentage in 1998 is expected to be somewhat lower than the
level achieved in 1997.
Wilcom, Inc.'s gross margins declined as a result of low shipping volumes
and thus poor absorption of fixed overhead costs. It is unlikely that Wilcom,
Inc. will return to pre-1997 gross margin levels due to the fact that line
treatment revenues are not expected to reach previous levels.
Selling expense for 1997 was $3.1 million, as compared to $3.4 million for
the same period in 1996. The 7% decrease was mostly attributable to the decline
in sales.
General and administrative expenses for 1997 were $4.1 million as compared
to $4.8 million in 1996. The decline is the result of NAI's intention to reduce
its expenses to an amount more commensurate with its current revenue level.
NAI-sponsored research and development expenditures for 1997 were $0.9
million, as compared to $1.0 million for 1996.
NAI reported operating earnings from continuing operations of $0.7 million
in 1997, as compared to operating earnings from continuing operations of $4.6
million in 1996. 1996 operating earnings from continuing operations were
favorably impacted by the recognition of a gain of approximately $1.5 million
from the sale of Codar's Systems Integration Division to Tracor Aerospace Inc.
in June 1996. Operating earnings for 1997 were adversely impacted by a $3.0
million charge substantially related to an inventory write-down at Codar.
Interest expense and amortization of deferred debt costs, net of interest
income, was $1.8 million in 1997, as compared to $2.5 million in 1996. The
decrease is attributable to lower borrowings, as well as a rate reduction.
The income tax expense pertains to NAI's Lynwood subsidiary located in the
U.K. Lynwood's earnings are taxed in the U.K., and, while NAI has a U.S. net
operating loss carry-forward, Lynwood is required to pay income taxes in the
U.K. NAI is unable to recognize the full tax benefit associated with its U.S.
net operating loss carry-forward due to uncertainties as to whether or not a
future benefit will be realized. When NAI returns to sustained profitability,
the benefits of such a tax loss carry-forward will be recognized.
77
<PAGE>
1996 COMPARED WITH 1995
The following chart provides the sales breakdown by segment and subsidiary
for 1996 and 1995.
IN THOUSANDS OF DOLLARS 1996 1995 % CHANGE
- ----------------------- ------- ------- --------
RUGGED SYSTEMS SEGMENT
Codar Technology, Inc. $32,727 $27,553 19%
Lynwood Rugged Systems Limited 14,621 11,587 26%
Inter-company (434) (249) --
------- ------- ---
Total Rugged Systems Segment 46,914 38,891 21%
SYSTEMS INTEGRATION SEGMENT
NAI Systems Division 14,330 13,504 6%
Inter-company (113) (582) --
------- ------- ---
Total Systems Integration Segment 14,217 12,922 10%
------- ------- ---
Total $61,131 $51,813 18%
======= ======= ===
Sales in the Rugged Systems segment (net of intercompany eliminations)
increased 21% to $46.9 million from $38.9 million in 1995. Each of the NAI
subsidiaries recorded sales increases in 1996, as compared to 1995. Codar's 1995
revenues were adversely impacted by production problems on certain contracts.
The increased sales at Lynwood is representative of the increased level of
business at this subsidiary.
Sales in the Systems Integration segment (net of intercompany eliminations)
increased 10% to $14.2 million from $12.9 million in 1995.
In recent years NAI has moved toward reducing its dependency on the United
States defense budget by expanding its non-military business operations.
The gross margin percentage for 1996 was 21.0%, as compared to 5.8% for
1995. The following chart provides the gross margin percentage by subsidiary.
1996 1995
---- ----
Codar Technology, Inc. .................................. 14.4% (5.8)%
Lynwood Rugged Systems Limited .......................... 34.0% 32.9%
NAI Systems Division .................................... 20.9% 17.4%
The margin improvement at Codar is attributable to increased shipping
volumes and cost reduction efforts initiated in late 1995 and early 1996.
Codar's operating performance in both years was adversely impacted by several
large contracts for which the gross margins were zero or negative. These
contracts were substantially completed during the third quarter of 1996. Codar's
1995 gross margins were adversely impacted by the recording of a $1,400,000
provision attributable to cost growth on certain long-term contracts due to
engineering design changes, greater than anticipated labor and material costs
and under-absorbed overhead and a $1,100,000 provision for inventory
obsolescence. The recording of a $900,000 provision for inventory obsolescence
adversely impacted Systems Division's 1995 gross margin.
Selling expense for 1996 was $3.4 million, as compared to $3.8 million for
the same period in 1995. The 12% decrease was realized, despite an increase in
sales of 18%, due to NAI's efforts to reduce operating expenses.
General and administrative expenses for 1996 were $4.8 million, as
compared to $5.9 million in 1995. Decreased corporate office expense, as well as
cost cutting moves taken in the fourth quarter of 1995, account for the decline.
NAI-sponsored research and development expenditures were $1.0 million for
each of 1996 and 1995.
NAI had operating earnings from continuing operations of $4.6 million in
1996, as compared to an operating loss from continuing operations of $8.1
million in 1995. 1996 operating earnings were favorably impacted by the
78
<PAGE>
recognition of a gain of approximately $1.5 million from the sale of the Systems
Integration Division to Tracor Aerospace Inc. in June 1996.
Interest expense and amortization of deferred debt costs, net of interest
income, was $2.5 million in 1996 as compared with $2.4 million in 1995.
The entire tax expense pertains to NAI's Lynwood subsidiary located in the
U.K. Lynwood's earnings are taxed in the U.K., and, while NAI has a U.S. net
operating loss carry-forward, Lynwood is required to pay taxes in the U.K. NAI
is unable to recognize the full tax benefit associated with its U.S. net
operating loss carry-forward due to uncertainties as to whether or not a future
benefit will be realized. When NAI returns to sustained profitability, the
benefits of such a tax loss carry-forward will be recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2.0 million at September 26, 1998, as
compared to $0.6 million at December 31, 1997. Cash provided by operating
activities amounted to $0.9 million in the first nine months of 1998, as
compared to $0.8 million in the comparable period of 1997. During the first nine
months, accounts receivable decreased by $0.1 million, inventory decreased by
$0.7 million, and accounts payable and other accrued expenses decreased by $1.0
million from December 31, 1997, respectively.
During the nine months ended September 26, 1998, NAI had borrowings of long
term debt and notes payable of $3.4 million, and had payments of long term debt
and notes payable of $2.9 million. Net borrowings of $0.5 million were used for
working capital purposes. From time to time, borrowings are necessary because of
the timing differences between payments due to NAI's vendors and the payment of
related receipts by NAI's customers. Payments due to vendors tend to precede the
payment of related receivables. At various times during the year NAI borrows
funds in the first month of each quarter in order to meet its financial
obligations to its vendors. This is necessitated because a disproportionate
amount of NAI's quarterly shipments take place in the last three weeks of the
quarter. Because of this shipment schedule, the first month of the following
quarter usually results in low receivable collections and high vendor payments.
This is usually reversed as the quarter progresses and the borrowed funds are
paid back to the extent possible.
At September 26, 1998 NAI's outstanding borrowing under NAI's credit
agreement was $6.5 million. NAI will be required to repay $750,000 on December
31, 1998. The remaining amount outstanding is due and payable on January 15,
1999.
As of September 26, 1998 NAI would have been in violation of the
consolidated current ratio and consolidated quick ratio debt covenants under its
credit agreement had it not received a waiver from its two lending banks. At the
same time, NAI also received a waiver to allow it to defer a required principal
payment of $750,000 until the maturity of the loan on January 15, 1999. The
terms of the waivers provide that NAI must comply with all of the terms of its
credit agreement. The waivers also require the Secretary or Executive Vice
President of NAI to certify periodically to the lenders that NAI is not in
default under the terms of its credit agreement and that NAI's representations
and warranties set forth in its credit agreement continue to be true and
accurate. The covenant waivers will expire on the fiscal quarter ended December
31, 1998 at which time NAI anticipates that it will once again be in violation
of the same two covenants. It is NAI's intention to request a waiver on the two
covenants as well as a deferral on the principal requirement of $750,000. If the
banks were to refuse to grant such a waiver, NAI would be in default under the
terms of its credit agreement, and the entire loan balance currently amounting
to $6,500,000 would be due immediately. It is unlikely that NAI would be able to
make the payment in this schedule without an alternative financing plan in
place.
No plans are in place to cure the inadequate cash flow situation. NAI's
cash flow is a major reason why the NAI board is in favor of the merger. It is
the intent of DRS to use a portion of the proceeds from the Mellon credit
agreement to pay down the entire outstanding principal and interest amounts
under NAI's credit agreement. NAI has had preliminary discussions with its two
principal banks regarding the need to refinance the January 1999 balloon payment
requirement. However, the banks have not made any commitment regarding the
loans. Although the NAI board has discussed the possibility of alternative
financing, NAI has not approached any new potential lenders. The NAI board
believes that it is difficult to approach potential lenders when the perception
is that NAI will be merging with DRS in the near future.
79
<PAGE>
INFLATION
NAI's financial statements are prepared in accordance with historical
accounting systems, and therefore, do not reflect the effect of inflation. The
impact of changing prices on the financial statements is not considered to be
significant.
BACKLOG
The backlog of unfulfilled orders as of December 31, 1997 was $26.4
million, compared to $30.0 million as of December 31, 1996. Approximately 48% of
the 1997 year-end backlog is scheduled for delivery over the next twelve months.
YEAR 2000
NAI's Year 2000 Project is proceeding on schedule. NAI's Year 2000 Project
is addressing the issue of computer and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000.
NAI's Year 2000 Project is divided into three major sections: (1) IT
Systems (infrastructure and applications software); (2) External Agents
(third-party suppliers and customers); and (3) Product Issues (Year 2000 issues
inherent in products sold by NAI).
The IT Systems section evaluates hardware and systems software. This
section is on schedule, and NAI estimates that approximately 95% of the
activities related to this section were completed as of September 26, 1998.
All IT Systems activities are expected to be completed by December 31, 1998.
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. Detailed evaluations of the most critical third parties have not
yet been initiated but will commence before December 31, 1998 and should be
completed by mid-1999. These evaluations will be followed by the development of
contingency plans, if considered necessary.
The Product Issues section includes the process of identifying any products
sold by NAI which may not be Year 2000 compliant, determining a corrective
course of action and disseminating relevant information to customers. Detailed
evaluations have recently begun, are approximately 15% complete and scheduled to
be completed by mid-1999.
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to NAI's financial position.
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 NAI'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, NAI is unable to
determine at this time whether the consequences of Year 2000 failure will have a
material impact on NAI's results of operations, liquidity or financial
condition. NAI's Year 2000 Project is expected to reduce significantly NAI's
level of uncertainty about the Year 2000 problem. NAI believes that, with the
completion of its Year 2000 Project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
NAI does not currently have any contingency plans in place to address the
failure of timely conversion of its and/or third-party systems in respect of the
Year 2000 issue.
80
<PAGE>
DESCRIPTION OF DRS CAPITAL STOCK FOLLOWING THE MERGER
DRS' authorized capital stock consists of 20,000,000 shares of DRS common
stock and 2,000,000 shares of undesignated preferred stock, $10.00 par value per
share. As of December 31, 1998, 6,359,503 shares of DRS common stock were issued
and outstanding, 385,164 shares were issued and held in treasury and 500,000
shares were reserved for issuance upon exercise of outstanding stock options.
There were no shares of DRS' preferred stock designated or issued.
For further information about DRS' authorized capital stock, reference is
made to DRS' reports incorporated in this joint proxy statement/prospectus by
reference in "Where You Can Find More Information."
DRS COMMON STOCK
In connection with the merger, up to 3,713,718 shares of DRS common stock
may be issued to holders of NAI common stock.
DRS WARRANTS
Discussion of the DRS warrants in this joint proxy statement/prospectus is
qualified entirely by reference to the form of the DRS warrant filed by DRS with
the SEC.
Assuming completion of the merger, DRS will offer to exchange for the
assumed NAI warrants appropriate DRS warrants representing rights with respect
to DRS common stock. Each DRS warrant entitles the holder to purchase specified
numbers of shares of DRS common stock at an exercise price equal to $10.00 per
share, subject to adjustment. As of the effective time, it is anticipated that
there will be DRS warrants outstanding which would result in the issuance of
approximately 603,175 shares of DRS common stock upon exercise. Each DRS warrant
is subject to adjustment upon the occurrence of any of the following events:
o the recapitalization of DRS or reclassification of the securities to
be received upon conversion or any merger or consolidation of DRS into
or with a corporation or other business entity, or the sale or
transfer of all or substantially all of DRS' assets or any successor
corporation's assets to any other corporation or business entity;
o the subdivision or combination of shares of DRS common stock;
o the payment of dividends or other distributions in the form of DRS
common stock; and
o the issuance of shares of DRS common stock at less than the closing
price.
No adjustment to the DRS warrants is required to be made until cumulative
adjustments otherwise required to be made amount to 1% or more of the exercise
price. DRS warrants will be exercisable, at any time and from time to time, on
or before 5:30 p.m., local time, February 15, 2002 by surrendering the DRS
warrant to DRS, accompanied with the appropriate form of consideration in
payment for the number of shares of DRS common stock as set forth in the
subscription form. The right to purchase shares of DRS common stock will be
forfeited after such date and time. Each DRS warrant may be exercised in whole
or in part so long as any exercise in part would not involve the issuance of
fractional shares of DRS common stock. DRS will reserve such shares of DRS
common stock as shall be required for issuance upon conversion of the DRS
warrants. Holders of DRS warrants are not entitled to any rights as stockholders
of DRS.
AMENDED NAI CONVERTIBLE NOTES
Although the amended NAI convertible notes are not DRS capital stock but a
portion of NAI's indebtedness, the amended NAI convertible notes will be
convertible, after completion of the merger, into shares of DRS common stock.
Accordingly, the following discussion briefly summarizes general terms of the
amended NAI convertible notes and resales of the notes as they relate to the DRS
common stock. Discussion of the amended NAI convertible notes in this joint
proxy statement/prospectus is qualified entirely by reference to the form of
such note on file with NAI.
81
<PAGE>
GENERAL
Assuming completion of the merger, holders of at least 90% of the aggregate
principal amount of NAI convertible notes outstanding as of August 26, 1998 will
have converted all of their notes into shares of NAI common stock prior to the
effective time of the merger. In addition, in connection with the merger, a
sufficient number of the holders of NAI convertible notes will have consented
pursuant to a consent solicitation to amend the NAI convertible notes and the
related indenture as of the effective time of the merger as follows:
o eliminate certain provisions in the notes;
o amend Section 8.1 of the indenture relating to the NAI convertible
notes; and
o remove the notes from the registration requirements under the
securities laws of the United States and the scope of the Trust
Indenture Act of 1939, as amended.
Consequently, assuming completion of the merger, NAI convertible notes
remaining outstanding as of and after the effective time of the merger will be
amended NAI convertible notes.
Each amended NAI convertible note remaining outstanding after the effective
time of the merger entitles the holder of such note to convert such note into
specified numbers of shares of DRS common stock representing a conversion price
equal to $8.00 per share, subject to adjustment. Assuming that holders of 90% of
the aggregate principal amount of NAI convertible notes outstanding as of August
26, 1998 convert their NAI convertible notes into shares of NAI common stock
prior to the effective time, it is anticipated that as of the effective time
there will be approximately $483,450 aggregate principal amount of amended NAI
convertible notes outstanding, which would result in the issuance of
approximately 60,431 shares of DRS common stock upon conversion. The conversion
price and number of conversion shares of each amended NAI convertible note are
subject to adjustment upon the occurrence of any of the following events:
o the recapitalization of DRS or reclassification of the securities to
be received upon conversion or any merger or consolidation of DRS into
or with a corporation or other business entity, or the sale or
transfer of all or substantially all of DRS' assets or any successor
corporation's assets to any other corporation or business entity;
o the subdivision or combination of shares of DRS common stock;
o the payment of dividends or other distributions in the form of DRS
common stock; and
o the issuance of shares of DRS common stock at less than the closing
price.
Each amended NAI convertible note will be convertible, at any time on or
before January 15, 2001, by notice and surrender of the relevant amended NAI
convertible note to DRS at its principal office. Each amended NAI convertible
note may be exercised in whole or in part so long as any exercise in part would
not involve the issuance of fractional shares of DRS common stock. DRS will
reserve such shares of DRS common stock as shall be required for issuance upon
conversion of the amended NAI convertible note. Holders of amended NAI
convertible notes are not entitled to any rights as stockholders of DRS.
RESALES OF AMENDED NAI CONVERTIBLE NOTES
If you hold NAI convertible notes after the completion of the merger, such
notes will no longer be freely transferable. As of the effective time, these NAI
convertible notes will be delisted from the Yellow Sheets of the National
Quotations Bureau, some terms of these notes will have been amended and the
registration requirements of these notes shall be removed. Furthermore, each
amended NAI convertible note will be prepayable by NAI as of the effective time.
Because these amended NAI convertible notes, which remain outstanding after the
effective time, will not be registered, they may not be offered for sale, sold,
transferred or otherwise disposed of unless an exemption from such registration
is available. An appropriate legend concerning such restrictions on the transfer
of these amended NAI convertible notes must be placed on each such note.
82
<PAGE>
Each amended NAI convertible note is freely exchangeable into DRS common
stock, shares of which are transferable subject only to the restrictions
described below in "--Resales of DRS Common Stock and DRS Warrants."
RESALES OF DRS COMMON STOCK AND DRS WARRANTS
The shares of DRS common stock to be issued to NAI shareholders and DRS
warrants to be issued to NAI warrantholders, in the merger have been registered
under the Securities Act. Consequently, these shares of DRS common stock and DRS
warrants may be traded freely and without restriction by those NAI shareholders
and NAI warrantholders who are not "affiliates" of DRS or NAI. Under the
Securities Act, an affiliate, includes persons (generally executive officers,
directors and ten percent stockholders) who control, are controlled by, or are
under common control with (1) DRS or NAI at the time of the DRS or NAI meeting,
respectively, or (2) DRS at or after the effective time. Any subsequent transfer
by an affiliate of NAI must be one permitted by the resale provisions of Rule
145 promulgated under the Securities Act (or Rule 144 promulgated under the
Securities Act, in the case of such persons who become affiliates of DRS).
Rules 144 and 145 will restrict the sale of DRS common stock and DRS
warrants received in the merger by affiliates and certain of their family
members and related interests. Generally speaking, during the year following the
effective time, those persons who are affiliates of NAI at the time of the NAI
meeting, provided, that they are not affiliates of DRS at or following the
effective time, may publicly resell any DRS common stock and DRS warrants
received by them in the merger. However, they remain subject to certain
limitations as to, the amount of DRS common stock and DRS warrants, sold by them
in any three-month period and as to the manner of sale. After the one-year
period, such affiliates of NAI may resell their shares without such restrictions
so long as there is adequate current public information with respect to DRS as
required by Rule 144. Persons who become affiliates of DRS prior to, at or after
the effective time may publicly resell the DRS common stock and DRS warrants
received by them in the merger subject to similar limitations and subject to
certain filing requirements specified in Rule 144.
The ability of affiliates to resell shares of DRS common stock and DRS
warrants received in the merger under Rule 144 or 145 will also be affected by
DRS' having satisfied its reporting requirement under the Securities Exchange
Act of 1934, as amended for specified periods before the time of sale.
Affiliates also would be permitted to resell DRS common stock and DRS warrants
received in the merger if they file an effective registration statement under
the Securities Act or qualify for another available exemption from the
Securities Act registration requirements.
This joint proxy statement/prospectus does not cover any resales of DRS
common stock and DRS warrants received by persons who may be deemed to be
affiliates of DRS or NAI in the merger, or the shares issuable upon exercise of
the DRS warrants.
Before DRS is required to complete the merger, it must receive a written
agreement from each person who is an affiliate (for purposes of Rule 145) of NAI
which provides that such person will not dispose of any DRS common stock in
violation of the Securities Act or its related rules and regulations. NAI has
agreed in the merger agreement to use its reasonable efforts to cause each
person who is an affiliate (for purposes of Rule 145) of NAI to deliver to DRS
such a written agreement.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004, is the transfer agent and the registrar of DRS common stock and will be
the warrant agent and registrar of the DRS warrants. At the effective time of
the merger, DRS will cause NAI to deposit with U.S. Bank National Association
(formerly First Trust National Association), as trustee, for the benefit of
holders of NAI convertible notes, certificates representing the amended NAI
convertible notes to be issued following the completion of the merger.
STOCK EXCHANGE LISTING; DELISTING AND DEREGISTRATION OF NAI COMMON STOCK
It is a condition to the merger that the shares of DRS common stock that
will be issued in connection with the merger be authorized for listing on the
AMEX, subject to official notice of issuance. If the merger is consummated, NAI
common stock will cease to be listed on the NASDAQ.
83
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
DRS is organized under the laws of Delaware. NAI is organized under the
laws of New York. Any differences, therefore, between the rights of DRS
stockholders and the rights of NAI shareholders arise from differences between
each corporation's certificate of incorporation, bylaws and state law. For
convenience, when we refer to Delaware's General Corporation Law and New York's
Business Corporation Law in this section, we use the abbreviations "DGCL" and
"NYBCL," respectively.
The following summary sets forth certain material differences between the
rights of DRS stockholders and the rights of NAI shareholders and is qualified
in its entirety by reference to DRS' charter, DRS' bylaws, NAI's charter, NAI's
bylaws, DGCL and NYBCL.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of DRS currently consists of 20,000,000 shares
of DRS common stock, $0.01 par value per share, and 2,000,000 shares of
undesignated preferred stock, $10.00 par value per share. As of December 31,
1998, 6,359,503 shares of DRS common stock were issued and outstanding and no
shares of DRS' preferred stock were designated or issued. The authorized capital
stock of NAI consists of 25,000,000 shares of NAI common stock, $0.10 par value
per share and 2,000,000 shares of preferred stock, $0.10 par value per share. As
of December 31, 1998, 9,179,567 shares of NAI common stock were issued and
outstanding, and no shares of NAI preferred stock were issued and outstanding.
If the merger is consummated, all of the shares of NAI common stock will
cease to exist. Shares of DRS common stock will be issued in exchange for the
shares of NAI common stock outstanding at the effective time. DRS warrants will
be issued for the NAI warrants outstanding at the effective time. Amended NAI
convertible notes will be issued in exchange for the NAI convertible notes
remaining outstanding at the effective time.
VOTING RIGHTS
The holders of DRS common stock have one vote per share with respect to all
matters submitted to a vote of the DRS stockholders. Likewise, the holders of
NAI common stock have one vote per share with respect to all matters submitted
to a vote of the NAI shareholders.
PREEMPTIVE RIGHTS; CUMULATIVE VOTING
Neither DRS' charter nor NAI's charter grants any preemptive rights to
security holders. Moreover, neither DRS' charter nor NAI's charter provides for
cumulative voting.
NOTICE OF STOCKHOLDER MEETINGS
DRS' bylaws provide that written notice of each annual and special meeting
of stockholders be given, stating the place, date and hour of such meeting and
stating the place within the city or other municipality or community at which
the list of DRS stockholders may be examined. DRS' bylaws require the notice of
an annual meeting to state that the meeting is called for the election of
directors and for the transaction of other business which may properly come
before the meeting, and (if any other action which could be taken at a special
meeting is to be taken at the annual meeting) to state the purpose or purposes.
DRS' bylaws require the notice of a special meeting in all instances to state
the purpose or purposes for which the meeting is called. DRS' bylaws further
provide that if any action is proposed to be taken at the meeting which would,
if taken, entitle DRS stockholders to receive payment for their shares of DRS
common stock, the notice for such meeting shall include a statement of that
purpose and to that effect. Pursuant to ss222 of the DGCL, written notice of any
meeting of stockholders shall be given not less than 10 nor more than 60 days
before the date of the meeting.
NAI's bylaws provide that written notice of each annual and special meeting
of NAI shareholders, other than any meeting the giving of notice of which is
otherwise prescribed by law, be given, personally or by mail, not less than 10
84
<PAGE>
nor more than 50 days before such meeting, to each NAI shareholder entitled to
vote at such meeting. NAI's bylaws require such notice to state the place, date
and hour of the meeting, and, in the case of a special meeting, indicate that it
is being issued by or at the direction of the person or persons calling the
meeting and state the purpose or purposes for which it is called. Pursuant to
ss606 of the NYBCL, written notice of any meeting of shareholders shall be given
not less than 10 nor more than 60 days before the date of the meeting.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
Under DRS' bylaws, any action that may be taken at a meeting of DRS
stockholders may be taken without a meeting, without prior notice and without a
vote, if a written consent setting forth the action to be taken is signed by the
holders of not less than the minimum number of votes that would be necessary to
take such action at a meeting of stockholders at which all shares entitled to
vote on such action were present and voted. DRS' bylaws also provide that prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
Neither NAI's charter nor NAI's bylaws state whether action may be taken by
NAI shareholders without a meeting. Therefore, under the provisions of ss615 of
the NYBCL, any action which requires the vote of NAI shareholders may be taken
without a meeting by written consent, setting forth the action taken, signed by
the holders of all outstanding shares of NAI common stock entitled to vote on
such action or, if NAI's charter so permits, signed by the holders of
outstanding shares of NAI common stock having not less than the minimum number
of votes that would be necessary to authorize or take such action at a meeting
at which all shares of NAI common stock entitled to vote on such action were
present and voted.
SPECIAL MEETINGS OF STOCKHOLDERS
Under DRS' bylaws, a special meeting of the stockholders may be called by
the DRS board or by any officer instructed by the DRS board to call the meeting.
Under NAI's bylaws, a special meeting of the NAI shareholders may be called
by the President of NAI or by order of the NAI board. According to NAI's bylaws,
special meetings of NAI shareholders prescribed by law for the election of
directors shall be called by the NAI board or the Secretary of NAI whenever
required to do so pursuant to applicable law. Pursuant to ss603 of the NYBCL,
if, for a period of one month after the date fixed under NAI's bylaws for the
annual meeting of NAI shareholders, or if no date has been so fixed, for a
period of thirteen months after the last annual meeting, there is a failure to
elect a sufficient number of directors to the NAI board to conduct the business
of NAI, the NAI board shall call a special meeting for the election of
directors.
QUORUM AND VOTING REQUIREMENTS FOR STOCKHOLDER MEETINGS
DRS' bylaws state that a quorum consists of a majority of the outstanding
shares of DRS common stock, except when a vote requires more than a majority of
the outstanding shares in which case, the holders of such portion must be
present, either in person or by proxy.
NAI's bylaws provide that, except as otherwise provided by law, at any
meeting of NAI shareholders the holders of a majority of the shares entitled to
vote at such meeting shall constitute a quorum for the transaction of any
business; provided, that when a specified item of business is required to be
voted on by a class or series, voting as a class, the holders of a majority of
the shares of such class or series shall constitute a quorum for the transaction
of such specified item of business.
STOCKHOLDERS' PROPOSALS
DRS' bylaws provide that DRS stockholders are required to give advance
notice to DRS of (1) any stockholder-proposed director nomination or (2) any
business to be introduced by a DRS stockholder at any annual meeting. DRS'
bylaws also provide that any DRS stockholder entitled to vote in the election of
directors generally may nominate one or more persons for election as director or
directors at an annual meeting only if written notice of such
85
<PAGE>
stockholder's intent has been given to the Secretary of DRS not less than 60
days nor more than 90 days prior to the anniversary date of the immediately
preceding annual meeting. In the event the annual meeting is called for a date
that is not within 30 days before or after such anniversary date, the
stockholder's written notice of such intent must be given within 10 days before
or after such anniversary date. In the case of a special meeting of DRS
stockholders called for the purpose of electing directors, to be timely, a
stockholder's notice must be delivered to or mailed and received not later than
the close of business on the tenth day following the day on which notice of the
date of the special meeting was mailed or public disclosure of the date of the
special meeting was made by DRS, whichever first occurs. The Chairman of the
meeting may determine that the nomination of any person was not made in
compliance with these provisions of DRS' bylaws.
DRS' bylaws further provide that, for business to be properly introduced by
a stockholder of DRS where such business is not specified in the notice of
meeting or brought by or at the direction of the DRS board, the DRS stockholder
must have given notice not less than 60 nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting of the
stockholders. In the event the annual meeting is called for a date that is not
within 30 days before or after such anniversary date, notice by the DRS
stockholder must be given 10 days before or after such anniversary date. The
Chairman of the DRS board may, if the facts warrant, determine and declare that
any business was not properly brought before such meeting and such business will
not be transacted.
No parallel provisions exist in NAI's charter and NAI's bylaws.
PROXY REPRESENTATION
Each of DRS' bylaws and NAI's bylaws permit each DRS stockholder and NAI
shareholder, respectively, to authorize another person or persons to act for
such stockholder by proxy in all matters in which a stockholder is entitled to
participate. Such proxy must be signed by the stockholder or such stockholder's
attorney-in-fact.
DRS' bylaws provide that no proxy shall be voted or acted upon after three
years from its date, unless such proxy provides for a longer period. DRS' Bylaws
further provide that a duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power; such interest need
not be an interest in DRS common stock or in DRS generally.
The NAI's bylaws provide that no proxy shall be valid after the expiration
of 11 months from the date of the proxy, unless otherwise provided in the proxy.
NAI's bylaws further provide that every proxy shall be revocable at the pleasure
of the NAI shareholder executing it, except as otherwise provided by law.
Pursuant to ss609 of the NYBCL, a proxy is irrevocable if it:
o is entitled "irrevocable proxy";
o states that it is irrevocable; and
o is held by a:
o pledgee;
o person who has agreed to purchase shares of NAI common stock;
o creditor or creditors of NAI who extend or continue credit to NAI
in consideration of such proxy, if the proxy states that it was
given in consideration of such extension or continuation of
credit, the amount of such extension or continuation of credit
and the name of the person extending or continuing credit;
o person who has contracted to perform services as an officer of
NAI, if a proxy is required by the employment contract and the
proxy states that it was given in consideration of such
employment contract, the name of the employee and the period of
employment contracted for;
o person designated by or under an agreement between two or more
holders of NAI common stock and under ss620(a) of the NYBCL; or
86
<PAGE>
o nominee of any of the foregoing.
The NYBCL provides that such irrevocable proxy becomes revocable under
certain circumstances.
BOARD OF DIRECTORS
The DRS board is currently divided into three classes, with each class
consisting of as nearly an equal number of directors as possible, and currently
consists of eight directors. The members of one of the three classes of
directors are elected each year at the annual meeting; such directors hold
office for three-year terms and until their successors are elected and
qualified. DRS' bylaws provide that the number of all directors on the DRS board
shall not be less than five nor more than nine; the number of all directors on
the DRS board is to be determined from time to time by a resolution adopted by
the directors then in office or by the remaining director if there be only one.
The NAI board is currently divided into two classes, designated Class I and
Class II. Class I consists of three directors and Class II consists of four
directors. The members of one of the two classes are elected each year at the
annual meeting; each director holds office for a two-year term and until his or
her successor is elected and qualified, except in the event of the earlier
termination of his or her term of office by reason of death, resignation,
removal or other reason.
Each director on the DRS board will serve until his or her successor has
been elected and qualified. The proxies solicited by this joint proxy
statement/prospectus, unless directed to the contrary in such proxies, will be
voted for the election of C. Shelton James, NAI's designee to the DRS board.
For information concerning Mr. James and his nomination for election as a
director of DRS, see "NAI Designee."
VACANCIES AND NEWLY-CREATED DIRECTORSHIPS
DRS' charter states that any vacancy in the office of a director may be
filled by the vote of the majority of the remaining directors, regardless of any
quorum requirements set forth in DRS' bylaws. DRS' charter provides that such
director serve until the next annual meeting at which the directors of the class
of directors (of which such director is a member) are to be elected, and until
his or her successor is elected and qualified. DRS' charter further provides
that newly created directorships may be filled by the DRS board.
NAI's charter provides that any vacancy in the office of a director may be
filled by the directors then in office, although less than a quorum, or by a
sole remaining director.
LIMITATION ON DIRECTOR'S LIABILITY
DRS' charter provides that no director shall be personally liable to DRS or
its stockholders for monetary damages for any breach of fiduciary duty by such
director as director. Notwithstanding the foregoing sentence, DRS' charter also
provides that a director shall be liable to the extent provided by applicable
law:
o for breach of the director's duty of loyalty to DRS or its
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o pursuant to Section 174 of the DGCL; or
o for any transaction from which the director derived an improper
personal benefit.
NAI's charter provides that the liability to NAI and NAI shareholders of
each and every person who is at any time a director of NAI, in such person's
capacity as such director, is, and shall be, limited and eliminated to the full
87
<PAGE>
extent authorized or permitted by law. Pursuant to ss719 of the NYBCL, a
director of NAI shall be liable to NAI to the extent that injury is suffered as
a result of his or her involvement in:
o the declaration of any dividend or other distribution contrary to
ss510 of the NYBCL;
o the purchase of the shares NAI capital stock in violation of ss513 of
the NYBCL;
o the distribution of assets to NAI shareholders after dissolution
without adequate provision for NAI's liabilities; or
o the making of any loan contrary to ss714 of the NYBCL.
REMOVAL OF DIRECTORS
Neither DRS' charter nor DRS' bylaws contain provisions relating to the
removal of directors. Section 3.5 of NAI's bylaws provides for the removal of
directors by NAI shareholders. Therefore, under both the DGCL and NYBCL,
directors of the DRS board and NAI board may be removed only for cause by the
vote of the holders of the DRS common stock and NAI common stock, respectively.
INDEMNIFICATION
DRS' charter provides that DRS shall indemnify its directors and executive
officers who were or are a party or are threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative), and DRS has the power to purchase
policies of directors' and officers' liability insurance for this purpose.
NAI's bylaws provide that to the full extent authorized or permitted by
law, NAI shall indemnify its directors and executive officers who shall at any
time be made or be threatened to be made a party to or otherwise involved in any
civil or criminal action or proceeding. NAI's bylaws further provide that in
furtherance of the powers conferred by statute, NAI may enter into agreements
providing indemnification to the full extent authorized or permitted by law and
including, as a part of such agreements, provisions to ensure the payment of
such amounts as may become necessary to effect indemnification as provided in
such agreements or elsewhere.
AMENDMENTS TO CHARTER AND BYLAWS
According to DRS' charter, the power to adopt, alter, or repeal DRS' bylaws
shall be vested in the DRS board as well as the stockholders; stockholders may
not make, adopt, alter, amend, change or repeal DRS' bylaws, except upon the
affirmative vote of not less than sixty-six and two-thirds percent (66-2/3%) of
the outstanding shares of DRS common stock.
According to NAI's bylaws, it may be amended, adopted or repealed at any
meeting of NAI shareholders. NAI's bylaws also may be amended, repealed or
adopted by the NAI board.
Although neither DRS' charter nor NAI's charter specifies the approvals
necessary to amend DRS' charter and NAI's charter, respectively, DRS' charter
provides it may be amended, altered or repealed pursuant to Delaware law. Under
the DGCL and NYBCL, any amendment to DRS' charter and NAI's charter must be
approved by a majority of all outstanding shares of DRS common stock and NAI
common stock, respectively.
88
<PAGE>
NAI DESIGNEE
The proxies solicited by this joint proxy statement/prospectus, unless
directed to the contrary in such proxies, will be voted for C. Shelton James,
NAI's designee to the DRS board and a current director of NAI. Mr. James has
consented to being named in this joint proxy statement/prospectus and to serve
on the DRS board if elected. The DRS board has no reason to believe that Mr.
James will not be a candidate or will be unable to serve, but if either occurs,
it is intended that the shares represented by proxies will be voted for a
substituted NAI designee to the DRS board as NAI and the DRS board, in its
discretion, may designate. If the merger is approved, NAI's designee will serve
until his or her successor has been elected and qualified.
Set forth below is certain information concerning Mr. James, who will serve
as a Class III Director of DRS, including his age, any positions held with DRS
and his business experience.
C. SHELTON JAMES (1)
President--Fundamental Management Corporation
C. Shelton James, age 59, is Chairman of the Board of Elcotel Inc., a
public communications company. He also is President and a director of
Fundamental Management Corporation, an investment management company which is
the general partner of limited partnerships which are substantial investors in
NAI, and he is on the board of directors of Concurrent Computer Systems Inc., a
company engaged in the manufacture of real time computers, SK Technologies, a
company engaged in development and marketing of point-of-sale software, CPSI,
Inc., a company engaged in high performance computing, Cyberguard Corporation, a
company involved in internet security, and Group Land Systems, Inc., a company
involved in long distance telephone services.
- --------
(1) If the merger is not approved, Mr. James will not be elected as a director
of DRS.
89
<PAGE>
DRS PROPOSAL 2: AMENDMENT OF DRS' 1996 OMNIBUS PLAN
Capitalized terms used in this section of this joint proxy
statement/prospectus will, unless otherwise defined, have the meanings assigned
to them in the text of DRS' 1996 Omnibus Plan.
DRS' plan was approved by the DRS board on June 17, 1996 and approved by
the DRS stockholders on August 7, 1996 at the 1996 Annual Meeting of
Stockholders.
On November 20, 1998, the DRS board adopted a resolution proposing the plan
amendment. The purpose of the plan amendment is to increase the number of shares
of DRS common stock reserved for issuance under the plan by 900,000 shares of
DRS common stock to an aggregate of 1,400,000 shares of DRS common stock.
The plan amendment is being presented for the approval of the DRS
stockholders. In all other respects, the provisions of DRS' plan will remain as
approved and adopted by the DRS stockholders at the 1996 Annual Meeting of
Stockholders. If approved by DRS stockholders, the plan amendment would cause
the first paragraph of Section 3(a) of DRS' plan to read as follows:
(a) Shares Available for Awards
The maximum number of shares of Company Stock reserved for
issuance under the Plan shall be 1,400,000 shares (subject to
adjustment as provided herein). Such shares may be authorized but
unissued Company Stock or authorized and issued Company Stock
held in DRS's treasury. The Committee may direct that any stock
certificate evidencing shares issued pursuant to the Plan shall
bear a legend setting forth such restrictions on transferability
as may apply to such shares pursuant to the Plan.
The following summary of DRS' plan (which assumes adoption of the plan
amendment) is qualified in its entirety by reference to the complete text of
DRS' plan and the plan amendment thereto attached as Annex D to this joint proxy
statement/prospectus.
DRS' plan is intended to provide officers and other employees of DRS and
each of its subsidiaries now held or hereinafter acquired with appropriate
incentives and rewards to encourage them to enter into and continue in the
employ of DRS and such subsidiaries and to acquire a proprietary interest in the
long-term success of DRS and such subsidiaries; to compensate each member of the
DRS board who is not and has never been an employee of DRS or such subsidiaries
and to provide to such members of the DRS board incentives which are directly
linked to increases in the value of DRS common stock; and to reward the
performance of individual officers, other employees, consultants and such
members of the DRS board in fulfilling their personal responsibilities for
long-range achievements. The DRS board believes that the plan amendment is in
the best interests of the DRS stockholders because approval of the plan
amendment will enable DRS to continue to implement effectively its plan and
attain the stated goals of its plan. If the plan amendment is not approved, DRS
will soon deplete the options available for grant under its plan.
It is intended that awards made under DRS' plan will be eligible for the
exception provided by Rule 16b-3 promulgated under the Exchange Act. In
addition, DRS' plan is intended to allow the grant of awards of Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, and, in the
case of Executive Officers, Restricted Stock and Phantom Stock that comply with
the performance-based compensation exception under Section 162(m) of the
Internal Revenue Code, which generally limits the deduction by an employer for
compensation of certain covered officers.
GENERAL
DRS' plan provides for the granting of awards to such employees (including
officers of DRS, whether or not they are directors of DRS) and consultants of
DRS as the Stock Option Committee of the DRS board (the "Committee") may select
from time to time. Approximately 1,900 employees and consultants are eligible to
participate in DRS' plan. DRS' plan also provides for the mandatory granting of
Non-Qualified Stock Options to Non-Employee Directors of DRS. Currently, there
are seven such directors.
Assuming adoption of the plan amendment, an aggregate of 1,400,000 shares
of DRS common stock is reserved for issuance under DRS' plan, subject to
adjustment as described below. Such shares may be authorized but unissued
90
<PAGE>
DRS common stock or authorized and issued DRS common stock held in DRS'
treasury. Generally, shares subject to an award that remain unissued upon
expiration or cancellation of the award will be available for other awards under
DRS' plan. The total number of shares of DRS common stock subject to awards
(including awards paid in cash but denominated as shares of DRS common stock)
granted to any Participant of DRS' plan during any tax year of DRS will not
exceed 200,000. In the event that the Committee determines that any dividend or
other distribution, stock split, recapitalization, reorganization, merger or
other similar corporate transaction or event affects the DRS common stock such
that an adjustment is appropriate in order to prevent dilution or enlargement of
the rights of Participants under DRS' plan, then the Committee will make such
equitable changes or adjustments as it deems necessary to the number and kind of
shares of DRS common stock which may thereafter be issued in connection with
awards, the limit on individual awards, the number and kind of shares of DRS
common stock subject to each outstanding award, and the exercise price, grant
price or purchase price of each award.
Awards under DRS' plan may be made in the form of:
o Incentive Stock Options;
o Non-Qualified Stock Options (Incentive and Non-Qualified Stock
Options are collectively referred to as "options" in this
section);
o Stock Appreciation Rights;
o Restricted Stock;
o Phantom Stock,
o Stock Bonuses; and
o Other Awards.
Awards may be granted to such officers and other employees and consultants
of DRS and its subsidiaries (including employees who are directors) as the
Committee may select in its discretion. Non-Employee Directors will be granted
Non-Qualified Stock Options under DRS' plan in the manner described below.
ADMINISTRATION
DRS' plan is administered by the Committee. DRS' plan requires that the
Committee, at all times, consist of two or more persons, each of whom is an
"outside director" within the meaning of Section 162(m) of the Internal Revenue
Code and a "disinterested person" within the meaning of Rule 16b-3. The
Committee is authorized, among other things, to construe, interpret and
implement the provisions of DRS' plan, to select the persons to whom awards will
be granted, to determine the terms and conditions of such awards and to make all
other determinations deemed necessary or advisable for the administration of
DRS' plan; provided, however, that the Committee may not exercise discretion
under any provision of DRS' plan with respect to Non-Qualified Stock Options
granted to Non-Employee Directors to the extent that such discretion is
inconsistent with Rule 16b-3.
AWARDS UNDER THE PLAN
STOCK OPTIONS
Unless the Committee expressly provides otherwise, options granted under
DRS' plan are not exercisable prior to one year after the date of grant and
become exercisable as to 25% of the shares subject thereto on each of the first
through fourth anniversaries of the date of grant. The Committee determines each
option's expiration date; provided, however, that no incentive stock option may
be exercised more than ten years after the date of grant. The purchase price per
share payable upon the exercise of an option (the "option exercise price") is
established by the Committee; provided, however, that in the case of an
Incentive Stock Option, the option exercise price may be no less than the Fair
91
<PAGE>
Market Value of a share of DRS common stock on the date of grant. The option
exercise price is payable by any one of the following methods or a combination
thereof:
o cash;
o personal, certified or bank cashier's check;
o wire transfer;
o with the consent of the Committee, by surrender of shares of DRS
common stock held at least six months by the Participant and
having a Fair Market Value on the date of the exercise equal to
the option exercise price; or
o by such other payment method as the Committee may prescribe.
The Committee may specify at the time of grant or, with respect to
Non-Qualified Stock Options, at or after the time of grant, that a Participant
will be granted a new Non-Qualified Stock Option (a "Reload Option") for a
number of shares equal to the number of shares surrendered by the participant
upon exercise of all or part of an option; provided, however, that no Reload
Option may be granted to a Non-Employee Director. Reload Options will be subject
to such conditions as may be specified by the Committee in its discretion,
subject to the terms of DRS' plan.
DRS' plan provides that a Non-Employee Director who becomes a member of the
DRS board subsequent to the Effective Date of DRS' plan (a "Subsequent
Director") will be granted automatically a Non-Qualified Stock Option to
purchase 5,000 shares of DRS common stock. On the date of each annual meeting
subsequent to the annual meeting immediately following the Effective Date (or,
in the case of a Subsequent Director, subsequent to such Subsequent Director
becoming a member of the DRS board), each Non-Employee Director will be granted
automatically a Non-Qualified Stock Option to purchase 2,500 shares of DRS
common stock; provided, however, that in no event may a current Non-Employee
Director be granted options to purchase more than 2,500 shares of DRS common
stock during any tax year of DRS under DRS' plan or any other stock option plan
of DRS. Non-Qualified Stock Options granted to Non-Employee Directors will
become fully exercisable on the first anniversary of the grant, and will expire
ten years from the date of grant.
STOCK APPRECIATION RIGHTS
Stock appreciation rights may be granted in connection with all or any part
of, or independently of, any option granted under DRS' plan, other than a
Non-Qualified Stock Option granted to a Non-Employee Director. A stock
appreciation right granted independently of any option will be subject to the
same vesting rules as described above for options. A stock appreciation right
granted in tandem with any stock option will be exercisable only when and to the
extent the option to which it relates is exercisable. The grantee of a stock
appreciation right has the right to surrender the stock appreciation right and
receive from DRS, in cash, an amount equal to the excess of the Fair Market
Value of a share of DRS common stock over the exercise price of the stock
appreciation right for each share of DRS common stock in respect of which such
stock appreciation right is being exercised.
RESTRICTED STOCK
The Committee may grant restricted shares of DRS common stock to such
persons, in such amounts, and subject to such terms and conditions as the
Committee may determine it its discretion. Awards of Restricted Stock granted to
Executive Officers of DRS may be contingent on the attainment by DRS of one or
more pre-established performance goals established by the Committee based on the
attainment by DRS (and/or its subsidiaries or divisions if applicable) of any
one or more of the following performance criteria:
o a specified percentage return on total stockholder equity;
o a specified percentage increase in earnings per share of DRS common
stock;
o a specified percentage increase in net income (before or after taxes);
92
<PAGE>
o a specified percentage increase in earnings before interest, taxes,
depreciation and amortization;
o a specified percentage increase in earnings before interest and income
taxes, as adjusted for corporate office overhead expense allocation;
o a specified percentage increase in revenues;
o a specified minimum return on assets; or
o such other criteria as the DRS stockholders may approve.
PHANTOM STOCK
The Committee may grant shares of Phantom Stock to such persons, in such
amounts, and subject to such terms and conditions as the Committee may determine
in its discretion. If the requirements specified by the Committee are met, the
grantee of such an award will receive a cash payment equal to the Fair Market
Value of the shares covered thereby plus the dividends that would have been paid
on such shares had they actually been outstanding following the grant date.
Awards of Phantom Stock granted to Executive Officers of DRS may be contingent
on the attainment by DRS of any one or more pre-established performance goals
established by the Committee based on the attainment by DRS (and/or its
subsidiaries or a divisions if applicable) of any one or more of the performance
criteria described under "--Awards Under the Plan--Restricted Stock."
STOCK BONUS
The Committee may grant bonuses comprised of shares of DRS common stock to
such persons, in such amounts and subject to such conditions as the Committee
may determine in its discretion. No Executive Officer will be eligible to
receive a Stock Bonus under DRS' plan unless a prior determination of
eligibility is made by the Committee.
OTHER AWARDS
Other Awards valued in whole or in part by reference to, or otherwise based
on, DRS common stock may be granted either alone or in addition to other awards
under DRS' plan. Subject to the provisions of DRS' plan, the Committee will have
the sole and complete authority to determine the persons to whom and the time or
times at which such Other Awards will be granted, the number of shares of DRS
common stock to be granted pursuant to such Other Awards and all other
conditions of such Other Awards.
OTHER FEATURES OF THE PLAN
DRS' plan provides for a stipulated period of exercisability for
outstanding options in the event of the termination of a Participant's
employment with DRS; this period varies depending on the form of award and
reason for termination.
In the event of a Change in Control, all outstanding awards will become
fully vested and/or immediately exercisable.
The DRS board may suspend, revise, terminate or amend DRS' plan at any
time; provided, however, that DRS stockholder approval must be obtained if and
to the extent required by Rule 16b-3 and if and to the extent that the DRS board
deems it appropriate so as to allow the granting of awards that satisfy the
requirements of the performance-based compensation exception under Section
162(m) of the Internal Revenue Code; and provided, further, that no such action
may, without the consent of a Participant, reduce the Participant's rights under
any outstanding award.
NEW PLAN BENEFITS
Inasmuch as awards (other than awards of Non-Qualified Stock Options
to Non-Employee Directors) under DRS' plan will be granted at the sole
discretion of the Committee, it is not possible to determine (except in the case
of
93
<PAGE>
Non-Employee Directors) the awards that will be made thereunder during fiscal
1999. The following chart sets forth the name, position and grant information
for currently eligible Non-Employee Directors.
NEW PLAN BENEFITS
DRS TECHNOLOGIES, INC. 1996 OMNIBUS PLAN
Number of Shares Underlying
Name and Position Annual Grant of Options during Fiscal 1999
----------------- ------------------------------------------
Ira Albom, Director 2,500
Donald C. Fraser, Director 2,500
William F. Heitmann, Director 2,500
Steven S. Honigman, Director 5,000(1)
Mark N. Kaplan, Director 2,500
Stuart F. Platt, Director 2,500
Eric J. Rosen, Director 5,000(1)
- ----------
(1) Steven S. Honigman and Eric J. Rosen first became members of the DRS board
during fiscal 1999.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a brief summary of the principal United States
federal income tax consequences under current federal income tax laws relating
to awards under DRS' plan. This summary is not intended to be exhaustive and,
among other things, does not describe state, local or foreign income and other
tax consequences.
NON-QUALIFIED STOCK OPTIONS
An optionee will not recognize income at the time of grant of a
Non-Qualified Stock Option. At the time of exercise of a Non-Qualified Stock
Option, an optionee will recognize ordinary income equal to the excess of the
Fair Market Value of the shares at the time of exercise over the aggregate
exercise price paid for the shares, regardless of whether the exercise price is
paid in cash, in stock, or in part with a note. DRS will be entitled to a
deduction in the amount of ordinary income so recognized; provided, that certain
income tax reporting requirements are satisfied.
INCENTIVE STOCK OPTIONS
In general, an optionee will not recognize income on the grant or exercise
of an Incentive Stock Option. However, the difference between the exercise price
and the Fair Market Value of the stock on the date of exercise is an adjustment
item for purposes of the alternative minimum tax. If an optionee does not
exercise an Incentive Stock Option within certain specified periods after
termination of employment, the optionee will recognize ordinary income on the
exercise of an Incentive Stock Option in the same manner as on the exercise of a
Non-Qualified Stock Option, as described below.
The general rule is that gain or loss from the sale or exchange of shares
acquired on the exercise of an Incentive Stock Option will be treated as capital
gain or loss. If certain holding period requirements are not satisfied, however,
the optionee generally will recognize ordinary income at the time of the
disposition. Gain recognized on the disposition in excess of the ordinary income
resulting therefrom will be capital gain, and any loss recognized will be
capital loss. If an optionee recognizes ordinary income on exercise of an
Incentive Stock Option or as a result of a disposition of the shares acquired on
exercise, DRS will be entitled to a deduction in the same amount; provided, that
certain income tax reporting requirements are satisfied.
RESTRICTED STOCK
A grantee of Restricted Stock is not required to include the value of such
shares of DRS common stock in ordinary income until the shares are no longer
subject to a substantial risk of forfeiture (i.e., they become vested), unless
the grantee elects to be taxed on receipt of the shares. In either case, the
amount of such income will be equal to the Fair Market Value of the shares at
the time the income is recognized. DRS will be entitled to a deduction in the
94
<PAGE>
amount of ordinary income so recognized, provided certain income tax reporting
requirements are satisfied. Gain or loss from the sale or exchange of shares of
Restricted Stock that have vested will be treated as capital gain or loss.
OTHER TYPES OF AWARDS
The grant of a stock appreciation right or Phantom Stock award will not
result in income for the grantee or in a tax deduction for DRS at the time of
grant. Upon the settlement of such a right or award, the grantee will recognize
ordinary income equal to the aggregate value of the payment received, and DRS
generally will be entitled to a tax deduction in the same amount, provided that
certain income tax reporting requirements are satisfied. A Stock Bonus generally
will result in compensation income for the grantee, and a tax deduction for DRS,
equal to the Fair Market Value of the shares of DRS common stock granted;
provided, that certain income tax reporting requirements are satisfied.
PARACHUTE PAYMENTS
Where payments to certain employees that are contingent on a change in
control exceed limits specified in the Internal Revenue Code, the employee
generally is liable for a 20% excise tax on, and the corporation or other entity
making the payment generally is not entitled to any deduction for, a specified
portion of such payments. If the Committee, in its discretion, grants an
Incentive Award, the vesting or exercisability of which is accelerated by a
change in control of DRS, such accelerated vesting or exercisability would be
relevant in determining whether the excise tax and deduction disallowance rules
would be triggered with respect to certain DRS employees.
PERFORMANCE BASED COMPENSATION
Subject to certain exceptions, Section 162(m) of the Internal Revenue Code
disallows federal income tax deductions for compensation paid by a publicly-held
corporation to certain executives to the extent the amount paid to an executive
exceeds $1 million for the taxable year. DRS' plan has been designed to allow
the Committee to make awards under DRS' plan of Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, and, in the case of
Executive Officers, Restricted Stock and Phantom Stock that qualify under an
exception to the deduction limit of Section 162(m) for "performance-based
compensation."
Performance goals under DRS' plan for purposes of the performance-based
compensation exception are based upon the performance criteria described under
"--Awards Under the Plan--Restricted Stock."
The affirmative votes of a majority of the votes cast by holders of all
outstanding shares of DRS common stock entitled to vote at the DRS meeting is
required to approve the plan amendment.
-------------------------------------
THE DRS BOARD UNANIMOUSLY RECOMMENDS
THE DRS STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE PLAN AMENDMENT.
-------------------------------------
95
<PAGE>
LEGAL MATTERS
The validity of the shares of DRS common stock to be issued in connection
with the merger will be passed upon for DRS by Nina Laserson Dunn, Esq., General
Counsel of DRS. As of the date of this joint proxy statement/prospectus, Ms.
Dunn beneficially owned shares of DRS common stock and options to purchase
additional shares of DRS common stock, which in the aggregate constitute less
than 0.5% of the DRS common stock outstanding. Certain tax matters will be
passed upon by Arnold & Porter on behalf of DRS. Certain tax matters will be
passed upon by Whitman Breed Abbott & Morgan LLP on behalf of NAI.
EXPERTS
The consolidated financial statements and consolidated financial statement
schedule of DRS as of March 31, 1998 and 1997, and for each of the years in the
three-year period ended March 31, 1998, have been incorporated by reference in
this joint proxy statement/prospectus and in the registration statement in
reliance upon the reports of KPMG LLP, independent certified public accountants,
incorporated by reference in this joint proxy statement/prospectus, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements and schedule of NAI as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, have been included in this joint proxy statement/prospectus
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere in this joint
proxy statement/prospectus, and upon the authority of said firm as experts in
accounting and auditing.
The Statement of Assets to be Acquired and Liabilities to be Assumed as of
December 31, 1997 of the Second Generation Ground Based Electro Optics and Focal
Plane Array businesses of Raytheon Company and the Statement of Direct Revenues
and Direct Operation Expenses for the year ended December 31, 1997 of the Second
Generation Ground Based Electro Optics and Focal Plan Array businesses of
Raytheon Company, have been incorporated by reference in this joint proxy
statement/prospectus and in the registration statement in reliance upon the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
incorporated by reference in this joint proxy statement/prospectus, and upon the
authority of said firm as experts in accounting and auditing.
STOCKHOLDERS' PROPOSALS
DRS
Any DRS stockholder who desires to submit a proposal for inclusion in the
proxy materials for the 1999 Annual Meeting of Stockholders of DRS must comply
with the requirements concerning both the eligibility of the proponent and the
form and substance of the proposal established by applicable law and
regulations. Such proposal must be received by DRS at its offices at 5 Sylvan
Way, Parsippany, New Jersey 07054 no later than the close of business on
February 27, 1999.
The advance notice provisions of DRS' bylaws provide that DRS stockholders
are required to give advance notice to DRS of (1) any stockholder-proposed
director nomination or (2) any business to be introduced by a DRS stockholder at
any annual meeting. The advance notice provisions provide that any DRS
stockholder entitled to vote in the election of directors generally may nominate
one or more persons for election as director or directors at an annual meeting
only if written notice of such stockholder's intent has been given to the
Secretary of DRS not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting. In the event the
annual meeting is called for a date that is not within 30 days before or after
such anniversary date, the stockholder's written notice of such intent must be
given within 10 days before or after such anniversary date. In the case of a
special meeting of stockholders called for the purpose of electing directors, to
be timely, a stockholder's notice must be delivered to or mailed and received
not later than the close of business on the tenth day following the day on which
notice of the date of the special meeting was mailed or public disclosure of the
date of the special meeting was made by DRS, whichever first occurs. The
Chairman of the meeting may determine that the nomination of any person was not
made in compliance with the advance notice provisions.
96
<PAGE>
The advance notice provisions further provide that, for business to be
properly introduced by a stockholder of DRS where such business is not specified
in the notice of meeting or brought by or at the direction of the DRS board, the
DRS stockholder must have given notice not less than 60 nor more than 90 days
prior to the anniversary date of the immediately preceding annual meeting of the
stockholders. In the event the annual meeting is called for a date that is not
within 30 days before or after such anniversary date, notice by the DRS
stockholder must be given 10 days before or after such anniversary date. The
Chairman of the DRS board may, if the facts warrant, determine and declare that
any business was not properly brought before such meeting and such business will
not be transacted.
NAI
NAI does not intend to hold an annual meeting during 1998. In the event
that the merger is not approved by the NAI shareholders, NAI will have an annual
meeting in 1999.
OTHER BUSINESS
DRS does not presently know of any matters that will be presented for
action at the DRS meeting other than those set forth in this joint proxy
statement/prospectus. If other matters properly come before the meeting, proxies
submitted on the enclosed form will be voted by the persons named in the
enclosed form of proxy in accordance with their best judgment.
NAI does not presently know of any matters that will be presented for
action at the NAI meeting other than those set forth in this joint proxy
statement/prospectus. If other matters properly come before the meeting, proxies
submitted on the enclosed form will be voted by the persons named in the
enclosed form of proxy in accordance with their best judgment.
WHERE YOU CAN FIND MORE INFORMATION
DRS and NAI file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements and other information that the companies file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. DRS and NAI public filings are also available to the public
from commercial document retrieval services and at the Internet World Wide Web
site maintained by the SEC at http://www.sec.gov. Reports, proxy statements and
other information concerning DRS and NAI may also be inspected at the offices of
the American Stock Exchange, 86 Trinity Place, New York, New York 10006, and the
National Association of Securities Dealers, Inc., Market Listing Section, 1735 K
Street, N.W., Washington, D.C. 20006, respectively.
DRS has filed the registration statement to register with the SEC the
shares of DRS common stock and DRS warrants to be issued to NAI shareholders and
NAI warrantholders in the merger. This joint proxy statement/prospectus is part
of the registration statement and constitutes a prospectus of DRS, as well as a
proxy statement for the DRS meeting and a proxy statement for the NAI meeting.
As allowed by SEC rules, this joint proxy statement/prospectus does not
contain all the information that DRS stockholders and NAI shareholders can find
in the registration statement or the exhibits to the registration statement.
97
<PAGE>
The SEC allows DRS to "incorporate by reference" information in this joint
proxy statement/prospectus, which means that DRS can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
joint proxy statement/prospectus, except for any information superseded by
information contained directly in this joint proxy statement/prospectus. This
joint proxy statement/prospectus incorporates by reference the documents set
forth below that DRS has previously filed with the SEC. These documents contain
important information about DRS and its financial condition.
DRS SEC FILINGS (FILE NO. 1-8533) PERIOD
- --------------------------------- ------
Annual Report on Form 10-K .............. Fiscal Year ended March 31, 1998
Quarterly Reports on Form 10-Q .......... Quarters ended September 30, 1998 and
June 30, 1998
Current Reports on Form 8-K ............. Dated November 4, 1998, as amended on
January 4, 1999 and January 6, 1999
Registration Statement on Form 8-A ...... Dated July 13, 1983, setting forth a
description of DRS common stock
(including any amendment or report
filed for the purpose of updating such
description)
We incorporate by reference additional documents that DRS may file with the
SEC between the date of this joint proxy statement/prospectus and the dates of
the DRS and NAI meetings. These include periodic reports, such as Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
DRS has supplied all information contained or incorporated by reference in
this joint proxy statement/prospectus relating to DRS, and NAI has supplied all
such information relating to NAI.
If you are a DRS stockholder, DRS may have sent you some of the documents
incorporated by reference, but you can obtain any of them through DRS or the SEC
or the SEC's Internet World Wide Web site described above. Documents
incorporated by reference are available from DRS without charge, excluding all
exhibits unless DRS has specifically incorporated by reference an exhibit in
this joint proxy statement/prospectus. DRS stockholders and NAI shareholders may
obtain documents incorporated by reference in this joint proxy
statement/prospectus by requesting them in writing or by telephone from the
following address:
DRS TECHNOLOGIES, INC.
5 Sylvan Way
Parsippany, New Jersey 07054
Attention: Patricia M. Williamson
Tel: (973) 898-1500
If you would like to request documents from DRS, please do so by February
4, 1999 to receive them before the DRS and NAI meetings. If you request from DRS
any documents incorporated by reference in this joint proxy
statement/prospectus, we will mail them to you by first-class mail, or other
equally prompt means, within one business day of receipt of your request.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE YOUR SHARES AT THE
DRS OR NAI MEETINGS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED JANUARY 25,
1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND
NEITHER THE MAILING OF THIS JOINT PROXY STATEMENT/PROSPECTUS TO DRS STOCKHOLDERS
AND NAI SHAREHOLDERS NOR THE ISSUANCE OF DRS COMMON STOCK AND DRS WARRANTS IN
THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES, OF THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION.
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Section A: Unaudited pro forma condensed consolidated financial
information for the year ended March 31, 1998 and as
of and for the six-month period ended September 30,
1998.................................................... F-2
Section B: Independent Auditors' Report of KPMG LLP regarding
audited historical financial statements of NAI as
of December 31, 1996 and 1997 and for each of the
years ended December 31, 1995, 1996 and 1997............ F-11
Section C: Audited and unaudited historical financial
statements of NAI as of December 31, 1996 and 1997
and for each of the years ended December 31, 1995,
1996 and 1997 and as of September 26, 1998 and for
each of the nine-month periods ended September 26,
1998 and September 27, 1997 and NAI Schedule of
Valuation and Qualifying Accounts as of and for the
years ended December 31, 1995, 1996 and 1997............ F-12
F-1
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
NAI TECHNOLOGIES, INC.
Unaudited Pro Forma Condensed Consolidated Financial Information
The unaudited pro forma condensed consolidated financial information (the
unaudited pro forma financial information) set forth below is presented to
reflect the pro forma effects of the merger of DRS Technologies, Inc. and
Subsidiaries (DRS) and NAI Technologies, Inc., (NAI), (the Merger) and other
acquisitions completed by DRS.
The unaudited pro forma financial information is based on, and should be read
together with, the historical consolidated financial statements of DRS as of and
for the Fiscal year ended March 31, 1998, and the unaudited consolidated
financial statements of DRS as of and for the six months ended September 30,
1998, and the historical consolidated financial statements of NAI as of and for
the year ended December 31, 1997, and the unaudited consolidated financial
statements of NAI as of and for the periods ended September 26, 1998 that are
included in or incorporated by reference in this joint proxy statement. The pro
forma financial information is based on certain assumptions and includes the
adjustments described below and in the notes to the pro forma financial
statements.
The unaudited pro forma condensed consolidated balance sheet is prepared based
on the assumption that the merger was completed on September 30, 1998. The
unaudited condensed consolidated statements of earnings for the year ended March
31, 1998 and for the six months ended September 30, 1998 are prepared as if the
Merger had taken place on April 1, 1997. For accounting purposes, the Merger
will be treated as a purchase, with DRS as the acquirer.
As more fully described in the notes to the pro forma financial statements, the
unaudited pro forma financial statements give effect to the issuance of
approximately 2,930,454 shares of DRS common stock to shareholders of NAI in the
merger as well as certain other transactions entered into by NAI and DRS prior
to consummation of the Merger. These transactions which are reflected in the pro
forma financial statements are as follows: (a) DRS' acquisition of the Applied
Systems Division of Spar Aerospace Limited and Spar Aerospace (U.K.) Limited
which took place on October 29, 1997, (the Spar Acquisition), (b) DRS'
acquisition of the Second Generation Ground Based Electro Optics and Focal Plane
Array businesses of Raytheon Company which took place on October 20, 1998 (EOS
Acquisition), and (c) NAI's disposal of Wilcom, Inc. (Wilcom) prior to the
Merger.
It should be understood that these unaudited pro forma financial statements do
not necessarily reflect the actual consolidated financial position or results of
operations of the combined entities since, among other factors, actual expenses
related to the merger may be different than amounts assumed or estimated. The
unaudited pro forma financial information is provided for illustrative purposes
only. It is not necessarily indicative of the financial results that would have
occurred had the Merger been effective on the dates indicated, and should not be
viewed as indicative of results of operations or financial position of future
periods.
F-2
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND NAI TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Fiscal Year Ended March 31, 1998
(in thousands except per share data)
<TABLE>
<CAPTION>
HISTORICAL DRS PRO FORMA HISTORICAL
------------------------------------------------------------------------------------------
EOS SPAR EOS DRS
DRS SPAR(2) BUSINESS(4) Adjustments Adjustments Subtotal NAI(1)
-------- -------- ----------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $190,854 $ 15,556 $ 40,981 $(1,182)(2) $(10,541)(8) $235,668 $47,758
Costs and expenses (176,595) (14,324) (39,776) (329)(2) 6,079 (5),(6) (224,945) (47,070)
-------- -------- ---------- ----------- ----------- -------- -------
(7),(8)
Operating income (loss) 14,259 1,232 $ 1,205 (1,511) (4,462) 10,723 688
==========
Interest and related expenses (5,098) (170) -- (7,332)(6) (12,600) (1,839)
Interest and other income, net 1,377 465 -- -- 1,842 61
Minority interest (874) -- -- -- (874) --
-------- -------- ----------- -------- -------
Earnings (loss) before income
taxes 9,664 1,527 (1,511) (11,794) (909) (1,090)
Income tax expense (benefit) 3,292 285 (453)(3) (3,918)(9) (794) 560
-------- -------- ----------- ----------- -------- -------
Income (loss) from continuing
operations before extraordinary
item (notes 6 and 10) $ 6,372 $ 1,242 $(1,058) $ (7,876) $ (115) $(1,650)
======== ======== =========== =========== ======== =======
Earnings per share
Earnings (loss) from
continuing operations
before extraordinary item
Basic $ 1.13 -- -- -- $ (0.02) $(0.18)
Diluted 0.93 -- -- -- (0.02) (0.18)
Weighted average shares
outstanding
Basic 5,626 -- -- -- 5,626 9,099
Diluted 9,045 -- -- -- 5,626 9,099
======== ======== ========== =========== =========== ======== =======
<CAPTION>
DRS/NAI PRO FORMA
-------------------------------
Merger DRS/NAI
Adjustments Total
----------------- ----------
Revenues $ -- $ 283,426
Costs and expenses (701)(11),(12) (272,716)
-------- ----------
Operating income (loss) (701) 10,710
Interest and related expenses 956 (12) (13,483)
Interest and other income, net -- 1,903
Minority interest -- (874)
-------- ----------
Earnings (loss) before income
taxes 255 (1,744)
Income tax expense (benefit) 354 (14) 120
-------- ----------
Income (loss) from continuing
operations before extraordinary
item (notes 6 and 10) $ (99) $ (1,864)
======== ==========
Earnings per share
Earnings (loss) from
continuing operations
before extraordinary item
Basic -- $ (0.22)
Diluted -- (0.22)
Weighted average shares
outstanding
Basic -- 8,556
Diluted -- 8,556
======== ======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Information
F-3
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND NAI TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Six Months Ended September 30, 1998
(in thousands except per share data)
<TABLE>
<CAPTION>
HISTORICAL DRS PRO FORMA HISTORICAL DRS/NAI PRO FORMA
------------------------ --------------------------- ---------- --------------------------
EOS EOS DRS Merger DRS/NAI
DRS BUSINESS(4) Adjustments Subtotal NAI Adjustments Total
--------- ------------- --------------------------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $92,114 $ 35,154 $(15,159)(8) $ 112,109 $21,924 $ -- $134,033
Costs and expenses (88,299) (33,896) 12,083 (5)(6) (110,112) (20,954) (383)(11)(12) (131,449)
--------- ------------- --------------- ---------- ---------- --------------- ---------
(7)(8)
Operating income (loss) 3,815 $ 1,258 (3,076) 1,997 970 (383) 2,584
=============
Interest and related expenses (3,113) (2,675)(6) (5,788) (886) 447(12) (6,227)
Interest and other income, net 328 -- 328 21 -- 349
Minority interest (425) -- (425) -- -- (425)
--------- --------------- ---------- ---------- --------------- ---------
Earnings (loss) from continuing
operations before income taxes 605 (5,751) (3,888) 105 64 (3,719)
Income tax expense (benefit) 224 (1,663)(9) (1,439) 348 166 (14) (925)
--------- --------------- ---------- ---------- --------------- ---------
Earnings (loss) from continuing
operations before extraordinary
item (notes 6 & 10) $ 381 $ (4,088) $ (2,449) $ (243) $(102) $ (2,794)
========= =============== ========== ========== =============== =========
Earnings per share
Income (loss) from continuing
operations
Basic $0.06 -- -- $ (0.39) $ (0.03) -- $ (0.31)
Diluted 0.06 -- -- (0.39) (0.03) -- (0.31)
Weighted average shares outstanding
Basic 6,224 -- -- 6,224 9,174 -- 9,154
Diluted 6,463 -- -- 6,224 9,174 -- 9,154
========= ============= =============== ========== ========== =============== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Information
F-4
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. & SUBSIDIARIES
AND NAI TECHNOLOGIES, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
HISTORICAL DRS PRO FORMA HISTORICAL
----------------------- --------------------------- -----------
EOS EOS DRS
DRS BUSINESS(4) Adjustments Subtotal NAI(1)
--------- ----------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 13,026 $ -- $ 500 (6) $ 13,526 $ 2,013
Accounts receivable, net 43,295 5,228 -- 48,523 11,248
Inventories, net of progress payments 41,152 23,245 (3,642)(8) 60,755 6,496
Current assets of discontinued ops -- -- -- -- 1,461
Prepaid expenses and other current assets 2,213 117 (833)(6) 1,497 836
--------- --------- --------- --------- ---------
Total current assets 99,686 28,590 (3,975) 124,301 22,054
Net equipment and improvements 22,661 14,459 -- 37,120 673
Net Intangible assets 31,451 -- 15,643(5) 47,094 7,709
Non-current assets of disc ops -- -- -- -- 1,051
Other assets 9,332 -- -- 9,332 1,098
--------- --------- --------- --------- ---------
Total assets $ 163,130 $ 43,049 $ 11,668 $ 217,847 $ 32,585
========= ========= ========= ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments - long term debt 8,543 -- -- 8,543 6,500
Other current liabilities 42,913 1,550 (308)(6) 44,155 9,499
--------- --------- --------- --------- ---------
Total current liabilities 51,456 1,550 (308) 52,698 15,999
Long term debt, excluding current
installments 57,819 -- 57,000 (6) 114,819 4,782
Deferred income taxes 3,897 -- (1,110)(6) 2,787 41
Other liabilities 4,233 -- -- 4,233 755
--------- --------- --------- --------- ---------
Total liabilities 117,405 1,550 55,582 174,537 21,577
Stockholders' equity:
Common stock 67 -- -- 67 918
Additional paid-in capital 20,446 -- -- 20,446 19,495
Retained earnings 27,438 -- (2,415)(6) 25,023 (9,721)
Net assets -- $ 41,499 $ (41,499) -- --
========= =========
Cumulative translation adjustment (291) (291) 316
Treasury stock, at cost (1,561) (1,561) --
Unamortized restricted stock compensation (374) (374) --
--------- --------- ---------
Net stockholders' equity 45,725 43,310 11,008
--------- --------- ---------
$ 163,130 $ 217,847 $ 32,585
========= ========= =========
<CAPTION>
NAI PRO FORMA DRS/NAI PRO FORMA
------------------------- -----------------------------------
Wilcom Merger
Disposal(10) Subtotal Adjustments DRS/NAI Total
------------ --------- ------------------- -------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 150 $ 2,163 $ (1,750)(11) $ 13,939
Accounts receivable, net -- 11,248 -- 59,771
Inventories, net of progress payments -- 6,496 -- 67,251
Current assets of discontinued ops (1,461) -- -- --
Prepaid expenses and other current assets -- 836 -- 2,333
--------- --------- --------- ---------
Total current assets (1,311) 20,743 (1,750) 143,294
Net equipment and improvements -- 673 -- 37,793
Net Intangible assets -- 7,709 18,973 73,776
Non-current assets of disc ops (1,051) -- -- --
Other assets -- 1,098 2,264 (12),(14) 12,694
--------- --------- --------- ---------
Total assets (2,362) 30,223 19,487 267,557
--------- --------- --------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments - long term debt -- 6,500 -- 15,043
Other current liabilities -- 9,499 -- 53,654
--------- --------- --------- ---------
Total current liabilities -- 15,999 -- 68,697
Long term debt, excluding current
installments -- 4,782 (4,782)(12) 114,819
Deferred income taxes -- 41 -- 2,828
Other liabilities -- 755 -- 4,988
--------- --------- --------- ---------
Total liabilities -- 21,577 (4,782) 191,332
Stockholders' equity:
Common stock -- 918 (889)(13) 96
Additional paid-in capital -- 19,495 13,391 (13) 53,332
Retained earnings (2,362) (12,083) 12,083 (13) 25,023
Net assets -- -- -- --
Cumulative translation adjustment -- 316 (316)(13) (291)
Treasury stock, at cost -- -- -- (1,561)
Unamortized restricted stock compensation -- -- -- (374)
--------- --------- --------- ---------
Net stockholders' equity (2,362) 8,646 24,269 76,255
--------- --------- --------- ---------
$ (2,362) $ 30,223 $ 19,487 $ 267,557
========= ========= ========= =========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Information.
F-5
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
NAI TECHNOLOGIES, INC.
Notes to Unaudited Pro Forma Condensed Financial Statements
1. The unaudited pro forma condensed consolidated financial statements of DRS
Technologies, Inc. and Subsidiaries ("DRS") and NAI Technologies, Inc.
(NAI) have been prepared by combining the historical consolidated
financial statements of DRS with the historical consolidated financial
statements of NAI. The pro forma condensed consolidated financial
statements as of and for the six months ended September 30, 1998 have been
prepared combining the unaudited historical financial statements of DRS
and NAI as of and for the six months ended September 30, 1998. DRS
prepares consolidated financial statements on the basis of a fiscal year
ending March 31, whereas the historical consolidated financial statements
of NAI have been prepared on a calendar year basis. As permitted under
United States Securities and Exchange Commission Regulation S-X, Article
11, the pro forma condensed consolidated statement of earnings (the "pro
forma statement of earnings") for the year ended March 31, 1998 has been
prepared by combining the historical financial statements of DRS and NAI
on the basis of their respective historical fiscal periods. Therefore, the
pro forma statement of earnings for the year ended March 31, 1998 has been
prepared using the consolidated financial statements of DRS as of and for
the fiscal year ended March 31, 1998, together with the consolidated
financial statements of NAI as of December 31, 1997 and for the year then
ended. As a result, the historical financial statements of NAI for the
period January 1, 1998 to March 31, 1998 are not included in this pro
forma presentation.
The pro forma financial statements give effect to (a) DRS's acquisition of
the Applied Systems Division of Spar Aerospace Limited and Spar Aerospace
(U.K.) Limited, which took place on October 29, 1997 (the Spar
Acquisition), as if the Spar Acquisition had taken place effective April
1, 1997, (b) DRS's acquisition of the Second Generation Ground Based
Electro Optics and Focal Plane Array businesses of Raytheon Company which
took place on October 20, 1998 (the EOS Acquisition), (c) NAI's disposal
of Wilcom prior to the Merger (Wilcom Disposal), and (d) the issuance of
2,930,454 shares of DRS common stock to shareholders of NAI in the Merger.
The pro forma financial statements have not been adjusted for certain
operating efficiencies that may be realized as a result of the merger.
SPAR ACQUISITION
2. On October 29, 1997, DRS acquired, through certain of its subsidiaries,
the net assets of the Applied Systems Division of Spar Aerospace Limited,
a Canadian corporation (Spar Applied Systems), and 100% of the stock of
Spar Aerospace (U.K.) Limited, incorporated under the laws of England and
Wales, pursuant to a Purchase Agreement (the Agreement) dated as of
September 19, 1997, between DRS and Spar Aerospace Limited. The Company
paid approximately $35.4 million in cash for the Spar Acquisition (which
includes $6.9 million for cash acquired in connection with this
transaction), subject to certain working capital adjustments as provided
for in the Agreement.
The Spar Acquisition was accounted for using the purchase method of
accounting. In connection with the Spar Acquisition, DRS incurred
professional fees and other costs of approximately $1.5 million, which
were capitalized as part of the total purchase price. The excess of cost
over assets acquired and liabilities assumed was approximately $20.0
million and is being amortized on a straight line basis over 30 years. The
pro forma financial statements for the year ended March 31, 1998 reflect
increased amortization expense of $0.3 million resulting from the Spar
Acquisition.
The pro forma condensed consolidated statement of earnings has been
adjusted to reflect the reversal of revenue previously recognized by Spar
Applied Systems in connection with a certain contract which was excluded
from the net assets acquired by DRS.
3. The adjustment to the provision for income taxes represents the income tax
effect of additional amortization, and reversal of revenue related to the
Spar Acquisition based on Canadian and UK effective tax rates.
F-6
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
NAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS--(Continued)
EOS ACQUISITION
4. In an agreement dated July 28, 1998 by and between Raytheon Company,
Raytheon Systems Georgia, Inc., Raytheon TI Systems, Inc. (collectively,
Raytheon) and DRS, DRS agreed to purchase certain assets and liabilities
of the electro-optical business of Raytheon. The EOS Acquisition was
consummated on October 20, 1998 for a purchase price of $45 million,
subject to post closing adjustments of no more than $7 million. For
purposes of the pro forma financial statements, the pro forma balance
sheet gives effect to the EOS Acquisition as if it had taken place on
September 30, 1998. The pro forma statements of earnings gives effect to
the EOS Acquisition as if it had taken place on April 1, 1997.
The acquired electro-optical business of Raytheon (the EOS Business) did
not operate as a stand-alone business within Raytheon. Because the EOS
Business did not operate on a stand-alone basis, the historical financial
statements do not include certain indirect expenses of the EOS Business
and the historical financial statements are not representative of the
complete results of operations of the EOS Business for the periods
presented.
The historical financial statements of the EOS Business have been prepared
on a calendar year basis. As permitted under United States Securities and
Exchange Commission Regulations S-X, Article 11, the pro forma statement
of earnings for the year ended March 31, 1998 has been prepared by
combining the historical financial statements of DRS and the EOS Business
on the basis of their respective historical fiscal periods. Therefore, the
pro forma statement of earnings for the year ended March 31, 1998 has been
prepared using the historical financial statements of the EOS Business for
the year ended December 31, 1997. As a result, the historical financial
statements of the EOS Business for the period January 1, 1998 to March 31,
1998 are not included in this pro forma presentation.
5. The EOS Acquisition is being accounted for using the purchase method of
accounting. For purposes of the pro forma financial statements, the total
estimated purchase price is $53.5 million, consisting of the contractual
purchase price of $45.0 million, the maximum post-closing adjustment of $7
million and the estimated costs of the acquisition. As of September 30,
1998, this purchase price exceeds the estimated fair value of net assets
acquired of $37.9 million (see also note 8). The excess of the purchase
price over the net assets acquired results in goodwill which will be
amortized by DRS on a straight line basis over 20 years. The pro forma
balance sheet has been adjusted to reflect estimated goodwill and the
statements of earnings have been adjusted to reflect amortization expense
of approximately $0.8 million for the year ended March 31, 1998 and
approximately $0.4 million for the six months ended September 30, 1998.
The actual purchase price will be determined upon receipt by DRS of a
closing date balance sheet, and the resulting purchase price could be up
to $7 million less than the amount used in the pro forma financial
statements. A lower price would result in less goodwill and related
amortization expenses.
DRS is in the process of completing its fair valuation of the net assets
acquired. As a result, the purchase price allocation has not been
finalized and actual purchase price allocation may differ from that used
for purposes of these pro forma financial statements. The valuation could
result in a different portion of the purchase price being allocated to
tangible or intangible assets, including acquired-in process research and
development (IPR&D). The useful lives of such tangible or intangible
assets could range from one to 20 years, while IPR&D would be expensed
immediately. DRS is currently unable to determine the potential effect on
its financial position and results of operations. However, if the
composite average life of these assets was 10 years, the amortization
expense would increase by approximately $0.8 million and $0.4 million for
the year and six months ended March 31, 1998 and September 30, 1998,
respectively. If the composite average life was 5 years, the amortization
would increase by approximately $2.3 million and $1.2 million for the
respective periods over that presented in the accompanying pro forma
financial statements.
6. In connection with the EOS Acquisition, DRS entered into an amendment of
its existing credit facility whereby DRS obtained a $150 million secured
credit facility (the Borrowing) consisting of two term loans in the
aggregate principal amount of $80 million and a $70 million revolving line
of credit. The proceeds of the Borrowing at the date of the EOS
Acquisition of approximately $98.9 million were used to repay the balance
of the debt outstanding under DRS's previous credit facility in the amount
of approximately $48.9 million which had been used to finance the Spar
Acquisition and for general corporate purposes.
F-7
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
NAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS--(Continued)
For accounting purposes, the amendment of the facility was accounted for
as an extinguishment of debt and therefore the unamortized balance of the
deferred financing costs of the previous credit facility plus the fees
paid to the lender in connection with the Borrowing resulted in an
extraordinary loss, net of related tax, of approximately $2.4 million.
The pro forma balance sheet includes an adjustment to reflect the
additional bank borrowing of $50.0 million, an assumed borrowing for the
maximum post-closing adjustment of $7 million, the write-off of
unamortized deferred financing costs of approximately $0.8 million and the
after-tax effect on equity of the extraordinary loss. The pro forma
statements of earnings include adjustments for additional interest expense
of approximately $7.4 million for the year ended March 31, 1998 and $2.8
million for the six months ended September 30, 1998, and include
adjustments to reverse amortization of deferred financing costs of $91,000
and $92,000 for the year ended March 31, 1998 and six months ended
September 30, 1998, respectively. The extraordinary loss on the
extinguishment of debt is excluded from the pro forma statements of
earnings due to its non-recurring nature.
7. Concurrent with the EOS Acquisition, DRS and Raytheon entered into master
services agreements (the Master Services Agreements) whereby Raytheon
agreed to provide and DRS agreed to purchase various support services and
facilities for the EOS Business. Generally the cost to DRS will be the
cost to Raytheon of labor, out of pocket costs, allocated overhead, and,
for some services, an agreed-upon fee. The pro forma statements of
earnings include adjustments for estimated costs associated with the
Master Services Agreements of $2.0 million and $1.0 million for the year
ended March 31, 1998 and six months ended September 30, 1998,
respectively.
8. The EOS Business recognized revenues on certain contracts on a percentage
completion (cost-to-cost) basis. To be consistent with DRS accounting
policies, revenue on these contracts would be recognized based on units
delivered. The pro forma statements of earnings reflect adjustments to
revenues and cost of sales on these contracts and the pro forma balance
sheet reflects an adjustment to inventories for the carrying costs of
these contracts.
9. The adjustment to the provision for income taxes represents the income tax
effect of an increase in interest expense, a reduction of amortization of
deferred financing costs, an increase of amortization related to the EOS
Acquisition, and the tax effect of the historical direct revenues and
expenses of the EOS Business.
WILCOM DISPOSAL
10. On August 26, 1998, DRS and NAI signed a merger agreement (the Merger
Agreement) pursuant to which, NAI agreed to dispose of Wilcom, Inc.
(Wilcom), a wholly owned-subsidiary of NAI. The Wilcom Disposal will take
place contemporaneously with the closing date of the Merger. As
consideration for the sale of Wilcom, NAI will receive cash proceeds of
$150,000 and a majority shareholder of the buyer will surrender 300,000 and
1,700,000 warrants to acquire 2,000,000 shares of NAI common stock at $3.00
and $2.50 per share, respectively. The pro forma balance sheet has been
adjusted to eliminate the net assets of discontinued operations of Wilcom,
Inc. and to reflect the estimated cash proceeds.
THE MERGER
11. Pursuant to the Merger Agreement, the estimated purchase price is
approximately $35 million calculated as the sum of (a) the product of
multiplying the outstanding shares of common stock of NAI by an exchange
factor of .25, as set forth in the Merger Agreement, multiplied by $10 per
share, the approximate average DRS share price at the time of the signing
of the Merger Agreement, (b) the fair value of NAI stock warrants and NAI
stock options which are exercisable as shares of DRS common stock, and (c)
estimated professional fees and other costs of approximately $1.8 million
to be incurred in connection with the Merger.
F-8
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
NAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS--(Continued)
The following pro forma adjustments have been made to reflect the
preliminary allocation of the purchase price to the estimated fair value
of the net assets acquired based on available information. The purchase
price allocation has not yet been finalized, and actual purchase price
allocation may differ from that used for purposes of these pro forma
financial statements.
(dollar amounts in thousands
except per share data)
----------------------------
(a) Number of shares of NAI common stock outstanding
including the effect of conversion of the outstanding
convertible debt prior to the Merger 11,721,817
Exchange ratio pursuant to Merger Agreement 0.25*
----------
Shares of DRS common stock to be issued in
exchange for NAI shares 2,930,454
Approximate market price per DRS share $10*
----------
$29,305
(b) Fair value of NAI stock warrants and options
(see note 13) 3,610
(c) Estimated professional fees and other costs to
be incurred in connection with the merger 1,750
----------
Estimated purchase price, total $34,665
NAI net asset value at September 30, 1998(i) $7,983
----------
Excess of cost over fair value of net assets
acquired (goodwill) $26,682
==========
(i) Reflects the historical NAI net assets as of September 30, 1998
after adjustments for the fair value of acquired assets and assumed
liabilities including elimination of pre-merger goodwill of
approximately $7.7 million, the conversion of the convertible debt
prior to the Merger (see note 12), the elimination of related
unamortized deferred debt financing costs of approximately $0.7
million, and the creation of a deferred tax asset on NAI tax loss
carryforward (see note 14).
The unaudited pro forma financial statements reflect adjustments for the
incremental goodwill resulting from the Merger over historical goodwill
($26.7 million less $7.7 million) and amortization of the Merger goodwill
on a straight line basis over 20 years as compared to historical goodwill
amortization.
12. As of September 30, 1998, NAI had approximately $5.1 million of debt
outstanding which is convertible into 2,542,250 additional shares of NAI
common stock prior to the Merger. Pursuant to the Merger Agreement, this
debt will be converted prior to the Merger and will be exchanged for DRS
common stock as described in note 11. An adjustment has been recorded to
the pro forma balance sheet to eliminate the debt outstanding and to
eliminate the unamortized deferred financing costs in the amount of
approximately $0.7 million related to the placement of this debt by NAI.
An adjustment has been made to the pro forma statements of earnings to
eliminate interest expense on the convertible debt in the amount of
approximately $0.6 million for the year ended March 31, 1998 and $0.3
million for the six months ended September 30, 1998 and to eliminate the
amortization expense of the period related to the deferred financing costs
in the amount of approximately $0.3 million for the year ended March 31,
1998 and $0.1 million for the six months ended September 30, 1998.
13. Upon effectiveness of the Merger, approximately 2,930,454 shares of DRS
common stock, par value $0.01 per share will be issued in exchange for
shares of NAI common stock outstanding at the effective date of the
Merger. The pro forma balance sheet reflects adjustments for the issuance
of DRS common stock and elimination of historical shareholders' equity of
NAI.
In addition, upon closing of the Merger, the outstanding common stock
options and warrants of NAI will be exercisable for the equivalent number
of DRS common shares. After giving effect to the cancellation of certain
warrants in connection with the Wilcom Disposal, NAI had at September 30,
1998, warrants to acquire 2,412,700 shares outstanding. These warrants
will be exercisable for approximately 603,000 shares of DRS common stock
(based on the exchange ratio of .25 shares of DRS for each share of NAI)
at an exercise price of $10.00 per share. Also
F-9
<PAGE>
SECTION A
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
NAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS--(Continued)
at September 30, 1998, NAI had a total of 667,419 stock options
outstanding, or an equivalent of options for 166,855 shares of DRS common
stock. These options and warrants have been valued at estimated fair value
and are included as part of the purchase price consideration above (see
note 11). An adjustment has been made to the Pro Forma consolidated
financial statements to reflect the fair value of options and warrants
outstanding as additional paid in capital.
14. The provision for income taxes has been adjusted to reflect the tax effect
of the adjustment to interest expense and amortization of deferred
financing costs. In addition, an adjustment has been made to establish a
deferred tax asset for that portion of the NAI tax loss carryforward which
DRS considers more likely than not to be realizable.
F-10
<PAGE>
SECTION B
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NAI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NAI
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997. In
connection with our audit of the consolidated financial statements, we have also
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of NAI's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement schedule
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 NAI
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMGLLP
Melville, New York
February 9, 1998, except for Note 2
which is as of November 6, 1998
F-11
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September
December 31, 26,
(in thousands, except share amounts) 1997 1996 1998
- --------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 572 $ 2,693 $ 2,013
Accounts receivable, net 11,379 12,102 11,248
Inventories, net 7,262 7,840 6,496
Deferred tax asset 148 173 151
Current assets of discontinued operations, net 1,968 2,589 1,461
Other current assets 497 597 685
-------- -------- --------
Total current assets 21,826 25,994 22,054
Property, plant and equipment, net 873 1,268 673
Excess of cost over fair value of net assets acquired, net 8,135 8,705 7,709
Non-current assets of discontinued operations 3,051 3,257 1,051
Other assets 1,330 1,681 1,098
-------- -------- --------
Total assets $ 35,215 $ 40,905 $ 32,585
======== ======== ========
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,122 $ 6,584 $ 5,640
Notes payable 571 -- --
Current installments of long-term debt 311 158 6,500
Accrued payroll and commissions 281 622 70
Other accrued expenses 2,014 3,809 2,727
Income taxes payable 597 580 1,062
-------- -------- --------
Total current liabilities 10,896 11,753 15,999
Long-term debt 9,747 12,224 4,782
Other accrued expenses 783 912 755
Deferred income taxes 41 36 41
-------- -------- --------
Total liabilities $ 21,467 $ 24,925 $ 21,577
- --------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital Stock:
Preferred stock, no par value, 2,000,000 shares
authorized and unissued -- -- --
Common stock, $.10 par value, 25,000,000 shares
Authorized; 9,179,567, 9,155,427 and 9,016,937
shares
issued in 1998, 1997 and 1996 916 902 918
Capital in excess of par value 19,457 19,217 19,495
Foreign currency translation adjustment 196 313 316
Accumulated deficit (6,821) (4,452) (9,721)
-------- -------- --------
Total Shareholders' Equity $ 13,748 $ 15,980 $ 11,008
-------- -------- --------
Total Liabilities and Shareholders' Equity $ 35,215 $ 40,905 $ 32,585
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-12
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
----------------------
YEARS ENDED DECEMBER 31, SEPTEMBER SEPTEMBER
-------------------------------- 26, 27,
(in thousands, except per share amounts) 1997 1996 1995 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(unaudited)
Net sales $ 47,758 $ 61,131 $ 51,813 $ 34,744 $ 36,658
Cost of sales 38,341 48,323 48,786 26,282 29,970
-------- -------- -------- -------- --------
Gross Margin 9,417 12,808 3,027 8,462 6,688
Selling expenses 3,128 3,351 3,793 2,369 2,304
General and administrative expenses 4,093 4,779 5,913 3,359 3,225
Research and development costs 947 1,014 1,038 406 720
Other (income) expense 561 (949) 425 474 419
-------- -------- -------- -------- --------
Total expenses, net 8,729 8,195 11,169 6,608 6,668
-------- -------- -------- -------- --------
Operating earnings (loss) 688 4,613 (8,142) 1,854 20
Non-operating income (expense):
Other -- 15 -- -- --
Amortization of deferred debt costs (341) (456) (895) (218) (260)
Interest income 61 152 195 28 47
Interest expense (1,498) (2,209) (1,667) (1,113) (1,149)
-------- -------- -------- -------- --------
(1,778) (2,498) (2,367) (1,303) (1,362)
Earnings (loss) from continuing operations
before income taxes (1,090) 2,115 (10,509) 551 (1,342)
Income tax expense 560 396 377 514 504
-------- -------- -------- -------- --------
Net earnings (loss) from continuing operations $ (1,650) $ 1,719 $(10,886) $ 37 $ (1,846)
-------- -------- -------- -------- --------
Earnings (loss) from operations of discontinued
Telecommunications segment (719) 694 (733) (245) (683)
-------- -------- -------- -------- --------
Loss on disposal of Telecommunications segment
including provision of $192,000 for operating
losses during phase-out period -- -- -- (2,692) --
-------- -------- -------- -------- --------
Net earnings (loss) $ (2,369) $ 2,413 $(11,619) $ (2,900) $ (2,529)
======== ======== ======== ======== ========
Basic earnings (loss) per share
From continuing operations $ (0.18) $ 0.21 $ (1.47) $ 0.00 $ (0.20)
From discontinued operations $ (0.08) $ 0.08 $ (0.10) $ (0.32) $ (0.08)
-------- -------- -------- -------- --------
Basic earnings (loss) per share $ (0.26) $ 0.29 $ (1.57) $ (0.32) $ (0.28)
======== ======== ======== ======== ========
Diluted earnings (loss) per share
From continuing operations $ (0.18) $ 0.21 $ (1.47) $ 0.00 $ (0.20)
From discontinued operations $ (0.08) $ 0.08 $ (0.10) $ (0.32) $ (0.08)
-------- -------- -------- -------- --------
Diluted earnings (loss) per share $ (0.26) $ 0.29 $ (1.57) $ (0.32) $ (0.28)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-13
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
EXCESS OF NOTE TRANSLATION ACCUMULATED SHAREHOLDERS'
(IN THOUSANDS) COMMON STOCK PAR RECEIVABLE ADJUSTMENT DEFICIT EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1995 $717 $14,730 $(12) $107 $4,754 $20,296
Net loss -- -- -- -- (11,619) (11,619)
Foreign currency translation
Adjustment -- -- -- (64) -- (64)
Common stock issued in debt
restructuring 25 475 -- -- -- 500
Issuance of stock warrants in
connection with debt
offering -- 913 -- -- -- 913
Exercise of employee stock
options and stock purchases
under stock purchase plan 4 56 -- -- -- 60
------------ ------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1995 746 16,174 (12) 43 (6,865) 10,086
Net earnings -- -- -- -- 2,413 2,413
Foreign currency translation
adjustment -- -- -- 270 -- 270
Issuance of stock warrants in
connection with debt
offering -- 1,060 -- -- -- 1,060
Payment of note receivable -- -- 12 -- -- 12
Conversion of convertible
debt, net of issuance costs 156 1,983 -- -- -- 2,139
------------ ------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1996 902 19,217 -- 313 (4,452) 15,980
Net loss -- -- -- -- (2,369) (2,369)
Foreign currency translation
adjustment -- -- -- (117) -- (117)
Exercise of employee stock
options, net and stock
purchases under stock
purchase plan 8 155 -- -- -- 163
Exercise of stock warrants 1 17 -- -- -- 18
Conversion of convertible
debt, net of issuance costs 5 68 -- -- -- 73
------------ ------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1997 $916 $19,457 $-- $196 $(6,821) $13,748
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-14
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
--------------------------
YEARS ENDED DECEMBER 31, SEPTEMBER SEPTEMBER
-------------------------------- 26, 27,
(in thousands) 1997 1996 1995 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss) from continuing operations $(1,650) $1,719 $(10,886) $37 $(1,846)
Net cash provided by (used in) discontinued
operations 108 629 (618) (430) (39)
Adjustments to reconcile net earnings (loss) to
cash provided by (used in) operating
activities:
Depreciation and amortization 1,881 2,186 2,620 1,081 1,452
Gain (loss) on disposal of property, plant
and equipment (6) (1,492) (1) -- (6)
Provision for inventory obsolescence 2,386 208 2,158 90 2,585
Loss on sale of notes receivable -- 89 -- -- --
Changes in continuing operating assets and
liabilities, excluding foreign currency adjustments:
Accounts receivable 723 (63) (841) 131 2,352
Inventories (1,808) 1,949 (566) 676 88
Accounts payable and other accrued expenses (1,727) (6,403) 3,648 (1,008) (4,348)
Income taxes 47 73 4,328 462 539
Other, net 87 (594) 46 (180) (25)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 41 (1,699) (112) 859 752
CASH FLOWS FROM INVESTING
ACTIVITIES:
Contingent payment on purchase of KMS Advanced
Products -- -- (103) -- --
Purchase of property, plant and equipment (464) (416) (770) (131) (241)
Proceeds from sale of division, property, plant
and equipment 24 2,990 443 -- 22
-------- -------- -------- -------- --------
Net cash provided by (used in) investing activities (440) 2,574 (430) (131) (219)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of notes payable 1,692 590 6 1,048 1,189
Issuances of 12% convertible notes -- 5,842 2,500 -- --
Payments of notes payable (1,121) (590) (133) (1,619) (1,121)
Payments for debt restructuring -- -- (345) -- --
Payments of long-term debt (2,369) (7,856) (656) (1,236) (2,323)
Receipts on notes receivable -- 1,113 -- -- --
Proceeds from borrowings under revolving credit
agreement -- -- -- 2,400 --
Proceeds from exercise of stock options and
stock purchase plan 163 -- 60 10 180
Proceeds from exercise of stock warrants 18 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities (1,617) (901) 1,432 603 (2,075)
Effect of foreign currency exchange rates on cash (105) 248 (60) 110 (195)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,121) 222 830 1,441 (1,737)
Cash and cash equivalents at beginning of year 2,693 2,471 1,641 572 2,693
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $572 $2,693 $2,471 $2,013 $956
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for (received):
Interest $1,477 $2,238 $1,506 $1,090 $1,101
Income taxes 571 398 (4,697) 68 14
Non-cash investing and financing activities:
Common stock issued in debt restructuring -- -- 500 -- --
Notes receivable from sale of property, plant
and Equipment -- -- 1,190 -- --
Conversion of 12% Notes into Common stock 73 2,139 -- 30 73
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-15
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(1) SUMMARY OF ACCOUNTING POLICIES
Description of Business: NAI Technologies, Inc. designs, manufactures and
markets rugged computer systems, advanced peripheral products, high performance
workstations, TEMPEST computer systems, telecommunications test equipment and
transmission products, and integrated systems for defense, military,
government-related and commercial businesses. NAI's customer base includes
commercial markets requiring rugged, mobile computer and communications systems,
U.S. and foreign armed services and intelligence agencies, and the regional Bell
operating companies and independent telephone companies. Net sales from
continuing operations to the U.S. Government for the years ended December 31,
1997, 1996 and 1995 were $13,186,000, $20,579,000 and $22,624,000, respectively.
Net sales to one other customer accounted for 17% and 16% of NAI's sales in 1997
and 1996, respectively.
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of NAI and its wholly-owned subsidiaries. All significant
inter-company transactions and balances have been eliminated in consolidation.
Management Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation: The financial statements and transactions of
NAI's foreign subsidiary are maintained in its functional currency. For
consolidation purposes, assets and liabilities of NAI's U.K. subsidiary have
been translated at rates of exchange at the end of the period. Revenues and
expenses have been translated at the weighted average rates of exchange in
effect during each period. Translation gains and losses are accumulated as a
separate component of shareholders' equity. Gains and losses resulting from
transactions denominated in a currency other than NAI's functional currency are
included in other operating expense in the consolidated statements of
operations. There were no significant gains or losses from foreign currency
transactions in the years presented.
Financial Statement Reclassification: Certain reclassifications have been
made to prior years' financial statements to conform to the 1997 presentation.
Cash Equivalents: NAI classifies investments that are readily convertible
into cash, and have maturities of three months or less at the time of purchase,
as cash equivalents.
Inventories: Inventories are valued at the lower of cost or market on a
first-in, first-out (FIFO) basis. Work in process is stated at total costs
incurred, reduced by estimated costs of units delivered, not in excess of net
realizable value. NAI's business is characterized by rapid change that
frequently results in product obsolescence. NAI continually reviews its on-hand
quantities and compares such to current business levels and future expectations
regarding usage. Adjustments to the carrying values of inventory are made when
quantities on hand are not justified by anticipated future usage.
Property, Plant and Equipment: Property, plant and equipment are recorded
at historical cost. Depreciation and amortization have been computed using the
straight-line method over the following estimated useful lives of the assets:
equipment and furniture and fixtures, generally -- 2 to 10 years, and buildings
- -- 30 years. Leasehold improvements are amortized over the shorter of the
estimated useful life of the improvements or the lease term.
Excess of Cost over Fair Value of Net Assets Acquired: The excess of cost
over fair value of net assets acquired (goodwill) is being amortized on a
straight line basis over a period of twenty years. NAI reviews the significant
assumptions that underlie the twenty-year amortization period on a quarterly
basis and will shorten the amortization period if considered necessary. NAI
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future cash flows. Accumulated amortization was
approximately $2,654,000 and $2,085,000 at December 31, 1997 and
F-16
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
1996, respectively. The amortization expense associated with these amounts is
included in other operating expense in the consolidated statements of operations
and amounted to $569,000, $568,000 and $566,000 in 1997, 1996 and 1995,
respectively.
Long-lived assets: In fiscal 1996 NAI adopted Statement of Financial
Accounting Standards (SFAS) No. 121. "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of," SFAS No.121
requires that long-lived assets and certain identifiable intangibles to be held
and used or disposed of by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. NAI assesses the recoverability of long lived assets by
determining whether the asset balance can be recovered through projected
undiscounted future cash flows. During 1996, NAI adopted this statement and
determined that no impairment loss need be recognized for applicable assets of
continuing operations.
Revenue Recognition: Sales are recorded when title passes (either at
shipment or customer acceptance). In some limited cases, a sale may be recorded
upon the completion of a specific contractual task such as the issuance of a
test report. Cost of goods sold is based upon average estimated cost per unit.
Sales and profits on cost reimbursable contracts are recognized as costs are
incurred. Sales and estimated profits under long-term contracts are recorded
under the percentage of completion method of accounting using the cost to cost
method. Costs include direct engineering and manufacturing costs, applicable
overhead costs and special tooling and test equipment costs. All selling,
general and administrative expenses are charged to operations as incurred.
Warranty expense is accrued based upon the historical relationship between sales
and warranty claims. Estimated losses are provided for in full when identified.
Income Taxes: Deferred tax assets and liabilities are recognized based on
the future tax consequences attributable to temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
income tax purposes using enacted rates expected to be in effect when such
amounts are realized or settled.
Earnings (Loss) Per Share: In 1997, NAI adopted Statement of Financial
Accounting Standards No.128 (SFAS No. 128), "Earnings per Share," which requires
the presentation of basic and diluted earnings per share. Basic earnings (loss)
per share is computed based upon the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed based upon the
weighted average number of common shares outstanding increased by dilutive
common stock options and warrants, common stock subscribed to under the Employee
Stock Purchase Plan and the effect of assuming the conversion of the outstanding
12% convertible notes. Prior year earnings per share data has been restated to
apply the provisions of SFAS No. 128. The table below provides the components of
the per share computations.
F-17
<PAGE>
SECTION C
<TABLE>
<CAPTION>
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
----------------------------------- -------------------
SEPTEMBER 26, SEPTEMBER 27,
(in thousands except per share data) 1997 1996 1995 1998 1997
- ------------------------------------ -------- ------ --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
BASIC EPS COMPUTATION
Net earnings (loss) $(2,369) $2,413 $(11,619) $(2,900) $(2,529)
Weighted average common
shares outstanding 9,099 8,268 7,382 9,162 9,079
Basic (loss) earnings per share $(0.26) $0.29 $(1.57) $(0.32) $(0.28)
DILUTED EPS COMPUTATION
Net earnings (loss) $(2,369) $2,413 $(11,619) $(2,900) $(2,529)
Adjusted earnings (loss) $(2,369) $2,413 $(11,619) $(2,900) $(2,529)
Weighted average common
shares outstanding 9,099 8,268 7,382 9,162 9,079
Stock options & warrants -- 198 -- -- --
12% convertible notes -- -- -- -- --
Diluted common shares
outstanding 9,099 8,466 7,382 9,162 9,079
Diluted earnings (loss) per share $(0.26) $0.29 $(1.57) $(0.32) $(0.28)
</TABLE>
The assumed conversion of the outstanding 12% convertible notes was
excluded from the diluted earnings per share in 1997 and 1996 since they were
anti-dilutive.
Fair Value of Financial Instruments: Statement of Financial Accounting
Standards No.107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash and
cash equivalents, accounts receivable, notes payable, accounts payable and
accrued expenses are reflected in the financial statements at fair value because
of the short-term maturity of these instruments. The fair value and net book
value of NAI's 12% convertible subordinated promissory notes at December 31,
1997 were $4,483,000 and $4,722,000, respectively. The book value of the secured
revolving credit obligation on December 31, 1997 approximated fair value since
it has a prime based interest rate that is adjusted for market rate
fluctuations.
Accounting for Stock-Based Compensation: NAI records compensation expense
for employee stock options and warrants only if the current market price of the
underlying stock exceeds the exercise price on the date of the grant. On January
1, 1996, NAI adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation." NAI has elected not to implement the fair value based
accounting method for employee and directors' stock options but has elected to
disclose the pro forma net earnings and pro forma earnings per share to account
for employee stock option grants beginning in 1995 as if such method had been
used to account for such stock-based compensation cost.
(2) SUBSEQUENT EVENTS
On August 26, 1998 NAI entered into a definitive merger agreement (the
"Merger Agreement") with DRS Technologies, Inc. ("DRS") and DRS Merger Sub,
Inc., a wholly-owned subsidiary of DRS. The Merger Agreement provides for the
merger of DRS Merger Sub, Inc. with and into NAI (the "Merger").
Under the terms of the Merger Agreement, NAI shareholders will receive
0.23 of a share of DRS common stock for each share of NAI common stock held,
subject to adjustment if the average daily closing stock price of DRS common
stock is less than $12 over a 60-trading day period ending 2 business days prior
to the closing date of the Merger. In such event, NAI shareholders will receive
0.25 of a share of DRS common stock for each share of NAI
F-18
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
common stock. All of NAI's unexercised warrants outstanding at the time of the
completion of the Merger will be assumed by DRS so that each holder of such
warrants will have the right to receive such number of shares of DRS common
stock on exercise based on the same exchange ratio as used to determine the
number of shares of DRS common stock an NAI shareholder is entitled to receive
pursuant to the Merger. All of NAI's unexercised options outstanding at the time
of the completion of the Merger will be converted into and become rights to
receive such number of shares of DRS common stock on exercise based on the same
exchange ratio as used to determine the number of shares of DRS common stock an
NAI shareholder is entitled to receive pursuant to the Merger.
The closing of the Merger is subject to certain conditions, including
regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, an effective DRS registration statement filed with the U.S. Securities and
Exchange Commission, approval by each of the NAI shareholders and stockholders
of DRS, the sale of NAI's subsidiary, Wilcom, Inc., the conversion of at least
90% of the outstanding principal amount of NAI's 12% Convertible Subordinated
Promissory Notes as of August 26, 1998 into shares of NAI common stock and the
satisfaction of certain other conditions. The Merger Agreement provides for the
payment of a termination fee by NAI in the amount of $1.5 million in the event
that NAI enters into a definitive agreement with a third party to acquire NAI.
On July 7,1998 the NAI Board of Directors passed a resolution to
discontinue the operations comprising NAI's Telecommunications segment which
consisted of one wholly-owned subsidiary, Wilcom, Inc. Accordingly, the
operating results for Wilcom, Inc. are accounted for as discontinued operations
and its operations are segregated in the accompanying financial statements. The
financial statements for all prior reporting periods have been reclasified for
amounts associated with Wilcom, Inc. The second quarter 1998 results include a
provision of $2,692,000 which is the estimated loss on disposal including an
estimate of future operating losses to be incurred prior to the actual disposal
of Wilcom, Inc. of $192,000. It is anticipated that the net assets of Wilcom,
Inc. will be sold to Wilcom Acquisition Corp., a Delaware corporation in which a
current director of NAI named Mr. Charles Holmes owns a majority of capital
stock and Mr. Dennis McCarthy, another current director of NAI, owns the
remaining outstanding shares of capital stock, contemporaneously with NAI's
merger with DRS. Wilcom Acquisition Corp. will purchase Wilcom, Inc. for a
purchase price of (1) $150,000 and (2) Mr. Holmes' surrender of (a) 1,700,000
NAI warrants with an exercise price of $2.50 per share and (b) 300,000 NAI
warrants with an exercise price of $3.00 per share.
F-19
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(3) ACCOUNTS RECEIVABLE
Accounts receivable at December 31, consisted of the following:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Amounts receivable from United States Government:
Amounts billed $ 3,489 $ 3,889
Unbilled contract receivables 59 47
- --------------------------------------------------------------------------------
3,548 3,936
Amounts receivable from others:
Amounts billed 6,248 7,955
Unbilled contract receivables 1,629 449
- --------------------------------------------------------------------------------
7,877 8,404
- --------------------------------------------------------------------------------
11,425 12,340
Allowance for doubtful accounts (46) (238)
- --------------------------------------------------------------------------------
$ 11,379 $ 12,102
================================================================================
Unbilled contract receivables represent revenue earned but not yet billed
to customers at year-end. NAI expects that substantially all of these amounts
will be billed and collected within one year.
(4) INVENTORIES
Inventories, summarized by major classification, were as follows:
AT DECEMBER 31, AT SEPTEMBER 26,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1998
- --------------------------------------------------------------------------------
Raw materials and components $ 7,528 $ 6,636 $6,659
Work-in-process 2,687 2,485 1,741
Finished goods 386 140 584
Allowance for obsolescence (2,820) (1,313) (2,488)
Unliquidated progress payments (519) (108) --
- --------------------------------------------------------------------------------
$ 7,262 $ 7,840 $ 6,496
================================================================================
F-20
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(5) OTHER CURRENT ASSETS
Other current assets at December 31, consisted of the following:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Prepaid insurance $171 $249
Other prepaid expenses 326 348
- --------------------------------------------------------------------------------
$497 $597
================================================================================
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, consisted of the following:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Machinery and equipment $ 6,895 $ 6,781
Furniture and fixtures 565 681
Leasehold improvements 516 404
- --------------------------------------------------------------------------------
7,976 7,866
Less accumulated depreciation and (7,103) (6,598)
amortization
- --------------------------------------------------------------------------------
$ 873 $ 1,268
================================================================================
(7) OTHER ACCRUED EXPENSES--CURRENT
Other accrued expenses--current at December 31, consisted of the following:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Supplemental retirement $ -- $ 800
Employee benefits 419 893
Insurance payable 182 164
Purchase liabilities 129 257
Warranty 303 659
Deferred revenue 276 296
Contract losses 116 58
Taxes, other than income 50 115
Interest 153 134
Other 386 433
- --------------------------------------------------------------------------------
$2,014 $3,809
================================================================================
F-21
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(8) DEBT
Long term debt at December 31, consisted of the following:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Secured revolving credit with quarterly step-downs of $ 5,300 $ 7,500
$750,000 and interest at prime plus 1%
(9.5% at December 31, 1997)
Notes payable, generally secured by specified 36 206
machinery and equipment, with interest at 10%
12% Convertible Subordinated Promissory 5,123 5,227
Notes due January 15, 2001
- --------------------------------------------------------------------------------
10,459 12,933
Original issue discount on 12% Notes (401) (551)
Less current installments (311) (158)
- --------------------------------------------------------------------------------
$ 9,747 $12,224
================================================================================
Aggregate principal payments for the five years subsequent to December 31, 1997
are as follows (in thousands):
1998 $ 311
1999 5,025
2000 --
2001 5,123
2002 --
-------
$10,459
=======
Effective February 15, 1996 NAI entered into an amendment to its credit
agreement with its bank lenders which amended and extended the payment
provisions contained therein and reset certain financial covenants on more
favorable terms for NAI. The revised credit agreement provides for quarterly
principal payments of $500,000, beginning on March 31, 1996, and payments of
$750,000 beginning on March 31, 1997 and paid through December 31, 1998. The
remaining principal balance is due on January 15, 1999. NAI intends to refinance
all or a substantial portion of the amount due and payable, either through
borrowing or other capital sources. Interest is payable monthly and was amended
in 1997 from a rate of 1-3/4% above prime to 1% above prime. The loan covenants
require that NAI maintain certain minimum levels of net worth, current ratio and
quick ratio. They also limited capital expenditures and the payment of cash
dividends. As of December 31, 1997 NAI had made prepayments of $2,725,000.
At various times from February 15, 1996 to May 2, 1996, NAI issued an
aggregate of $8,342,000 of 12% convertible subordinated promissory notes due
January 15, 2001 and warrants to purchase an aggregate of 2,085,500 shares of
NAI's common stock. The Notes are convertible by the holders into shares of
common stock at a conversion price equal to $2.00 per share. Interest on the
Notes is payable quarterly in arrears on January 15, April 15, July 15 and
October 15 of each year. The Notes mature on January 15, 2001. The Notes may be
prepaid by NAI without premium or penalty at any time after January 15, 1999.
The Notes are unsecured obligations of NAI and contain certain restrictions on
NAI's assets not otherwise encumbered by the holders of the senior indebtedness.
As of December 31, 1997, $3,219,500 of such Notes had been converted into common
stock.
In addition to the Warrants noted above, NAI issued 2,034,200 Warrants to
the lead investor and placement agent. All Warrants entitle the holders thereof
to purchase shares of common stock at any time on or before February
F-22
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
15, 2002, at an exercise price equal to $2.50 per share of common stock. The
Warrants are detachable and separately transferable. The Warrants were valued at
$0.50 each. Such value was derived based upon an evaluation by an independent
third party and included a review of both current and historical stock price
data, the lack of liquidity afforded to the Warrants, the results of various
quantitative methodologies, NAI's financial position and historical and
projected cash flows. The Warrants issued in conjunction with the Notes are
recorded as original issued discount on NAI's balance sheet. The Warrants issued
to the lead investor and the placement agent are recorded as deferred debt costs
and are included in other assets in the accompanying consolidated balance sheet.
On May 9, 1996, NAI entered into an agreement with Charles S. Holmes, a
member of NAI's Board of Directors, that in consideration of his converting the
Note in the aggregate unpaid principal amount of $2,000,000 held by him into
1,000,000 shares of common stock, NAI would immediately issue warrants to
purchase 300,000 shares of common stock exercisable at any time on or before
February 15, 2002 at $3.00 per share. The warrants were valued at $0.50 per
warrant and NAI recorded a charge to operations of $150,000 in 1996.
NAI's U.K. subsidiary has a credit facility (sterling overdraft) with a
U.K. bank. The credit facility amounts to (pound)600,000 (approximately
$990,000) and bears interest at 1-3/4% above the U.K. base rate (7-1/4% at
December 31, 1997). This facility is renewable in March 1998. The amounts
outstanding under the credit facility at December 31, 1997 and 1996 were
$571,000 and $-0-, respectively. The maximum month end borrowings under the
credit facility during the years ended December 31, 1997 and 1996 were
(pound)673,000 and (pound)346,000 (approximately $1,120,000 and $543,000,
respectively). The average short term borrowings for the years ended December
31, 1997 and 1996 were (pound)140,000 and (pound)29,000 (approximately $231,000
and $50,000, respectively). The weighted average interest rate during the years
ended December 31, 1997 and 1996 was 8.40% and 8.23%, respectively.
(9) OTHER ACCRUED EXPENSES--NON-CURRENT
Other accrued expenses--non-current at December 31, consisted of the
following:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred compensation $ 433 $ 473
Other 350 439
- --------------------------------------------------------------------------------
$ 783 $ 912
================================================================================
In 1981, NAI entered into agreements with two former officers which
provide for the payments to each of $25,000 per year, adjusted for the
cumulative effects of inflation from inception of the agreement, over a period
of 15 years. Such deferred compensation payments commenced on January 1, 1990.
The 1998 payment to each of the former officers will be approximately $43,000.
F-23
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(10) OTHER (INCOME) EXPENSE
Other (income) expense for the years ended December 31, are as follows:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Gain on sale of division (1) $ -- $(1,510) $ --
Amortization of goodwill 569 568 566
Other (8) (7) (141)
- --------------------------------------------------------------------------------
$ 561 $ (949) $ 425
================================================================================
(1) In June 1996, NAI sold the assets of its Systems Integration division that
operated within the Codar Technology subsidiary.
(11) INCOME TAXES
NAI and its domestic subsidiaries file a consolidated Federal income tax
return. The (loss) income before provision for income taxes for the years ended
December 31, 1997, 1996 and 1995 were $(1,809,000), $2,809,000 and
$(11,242,000), respectively, comprised of domestic (loss) income of
$(3,859,000), $1,641,000 and $(12,077,000), respectively and foreign income of
$2,050,000, $1,168,000 and $835,000, respectively. The provision for income
taxes consisted of the following items:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $ (85) $-- $ --
State -- -- --
Foreign 615 533 377
- --------------------------------------------------------------------------------
530 533 377
- --------------------------------------------------------------------------------
Deferred:
Federal -- -- --
State -- -- --
Foreign 30 (137) --
- --------------------------------------------------------------------------------
30 (137) --
- --------------------------------------------------------------------------------
Total income tax expense $ 560 $ 396 $ 377
================================================================================
F-24
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax asset and (liability) at December 31, 1997, and
1996 are as follows:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 4,603 $ 3,389
AMT credit carryforward 514 514
Inventories 916 401
Supplemental retirement obligation -- 204
Accrued vacation 66 81
Deferred compensation 177 186
Other 208 392
Plant and equipment 333 109
Valuation allowance (6,669) (5,103)
- --------------------------------------------------------------------------------
$ 148 $ 173
- --------------------------------------------------------------------------------
Deferred tax liabilities non-current:
Other (41) (36)
- --------------------------------------------------------------------------------
(41) (36)
- --------------------------------------------------------------------------------
$ 107 $ 137
================================================================================
NAI has recorded a valuation allowance to reflect the estimated amount of
deferred tax assets that may not be realized through the realization of future
taxable income.
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the actual provision for income taxes is as follows:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Expected tax expense (benefit) $ (615) $ 955 $(3,822)
Increases (decreases) resulting from:
Adjustment of prior years' income taxes (344) -- (350)
Non-deductible expenses 106 214 278
Other (153) (250) 246
Change in valuation allowance 1,566 (523) 4,025
- --------------------------------------------------------------------------------
Actual income tax expense $ 560 $ 396 $ 377
================================================================================
No provision has been recorded for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.
At December 31, 1997, NAI has U.S. net operating loss carryforwards of
$13,549,000, expiring at various dates beginning in 2009 to 2012.
(12) SHAREHOLDERS' EQUITY
NAI has three stock option plans -- the 1991 Stock Option Plan, the 1993
Stock Option Plan for Directors, and the 1996 Stock Option Plan.
THE 1991 STOCK OPTION PLAN
Options under the 1991 Stock Option Plan are non-qualified stock options
and are granted at the option price fixed by the Compensation Committee of the
Board of Directors but in no event may the option price be less than the
F-25
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
fair market value of the share of common stock on the date of grant. Options
under the 1991 Stock Option Plan have such term as is fixed by the Compensation
Committee but no option may be exercised during the first year after its date of
grant or after the expiration of ten years from its date of grant.
THE 1993 STOCK OPTION PLAN FOR DIRECTORS
Options under the Directors' Plan are non-qualified stock options and
non-employee directors are automatically granted 5,000 options to purchase
common shares upon the director's election or re-election to the Board of
Directors. The option price is equal to the fair market value of a share of
common stock on the date of grant. Options are granted for a term of ten years
and become exercisable eleven months after their date of grant. In no event may
an option be exercised after the expiration of the term of such option.
THE 1996 STOCK OPTION PLAN
Options under the 1996 Stock Option Plan are non-qualified stock options
and are granted at the option price fixed by the Compensation Committee of the
Board of Directors but in no event may the option price be less than the fair
market value of a share of common stock on the date of grant. Options under the
1996 Stock Option Plan have such term as is fixed by the Compensation Committee
but no option may be exercised during the first year after its date of grant or
after the expiration of ten years from its date of grant.
Full payment of the exercise price under all stock option plans may be
made in cash or in shares of common stock valued at the fair market value
thereof on the date of exercise. NAI's policy is that the optionee must have
acquired such shares at least six months prior to the exercise date. During
1997, 11,770 common shares were received as payment for the exercise of options.
No options were exercised in 1996. In 1995 all payments were made in cash.
In 1996, NAI adopted the disclosure-only alternative of SFAS No. 123,
"Accounting for Stock Based Compensation." The weighted-average fair value per
option at the date of grant for options granted during 1997, 1996 and 1995 was
$1.48, $0.74 and $0.61, respectively. The weighted-average fair value per
purchase right under the Employee Stock Purchase Plans was $1.05 and $0.74
respectively, for 1997 and 1996 subscriptions. There were no subscriptions in
1995. The fair value was estimated using the Black-Scholes option pricing model
and the following weighted-average assumptions:
1997 1996 1995
- --------------------------------------------------------------------------------
Expected dividend yield 0% 0% 0%
Expected stock volatility 20% 30% 30%
Risk-free interest rate 5% 5% 5%
Expected term until exercise (years) 3 3 3
================================================================================
F-26
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
Pro forma net income and earnings per share reflecting compensation cost
for the fair value of stock options awarded in 1997, 1996 and 1995 were as
follows:
(In thousands of dollars, expect per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
Net income (loss)
As reported $(2,369) $2,413 $(11,619)
Pro forma $(2,542) $2,315 $(11,671)
Basic (loss) earnings per share:
As reported $ (0.26) $ 0.29 $ (1.57)
Pro forma $ (0.28) $ 0.28 $ (1.58)
Diluted (loss) earnings per share
As reported $ (0.26) $ 0.29 $ (1.57)
Pro forma $ (0.28) $ 0.27 $ (1.58)
================================================================================
The pro forma effects on net income and earnings per share for 1997, 1996
and 1995 may not be representative of the pro forma effects in future years
because they include compensation cost calculated on a straight-line basis over
the vesting periods of the grants and do not take into consideration pro forma
compensation cost for options granted prior to 1995.
EMPLOYEE STOCK OPTION PLANS
The following is a summary of activity related to all stock option plans:
NUMBER WEIGHTED AVERAGE
OF OPTION PRICE
SHARES PER SHARE
------ ---------
Outstanding at January 1, 1995 662,351 $4.77
Granted 515,000 $2.43
Exercised (37,962) $1.93
Expired/canceled (486,656) $4.81
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 652,733 $3.06
Granted 330,400 $2.69
Expired/canceled (256,239) $2.22
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 726,894 $2.63
Granted 135,000 $3.56
Exercised (78,850) $2.45
Canceled (63,125) $2.80
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 719,919 $2.81
================================================================================
F-27
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
Stock options outstanding at December 31, 1997 are summarized as follows:
Range of
Exercise Number Weighted average Weighted exercise
price outstanding remaining life average price
----- ----------- -------------- -------------
$1.88-$2.00 41,250 4.0 years $ 1.90
$2.50 509,675 3.1 years $ 2.50
$3.44-$3.75 130,000 5.2 years $ 3.58
$4.50-$8.33 38,994 6.2 years $ 5.32
- --------------------------------------------------------------------------------
$1.88-$8.33 719,919 4.0 years $ 2.81
================================================================================
At December 31, 1997, 431,102 options were exercisable at a weighted
average exercise price of $2.67 and 1,166,651 shares were reserved for issuance
under all stock option plans.
WARRANTS
At December 31, 1997, there were 4,112,700 warrants outstanding
exercisable at $2.50 per share and 300,000 warrants outstanding exercisable at
$3.00 per share. All warrants expire February 15, 2002.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1992 Employee Stock Purchase Plan, which commenced July 1, 1992,
employees may subscribe to purchase shares of common stock at the lesser of 85%
of the market price on the first day of the purchase period or the date
purchased one year later. Payment for the shares is made through payroll
deductions of up to 5% of annual base pay over a one-year period. A total of
101,017 shares has been reserved for issuance under the Employee Stock Purchase
Plan and as of December 31, 1997, 61,233 shares have been issued pursuant to the
plan. The following table is a summary of shares subscribed under the Employee
Stock Purchase Plan:
NUMBER OF PRICE
SHARES RANGE
------ -----
Outstanding at January 1, 1995 22,920 $3.13
Purchases (13,870) $3.13
Cancellations (9,050) $3.13
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 -- $--
Subscriptions 19,780 $2.76
Cancellations (1,000) $2.76
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 18,780 $2.76
Purchases (12,160) $2.76
Subscriptions 10,520 $4.36
Cancellations (12,410) $2.76-$4.36
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 4,730 $4.36
================================================================================
(13) EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN
NAI has a voluntary Retirement Savings Plan for all eligible employees,
which provides for basic employee contributions (up to 15% of compensation).
Plan participants may invest in a combination of equity, fixed income and money
market funds. Beginning in January 1997, NAI re-instituted a matching provision
of 100% of the first 1% of each employee's compensation that is contributed.
NAI's contribution in 1997 under the Plan was $51,000. There were no NAI
contributions made in 1996 or 1995.
F-28
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
The plan also provides for a discretionary profit sharing contribution as
determined by the Board of Directors, which may be contributed to each of the
participant's individual accounts. NAI made no such contribution for 1997, 1996
or 1995.
SUPPLEMENTAL RETIREMENT PLAN
The NAI Technologies Supplemental Retirement Plan, a non-qualified,
unfunded pension plan was terminated in 1996. The expenses related to this plan
amounted to $146,000 in 1995. In 1995, the actuarial computations assumed a
discount rate of 6.75% on benefit obligation and an annual compensation increase
of 5%.
The following table sets forth the funded status and cost components of
NAI's Supplemental Retirement Plan at December 31, 1995:
(in thousands) 1995
- --------------------------------------------------------------------------------
Accumulated benefit obligation including vested benefits of $1,215 $ 1,221
Projected benefit obligation for service
rendered to date (1,442)
Plan assets at fair value --
- --------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (1,442)
Unrecognized prior service cost 332
Unreorganized net loss 178
Adjustment required to recognize
minimum liability (289)
- --------------------------------------------------------------------------------
Unfunded accrued supplementary costs $(1,221)
- --------------------------------------------------------------------------------
Net pension expense is comprised of the following:
Service cost $ 25
Interest cost 93
Net amortization and deferral 28
- --------------------------------------------------------------------------------
Net pension expense $ 146
- --------------------------------------------------------------------------------
(14) INFORMATION BY GEOGRAPHIC AREA
Information about NAI's foreign operations and export sales is provided in
the following table. Export revenue is foreign revenue produced by identifiable
assets located in the United States while foreign revenue is generated by
identifiable assets located in foreign countries.
In order to achieve an appropriate sharing of operating results between
NAI's subsidiaries, transfers between geographic areas are accounted for on the
basis of a mark-up of manufacturing costs. Operating earnings are total sales
less operating expenses. In computing operating earnings, none of the following
items has been added or deducted: general corporate expenses, interest income,
interest expense and income taxes.
Identifiable assets are those assets of NAI that are identified with the
operations in each geographic area. Corporate assets consisted primarily of cash
and cash equivalents.
F-29
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
(in thousands)
As of or Years ended December 31
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States $30,664 $45,610 $39,581
Export 1,368 948 1,339
United Kingdom 15,726 14,573 10,893
--------------------------------
Total $47,758 $61,131 $51,813
================================
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 812 $ 547 $ 831
United Kingdom 71 -- --
--------------------------------
Total $ 883 $ 547 $ 831
================================
TOTAL SALES:
United States $31,044 $46,157 $40,412
Export 1,820 948 1,339
United Kingdom 15,777 14,573 10,893
Eliminations (883) (547) (831)
--------------------------------
Total $47,758 $61,131 $51,813
================================
OPERATING EARNINGS (LOSS):
United States $ (211) $ 4,175 $(5,499)
United Kingdom 2,549 2,070 1,226
--------------------------------
Subtotal 2,338 6,245 (4,273)
Corporate expenses and other (1,650) (1,632) (3,869)
--------------------------------
Total operating earnings (loss)
from continuing operations 688 4,613 (8,142)
Net interest expense & other (1,778) (2,498) (2,367)
--------------------------------
Earnings (loss) from continuing
operations before income taxes: $(1,090) $2,115 $(10,509)
================================
IDENTIFIABLE ASSETS:
United States $18,325 $21,982 $27,294
United Kingdom 10,055 9,602 8,283
--------------------------------
Subtotal 28,380 31,584 35,577
Corporate and other 6,835 9,321 11,407
--------------------------------
Total $35,215 $40,905 $46,984
================================
</TABLE>
F-30
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(15) INFORMATION BY BUSINESS SEGMENT
NAI's operations are classified into two business segments: Rugged Systems
and Systems Integration. The Rugged Systems segment includes Codar Technology,
Inc. based in Longmont, Colorado, and Lynwood Rugged Systems Limited in Farnham,
England.
Codar Technology designs, manufactures, integrates and supports rugged
computer systems, advanced computer peripherals and memory systems for military
and commercial use. Lynwood supplies rugged, environmentally and electrically
screened personal computers and workstations based upon standard commercial off
the shelf technology, targeted to the military and government markets
principally in Europe. One customer accounted for 25% of the Rugged Systems
segment's 1997 sales. No other customer accounted for greater than 10% of the
segment's sales.
The Systems Integration segment consists of NAI Technologies -- Systems
Division Corporation ("Systems Division") in Columbia, Maryland. Systems
Division provides custom packaged integrated computer systems for deployment in
shelters, ships, land vehicles and other demanding environments. The U.S.
Government accounted for 70% of the Systems Integration segment's 1997 sales and
one other customer accounted for 22% of the segment's sales.
Inter-segment sales are accounted for on the basis of a mark-up of
manufacturing costs. Operating earnings are total sales less operating expenses.
In computing operating earnings, none of the following items has been added or
deducted: general corporate expenses, interest income, interest expense and
income taxes.
Identifiable assets by segment are those assets of NAI that are used in
NAI's operations in each segment. Corporate assets consist primarily of cash and
cash equivalents.
F-31
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
INFORMATION BY INDUSTRY SEGMENT
(in thousands)
<TABLE>
<CAPTION>
As of or Years Ended December 31,
---------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
Rugged Systems $ 30,904 $ 46,914 $ 38,891
Systems Integration 16,854 14,217 12,922
--------------------------------------------
Total $ 47,758 $ 61,131 $ 51,813
--------------------------------------------
INTERSEGMENT SALES:
Rugged Systems $ 520 $ 434 $ 249
Systems Integration 363 113 582
--------------------------------------------
Total $ 883 $ 547 $ 831
--------------------------------------------
TOTAL SALES:
Rugged Systems $ 31,424 $ 47,348 $ 39,140
Systems Integration 17,217 14,330 13,504
Eliminations (883) (547) (831)
============================================
Total $ 47,758 $ 61,131 $ 51,813
--------------------------------------------
OPERATING EARNINGS (LOSS) FROM CONTINUING
OPERATIONS:
Rugged Systems $ (208) $ 4,927 $ (4,856)
Systems Integration 2,546 1,318 583
--------------------------------------------
Subtotal 2,338 6,245 (4,273)
Corporate expense and other (1,650) (1,632) (3,869)
--------------------------------------------
Total operating earnings
(loss) from continuing
operations (688) 4,613 (8,142)
Net interest expense & other (1,778) (2,498) (2,367)
--------------------------------------------
Earnings (loss) from continuing
operations before income taxes $ (1,090) $ 2,115 $(10,509)
--------------------------------------------
IDENTIFIABLE ASSETS:
Rugged Systems $ 21,351 $ 25,484 $ 31,282
Systems Integration 7,029 6,100 4,295
--------------------------------------------
Subtotal 28,380 31,584 35,577
Corporate and other 6,835 9,321 11,407
--------------------------------------------
Total $ 35,215 $ 40,905 $ 46,984
--------------------------------------------
CAPITAL EXPENDITURES:
Rugged Systems $ 293 $ 398 $ 742
Systems Integration 171 14 7
--------------------------------------------
Subtotal 464 412 749
Corporate and other -- 4 21
--------------------------------------------
Total $ 464 $ 416 $ 770
--------------------------------------------
DEPRECIATION AND AMORTIZATION:
Rugged Systems $ 1,262 $ 1,416 $ 1,461
Systems Integration 124 144 219
--------------------------------------------
Subtotal 1,386 1,560 1,680
Corporate and other 495 626 940
--------------------------------------------
Total $ 1,881 $ 2,186 $ 2,620
============================================
</TABLE>
F-32
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(16) COMMITMENTS AND CONTINGENCIES
NAI and its subsidiaries lease office and manufacturing facilities,
automobiles, computers and other equipment under various non-cancelable
operating leases.
Future minimum rental commitments for leases with non-cancelable terms in
excess of one year are as follows:
Amount
------
(in thousands)
1998 $1,329
1999 1,161
2000 708
2001 623
2002 346
Thereafter 4,001
------
Total minimum lease payments $8,168
======
With the acquisition of Lynwood, NAI assumed a 25-year operating lease for
office and manufacturing facilities. Annual future minimum lease payments
through the year 2014, which are included in the above table, amount to
approximately $333,000 per year.
Net rental expense amounted to $1,072,000, $1,570,000 and $1,725,000 in
1997, 1996 and 1995, respectively. In 1997, there was $44,000 of sublease income
netted against the rental expense.
Most leases provide for additional payments of real estate taxes,
insurance and other operating expenses applicable to the property, generally
over a base period level. Total rental expense includes such base period
expenses and the additional expense payments as part of the minimum lease
payments.
NAI and its subsidiaries are subject to certain legal actions that arise
in the normal course of business. It is management's belief that these actions
will not have a material effect on NAI's consolidated financial position.
F-33
<PAGE>
SECTION C
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997, 1996 AND 1995 AND SEPTEMBER 26, 1998
(17) QUARTERLY RESULTS OF OPERATIONS-(UNAUDITED)
The following table sets forth quarterly financial information for 1997
and 1996:
Basic Diluted
Earnings Earnings
Net Gross Net (loss) (loss) (loss)
Sales Margin Income Per Share Per Share
--------------------------------------------------------
1997 (in thousands,
except per share data)
First Quarter $12,018 $ 3,319 $ 379 $ 0.04 $ 0.04
Second Quarter 12,809 3,256 501 0.05 0.05
Third Quarter(1) 11,831 113 (3,409) (0.37) (0.37)
Fourth Quarter 11,100 2,729 160 0.02 0.02
--------------------------------------------------------
Total $47,758 $ 9,417 $(2,369) $ (0.26) $ (0.26)
1996
First Quarter $14,381 $ 2,592 $ (450) $ (0.06) $ (0.06)
Second Quarter 15,225 2,799 815 0.10 0.10
Third Quarter 15,749 3,098 964 0.11 0.11
Fourth Quarter 15,776 4,319 1,084 0.12 0.12
--------------------------------------------------------
Total $61,131 $12,808 $ 2,413 $ 0.29 $ 0.29
========================================================
(1) NAI recorded a $3.0 million charge substantially related to an inventory
write-down at its Codar Technology Inc. subsidiary.
F-34
<PAGE>
SECTION C
SCHEDULE II
NAI TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------
ADDITIONS
-------------------------
(2)
(1) Charged to
Balance at Charged to other Balance
beginning of costs and accounts Deductions at end
Description period expenses describe describe of period
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from
asset to which it applies
Allowance for doubtful
accounts:
Year ended December 31, 1997 $ 238 $ 38 $ (2)(C) $ 228 (A) $ 46
Year ended December 31, 1996 117 84 5 (C) (32) (A) 238
Year ended December 31, 1995 108 204 195 (A) 117
Allowance for inventory
obsolescence reserve:
Year ended December 31, 1997 1,313 2,386 $ (9)(C) 870 (E) 2,820
Year ended December 31, 1996 2,221 208 879 (D) 1,995 (B) 1,313
Year ended December 31, 1995 945 2,158 -- 882 (B) 2,221
</TABLE>
- ----------
Note A - Uncollected receivables written off, net of recoveries.
Note B - Obsolete inventories scrapped, net of recoveries.
Note C - Foreign currency translation adjustment.
Note D - Reclassification of 1995 provisions for future inventory loss on
work in process of $650,000. Gross-up of inventory reserve
previously netted of $207,000. Foreign currency translation
adjustment of $22,000.
Note E - Obsolete inventory scrapped, net of recoveries--$992,000. $120,000
write-down of inventory to net realizable value.
F-35
<PAGE>
SECTION C
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
-----------------------
1997 1996
-----------------------
(in thousands)
Net (loss) income $(2,369) $ 2,413
Average shares of common stock
outstanding during the period 9,099 8,268
Basic earnings (loss) per share $ (0.26) $ 0.29
=======================
Net income (loss) $(2,369) $ 2,413
Adjusted net (loss) income (2,369) $ 2,413
Average shares of common stock outstanding
during the period 9,099 8,268
Incremental shares from assumed exercise of
stock options, stock warrants and employee
stock purchase plan -- 198
-----------------------
Average diluted shares outstanding during the
period 9,099 8,466
Diluted earnings per share $ (0.26) $ 0.29
=======================
The assumed conversion of the 12% subordinated convertible notes was
excluded from diluted earnings per share in 1997 and 1996 since they were
anti-dilutive.
F-36
<PAGE>
SECTION C
LIST OF SUBSIDIARIES
The following are subsidiaries of NAI, respective jurisdictions of their
incorporation and names (if any) under which they do business. NAI owns all of
the voting securities of each subsidiary.
JURISDICTION OF NAME UNDER WHICH
NAME INCORPORATION SUBSIDIARY DOES BUSINESS
- --------------------------------------------------------------------------------
NAI Technologies --
Systems Division Corporation New York NAI Systems Division
Wilcom, Inc. New York Wilcom, Inc.
Lynwood Rugged
Systems Limited United Kingdom Lynwood
Codar Technology, Inc. Colorado Codar
F-37
<PAGE>
ANNEX A-I
AGREEMENT AND PLAN OF MERGER
dated as of August 26, 1998
among
DRS TECHNOLOGIES, INC.,
DRS MERGER SUB, INC.
and
NAI TECHNOLOGIES, INC.
A-I-1
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
MERGER.................................................................2
1.1. The Merger.................................................2
1.2. Filing.....................................................2
1.3. Effective Time of the Merger...............................2
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS; ETC.............................2
2.1. Certificate of Incorporation and By-Laws of Surviving
Corporation...............................................2
2.2. Directors and Officers of Surviving Corporation............3
2.3. Board of Directors of Acquiror.............................3
ARTICLE III
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF
SHARES IN THE MERGER...................................................3
3.1. Share Consideration; Conversion or Cancellation of
Shares in the Merger......................................3
3.2. Payment for Shares in the Merger...........................6
3.3. Fractional Shares..........................................9
3.4. Transfer of Shares After the Effective Time................9
ARTICLE IV
CERTAIN EFFECTS OF THE MERGER..........................................9
4.1. Effect of the Merger.......................................9
4.2. Further Assurances.........................................9
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................10
5.1. Organization and Qualification............................10
5.2. Subsidiaries..............................................11
5.3. Capitalization............................................11
5.4. Authority Relative to This Agreement......................12
A-I-2
<PAGE>
5.5. No Violations, etc........................................13
5.6. Commission Filings; Financial Statements..................14
5.7. Absence of Changes or Events..............................14
5.8. Absence of Undisclosed Liabilities........................15
5.9. Joint Proxy Statement.....................................15
5.10. Accounts Receivable.......................................16
5.11. Inventories...............................................16
5.12. Litigation................................................16
5.13. Title to and Condition of Properties; Leases..............17
5.14. Contracts and Commitments.................................17
5.15. Labor Matters.............................................18
5.16. Compliance with Law.......................................18
5.17. Board Recommendation......................................18
5.18. Intellectual Property.....................................18
5.19. Taxes.....................................................20
5.20. Employee Benefit Plans....................................21
5.21. Environmental Matters.....................................24
5.22. Government Contracts......................................25
5.23. Disclosure................................................28
5.24. Finders or Brokers........................................29
5.25. State Anti-takeover Statutes..............................29
5.26. Opinion of Financial Advisor..............................29
5.27. Insurance.................................................29
5.28. Employment and Labor Contracts............................30
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB.............30
6.1. Organization and Qualification............................30
6.2. Subsidiaries..............................................31
6.3. Capitalization............................................31
6.4. Authority Relative to This Agreement......................31
6.5. No Violations, etc........................................32
A-I-3
<PAGE>
6.6. Commission Filings; Financial Statements..................33
6.7. Absence of Changes or Events..............................33
6.8. Litigation................................................34
6.8. Joint Proxy Statement.....................................34
6.9. Board Recommendation......................................34
6.10 Disclosure................................................34
6.11. Finders or Brokers........................................35
6.12. Opinion of Financial Advisor..............................35
ARTICLE VII
CONDUCT OF BUSINESS OF ACQUIROR AND THE COMPANY PENDING THE MERGER....35
7.1. Conduct of Business of the Company Pending the Merger.....35
7.2. Conduct of Business of Acquiror Pending the Merger........37
ARTICLE VIII
COVENANTS AND AGREEMENTS..............................................38
8.1. Preparation of the Form S-4 and the Joint Proxy
Statement; Stockholders Meetings.........................38
8.2. Letters of the Company's Accountants......................40
8.3. Letters of Acquiror's Accountants.........................40
8.4. Additional Agreements; Cooperation........................40
8.5. Publicity.................................................41
8.6. No Solicitation...........................................41
8.7. Access to Information.....................................43
8.8. Notification of Certain Matters...........................43
8.9. Directors and Officers; Insurance.........................44
8.10. Fees and Expenses.........................................44
8.11. Affiliates................................................44
8.12. AMEX Listing..............................................45
8.12. Stockholder Litigation....................................45
8.14. Tax Treatment.............................................45
8.15. Fairness Opinion..........................................45
8.16. Credit Facilities.........................................45
A-I-4
<PAGE>
8.17. Patent, Trademark and Copyright Filings...................45
8.18. Convertible Notes.........................................46
ARTICLE IX
CONDITIONS TO CLOSING.................................................46
9.1. Conditions to Each Party's Obligation to Effect the
Merger...................................................46
9.2. Conditions to Obligations of Acquiror.....................47
9.3. Conditions to Obligations of the Company..................50
ARTICLE X
TERMINATION...........................................................51
10.1. Termination...............................................51
10.2. Effect of Termination.....................................53
ARTICLE XI
MISCELLANEOUS.........................................................54
11.1. Non-Survival of Representations and Warranties............54
11.2. Closing and Waiver........................................54
11.3. Notices...................................................54
11.4. Counterparts..............................................55
11.5. Interpretation............................................55
11.6. Amendment.................................................56
11.7. No Third Party Beneficiaries..............................56
11.8. Governing Law.............................................56
11.9. Entire Agreement..........................................56
11.10. Validity.................................................56
EXHIBIT A..............................................................1
ANNEX I TO EXHIBIT A...................................................1
EXHIBIT B..............................................................1
A-I-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 26, 1998, by and among DRS
TECHNOLOGIES, INC., a Delaware corporation ("Acquiror"), DRS MERGER SUB, INC., a
New York corporation and a direct wholly owned subsidiary of Acquiror ("Merger
Sub"), and NAI TECHNOLOGIES, INC., a New York corporation (the "Company" and,
together with Merger Sub, the "Constituent Corporations").
W I T N E S S E T H :
WHEREAS, Acquiror, the Company and Merger Sub have determined that it is
advisable that Merger Sub be merged with and into the Company, with the Company
being the survivor (the "Merger"), upon the terms and subject to the conditions
set forth herein and in accordance with the laws of the State of New York and
any other applicable statutes and regulations;
WHEREAS, in consideration of Acquiror's entering into this Agreement, each
of certain holders of the common stock, par value $0.10 per share, of the
Company (the "Company Common Stock"), has entered into a Shareholder's Agreement
(as defined herein) as of the date hereof, pursuant to which, among other
things, each of such shareholders has agreed to vote his or her shares of
Company Common Stock in favor of the Merger;
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger shall qualify as a tax free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, the respective boards of directors of Acquiror, the Company and
Merger Sub have authorized and approved the execution, delivery and performance
of this Agreement and the transactions contemplated hereby, and the respective
boards of directors of Acquiror and the Company have directed that this
Agreement be submitted to the respective stockholders of Acquiror and the
Company in order for such stockholders to consider and vote upon the approval of
this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, representations
and warranties herein contained, the parties hereto, intending to be legally
bound, agree as follows:
A-I-6
<PAGE>
ARTICLE I
MERGER
1.1 The Merger.
Upon the terms and conditions set forth in this Agreement, at the Effective
Time (as hereinafter defined), Merger Sub shall be merged with and into the
Company as provided herein. Thereupon, the corporate existence of the Company,
with all its purposes, powers and objects, shall continue unaffected and
unimpaired by the Merger, and the corporate identity and existence, with all the
purposes, powers and objects, of Merger Sub shall be merged with and into the
Company, and the Company as the corporation surviving the Merger (hereinafter
sometimes called the "Surviving Corporation") shall continue its corporate
existence under the laws of the State of New York.
1.2 Filing.
As soon as practicable after the fulfillment or waiver of the conditions
set forth in Sections 9.1, 9.2 and 9.3, or on such later date as may be mutually
agreed to between Acquiror and the Company, the parties hereto will cause to be
filed with the office of the Secretary of State of the State of New York, a
certificate of merger (the "Certificate of Merger"), in such form as required
by, and executed in accordance with, the relevant provisions of the New York
Business Corporation Law ("NYBCL").
1.3 Effective Time of the Merger.
The Merger shall be effective at the time of the filing of the Certificate
of Merger with the office of the Secretary of State of the State of New York, or
at such later time specified in such Certificate of Merger, which time is herein
sometimes referred to as the "Effective Time" and the date thereof is herein
sometimes referred to as the "Effective Date" or the "Closing Date."
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS; ETC.
2.1 Certificate of Incorporation and By-Laws of Surviving Corporation.
The Certificate of Incorporation and By-Laws of the Company, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation and By-Laws, respectively, of the Surviving Corporation, until
thereafter amended in accordance with applicable law.
A-I-7
<PAGE>
2.2 Directors and Officers of Surviving Corporation.
(a) The directors of Merger Sub immediately prior to the Effective
Time shall continue as the directors of the Surviving Corporation, in each case
until their successors are elected and qualified or until their earlier death,
resignation or removal.
(b) Unless otherwise provided in this Agreement, the officers of the
Company immediately prior to the effective time shall continue as the officers
of the Surviving Corporation, in each case until removed or until their
respective successors are duly elected or appointed and qualified in the manner
provided in the Articles of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
2.3 Board of Directors of Acquiror.
At or prior to the Effective Time, C. Shelton James, currently a director
of the Company, shall be elected to the Board of Directors of Acquiror, such
person to serve for a term of three (3) years (the "Term") or until the earlier
death, resignation or removal of such person; provided, however, that if such
person is unable to serve as a director of Acquiror for the full Term due to his
death or incapacitation, then the Board of Directors of Acquiror shall fill such
vacancy by electing to the Board of Directors such person as it shall designate.
ARTICLE III
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
3.1 Share Consideration; Conversion or Cancellation of Shares in the
Merger.
Subject to the provisions of this Article III, at the Effective Time, by
virtue of the Merger and without any action on the part of the holders thereof,
the shares of the Constituent Corporations shall be converted as follows:
(a) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right to
receive 0.23 shares of duly authorized, validly issued, fully paid and
non-assessable shares of common stock, par value $0.01 per share (the "Acquiror
Common Stock"), of Acquiror (the "Merger Consideration") (such fraction being
referred to herein as the "Exchange Ratio"); provided, however, that if the
average of the reported closing prices per share of Acquiror Common Stock on the
American Stock Exchange, Inc. ("AMEX") for the consecutive 60-trading day period
ending two business days before the Effective Date falls below $12.00 per share,
then the Exchange Ratio shall be 0.25. If, prior to the Effective Time, Acquiror
should split or combine the Acquiror Common Stock, or pay a stock dividend or
other stock distribution in shares of Acquiror Common Stock, or otherwise change
the Acquiror Common Stock into any other securities, or make any other dividend
or distribution on the
A-I-8
<PAGE>
Acquiror Common Stock (other than normal quarterly dividends as the same may be
adjusted from time to time in the ordinary course), then the Exchange Ratio will
be appropriately adjusted to reflect such split, combination, dividend or other
distribution or change.
(b) All shares of Company Common Stock to be converted into shares of
Acquiror Common Stock pursuant to this Section 3.1 shall cease to be
outstanding, shall be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall thereafter cease to
have any rights with respect to such shares, except the right to receive for
each of such shares, upon the surrender of such certificate in accordance with
Section 3.2, the Merger Consideration and cash in lieu of fractional shares of
Acquiror Common Stock as contemplated by Section 3.3.
(c) Each share of common stock, par value $1.00 per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time shall remain
outstanding and shall represent one share of common stock of the Surviving
Corporation, which shares shall be issued to Acquiror and shall constitute the
only outstanding shares of capital stock of the Surviving Corporation.
(d) At the Effective Time, each option to purchase shares of Company
Common Stock (each an "Option") granted by the Company under the Company's 1991
Stock Option Plan, as amended, 1993 Stock Option Plan for Directors, as amended,
or 1996 Stock Option Plan (collectively, the "Stock Option Plans") then
outstanding, whether vested or unvested, shall be converted into and become
rights with respect to Acquiror Common Stock, and (i) the Company and a
committee of the Company's board of directors, which shall be under the
supervision of Acquiror and its compensation committee, shall be substituted in
each Stock Option Plan as the "committee" authorized to administer each Stock
Option Plan; (ii) each Option may be exercised solely for shares of Acquiror
Common Stock; (iii) the number of shares of Acquiror Common Stock subject to
each Option shall be equal to the product of the Exchange Ratio and the number
of shares of Company Common Stock subject to such Option; and (iv) the per share
exercise price of each Option shall be equal to the aggregate exercise price for
the shares of Company Common Stock subject to such Option divided by the number
of full shares of Acquiror Common Stock, as provided above, purchasable pursuant
to such Option; provided, however, that the number of shares of Acquiror Common
Stock that may be purchased upon exercise of each Option shall not include any
fractional shares and, upon such exercise of such Option, a cash payment shall
be made for any fractional share based upon the per share average of the highest
and lowest sale prices of a share of Acquiror Common Stock as reported on the
AMEX on the date of such exercise.
(e) No Options shall be granted under any of the Stock Option Plans
after the date hereof, and the Company shall not accelerate the vesting of any
Option. The provisions of any other benefit plan or option agreement of the
Company providing for the issuance, transfer or grant of any capital stock of
the Company, or any interest in respect of any capital stock of the Company,
shall be terminated as of the Effective Time, and the Company shall ensure that
following the Effective Time, no holder of an Option, no participant in any
Stock Option Plan or any other benefit plan, shall have any right
A-I-9
<PAGE>
thereunder to acquire any capital stock of the Company or the Surviving
Corporation. The Company shall terminate the Company's 1992 Employee Stock
Purchase Plan prior to the Effective Time and shall return all payroll
deductions held thereunder to the applicable participants.
(f) Each Warrant to purchase shares of Company Common Stock at an
exercise price of $2.50 per share issued by the Company and outstanding and
unexercised as of the Effective Time (each a "Warrant") shall be assumed by
Acquiror and, in accordance with Section 5(a) of each Warrant, shall be deemed
to be immediately converted into and shall constitute a warrant issued by
Acquiror fully and to the same extent as if such assumed Warrant had been
initially executed and delivered by Acquiror, and shall constitute rights with
respect to Acquiror Common Stock on substantially the same terms and conditions
as contained in such Warrant, such that (i) each assumed Warrant may be
exercised solely for shares of Acquiror Common Stock; (ii) the number of shares
of Acquiror Common Stock subject to each assumed Warrant shall be equal to the
product of the Exchange Ratio and the number of shares of Company Common Stock
subject to such assumed Warrant; and (iii) the per share exercise price of each
assumed Warrant shall be equal to the aggregate exercise price for the shares of
Company Common Stock subject to such assumed Warrant divided by the number of
full shares of Acquiror Common Stock, as provided above, purchasable pursuant to
such assumed Warrant; provided, however, that the number of shares of Acquiror
Common Stock that may be purchased upon exercise of each assumed Warrant shall
not include any fractional shares and, upon such exercise of such assumed
Warrant, a cash payment shall be made for any fractional share based upon the
per share average of the highest and lowest sale prices of a share of Acquiror
Common Stock as reported on the AMEX on the date of such exercise. Each such
assumed Warrant as of the Effective Time shall be referred to as an "Acquiror
Warrant." To implement this understanding, Acquiror shall register on its Form
S-4 (as defined in Section 5.9 below) the Acquiror Warrants and the shares of
Acquiror Common Stock issuable upon exercise of such Acquiror Warrants.
(g) Each 12% Convertible Subordinated Promissory Note due January 15,
2001, convertible into shares of Company Common Stock at a conversion price of
$2.00 per share, subject to adjustment, issued by the Company and outstanding
and unexercised as of the Effective Time (each a "Convertible Note")
representing up to 10% of the aggregate principal amount of such Convertible
Notes outstanding as of the date hereof that have not been converted in
accordance with Section 9.2(h) below, shall, prior to the Effective Time, have
been duly amended as set forth in Sections 8.18 and 9.2(h) below, and each
outstanding Convertible Note shall be deemed to represent an amended Convertible
Note (each an "Amended Convertible Note"), and shall, in accordance with Section
6(a) of each Amended Convertible Note, be deemed to represent rights with
respect to Acquiror Common Stock, such that (i) each Amended Convertible Note
may be exercised solely for shares of Acquiror Common Stock; (ii) the number of
shares of Acquiror Common Stock subject to each Amended Convertible Note shall
be equal to the product of the Exchange Ratio and the number of shares of
Company Common Stock subject to such Amended Convertible Note; and (iii) the per
share exercise price of each Amended Convertible Note shall be equal to the
aggregate exercise price for the shares of Company Common Stock subject to such
Amended Convertible Note divided by the
A-I-10
<PAGE>
number of full shares of Acquiror Common Stock, as provided above, purchasable
pursuant to such Amended Convertible Note; provided, however, that the number of
shares of Acquiror Common Stock that may be purchased upon exercise of each
Amended Convertible Note shall not include any fractional shares and, upon such
exercise of such Amended Convertible Note, a cash payment shall be made for any
fractional share based upon the per share average of the highest and lowest sale
prices of a share of Acquiror Common Stock as reported on the AMEX on the date
of such exercise.
(h) All shares of Company Common Stock, outstanding or issuable upon
exercise or conversion of the Options, the Warrants and the Convertible Notes,
which are owned by Acquiror or any of its subsidiaries or held in the treasury
of the Company or any of its subsidiaries in each case shall be canceled and
shall cease to exist, and no consideration shall be delivered in exchange
therefor.
(i) Acquiror shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Acquiror Common Stock for delivery
upon exercise of the Options and assumed Warrants or Acquiror Warrants in
accordance with this Section 3.1. Acquiror shall file a registration statement
on Form S-8 (or any successor form) or another appropriate form with respect to
Acquiror Common Stock subject to such Options and shall use all reasonable
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectuses
contained therein) for so long as such Options remain outstanding. With respect
to those individuals who subsequent to the Merger will be subject to the
reporting requirements under Section 16(a) of the Securities and Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act"), Acquiror shall cause the Options of such persons to be
administered pursuant to Section 3.1(d) in a manner that complies with Rule
16b-3 promulgated under the Exchange Act to the extent the applicable Stock
Option Plan complied with such rule prior to the Merger.
3.2 Payment for Shares in the Merger.
The manner of making payment for shares in the Merger shall be as follows:
(a) At the Effective Time, Acquiror shall make available to an
exchange agent selected by Acquiror (the "Exchange Agent"), for the benefit of
those persons who immediately prior to the Effective Time were the holders of
Company Common Stock, a sufficient number of certificates representing Acquiror
Common Stock required to effect the delivery of the aggregate Merger
Consideration required to be issued pursuant to Section 3.1(a) (the certificates
representing Acquiror Common Stock comprising such aggregate Merger
Consideration being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions from Acquiror,
deliver the Acquiror Common Stock contemplated to be issued pursuant to Section
3.1(a) and effect the sales provided for in Section 3.3 out of the Exchange
Fund. The Exchange Fund shall not be used for any other purpose.
(b) Promptly after the Effective Time, the Exchange Agent shall mail
to each holder of record (other than Acquiror and the Company) of a certificate
or certificates,
A-I-11
<PAGE>
which immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "Share Certificates"), (i) a form of letter of
transmittal (which shall specify that delivery shall be effected, and the risk
of loss and title to the Share Certificates shall pass, only upon proper
delivery of the Share Certificates to the Exchange Agent) and (ii) instructions
for use in effecting the surrender of the Share Certificates for payment
therefor. Upon surrender of Share Certificates for cancellation to the Exchange
Agent, together with such letter of transmittal duly executed and any other
required documents, the holder of such Share Certificates shall be entitled to
receive the Merger Consideration for each of the shares of Company Common Stock
formerly represented by such Share Certificates, and the Share Certificates so
surrendered shall forthwith be canceled. Until so surrendered, Share
Certificates shall represent solely the right to receive the Merger
Consideration and any cash in lieu of fractional shares of Acquiror Common Stock
as contemplated by Section 3.3 with respect to each of the shares formerly
represented thereby. No dividends or other distributions that are declared after
the Effective Time on Acquiror Common Stock and payable to the holders of record
thereof after the Effective Time will be paid to persons entitled by reason of
the Merger to receive Acquiror Common Stock until such persons surrender their
Share Certificates. Upon such surrender, there shall be paid to the Person in
whose name the shares of the Acquiror Common Stock are issued any dividends or
other distributions on such Acquiror Common Stock that shall have a record date
after the Effective Time and prior to such surrender and a payment date after
such surrender and such payment shall be made on such payment date. In no event
shall the persons entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions, except to
the extent so paid to all stockholders of Acquiror. If any cash or any
certificate representing Acquiror Common Stock is to be paid to or issued in a
name other than that in which the Share Certificate surrendered in exchange
therefor is registered, it shall be a condition of such exchange that the Share
Certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the Person requesting such exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
certificates for such Acquiror Common Stock in a name other than that of the
registered holder of the Share Certificate surrendered, or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of shares of Company Common Stock for
any Acquiror Common Stock or dividends thereon or, in accordance with Section
3.3, proceeds of the sale of fractional interests, delivered to a public
official pursuant to applicable escheat law. The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to Acquiror
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect to such Acquiror Common Stock for the account of the persons entitled
thereto.
(c) Each certificate, which immediately prior to the Effective Time
represented outstanding Warrants (each a "Warrant Certificate") or Convertible
Notes (each a "Note Certificate"), shall as of the Effective Time become a
certificate representing Acquiror Warrants (each an "Acquiror Warrant
Certificate") pursuant to Section 3.1(f) or Amended Convertible Notes (each a
"New Note Certificate") pursuant to Section 3.1(g), unless surrendered for
cancellation or transfer, and after the Effective Time, conversions
A-I-12
<PAGE>
into Acquiror Common Stock available to a holder of record of the Warrants or
Convertible Notes may be made, regardless of whether such holder has surrendered
his, her or its Warrant or Note Certificate(s). At the Effective Time, Acquiror
shall make available to the transfer agent (the "Warrant Agent"), which served
for the benefit of those persons who or which immediately prior to the Effective
Time were the holders of Warrants, a sufficient number of Acquiror Warrant
Certificates equal to the number of Warrant Certificates. At the Effective Time,
Acquiror shall cause the Company to make available to United Bank (formerly
First Trust National Association), as trustee (the "Trustee") under the
Indenture, dated as of July 15, 1996 (the "Indenture"), between the Company and
First Trust National Association, a sufficient number of New Note Certificates
equal to the number of Note Certificates representing up to 10% of the aggregate
principal amount of the Convertible Notes outstanding as of the date hereof that
have not been converted in accordance with Section 9.2(h) below. Upon surrender
of Warrant or Note Certificates for cancellation or transfer to the Warrant
Agent or Trustee, (i) the holder of such Warrant or Note Certificates shall be
entitled to receive Acquiror Warrant Certificates formerly represented by such
Warrant Certificates or New Note Certificates formerly represented by such Note
Certificates; (ii) the Warrant Agent or Trustee shall, pursuant to irrevocable
instructions from Acquiror or the Company, respectively, deliver Acquiror
Warrant Certificates or New Note Certificates; and (iii) the Warrant or Note
Certificates so surrendered shall forthwith be canceled. The Warrant Agent or
Trustee shall not be entitled to exercise any rights of ownership with respect
to Acquiror Warrant Certificates or New Note Certificates, respectively, held by
it from time to time hereunder.
(d) Share Certificates surrendered for exchange by any person
constituting an affiliate of the Company for purposes of Rule 145 under the
Securities Act shall not be exchanged for certificates representing Acquiror
Common Stock until Acquiror has received a written agreement from such person as
provided in Section 8.11.
(e) Any portion of the Exchange Fund and the Fractional Securities
Fund (as hereinafter defined) which remains unclaimed by the former shareholders
of the Company for one year after the Effective Time shall be delivered by the
Exchange Agent to Acquiror, upon demand of Acquiror, and any former shareholders
of the Company shall thereafter look only to Acquiror for payment of their
claims for the Merger Consideration in respect of Company Common Stock or for
any cash in lieu of fractional shares of Acquiror Common Stock.
3.3 Fractional Shares.
No fraction of Acquiror Common Stock shall be issued in the Merger. In lieu
of any such fractional securities, each holder of Company Common Stock who would
otherwise have been entitled to a fraction of Acquiror Common Stock upon
surrender of Share Certificates for exchange pursuant to this Article III will
be paid an amount in cash (without interest) equal to such holder's
proportionate interest in the net proceeds from the sale or sales in the open
market by the Exchange Agent, on behalf of all such holders, of the aggregate
shares of fractional Acquiror Common Stock issued pursuant to this Article III.
As soon as practicable following the Effective Time, the Exchange Agent shall
determine the excess of (i) the number of full shares of Acquiror Common Stock
A-I-13
<PAGE>
delivered to the Exchange Agent by Acquiror over (ii) the aggregate number of
full shares of Acquiror Common Stock to be distributed (such excess being herein
called the "Excess Shares"), and the Exchange Agent, as agent for the former
holders of shares of Company Common Stock, shall sell the Excess Shares at the
prevailing prices on the AMEX. The sale of the Excess Shares by the Exchange
Agent shall be executed on the AMEX through one or more member firms of the AMEX
and shall be executed in round lots to the extent practicable. Acquiror shall
pay all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of Excess Shares. Until the net proceeds of such sale
have been distributed to the former shareholders of the Company, the Exchange
Agent will hold such proceeds in trust for such former shareholders (the
"Fractional Securities Fund"). As soon as practicable after the determination of
the amount of cash to be paid to former shareholders of the Company in lieu of
any fractional interest, the Exchange Agent shall make available in accordance
with this Agreement such amounts to such former shareholders.
3.4 Transfer of Shares After the Effective Time.
No transfers of Company Common Stock or Warrants shall be made on the stock
transfer books of the Company after the close of business on the day prior to
the date of the Effective Time. If, after the Effective Time, certificates are
presented to the Surviving Corporation, Acquiror or the Exchange Agent, they
shall be cancelled and exchanged as provided in this Article III.
ARTICLE IV
CERTAIN EFFECTS OF THE MERGER
4.1 Effect of the Merger.
On and after the Effective Time and pursuant to the NYBCL, the Surviving
Corporation shall possess all the rights, privileges, immunities, powers and
purposes of each of Merger Sub and the Company; all the property, real and
personal, including subscriptions to shares, causes of action and every other
asset (including books and records) of Merger Sub and the Company, shall vest in
the Surviving Corporation without further act or deed; and the Surviving
Corporation shall assume and be liable for all of the liabilities, obligations
and penalties of Merger Sub and the Company. No liability or obligation due or
to become due and no claim or demand for any cause existing against either
Merger Sub or the Company, or any shareholder, officer or director thereof,
shall be released or impaired by the Merger, and no action or proceeding,
whether civil or criminal, then pending by or against Merger Sub or the Company,
or any shareholder, officer or director thereof, shall abate or be discontinued
by the Merger, but may be enforced, prosecuted, settled or compromised as if the
Merger had not occurred, and the Surviving Corporation may be substituted in any
such action or proceeding in place of Merger Sub or the Company.
A-I-14
<PAGE>
4.2 Further Assurances.
If at any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of either of Merger Sub or the
Company, the officers of such corporation are fully authorized in the name of
their corporation or otherwise to take, and shall take, all such further action.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Acquiror and Merger Sub that the
statements contained in this Article V are true and correct:
5.1 Organization and Qualification.
Each of the Company and its subsidiaries is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation. Each of the Company and its subsidiaries
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted, except for
such failures that could not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect (as defined below). Each of the
Company and its subsidiaries is duly qualified to conduct its business, and is
in good standing, in each jurisdiction where the character of its properties
owned, leased or operated, or the nature of its activities, makes such
qualification necessary, except for such failures that could not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. Section 5.1 of the Disclosure Schedule previously delivered by the
Company to Acquiror (the "Disclosure Schedule") sets forth, with respect to the
Company, each jurisdiction within the United States where it is qualified or
otherwise licensed as a foreign corporation to do business, and with respect to
each of its subsidiaries, (i) its name and jurisdiction of incorporation; (ii)
each jurisdiction where it is qualified or otherwise licensed as a foreign
corporation to do business; (iii) the number of shares of authorized capital
stock of each class of its capital stock; (iv) the number of issued and
outstanding shares of each class of its capital stock; (v) the number of shares
of its capital stock held in treasury; and (vi) its duly elected directors and
officers. The Company has heretofore made available to Acquiror a complete and
correct copy of the Certificate of Incorporation (or other applicable charter
document) and the By-Laws (or other applicable organizational document), each as
amended to the date hereof, of the Company and each of its subsidiaries other
than Wilcom, Inc. (the "Retained Subsidiaries"). Neither the Company nor any of
its subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation (or other applicable charter document) or its By-Laws (or other
applicable organizational document). As used herein, the term "Company Material
Adverse Effect"
A-I-15
<PAGE>
means any material adverse effect on the general affairs, business, management,
operations, assets and liabilities or prospects of the Company and its Material
Subsidiaries taken as a whole or any material adverse effect on the condition
(financial or otherwise) of the Company or any Material Subsidiary. For purposes
of the preceding sentence, the term "Material Subsidiary" shall mean each of
Codar Technology, Inc., Lynwood Rugged Systems Limited and NAI
Technologies-Systems Division Corporation.
5.2 Subsidiaries.
The only direct or indirect subsidiaries of the Company are those listed in
Section 5.1 of the Disclosure Schedule. The Company is directly or indirectly
the record (or legal and registered) and beneficial owner of all of the
outstanding shares of capital stock of each of its subsidiaries, there are no
proxies with respect to such shares, and no equity securities of any of such
subsidiaries are or may be required to be issued by reason of any options,
warrants, scrip, rights to subscribe for, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any capital stock of any such subsidiary, and there are no
contracts, commitments, understandings or arrangements by which any such
subsidiary is bound to issue additional shares of its capital stock or
securities convertible into or exchangeable for such shares. Other than as set
forth in Section 5.1 of the Disclosure Schedule, all of such shares so owned by
the Company are validly issued, fully paid and non-assessable and are owned by
it free and clear of any claim, lien or encumbrance of any kind with respect
thereto, and the Company does not directly or indirectly own any interest in any
other corporation, partnership, joint venture or other business association or
entity.
5.3 Capitalization.
The authorized capital stock of the Company consists, as of the date
hereof, of: (i) 25,000,000 shares of Company Common Stock, of which 9,179,567
are issued and outstanding; and (ii) 2,000,000 shares of preferred stock, par
value $0.10 per share (the "Company Preferred Stock"), of which none are issued
and outstanding. There is no other capital stock authorized for issuance. All of
such issued and outstanding shares of Company Common Stock are validly issued,
fully paid and non-assessable and free of preemptive rights. As of the date
hereof, the Company does not hold any shares of its capital stock in treasury.
As of the date hereof, (i) 494,232 shares of Company Common Stock were reserved
for issuance upon exercise of outstanding Options under the Stock Option Plans,
(ii) 98,377 shares of Company Common Stock were reserved for issuance upon the
purchase of shares under the Stock Purchase Plan, (iii) 4,112,700 shares of
Company Common Stock were reserved for issuance upon exercise of the Warrants
and (iv) 2,542,250 shares of Company Common Stock were reserved for issuance
upon exercise of outstanding Convertible Notes. Section 5.3 of the Disclosure
Schedule lists and describes the Stock Option Plans, the Stock Purchase Plan,
the Warrants and the Convertible Notes, including the number of Warrants and the
aggregate principal amount of Convertible Notes issued and outstanding as of the
date hereof. Other than the Stock Option Plans, the Stock Purchase Plan, the
Warrants and the Convertible Notes, the Company has no other plan which provides
for the grant of options or warrants to
A-I-16
<PAGE>
purchase shares of capital stock, stock appreciation or similar rights or stock
awards. Except as set forth above, there are not now, and at the Effective Time,
except for shares of Company Common Stock issued after the date hereof upon the
conversion of the Convertible Notes and the exercise of Options and Warrants
outstanding on the date hereof or pursuant to the Company's 401(k) Plan, there
will not be, any shares of capital stock of the Company issued or outstanding or
any subscriptions, options, warrants, calls, claims, rights (including without
limitation any stock appreciation or similar rights), convertible securities or
other agreements or commitments of any character obligating the Company to
issue, transfer or sell any of its securities or to distribute any evidences of
indebtedness or assets to holders of any class of its capital stock. Except as
disclosed in Section 5.3 of the Disclosure Schedule, none of the Company and its
Retained Subsidiaries is a party to any voting agreement, voting trust, proxy or
similar agreement, arrangement or understanding relating to its capital stock or
any agreement, arrangement or understanding relating to or providing for
registration rights with respect to its capital stock. The Company has made all
payments required through the date hereof under the Convertible Notes.
5.4 Authority Relative to This Agreement.
The Company has full corporate power and authority to execute and deliver
this Agreement and, subject to obtaining any necessary shareholder approval of
the Merger, to consummate the Merger and other transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the Merger
and other transactions contemplated hereby have been duly and validly authorized
by the Board of Directors of the Company, and no other corporate proceedings on
the part of the Company are necessary to authorize this Agreement or to
consummate the Merger or other transactions contemplated hereby (other than,
with respect to the Merger, the approval of the Company's shareholders in
accordance with the NYBCL). This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due authorization, execution and
delivery hereof by Acquiror and Merger Sub, constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms.
5.5 No Violations, etc.
(a) Other than the filings, permits, authorizations, consents and
approvals or waivers thereof that are identified in Section 5.5(b) and that have
been duly made or obtained as contemplated herein, and except as listed in
Section 5.5 of the Disclosure Schedule, neither the execution and delivery of
this Agreement by the Company nor the consummation of the Merger or other
transactions contemplated hereby nor compliance by the Company with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
or suspension of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or any of its subsidiaries under, any of the terms,
conditions or provisions of (x) their respective charters
A-I-17
<PAGE>
or by-laws (or other applicable organizational document), (y) any note, bond,
mortgage, debenture, indenture or deed of trust or (z) any license, lease,
contract, agreement or other instrument or obligation to which the Company or
any such subsidiary is a party or to which they or any of their respective
properties or assets may be subject; or (ii) violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company or any of its subsidiaries or any of their respective properties or
assets, except, in the case of clauses (i) and (ii) above, for any such
violations, conflicts, breaches, defaults or other alterations or occurrences
that could not have, individually or in the aggregate, a Company Material
Adverse Effect and would not, in any material respect, prevent or delay
consummation of the Merger or otherwise prevent the Company from performing its
obligations under this Agreement.
(b) No filing or registration with, no notification to and no permit,
authorization, consent or approval of any governmental entity (including,
without limitation, any federal, state or local regulatory authority or agency)
is required of the Company in connection with the execution and delivery of this
Agreement or the consummation by the Company of the Merger or other transactions
contemplated hereby, except (i) as required by (A) applicable requirements, if
any, of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), (B) the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act"), and the Exchange Act,
(C) state securities or "blue sky" laws and (D) the National Association of
Securities Dealers, Inc. or the NASDAQ; (ii) the filing and recordation of
appropriate merger documents as required by the NYBCL; (iii) the approval of the
Company's shareholders as required by the NYBCL; and (iv) such other filings,
registrations, notifications, permits, authorizations, consents or approvals the
failure of which to be obtained, made or given would not, individually or in the
aggregate, either have a Company Material Adverse Effect or materially impair
the Company's ability to consummate the Merger or other transactions
contemplated hereby.
(c) The Company and its Retained Subsidiaries are not in violation of
or default under, except as set forth in Section 5.5 of the Disclosure Schedule,
(i) any note, bond, mortgage, debenture, indenture or deed of trust; or (ii) any
license, lease, contract, agreement or other instrument or obligation to which
the Company or any such subsidiary is a party or to which they or any of their
respective properties or assets may be subject, except, in the case of clauses
(i) and (ii) above, for such violations or defaults that would not, individually
or in the aggregate, either have a Company Material Adverse Effect or materially
impair the Company's ability to consummate the Merger or other transactions
contemplated hereby.
5.6 Commission Filings; Financial Statements.
The Company has filed all forms, reports, schedules, statements and other
documents required to be filed by it since December 31, 1994 (as supplemented
and amended since the time of filing, collectively, the "SEC Reports") with the
Securities and Exchange Commission (the "SEC"), each of which complied when
filed in all material respects with all applicable requirements of the
Securities Act and the Exchange Act. All of the historical financial statements
contained in the SEC Reports were prepared from
A-I-18
<PAGE>
the books and records of the Company and its subsidiaries. The audited
consolidated financial statements and unaudited consolidated interim financial
statements of the Company and its subsidiaries included or incorporated by
reference in such SEC Reports have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and present fairly
the financial position and results of operations and cash flows of the Company
and its subsidiaries on a consolidated basis at the respective dates and for the
respective periods indicated (subject, in the case of all such financial
statements that are interim financial statements, to normal year-end audit
adjustments, none of which will be material). None of the SEC Reports contained
at the time filed any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 Absence of Changes or Events.
Except as set forth in Section 5.7 of the Disclosure Schedule, the
Company's Form 10-K for the fiscal year ended December 31, 1997, as filed with
the SEC, or the Company's Form 10-Q for the fiscal quarter ended March 28, 1998,
as filed with the SEC, since December 31, 1997, the Company and its subsidiaries
have conducted their respective businesses in the ordinary course consistent
with their past practices and have not incurred any material liability, except
in the ordinary course of their businesses consistent with their past practices,
and there has not been (i) any change, or any event involving a prospective
change, in the business, financial condition or results of operations of the
Company or any of its subsidiaries which has had, or could have, individually or
in the aggregate, a Company Material Adverse Effect; (ii) any damage,
destruction or loss, whether covered by insurance or not, which has had, or
could have, individually or in the aggregate, a Company Material Adverse Effect;
(iii) any entry into or termination of any material commitment, contract,
agreement or transaction (including, without limitation, any material borrowing
or capital expenditure or sale or other disposition of any material asset or
assets) of or involving the Company and its subsidiaries, other than this
Agreement, the Stock Purchase Agreement, a form of which is attached hereto as
Exhibit B (the "Wilcom Agreement"), to be entered into among Wilcom Acquisition
Corp., as Buyer, and the Company, as Seller, relating to the sale of Wilcom,
Inc. and agreements executed in the ordinary course of business; (iv) any
redemption, repurchase or other acquisition for value of its capital stock by
the Company, or any issuance of capital stock of the Company or any of its
subsidiaries or of securities convertible into or rights to acquire any such
capital stock or any dividend or distribution declared, set aside, or paid on
capital stock of the Company, other than the sale of Wilcom, Inc.; (v) any
transfer of or right granted under any material lease, license, agreement or
Intellectual Property (as defined in Section 5.18 below) of the Company or any
of its Retained Subsidiaries or any liens or other security interests in any
Intellectual Property of the Company or any of its Retained Subsidiaries; (vi)
any sale or other disposition of any asset of the Company or any of its
subsidiaries or any charge, mortgage, pledge or imposition of any lien or other
encumbrance (or any satisfaction and discharge thereof) on any asset of the
Company or any of its subsidiaries, other than in the ordinary course of
business, or any agreement relating to any of the foregoing; (vii)
A-I-19
<PAGE>
any default or breach by the Company or any of its subsidiaries in any material
respect under any contract, license or permit; (viii) any general wage or salary
increase or any increase in compensation payable or to become payable to any
executive officers or management employees of the Company or any of its
subsidiaries or any entry into any employment contract with any executive
officer or key salaried employee of the Company or any of its subsidiaries; and
(ix) any change in the accounting methods of the Company or any of its
subsidiaries.
5.8 Absence of Undisclosed Liabilities.
Except as set forth in Section 5.8 of the Disclosure Schedule, neither the
Company nor any of its subsidiaries has any liabilities or obligations of any
nature, whether absolute, accrued, unmatured, contingent or otherwise, or any
unsatisfied judgments or any leases of personalty or realty or unusual or
extraordinary commitments, except for (i) liabilities recorded on the Company's
consolidated balance sheet at December 31, 1997 included in the financial
statements referred to in Section 5.6 and the notes thereto; (ii) liabilities or
obligations incurred in the ordinary course of business and consistent with past
practice since December 31, 1997; and (iii) liabilities or obligations that do
not exceed $25,000 individually and $100,000 in the aggregate.
5.9 Joint Proxy Statement.
None of the information supplied or to be supplied by or on behalf of the
Company for inclusion or incorporation by reference in the registration
statement to be filed with the SEC by Acquiror in connection with the issuance
of shares of Acquiror Common Stock in the Merger (the "Form S-4") will, at the
time the Form S-4 becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the joint proxy statement, in
definitive form, relating to the Company Shareholder Meeting (as hereinafter
defined) and the Acquiror Stockholder Meeting (as hereinafter defined), or in
the related proxy and notice of meeting, or soliciting material used in
connection therewith (referred to herein collectively as the "Joint Proxy
Statement") will, at the dates mailed to stockholders and at the times of the
Company Shareholder Meeting and the Acquiror Stockholder Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Form
S-4 and the Joint Proxy Statement as it relates to the Company and its
subsidiaries will comply as to form in all material respects with the provisions
of the Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder, except that no representation is made by the Company
with respect to information relating to or supplied by Acquiror.
A-I-20
<PAGE>
5.10 Accounts Receivable.
All accounts receivable of the Company reflected in the Company's December
31, 1997 audited consolidated balance sheet contained in the Company's Form 10-K
for the fiscal year ended December 31, 1997 filed with the SEC (the "Balance
Sheet") represent transactions in the ordinary course of business (including
without limitation recoverable costs and accrued profits on progress completed
but not billed under Government Contracts (as defined in Section 5.22 below) or
other contracts) and are current and collectible net of any reserves shown on
such Balance Sheet (which reserves are adequate and were calculated consistent
with past practice). Section 5.10 of the Disclosure Schedule sets forth (i) the
aging of the Company's receivables in excess of $25,000; (ii) each receivable in
excess of $25,000; (iii) each receivable in an amount in excess of $25,000 that
is more than ninety (90) days outstanding; and (iv) each receivable from a
person or entity from whom the aggregate of such receivables exceeds $25,000.
5.11 Inventories.
All inventories of the Company reflected in the Balance Sheet are of a
quality and quantity usable and salable in the ordinary course of business,
except for obsolete items and items of below-standard quality, all of which, in
the aggregate, are immaterial in amount. Items included in such inventories are
carried on the books of the Company and are valued on such Balance Sheet at the
lower of cost or market and, in any event, at not greater than their net
realizable value after appropriate deduction for costs of completion, marketing
costs, transportation expense and allocation of overhead.
5.12 Litigation.
Except as set forth in Section 5.12 of the Disclosure Schedule, there is no
(i) claim, action, suit or proceeding pending or, to the best knowledge of the
Company or any of its Retained Subsidiaries, threatened against or relating to
the Company or any of its Retained Subsidiaries before any court or governmental
or regulatory authority or body or arbitration tribunal; or (ii) outstanding
judgment, order, writ, injunction or decree, or application, request or motion
therefor, of any court, governmental agency or arbitration tribunal in a
proceeding, seeking unspecified damages, damages in excess of $100,000 or any
injunctive or other equitable relief to which the Company, any Retained
Subsidiary of the Company or any of their respective assets is a party.
5.13 Title to and Condition of Properties; Leases.
(a) Each of the Company and its subsidiaries (i) except as set forth
in Section 5.13(a)(i) of the Disclosure Schedule, has good, marketable and
insurable title to all of the properties and assets reflected on the Company's
December 31, 1997 audited consolidated balance sheet contained in the Company's
Form 10-K for the fiscal year ended December 31, 1997 filed with the SEC (the
"Balance Sheet") as being owned by the Company or its subsidiaries, except for
any property or asset since sold or otherwise disposed of since the date thereof
in the ordinary course of business and consistent with past practice; and (ii)
is the lessee under all of the leases set forth in Section 5.13(a)(ii) of
A-I-21
<PAGE>
the Disclosure Schedule and has valid, effective, enforceable and continuing
leasehold rights without default in all property leased by it under such leases,
free and clear of all encumbrances, except in the case of clauses (i) and (ii)
above (x) statutory liens securing payments not yet due and (y) such
imperfections or irregularities of title, claims, liens, charges, security
interests or encumbrances as do not materially affect the use of the properties
or assets subject thereto or affected thereby or otherwise materially impair the
business operations at such properties. The assets and properties of the Company
and its Retained Subsidiaries are in good operating condition and repair and are
adequate for the uses to which they are being put, all of which are lawful,
authorized and permitted.
(b) The Company is not a party to any executory contract to sell or
transfer any part of any leasehold interest of the Company. True and accurate
copies of all leases, and of all amendments, supplements, extensions and
modifications thereof, have been delivered to Acquiror by the Company.
5.14 Contracts and Commitments.
Other than as disclosed in Section 5.14 of the Disclosure Schedule, no
existing contract or commitment of the Company or any of its subsidiaries, or as
to which any thereof is a party or their respective assets are bound, contains
an agreement with respect to any change of control that would be triggered by
the Merger. Other than as set forth in Section 5.14 of the Disclosure Schedule,
neither this Agreement, the Merger nor the other transactions contemplated
hereby will result in any outstanding loans or borrowings in excess of $50,000
by the Company or any Retained Subsidiary of the Company becoming due, going
into default or giving the lenders or other holders of debt instruments the
right to require the Company or any of its Retained Subsidiaries to repay all or
a portion of such loans or borrowings; provided, that it is expressly understood
and agreed that the Company is not making any representations or warranties with
respect to the effect of the financial condition or results of operation of
Acquiror and Merger Sub.
5.15 Labor Matters.
Each of the Company and its Retained Subsidiaries is in compliance in all
material respects with all applicable laws relating to employment and employment
practices, terms and conditions of employment and wages and hours. To the
Company's knowledge, there is no labor strike, slowdown or work stoppage pending
or threatened against or affecting the Company or any of its subsidiaries. No
petition for certification has been filed and is pending before the National
Labor Relations Board with respect to any employees of the Company or any of its
Retained Subsidiaries who are not currently organized.
5.16 Compliance with Law.
Except as set forth in Section 5.16 of the Disclosure Schedule, neither the
Company nor any of its Retained Subsidiaries has violated or failed to comply
with any applicable statute, law, ordinance, regulation, rule or order
(including without limitation any U.S. export control statutes, regulations and
Executive Orders) of any foreign,
A-I-22
<PAGE>
federal, state or local government or any other governmental department or
agency, or any judgment, decree or order of any court, applicable to its
business or operations or the conduct thereof by the Company and its Retained
Subsidiaries, except for such violations, if any, that could not have,
individually or in the aggregate, a Company Material Effect. The Company and its
Retained Subsidiaries have all permits, licenses and franchises from
governmental agencies required to conduct their businesses as now being
conducted, except for any permits, licenses, franchises, the absence of which
could not have, individually or in the aggregate, a Company Material Effect.
5.17 Board Recommendation.
The Board of Directors of the Company has approved and adopted this
Agreement, the Merger and the other transactions contemplated hereby, has
determined that the transactions contemplated by this Agreement are in the best
interests of the Company and its shareholders and has recommended that the
shareholders of the Company vote in favor thereof.
5.18 Intellectual Property.
(a) Section 5.18 of the Disclosure Schedule lists all of the
Intellectual Property of the Company, its Retained Subsidiaries and any
predecessor entities of the foregoing.
(b) The Company and its Retained Subsidiaries own or have the right
to use all Intellectual Property used in the conduct of their respective
businesses. None of the Intellectual Property used in the conduct of their
respective businesses infringes or violates the intellectual property rights of
any third parties. Consummation of the transactions contemplated hereby shall
not impair any rights or impose any obligations with respect to Intellectual
Property used in the conduct of the businesses of the Company and its Retained
Subsidiaries.
(c) There is no pending or, to the knowledge of the Company or its
Retained Subsidiaries, threatened (or unasserted but considered probable of
assertion) claim against the Company or any of its Retained Subsidiaries, nor
has the Company or any of its Retained Subsidiaries received any notice, (i)
asserting that any of the Intellectual Property, or that the past, present or,
to the knowledge of the Company or its Retained Subsidiaries, contemplated
future conduct of the Company's or its Retained Subsidiaries' business,
infringes or violates the intellectual property rights of any third parties;
(ii) asserting that any third parties have any rights to use any of the
Intellectual Property except for Licensed Intellectual Property licensed to the
Company or a Retained Subsidiary on a nonexclusive basis; or (iii) which could,
if adversely determined against the Company or any Retained Subsidiary,
adversely affect the ability of the Company or a Retained Subsidiary to use any
of the Intellectual Property upon consummation of the transactions contemplated
hereby or thereafter, and to the knowledge of the Company and its Retained
Subsidiaries, there is no basis for any claim of the foregoing types.
A-I-23
<PAGE>
(d) Neither the Company nor any Retained Subsidiary has given notice
to any third parties asserting infringement by such third parties of any of the
Intellectual Property, and to the knowledge of the Company and its Retained
Subsidiaries, there is no basis for any such claim against a third party.
(e) All of the Licensed Intellectual Property is licensed pursuant
to valid written agreements (the "License Agreements"), enforceable in
accordance with their terms.
(f) Neither the Company nor any Retained Subsidiary is subject to
any bars or other restrictions with respect to its rights to utilize the
Intellectual Property, except for the terms and conditions of the License
Agreements and, to the knowledge of the Company and its Retained Subsidiaries,
no bars or other restrictions on such rights will be created by or exist after
the consummation of the transactions contemplated herein.
(g) There is no pending or, to the knowledge of the Company or any
of its Retained Subsidiaries, threatened claim that the Company, any Retained
Subsidiary or any licensor is in breach of any of the License Agreements and, to
the knowledge of the Company and its Retained Subsidiaries, no basis for any
such claim exists.
(h) There is no pending or, to the knowledge of the Company or any
of its Retained Subsidiaries, threatened claim against the Company, any Retained
Subsidiary or the licensor of any Licensed Intellectual Property asserting that
any of the Licensed Intellectual Property infringes or conflicts with the rights
of third parties, and to the knowledge of the Company and its Retained
Subsidiaries, no basis for any such claim exists.
(i) Each of the Company and its Retained Subsidiaries has performed
all of the obligations required to be performed by it, and is not in default
under any agreement relating to any Intellectual Property.
(j) Section 5.18(j) of the Disclosure Schedule identifies each trade
name, fictitious business name, or other similar name under which the Company or
any of its Retained Subsidiaries has conducted any part of its business during
the five (5) years preceding the date hereof.
(k) For purposes of this Section 5.18 and Section 5.7 above:
(i) "Copyrights" shall mean all registered and unregistered
copyrights and applications for copyright registration in every country of the
world;
(ii) "Intellectual Property" shall mean Patents, Trademarks,
Copyrights and Know-How, including Licensed Intellectual Property;
(iii) "Know-How" shall mean technical information, trade
secrets, inventions, processes, specifications, manuals, reports, documents,
drawings, procedures, processes, devices, software and source code, software
documentation, flow
A-I-24
<PAGE>
charts, recording media, research and development data, notebooks, marketing
information, customer lists, database rights, other tangible embodiments of
information and proprietary rights other than Copyrights Patents, and
Trademarks, in every country of the world;
(iv) "Licensed Intellectual Property" shall mean all
intellectual property owned by third parties and licensed to the Company or any
Retained Subsidiary;
(v) "Patents" shall mean all utility and design patents and
patent applications (including any divisions, continuations,
continuations-in-part, reexaminations, extensions, renewals or reissues
thereof), design, design registrations, utility models and any similar rights
and applications therefor, in every country of the world; and
(vi) "Trademarks" shall mean all registered and unregistered
trademarks, service marks, trade dress, trade names, fictitious business names
or other similar names and applications for registration of any of the
foregoing, in every country of the world.
5.19 Taxes.
"Tax" (including, with correlative meaning, the term "Taxes") shall mean
all federal, state, local and foreign taxes, duties, levies, charges and
assessments of any nature, including social security payments and deductibles
relating to wages, salaries and benefits and payments to subcontractors (to the
extent required under applicable Tax law), and also including all interest,
penalties and additions imposed with respect to such amounts. Except as set
forth in Section 5.19 of the Disclosure Schedule, (i) the Company and its
subsidiaries have prepared and timely filed or will timely file with the
appropriate governmental agencies all franchise, income and all other Tax
returns and reports required to be filed for any period ending on or before the
Effective Time, taking into account any extension of time to file granted to or
obtained on behalf of the Company and/or its subsidiaries; (ii) all Taxes of the
Company and its subsidiaries in respect of the pre-Merger period have been paid
in full to the proper authorities, other than such Taxes as are being contested
in good faith by appropriate proceedings and/or are adequately reserved for in
accordance with generally accepted accounting principles; (iii) all deficiencies
resulting from Tax examinations, inquiries or investigations of federal, state
and foreign income, sales and franchise and all other Tax returns filed by the
Company and its subsidiaries have either been paid or are being contested in
good faith by appropriate proceedings; (iv) to the best knowledge of the
Company, no deficiency has been asserted or assessed against the Company or any
of its subsidiaries, and no examination, inquiry or investigation of the Company
or any of its subsidiaries is pending or threatened for any amount of Tax by any
taxing authority; (v) no extension of the period for assessment or collection of
any Tax is currently in effect and no extension of time within which to file any
Tax return has been requested, which Tax return has not since been filed; (vi)
no Tax liens have been filed with respect to any Taxes; (vii) the Company and
each of its subsidiaries will not make any voluntary adjustment by reason of a
change in their accounting methods for any pre-Merger period that would affect
the
A-I-25
<PAGE>
taxable income or deductions of the Company or any of its subsidiaries for any
period ending after the Effective Date; (viii) the Company and its subsidiaries
have made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; and (ix) the Company and its subsidiaries are
not parties to any tax sharing or tax matters agreement.
5.20 Employee Benefit Plans.
(a) Section 5.20(a) of the Disclosure Schedule contains a true and
complete list of each material bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance pay, vacation, worker's
compensation, medical, life or other material insurance, profit-sharing, or
pension plan, program, agreement or arrangement, and each other material
employee benefit plan, program, agreement or arrangement, sponsored, maintained
or contributed to or required to be contributed to by the Company or any of its
subsidiaries or by any trade or business, whether or not incorporated, that
together with the Company or any of its subsidiaries would be deemed a "single
employer" under Section 414 of the Code (an "ERISA Affiliate") for the benefit
of any employee or director or former employee or former director of the Company
or any of its subsidiaries, whether formal or informal and whether legally
binding or not (the "Plans"). With respect to each Plan, Section 5.20(a) of the
Disclosure Schedule identifies each ERISA Affiliate that sponsors, maintains, or
contributes to the Plan and whether the Plan covers or provides benefits to
current or former employees or directors of any ERISA Affiliate (and if so, the
identity of each such ERISA Affiliate). Neither the Company nor any of its
subsidiaries has any formal plan or commitment, whether legally binding or not,
to create any additional plan or modify or change any existing Plan that would
affect any employee or director or former employee or former director of the
Company or any of its subsidiaries.
(b) With respect to each of the Plans, the Company has heretofore
delivered to the Acquiror true and complete copies of each of the following
documents: (i) the Plan and related documents (including all amendments
thereto); (ii) the two most recent annual reports, actuarial reports, and
financial statements, if any; (iii) the most recent Summary Plan Description,
together with each Summary of Material Modifications, required under The
Employee Retirement Income Security Act of 1974, as amended ("ERISA") with
respect to such Plan, and all material employee communications relating to such
Plan; and (iv) the most recent determination letter received from the IRS with
respect to each Plan that is intended to be qualified under the Code, all
authorizations and approvals from the UK Inland Revenue in relation to each
other Plan and all communications to or from the IRS or any other governmental
or regulatory authority relating to each Plan.
(c) No liability under Title IV of ERISA has been incurred by the
Company or any of its subsidiaries or any ERISA Affiliate since the effective
date of ERISA that has not been satisfied in full, and no condition exists that
presents a material risk to the Company or any of its subsidiaries or any ERISA
Affiliate of incurring a liability under such Title other than liability for the
payment of PBGC premiums, which have been or will be paid when due.
A-I-26
<PAGE>
(d) Neither the Company nor any of its subsidiaries nor any ERISA
Affiliate, nor any of the Plans, nor any trust created thereunder, nor, to the
Company's knowledge, any trustee or administrator thereof has engaged in a
transaction in connection with which the Company, or any of its subsidiaries,
any of the Plans, any such trust, or any trustee or administrator thereof,
could, directly or indirectly, be subject to a civil penalty assessed pursuant
to Section 409 or 502(i) of ERISA, a tax imposed pursuant to Section 4975 or
4976 of the Code, or any other liability.
(e) Full payment has been made, or will be made (where applicable)
in accordance with Section 404(a)(6) of the Code, of all amounts that the
Company or any of its subsidiaries or any ERISA Affiliate is required to pay
under Section 412 of the Code or under the terms of the Plans and the applicable
contracts of employment, and all such amounts properly accrued through the
Closing Date, with respect to the current plan year thereof will be paid on or
prior to the Closing Date or will be properly recorded on the Company's
financial statements.
(f) As of the time immediately prior to the consummation of the
Company's sale of Wilcom, Inc. and as of the Closing Date, the then fair market
value of the assets held under each Plan that is subject to Title IV of ERISA
will be sufficient so as to permit a "standard termination" of each such Plan
under Section 4042(b) of ERISA without the need to make any additional
contributions to such Plans. No reportable event under Section 4043 of ERISA has
occurred or will occur with respect to any Plan on or before the Closing Date
other than any reportable event occurring by reason of the transactions
contemplated by this Agreement.
(g) None of the Plans is a "multi-employer pension plan," as such
term is defined in Section 3(37) of ERISA, a "multiple employer welfare
arrangement," as such term is defined in Section 3(40) of ERISA, or a single
employer plan that has two or more contributing sponsors, at least two of whom
are not under common control, within the meaning of Section 4063(a) of ERISA.
(h) Each of the Plans that is intended to be "qualified" within the
meaning of Section 401(a) of the Code is so qualified and a favorable
determination to that effect has been issued by the IRS with respect to each
such Plan. Each of the Plans that is intended to satisfy the requirements of
Section 125 or 501(c)(9) of the Code satisfies such requirements. Each of the
Plans has been operated and administered in all material respects in accordance
with its terms and applicable laws and regulations, including but not limited to
ERISA and the Code.
(i) Except as set forth in Section 5.20(i) of the Disclosure
Schedule, each Plan may be amended or terminated without liability to the
Company or any of its subsidiaries or any ERISA Affiliate. No amounts payable
under the Plans will fail to be deductible for federal income tax purposes under
Section 280G of the Code or for United Kingdom corporation tax purposes. To the
Company's knowledge, each person who performs services for the Company or any of
its subsidiaries has been, and is, properly
A-I-27
<PAGE>
classified by the Company or any of its subsidiaries as an employee or
independent contractor.
(j) There are no claims pending, or, to the knowledge of the
Company, threatened or anticipated (other than routine claims for benefits)
against any Plan, the assets of any Plan or against the Company or any of its
subsidiaries or any ERISA Affiliate with respect to any Plan. There is no
judgment, decree, injunction, rule or order of any court, governmental body,
commission, agency or arbitrator outstanding against or in favor of any Plan or
any fiduciary thereof (other than rules of general applicability). There are no
pending or, to the knowledge of the Company, threatened audits or investigations
by any governmental body, commission or agency involving any Plan.
(k) Except as set forth in Section 5.20(k) of the Disclosure
Schedule, no Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees or directors after retirement or other termination of service (other
than (i) coverage mandated by applicable law; (ii) death benefit or retirement
benefits under any "employee pension plan," as that term is defined in Section
3(2) of ERISA; (iii) deferred compensation benefits accrued as liabilities on
the books of the Company or the ERISA Affiliates; or (iv) benefits, the full
cost of which is borne by the current or former employee or director (or his
beneficiary)).
(l) Except as set forth in Section 5.20(l) of the Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not (i) entitle any current or former employee or director of the Company
or any of its subsidiaries to severance pay, unemployment compensation,
termination or any similar payment; or (ii) accelerate the time of payment or
vesting, or increase the amount, of any compensation due to any such current or
former employee or director; or (iii) renew or extend the term of any agreement
regarding compensation for any such current or former employee or director.
5.21 Environmental Matters.
Except as set forth in Section 5.21 of the Disclosure Schedule:
(a) The Company and its subsidiaries have obtained all material
Environmental Permits and all material licenses and other authorizations and
have made all registrations and given all notifications that are required under
any applicable Environmental Law, except where such failure could not,
individually or in the aggregate, have a Company Material Adverse Effect.
(b) There is no Environmental Claim pending against the Company and
its subsidiaries under an Environmental Law, except for any such Environmental
Claims that could not, individually or in the aggregate, have a Company Material
Adverse Effect.
(c) The Company and its subsidiaries are in compliance with all
material terms and conditions of their Environmental Permits, and are in
compliance with
A-I-28
<PAGE>
all applicable Environmental Laws, except where such failure could not,
individually or in the aggregate, have a Company Material Adverse Effect.
(d) The Company and its subsidiaries did not, in any material
respect, generate, treat, store, transport, discharge, dispose of or release any
Hazardous Materials on or from any property now or previously owned, leased or
used by the Company and its subsidiaries.
(e) For purposes of this Section 5.21:
(i) "Environment" shall mean any surface water, ground water,
or drinking water supply, land surface or subsurface strata, or ambient air and
includes, without limitation, any indoor location;
(ii) "Environmental Claim" means any written notice or written
claim by any person alleging potential liability (including, without limitation,
potential liability for investigator costs, cleanup costs, governmental costs,
or harm, injuries or damages to any person, property or natural resources, and
any fines or penalties) arising out of, based upon, resulting from or relating
to (1) the emission, discharge, disposal or other release or threatened release
in or into the Environment of any Hazardous Materials or (2) circumstances
forming the basis of any violation, or alleged violation, of any applicable
Environmental Law;
(iii) "Environmental Laws" means any national, supranational,
federal, state, and local laws, codes, and regulations as now or previously in
effect relating to pollution, the protection of human health, the protection of
the Environment or the emission, discharge, disposal or other release or
threatened release of Hazardous Materials in or into the Environment;
(iv) "Environmental Permit" shall mean a permit, identification
number, license or other written authorization required under any applicable
Environmental Law; and
(v) "Hazardous Materials" shall mean all pollutants,
contaminants, or chemical, hazardous or toxic materials, substances,
constituents or wastes, including, without limitation, asbestos or
asbestos-containing materials, polychlorinated biphenyl's and petroleum, oil, or
petroleum or oil derivatives or constituents, including, without limitation,
crude oil or any fraction thereof.
5.22 Government Contracts.
(a) Section 5.22 of the Disclosure Schedule constitutes a complete
and accurate record of (i) all of the Company's past and present Government
Contracts that were in force since January 1, 1992, with the exception of such
completed and "closed out" Government Contracts to which the Company was a party
during the period of time the Company had operations in Hauppauge, New York (the
"Hauppauge Contracts") (which Hauppauge Contracts were subsequently assigned to
Codar Technology, Inc. as of January 1, 1996 and which operations were therefore
transferred to Longmont, Colorado); (ii) all
A-I-29
<PAGE>
of the Company's Government Contracts currently in force; (iii) all of the
Company's outstanding quotations, bids and proposals for Government Contracts;
and (iv) all of the Company's Government Contracts under which the Company knows
or has reason to know are currently or are likely to experience substantial
cost, schedule, technical or quality problems that could result in a claim
against the Company (or its successors in interest) by the Government, a prime
contractor or a higher-tier subcontractor. The Company has made available to
Acquiror true and complete copies of all Contracts (other than the Hauppauge
Contracts) listed in Section 5.22 of the Disclosure Schedule. Except as
described in Section 5.22 of the Disclosure Schedule, all of the Company's
Government Contracts were legally awarded, are binding on the parties thereto,
and are in full force and effect. Such Government Contracts (or, where
applicable, the Prime Government Contracts under which such Government Contracts
were awarded) are not currently the subject of bid protest or analogous
proceedings in any agency, administrative or judicial forum, and the Company has
no knowledge that such Government Contracts (or, where applicable, the Prime
Government Contracts under which such Government Contracts were awarded) are
reasonably likely to become the subject of bid protest or analogous proceedings.
(b) The Company has complied with all statutory and regulatory
requirements, including, but not limited to, the False Claims Act ("FCA"), the
Truth in Negotiations Act ("TINA"), the Federal Acquisition Regulation ("FAR"),
the FAR cost principles and the Cost Accounting Standards, where and as
applicable to each of the Company's Government Contracts and each of the
Company's quotations, bids and proposals for Government Contracts.
(c) The Company has complied with all terms, conditions, clauses,
provisions and specifications of the Company's Government Contracts, whether
incorporated expressly, by reference, or by operation of law.
(d) To the Company's knowledge, after due inquiry, all facts set
forth in or acknowledged by any representations, certifications or disclosure
schedules made or submitted by or on behalf of the Company in connection with
each of the Company's Government Contracts and each of the Company's quotations,
bids and proposals for Government Contracts were current, accurate and complete
as of the date of submission.
(e) The Company has complied with all applicable representations,
certifications and disclosure requirements under each of the Company's
Government Contracts and each of the Company's quotations, bids and proposals
for Government Contracts.
(f) The Company has developed and implemented a government contracts
compliance program that includes corporate policies and procedures to ensure
compliance with applicable government procurement statutes, regulations and
contract requirements. The Company has delivered to Acquiror a true and complete
copy of such compliance program.
(g) With respect to the Company's Government Contracts, neither the
Government nor any prime contractor or higher-tier subcontractor under a
Government
A-I-30
<PAGE>
Contract nor any other person has notified the Company, either orally or in
writing, of any actual or alleged violation or breach of any statute,
regulation, representation, certification or contract term, condition, clause,
provision or specification.
(h) To the Company's knowledge, after due inquiry, no facts exist
which could give rise to a claim for price adjustment under the TINA or to any
other request for a material reduction in the price of any of the Company's
Government Contracts.
(i) Except as described in Section 5.22 of the Disclosure Schedule,
the Company is not aware of and has received no show cause, cure, deficiency,
default or similar notice relating to its outstanding Government Contracts, and
none of the Company's Government Contracts has been terminated for default.
Except as described in Section 5.22 of the Disclosure Schedule, the Company has
received no notice of an intent to terminate any of the Company's contracts for
convenience or of any consideration of such termination.
(j) Except as described in Section 5.22 of the Disclosure Schedule,
there are no outstanding disputes or claims relating to the Company's Government
Contracts and involving either the Government, any prime contractor, any
higher-tier subcontractor or any third party, and the Company neither knows nor
has reason to know of any facts or allegations that could give rise to such a
dispute or claim in the future.
(k) Except as described in Section 5.22 of the Disclosure Schedule,
there are no outstanding disputes or claims relating to the Company's Government
Contracts which, if resolved unfavorably to the Company, would materially
increase the Company's cost to complete performance of such Government Contract
above the amounts set forth in the Estimates to Complete prepared by the Company
and made available to Acquiror for each Government Contract. In addition, there
are no known or reasonably foreseeable expenditures which would increase the
cost to complete performance of the Company's Government Contracts above the
amounts set forth in the Estimates to Complete.
(l) The Company has not been and is not now blacklisted, suspended
or debarred, or proposed for suspension or debarment, from participation in the
award of Government Contracts. No facts exist which could give rise to such
suspension or debarment.
(m) No negative determination of responsibility has ever been issued
against the Company with respect to any quotation, bid or proposal for a
Government Contract.
(n) Except as described in Section 5.22 of the Disclosure Schedule,
the Company has not undergone and is not undergoing any audit, review, survey,
inspection, investigation or examination of records relating to the Company's
Government Contracts, and neither knows nor has reason to know of any basis for
any such audit, review, survey, inspection, investigation or examination of
records. No audit, review, survey, inspection,
A-I-31
<PAGE>
investigation or examination of records described in Section 5.22 of the
Disclosure Schedule has revealed any occurrence or practice that could affect
the assets, business or financial statements of the Company.
(o) The Company has not been and is not now under any
administrative, civil or criminal investigation or indictment involving alleged
false statements, false claims or other improprieties relating to the Company's
Government Contracts or quotations, bids and proposals for Government Contracts.
The Company neither knows nor has reason to know of any basis for any such
investigation or indictment.
(p) The Company has not been and is not now a party to any
administrative or civil litigation involving alleged false statements, false
claims or other improprieties relating to the Company's Government Contracts or
quotations, bids and proposals for Government Contracts. The Company neither
knows nor has reason to know of any basis for any such proceeding.
(q) The Company has made no payment, directly or indirectly, to any
person in violation of applicable Government procurement laws, including (but
not limited to) laws relating to bribes, gratuities, kickbacks, lobbying
expenditures, political contributions and contingent fee payments.
(r) Except as described in Section 5.22 of the Disclosure Schedule,
neither the Government nor any prime contractor or higher-tier subcontractor
under a Government Contract has withheld or set off, or attempted to withhold or
set off, monies due to the Company under any of the Company's Government
Contracts.
(s) The Company's cost accounting, purchasing, inventory and quality
control systems are in compliance with all applicable government procurement
statutes and regulations and with the requirements of all of the Company's
Government Contracts.
(t) Except as described in Section 5.22 of the Disclosure Schedule,
neither the Government nor any prime contractor or higher-tier subcontractor
under a Government Contract has questioned or disallowed any costs claimed by
the Company under the Company's outstanding Government Contracts. The Company
neither knows nor has reason to know of any basis for disallowing any such
costs.
(u) Except as described in Section 5.22 of the Disclosure Schedule,
the Company has made no assignments of the Company's Government Contracts or of
any interests in the Company's Government Contracts, and the Company has entered
into no financing arrangements with respect to the performance of any
outstanding Government Contract.
(v) The Company lists in Section 5.22 of the Disclosure Schedule all
government property that has been provided to the Company pursuant to the
Company's Government Contracts.
A-I-32
<PAGE>
(w) The Company has complied with all applicable requirements under
each of the Company's Government Contracts relating to the protection of
classified information, except as described in Section 5.22 of the Disclosure
Schedule.
(x) For purposes of this Section 5.22 and Section 5.10 above:
(i) The term "Government" includes any agency, department,
ministry, division, subdivision or office of a Government, including the
officials, employees and agents thereof.
(ii) The term "Company" includes the Company's subsidiaries,
affiliates, directors, officers, employees and agents.
(iii) The term "Contract" includes any prime contract,
subcontract, basic ordering agreement, letter contract, purchase order or
delivery order of any kind, including all amendments, modifications and options
thereunder or relating thereto.
(iv) The term "Government Contract" means any prime Contract
with a Government and any subcontract with a prime contractor or higher-tier
subcontractor under a prime contract with a Government.
(v) The term "Prime Government Contract" means any prime
Contract with a Government.
5.23 Disclosure.
All of the facts and circumstances not required to be disclosed as
exceptions under or to any of the foregoing representations and warranties made
by the Company in this Article V by reason of any minimum disclosure requirement
in any such representation and warranty would not, in the aggregate, have a
Company Material Adverse Effect. The information contained in the Disclosure
Schedule (and any updated Disclosure Schedule) as it relates to the
representations and warranties made by the Company in this Article V does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the information
or statements contained or referenced therein not misleading.
5.24 Finders or Brokers.
Except as set forth in Section 5.24 of the Disclosure Schedule, none of the
Company, the Retained Subsidiaries of the Company, the Board of Directors or any
member of the Board of Directors has employed any investment banker, broker,
finder or intermediary in connection with the transactions contemplated hereby
who might be entitled to a fee or any commission in connection with the Merger,
and Section 5.24 of the Disclosure Schedule sets forth the maximum consideration
(present and future) agreed to be paid to each such party.
A-I-33
<PAGE>
5.25 State Anti-takeover Statutes.
The Company has granted all approvals and taken all other steps necessary
to exempt the Merger and the other transactions contemplated hereby from the
requirements and provisions of Section 912 of the NYBCL and any other applicable
national, supranational or state anti-takeover statute or regulation such that
none of the provisions of such Section 912 or any other "business combination,"
"moratorium," "control share" or other state anti-takeover statute or regulation
(i) prohibits or restricts the Company's ability to perform its obligations
under this Agreement or its ability to consummate the Merger and the other
transactions contemplated hereby; (ii) would have the effect of invalidating or
voiding this Agreement any provision hereof; or (iii) would subject Acquiror to
any impediment or condition in connection with the exercise of any of its rights
under this Agreement.
5.26 Opinion of Financial Advisor.
The Company has received the opinion of Commonwealth Associates
("Commonwealth") dated July 7, 1998, to the effect that, as of such date, the
Exchange Ratio is fair from a financial point of view to the holders of shares
of Company Common Stock.
5.27 Insurance.
Section 5.27 of the Disclosure Schedule contains a list of all insurance
policies maintained by the Company for the benefit of or in connection with the
assets of the Company and its Retained Subsidiaries. The Company has not
received any notice of cancellation, termination or reduction of coverage, nor
has the Company received any notice of intention to cancel, terminate or reduce
coverage, relating thereto. The Company has given Acquiror access to complete
and correct copies of all such policies together with all riders and amendments
thereto. Such policies are (i) in such amounts as are appropriate and
reasonable, in the judgment of the Company's Board of Directors, taking into
account the Company's and its Retained Subsidiaries' properties, business and
operations; and (ii) are in full force and effect, with all premiums due thereon
having been paid.
5.28 Employment and Labor Contracts.
Neither the Company nor any of its Retained Subsidiaries is a party to any
employment contract or other similar contract or any other contract for the
provision of management or consulting services to the Company or any of its
Retained Subsidiaries with any past or present officer, director, employee or,
to the best of the Company's knowledge, any entity affiliated with any past or
present officer, director or employee, other than those set forth in Section
5.28 of the Disclosure Schedule and other than the agreements executed by
employees generally, the forms of which have been delivered to Acquiror.
A-I-34
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Each of Acquiror and Merger Sub jointly and severally represents and
warrants to the Company that:
6.1 Organization and Qualification.
Each of Acquiror, Merger Sub and Acquiror's other subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of Acquiror, Merger Sub and Acquiror's
other subsidiaries is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or leased or the nature of its activities makes such
qualification necessary, except for failures to be so qualified or in good
standing which would not, individually or in the aggregate, have a material
adverse effect on the general affairs, management, business, operations,
condition (financial or otherwise) or prospects of Acquiror and its subsidiaries
taken as a whole (an "Acquiror Material Adverse Effect"). Except as set forth in
Section 6.1 of the Disclosure Schedule previously delivered by Acquiror to the
Company (the "DRS Disclosure Schedule"), neither Acquiror nor Merger Sub is in
violation of any of the provisions of its Certificate of Incorporation (or other
applicable charter document) or By-Laws (or other applicable organizational
document). Acquiror has delivered to the Company accurate and complete copies of
the Certificate of Incorporation (or other applicable charter document) and
By-Laws (or other applicable organizational document), each as amended to date,
of each of Acquiror and Merger Sub. Neither Acquiror nor Merger Sub is in
violation of any of the provisions of its Certificate of Incorporation (or other
applicable charter document) or By-Laws (or other applicable organizational
document).
6.2 Subsidiaries.
The only direct or indirect subsidiaries of Acquiror as of the date hereof
are those listed in Section 6.2 of the DRS Disclosure Schedule. As of the date
hereof, Acquiror is directly or indirectly the record (except for directors'
qualifying shares) and beneficial owner (including all qualifying shares owned
by directors of such subsidiaries as reflected in Section 6.2 of the DRS
Disclosure Schedule) of all of the outstanding shares of capital stock of each
of its subsidiaries, there are no proxies with respect to such shares, and no
equity securities of any of such subsidiaries are or may be required to be
issued by reason of any options, warrants, scrip, rights to subscribe for, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock of any such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any such subsidiary is bound to issue additional shares of
its capital stock or securities convertible
A-I-35
<PAGE>
into or exchangeable for such shares. All of the capital stock of Merger Sub
will at all times be owned directly by Acquiror, free and clear of any liens,
claims or encumbrances.
6.3 Capitalization.
The authorized capital stock of Acquiror consists of 20,000,000 shares of
Acquiror Common Stock, par value $.01 per share, and 2,000,000 shares of
undesignated preferred stock, par value $10.00 per share. As of July 27, 1998,
6,208,976 shares of Common Stock are issued and outstanding and no shares of
preferred stock are issued and outstanding. All of such issued and outstanding
shares are validly issued, fully paid and non-assessable and free of preemptive
rights. As of July 27, 1998, Acquiror holds 402,461 shares of Acquiror Common
Stock in treasury. Except as set forth above and except as disclosed in Section
6.3 of the DRS Disclosure Schedule, there are not as of the date hereof any
shares of capital stock of Acquiror issued or outstanding or any subscriptions,
options, warrants, calls, claims, rights (including without limitation any stock
appreciation or similar rights), convertible securities or other agreements or
commitments of any character obligating Acquiror to issue, transfer or sell any
of its securities. Except as disclosed in Section 6.3 of the DRS Disclosure
Schedule, Acquiror is not a party to any voting agreement, voting trust, proxy
or similar agreement, arrangement or understanding relating to its capital stock
or any agreement, arrangement or understanding relating to or providing for
registration rights with respect to its capital stock.
6.4 Authority Relative to This Agreement.
Each of Acquiror and Merger Sub has full corporate power and authority to
execute and deliver this Agreement and to consummate the Merger and other
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the Merger and other transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of Acquiror and
Merger Sub and no other corporate proceedings on the part of Acquiror and Merger
Sub are necessary to authorize this Agreement or to consummate the Merger or
other transactions contemplated hereby (other than the approval of Acquiror's
stockholders of the Merger as required by Section 712(b) of the AMEX Company
Guide. This Agreement has been duly and validly executed and delivered by
Acquiror and, assuming the due authorization, execution and delivery hereof by
the Company, constitutes a valid and binding agreement of Acquiror, enforceable
against Acquiror in accordance with its terms.
6.5 No Violations, etc.
(a) Other than the filings, permits, authorizations, consents and
approvals or waivers thereof that are identified in Section 6.5(b) and that have
been duly made or obtained as contemplated herein, neither the execution and
delivery of this Agreement by Acquiror and Merger Sub nor the consummation of
the Merger or other transactions contemplated hereby nor compliance by Acquiror
and Merger Sub with any of the provisions hereof will (i) violate, conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or
A-I-36
<PAGE>
both, would constitute a default) under, or result in the termination or
suspension of, or accelerate the performance required by, or result in a right
of termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Acquiror or Merger Sub under, any of the terms, conditions or provisions of (x)
their respective charters or by-laws, (y) any note, bond, mortgage, indenture or
deed of trust or (z) any license, lease, contract, agreement or other instrument
or obligation, to which Acquiror or Merger Sub is a party or to which they or
any of their respective properties or assets may be subject; or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to Acquiror or Merger Sub or any of their respective
properties or assets, except, in the case of clauses (i) and (ii) above, for
such violations, conflicts, breaches, defaults, terminations, suspensions,
accelerations, rights of termination or acceleration or creations of liens,
security interests, charges or encumbrances which would not, individually or in
the aggregate, either have an Acquiror Material Adverse Effect or materially
impair Acquiror's or Merger Sub's ability to consummate the Merger or other
transactions contemplated hereby.
(b) No filing or registration with, no notification to and no permit,
authorization, consent or approval of any governmental entity (including,
without limitation, any federal, state or local regulatory authority or agency)
is required of Acquiror or Merger Sub in connection with the execution and
delivery of this Agreement or the consummation by Merger Sub of the Merger or
other transactions contemplated hereby, except (i) as required by (A) applicable
requirements, if any, of the HSR Act, (B) the Securities Act and the Exchange
Act, (C) state securities or "blue sky" laws and (D) the AMEX; (ii) the filing
and recordation of appropriate merger documents as required by the NYBCL; (iii)
the approval of Acquiror's stockholders as required by the AMEX rules; and (iv)
such other filings, registrations, notifications, permits, authorizations,
consents or approvals the failure of which to be obtained, made or given would
not, individually or in the aggregate, either have an Acquiror Material Adverse
Effect or materially impair Acquiror's or Merger Sub's ability to consummate the
Merger or other transactions contemplated hereby.
(c) Acquiror and Merger Sub are not in violation of or default under,
except as set forth in Section 6.5 of the DRS Disclosure Schedule, (i) any note,
bond, mortgage, indenture or deed of trust; or (ii) any license, lease,
contract, agreement or other instrument or obligation to which Acquiror or
Merger Sub is a party or to which they or any of their respective properties or
assets may be subject, except, in the case of clauses (i) and (ii) above, for
such violations or defaults which would not, individually or in the aggregate,
either have an Acquiror Material Adverse Effect or materially impair Acquiror's
or Merger Sub's ability to consummate the Merger or other transactions
contemplated hereby.
6.6 Commission Filings; Financial Statements.
Acquiror has filed all required forms, reports, schedules, statements and
other documents required to be filed by it since March 31, 1995 to the date
hereof (as
A-I-37
<PAGE>
supplemented and amended since the time of filing, collectively, the "Acquiror
SEC Reports") with the SEC, all of which complied when filed in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act. All of the historical financial statements contained in the Acquiror SEC
Reports were prepared from the books and records of Acquiror and its
subsidiaries. The audited consolidated financial statements and unaudited
consolidated interim financial statements of Acquiror and its subsidiaries
included or incorporated by reference in such Acquiror SEC Reports were prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and present fairly, in all material respects, the financial
position and results of operations and cash flows of the Acquiror and its
subsidiaries on a consolidated basis at the respective dates and for the
respective periods indicated (subject, in the case of all such financial
statements that are interim financial statements, to normal year-end audit
adjustments, none of which will be material). None of the Acquiror SEC Reports
contained at the time filed any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
6.7 Absence of Changes or Events.
Except as set forth in Acquiror's Form 10-K for the fiscal year ended March
31, 1998, as filed with the SEC, or except as set forth in Section 6.7 of the
DRS Disclosure Schedule, since March 31, 1998 to the date hereof, Acquiror and
its subsidiaries have not incurred any material liability, except in the
ordinary course of their businesses consistent with their past practices, and
there has not been any change in the business, financial condition or results of
operations of Acquiror and its subsidiaries taken as a whole which has had, or
could have, an Acquiror Material Adverse Effect, and Acquiror and its
subsidiaries taken as a whole have conducted their respective business in the
ordinary course consistent with their past practices.
6.8 Litigation.
Except as set forth in Section 6.8 of the DRS Disclosure Schedule, there is
no (i) claim, action, suit or proceeding pending or, to the best knowledge of
Acquiror, threatened against or relating to Acquiror before any court or
governmental or regulatory authority or body or arbitration tribunal; or (ii)
outstanding judgment, order, writ, injunction or decree, or application, request
or motion therefor, of any court, governmental agency or arbitration tribunal in
a proceeding to which Acquiror is a party, except, in the case of clauses (i)
and (ii) above, such as would not, individually or in the aggregate, materially
impair Acquiror's or Merger Sub's ability to consummate the Merger.
6.9 Joint Proxy Statement.
None of the information supplied or to be supplied by or on behalf of
Acquiror and Merger Sub for inclusion or incorporation by reference in the Form
S-4 will, at the time the Form S-4 becomes effective under the Securities Act,
contain any untrue
A-I-38
<PAGE>
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by or on behalf of Acquiror and Merger
Sub for inclusion or incorporation by reference in the Joint Proxy Statement
will, at the dates mailed to stockholders and at the times of the Company
Shareholder Meeting and the Acquiror Stockholder Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Form S-4 and
the Joint Proxy Statement as it relates to Acquiror, Merger Sub and Acquiror's
other subsidiaries will comply as to form in all material respects with the
provisions of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made by
Acquiror with respect to information relating to or supplied by the Company.
6.10 Board Recommendation.
The Board of Directors of Acquiror has approved and adopted this Agreement,
the Merger and the other transactions contemplated hereby (including, without
limitation, the issuance of Acquiror Common Stock as a result of the Merger),
has determined that the transactions contemplated by this Agreement are in the
best interests of Acquiror and its stockholders and has recommended that the
stockholders of Acquiror vote in favor thereof (including in favor of the
issuance of Acquiror Common Stock as a result of the Merger as required by the
AMEX).
6.11 Disclosure.
All of the facts and circumstances not required to be disclosed as
exceptions under or to any of the foregoing representations and warranties made
by Acquiror in this Article VI by reason of any minimum disclosure requirement
in any such representation and warranty would not, in the aggregate, have an
Acquiror Material Adverse Effect.
6.12 Finders or Brokers.
Except as set forth in Section 6.12 of the DRS Disclosure Schedule, none of
Acquiror, the subsidiaries of Acquiror, the Board of Directors of Acquiror or
any member of the Board of Directors of Acquiror has employed any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated hereby who might be entitled to a fee or any commission in
connection with of the Merger, and Section 6.12 of the DRS Disclosure Schedule
sets forth the maximum consideration (present and future) agreed to be paid to
each such party.
6.13 Opinion of Financial Advisor.
Acquiror has received the opinion (the "Fairness Opinion") of McFarland
Dewey & Co., LLC, dated July 23, 1998, to the effect that as of such date, the
Exchange Ratio is fair from a financial point of view to Acquiror.
A-I-39
<PAGE>
ARTICLE VII
CONDUCT OF BUSINESS OF ACQUIROR AND THE COMPANY PENDING THE MERGER
7.1 Conduct of Business of the Company Pending the Merger.
Except as contemplated by this Agreement or as expressly agreed to in
writing by Acquiror, during the period from the date of this Agreement to the
Effective Time, each of the Company and its subsidiaries will conduct their
respective operations according to its ordinary course of business consistent
with past practice, and will use all commercially reasonable efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would materially adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement, prior to the Effective Time, the Company will not
nor will it permit any of its subsidiaries to, without the prior written consent
of Acquiror, which consent shall not be unreasonably withheld:
(a) amend its certificate of incorporation, by-laws or other
organizational documents;
(b) authorize for issuance, issue, sell, deliver, grant any options
for or otherwise agree or commit to issue, sell or deliver any shares of any
class of its capital stock or any securities convertible into shares of any
class of its capital stock, except pursuant to and in accordance with the terms
of the currently outstanding Convertible Notes, Warrants and Options;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock or
purchase, redeem or otherwise acquire any shares of its own capital stock or of
any of its subsidiaries, except as otherwise expressly provided in this
Agreement;
(d) (i) create, incur, assume, maintain or permit to exist any debt
for borrowed money other than under existing lines of credit in the ordinary
course of business consistent with past practice; (ii) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person except for
its wholly owned subsidiaries in the ordinary course of business and consistent
with past practices; or (iii) make any loans, advances or capital contributions
to, or investments in, any other person in an aggregate amount not to exceed
$50,000;
(e) (i) increase in any manner the compensation of (x) any employee
except in the ordinary course of business consistent with past practice or (y)
any of its directors or officers; (ii) pay or agree to pay any pension,
retirement allowance, welfare
A-I-40
<PAGE>
benefit or other employee benefit not required, or enter into or agree to enter
into any agreement or arrangement with such director or officer or employee,
whether past or present, relating to any such pension, retirement allowance,
welfare benefit or other employee benefit, except as required under currently
existing agreements, plans or arrangements; (iii) grant any severance or
termination pay to, or enter into any employment or severance agreement with,
(x) any employee except in the ordinary course of business consistent with past
practice or (y) any of its directors or officers except for honorarium payments
to outside directors of the Company in an amount not to exceed $10,000 in the
aggregate for each director; or (iv) except as may be required to comply with
applicable law, become obligated (other than pursuant to any new or renewed
collective bargaining agreement) under any new pension plan, welfare plan,
multi-employer plan, employee benefit plan, benefit arrangement, or similar plan
or arrangement, which was not in existence on the date hereof, including any
bonus, incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other benefit
plan, agreement or arrangement, or employment or consulting agreement with or
for the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof; provided, however, that this clause
(iv) shall not prohibit the Company from renewing any such plan, agreement or
arrangement already in existence on terms no more favorable to the parties to
such plan, agreement or arrangement;
(f) except as otherwise expressly contemplated by this Agreement,
enter into any other agreements, commitments or contracts, except agreements,
commitments or contracts for the purchase, sale or lease of goods or services
involving payments or receipts by the Company or its subsidiaries in excess of
$50,000, other than (i) customer agreements; (ii) leases for rental space in an
amount not to exceed $50,000 for any lease; or (iii) developer agreements in an
amount not to exceed $50,000 for any agreement;
(g) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in principle or an
agreement with respect to, any plan of liquidation or dissolution, any
acquisition of a material amount of assets or securities, any sale, transfer,
lease, license, pledge, mortgage, or other disposition or encumbrance of a
material amount of assets or securities or any material change in its
capitalization, or any entry into a material contract or any amendment or
modification of any material contract or any release or relinquishment of any
material contract rights;
(h) authorize or commit to make capital expenditures in excess of
$50,000 for any one order in the Company's service business (other than
purchases by the Company's systems business in the ordinary course of business
consistent with past practice);
(i) make any change in the accounting methods, accounting practices or
tax policies or procedures followed by the Company;
(j) settle any action, suit, claim, investigation or proceeding
(legal, administrative or arbitrative) in excess of $50,000 without the consent
of the Acquiror;
A-I-41
<PAGE>
(k) make any election under the Code which would have a Company
Material Adverse Effect;
(l) take or cause to be taken, whether before or after the Effective
Time, any action that would disqualify the Merger as a "reorganization" within
the meaning of Section 368(a) of the Code; or
(m) agree to do any of the foregoing.
7.2 Conduct of Business of Acquiror Pending the Merger.
Except as contemplated by this Agreement or Section 6.7 of the DRS
Disclosure Schedule or as expressly agreed to in writing by the Company, during
the period from the date of this Agreement to the Effective Time, Acquiror will
use all commercially reasonable efforts to keep substantially intact its
business, properties and business relationships and will take no action which
would materially adversely affect the ability of the parties to consummate the
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, and except as otherwise expressly provided in this Agreement,
prior to the Effective Time, Acquiror will not, without the prior written
consent of the Company, which consent shall not be unreasonably withheld:
(a) amend its certificate of incorporation or by-laws;
(b) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock or
purchase, redeem or otherwise acquire any shares of its own capital stock,
except as otherwise expressly provided in this Agreement;
(c) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in principle or an
agreement with respect to, any plan of liquidation or dissolution;
(d) take or cause to be taken, whether before or after the Effective
Time, any action that would disqualify the Merger as a "reorganization" within
the meaning of Section 368(a) of the Code; or
(e) agree to do any of the foregoing.
A-I-42
<PAGE>
ARTICLE VIII
COVENANTS AND AGREEMENTS
8.1 Preparation of the Form S-4 and the Joint Proxy Statement;
Stockholders Meetings.
(a) As soon as practicable following the date of this Agreement, the
Company and Acquiror shall prepare and file with the SEC the Joint Proxy
Statement and Acquiror thereafter shall prepare and file with the SEC the Form
S-4, in which the Joint Proxy Statement will be included as a prospectus. Each
of the Company and Acquiror shall use their respective best efforts to have the
Form S-4 declared effective under the Securities Act as promptly as practicable
after such filing. The Company will use all best efforts to cause the Joint
Proxy Statement to be mailed to the Company's shareholders, and Acquiror will
use all best efforts to cause the Joint Proxy Statement to be mailed to
Acquiror's stockholders, in each case as promptly as practicable after the Form
S-4 is declared effective under the Securities Act. Acquiror shall also take any
action required to be taken under any applicable state securities laws in
connection with the issuance of Acquiror Common Stock and Acquiror Warrants in
the Merger. Acquiror will make no filing of, or amendment or supplement to, the
Form S-4 or the Joint Proxy Statement without providing the Company and its
advisors the opportunity to review and comment thereon; provided, that such
review be completed and such comments provided to Acquiror within a reasonable
period of time; provided, further, that such comments shall be subject to the
review of Acquiror and its advisors. Acquiror will advise the Company, promptly
after it receives notice thereof, of the time when the Form S-4 has become
effective or any supplement or amendment has been filed, the issuance of any
stop order, the suspension of the qualification of the Acquiror Common Stock or
Acquiror Warrants issuable in connection with the Merger for offering or sale in
any jurisdiction, or any request by the SEC for amendment of the Joint Proxy
Statement or the Form S-4 or comments thereon and responses thereto or requests
by the SEC for additional information. If at any time prior to the Effective
Time any information relating to the Company or Acquiror, or any of their
respective affiliates, officers or directors, should be discovered by the
Company or Acquiror which should be set forth in an amendment or supplement to
any of the Form S-4 or the Joint Proxy Statement, so that any of such documents
would not include any misstatement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the stockholders of the Company and Acquiror.
(b) The Company shall, as soon as practicable following the date of
this Agreement take all action necessary in accordance with the NYBCL and its
Certificate of Incorporation and By-Laws to convene and hold a meeting of its
shareholders (together with any adjournment or postponement thereof, the
"Company Shareholder Meeting") for the purpose of obtaining the approval (the
"Company Shareholder Approval") of two-thirds of the shareholders of the Company
of this Agreement and shall, through its Board of Directors, recommend to its
shareholders the approval and adoption of this Agreement, the
A-I-43
<PAGE>
Merger and the other transactions contemplated hereby, and shall use all
commercially reasonable efforts to solicit from its shareholders proxies in
favor of approval and adoption of this Agreement; provided, however, that such
recommendation is subject to any action required by the fiduciary duties of the
Board of Directors.
(c) Acquiror shall, as soon as practicable following the date of this
Agreement, take all action necessary in accordance with the General Corporation
Law of Delaware and its Certificate of Incorporation and By-Laws to convene and
hold a meeting of its stockholders (together with any adjournment or
postponement thereof, the "Acquiror Stockholder Meeting") for the purpose of
obtaining the approval (the "Acquiror Stockholder Approval") of a majority of
votes cast by the stockholders of Acquiror of, amongst other things, the Merger
and the issuance of the Acquiror Common Stock in connection with the Merger (the
"Issuance"), and shall, through its Board of Directors, recommend to its
stockholders the approval and adoption of this Agreement, the Merger, the
Issuance and the other transactions contemplated hereby, and shall use all
commercially reasonable efforts to solicit from its stockholders proxies in
favor of approval and adoption of this Agreement.
(d) Acquiror and the Company will use best efforts to hold the
Company Shareholder Meeting and the Acquiror Stockholder Meeting on the same
date and as soon as practicable after the date hereof.
8.2 Letters of the Company's Accountants.
The Company shall use its best efforts to cause to be delivered to Acquiror
two letters from the Company's independent accountants, one dated the date of
effectiveness of Form S-4 and one dated the Closing Date, each addressed to
Acquiror, in form and substance reasonably satisfactory to Acquiror and
customary in scope and substance for comfort letters delivered by independent
public accountants in connection with registration statements similar to the
Form S-4.
8.3 Letters of Acquiror's Accountants.
Acquiror shall use its best efforts to cause to be delivered to the Company
two letters from Acquiror's independent accountants, one dated the date of
effectiveness of Form S-4 and one dated the Closing Date, each addressed to the
Company, in form and substance reasonably satisfactory to the Company and
customary in scope and substance for comfort letters delivered by independent
public accountants in connection with registration statements similar to the
Form S-4.
8.4 Additional Agreements; Cooperation.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use its best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, and to cooperate with each other in connection
with the foregoing, including using its best efforts (i) to obtain all necessary
waivers, consents and approvals from other parties to loan
A-I-44
<PAGE>
agreements, material leases and other material contracts that are specified on
Schedule 8.4 to the Disclosure Schedule or the DRS Disclosure Schedule; (ii) to
obtain all necessary consents, approvals and authorizations as are required to
be obtained under any federal, state or foreign law or regulations; (iii) to
defend all lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby; (iv) to lift or rescind
any injunction or restraining order or other order adversely affecting the
ability of the parties to consummate the transactions contemplated hereby; (v)
to effect all necessary registrations and filings, including, but not limited
to, filings under the HSR Act and submissions of information requested by
governmental authorities; (vi) provide all necessary information for the Joint
Proxy Statement and the Form S-4; and (vii) to fulfill all conditions to this
Agreement.
(b) The Company shall use its best efforts to facilitate, and assist
and cooperate with Acquiror in, Acquiror's conduct of on-site visits by
representatives of Acquiror to representatives of customers of the Company and
its subsidiaries.
(c) Each of the parties hereto agrees to furnish to the other party
hereto such necessary information and reasonable assistance as such other party
may request in connection with its preparation of necessary filings or
submissions to any regulatory or governmental agency or authority, including,
without limitation, any filing necessary under the provisions of the HSR Act or
any other applicable Federal or state statute. At any time upon the written
request of Acquiror, the Company shall advise Acquiror of the number of shares
of Company Common Stock outstanding on such date.
8.5 Publicity.
The Company, Acquiror and Merger Sub agree to consult with each other in
issuing any press release and with respect to the general content of other
public statements with respect to the transactions contemplated hereby, and
shall not issue any such press release prior to such consultation, except as may
be required by law.
8.6 No Solicitation.
(a) The Company shall not, nor shall it permit any of its Retained
Subsidiaries to, nor shall it authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any of its subsidiaries to, directly
or indirectly, (i) solicit any Company Takeover Proposal (as hereinafter
defined); or (ii) participate in any discussions or negotiations regarding any
Company Takeover Proposal; provided, however, that if, at any time prior to the
Company Shareholders Meeting, the Board of Directors of the Company determines
in good faith, after consultation with outside counsel, that it is necessary to
do so in order to comply with its fiduciary duties to the Company's shareholders
under applicable law, the Company may, in response to a Company Takeover
Proposal that was not solicited, and subject to compliance with Section 8.6(c),
(x) furnish information with respect to the Company to any person pursuant to a
customary confidentiality agreement (as determined by the Company after
consultation with its outside counsel) and (y) participate in negotiations
regarding such Company Takeover Proposal; and provided,
A-I-45
<PAGE>
further, that if the Company responds to a Company Takeover Proposal, the
Company shall within two (2) business days of such response reimburse Acquiror
for all of Acquiror's out-of-pocket expenses (including without limitation fees
and expenses of outside professionals) (in any case all such expenses not to
exceed in the aggregate $300,000) by wire transfer of immediately available
funds to an account specified by Acquiror. For purposes of this Agreement,
"Company Takeover Proposal" means any inquiry, proposal or offer from any person
relating to any direct or indirect acquisition or purchase of 15% or more of the
assets of the Company or its Retained Subsidiaries or 15% or more of any class
of equity securities of the Company or any of its Retained Subsidiaries, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 15% or more of any class of equity securities of the Company
or any of its Retained Subsidiaries, any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any of its Retained Subsidiaries, other than the
transactions contemplated by this Agreement, or any other transaction the
consummation of which could impede, interfere with, prevent or materially delay
the Merger or which could dilute materially the benefits to Acquiror of the
transactions contemplated by this Agreement.
(b) Except as set forth in this Section 8.6, neither the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to Acquiror, the
approval or recommendation by such Board of Directors or such committee of the
Merger or this Agreement; (ii) approve or recommend, or propose publicly to
approve or recommend, any Company Takeover Proposal; or (iii) cause the Company
to enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement (each, a "Company Acquisition Agreement")
related to any Company Takeover Proposal. Notwithstanding the foregoing, in the
event that prior to the Company Shareholders Meeting the Board of Directors of
the Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company's shareholders under applicable law, the Board of Directors of the
Company may (subject to this and the following sentences) (x) withdraw or modify
its approval or recommendation of the Merger and this Agreement or (y) approve
or recommend a Superior Company Proposal (as defined below) or terminate this
Agreement (and concurrently with or after such termination, if it so chooses,
cause the Company to enter into any Company Acquisition Agreement with respect
to any Superior Company Proposal), but in each of the cases set forth in this
clause (y), no action shall be taken by the Company pursuant to clause (y) until
a time that is after the fifth (5th) business day following Acquiror's receipt
of written notice advising Acquiror that the Board of Directors of the Company
has received a Superior Company Proposal, specifying the material terms and
conditions of such Superior Company Proposal and identifying the person making
such Superior Company Proposal, to the extent such identification of the person
making such proposal does not breach the fiduciary duties of the Board of
Directors as advised by outside legal counsel; and provided, that if the Board
of Directors takes any action pursuant to the foregoing clauses (x) and (y), the
Company shall within two (2) business days of such action reimburse Acquiror for
any of Acquiror's out-of-pocket expenses (including without limitation fees and
expenses of outside professionals) not previously reimbursed (in any case all
such expenses not to exceed in the aggregate $300,000) by wire transfer of
A-I-46
<PAGE>
immediately available funds to an account specified by Acquiror. For purposes of
this Agreement, a "Superior Company Proposal" means any bona fide proposal made
by a third party to acquire, directly or indirectly, for consideration
consisting of cash and/or securities, more than 50% of the combined voting power
of the shares of Company Common Stock then outstanding or all or substantially
all the assets of the Company and otherwise on terms that the Board of Directors
of the Company determines in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation) to be more favorable to
the Company's shareholders than the Merger.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 8.6, the Company shall immediately advise
Acquiror orally and in writing of any request for information or of any Company
Takeover Proposal, the material terms and conditions of such request or Company
Takeover Proposal, and to the extent such disclosure is not a breach of the
fiduciary duties of the Board of Directors as advised by outside legal counsel
or a violation of law or statute, the identity of the person making such request
or Company Takeover Proposal.
(d) Nothing contained in this Section 8.6 shall prohibit the Company
from taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act, or from making any disclosure to
the Company's shareholders if, in the good faith judgment of the Board of
Directors of the Company, after consultation with outside counsel, failure so to
disclose would be inconsistent with its fiduciary duties to the Company's
shareholders under applicable law; provided, however, neither the Company nor
its Board of Directors nor any committee thereof shall, except as permitted by
Section 8.6(b), withdraw or modify, or propose publicly to withdraw or modify,
its position with respect to this Agreement or the Merger or approve or
recommend, or propose publicly to approve or recommend, a Company Takeover
Proposal.
8.7 Access to Information.
(a) From the date of this Agreement until the Effective Time, each of
the Company and Acquiror will give the other party and its authorized
representatives (including counsel, environmental and other consultants,
accountants and auditors) reasonable access during normal business hours to all
facilities, personnel and operations and to all books and records of it and its
subsidiaries, will permit the other party to make such inspections as it may
reasonably require and will cause its officers and those of its subsidiaries to
furnish the other party with such financial and operating data and other
information with respect to its business and properties as such party may from
time to time reasonably request.
(b) Each of the parties hereto will hold and will cause its
consultants and advisors to hold in strict confidence on the terms and
conditions set forth in the Confidentiality Agreement, dated November 28, 1997,
between Acquiror and the Company (the "Confidentiality Agreement") all documents
and information furnished to the other in connection with the transactions
contemplated by this Agreement as if each of the parties hereto and such
consultant or advisor was a party thereto, and this provision shall survive any
termination of this Agreement.
A-1-47
<PAGE>
8.8 Notification of Certain Matters.
The Company or Acquiror, as the case may be, shall promptly notify the
other of (i) its obtaining of actual knowledge as to the matters set forth in
clauses (x) and (y) below; or (ii) the occurrence, or failure to occur, of any
event, which occurrence or failure to occur would be likely to cause (x) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time, or (y) any material failure of the Company or Acquiror, as the
case may be, or of any officer, director, employee or agent thereof, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement; provided, however, that no such
notification shall affect the representations or warranties of the parties or
the conditions to the obligations of the parties hereunder.
8.9 Directors and Officers; Insurance.
(a) At or prior to the Effective Time, the Company shall take all
commercially reasonable efforts to deliver to Acquiror the resignations of such
directors and officers of the Company and its subsidiaries as Acquiror shall
specify, effective at the Effective Time.
(b) Acquiror shall cause the Surviving Corporation to maintain in
effect for not less than three (3) years from the Effective Time the current
polices of directors' and officers' liability insurance maintained by the
Company and its subsidiaries (provided that Acquiror may substitute therefor
policies of at least the same coverage containing terms and conditions which are
no less advantageous to the Indemnified Parties in all material respects so long
as no lapse in coverage occurs as a result of such substitution) with respect to
all matters, including the transactions contemplated hereby, occurring prior to,
and including the Effective Time; provided, that in the event that any Claim is
asserted or made within such three (3) year period, such insurance shall be
continued in respect of any such Claim until final disposition of any and all
such Claims; provided, further, that Acquiror shall not be obligated to make
premium payments (calculated on an annual basis) for such insurance in excess of
100% of the annual premiums paid as of the date hereof by the Company for such
insurance.
8.10 Fees and Expenses.
Except as set forth in Sections 8.6 and 8.7 herein, whether or not the
Merger is consummated, the Company and Acquiror shall bear their respective
expenses incurred in connection with the Merger, including, without limitation,
the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, and all fees and expenses of investment
bankers, finders, brokers, agents, representatives, counsel and accountants,
except that each of Acquiror and the Company shall bear and pay one-half of the
actual costs and expenses (excluding those of investment bankers, finders,
brokers, agents, representatives, counsel and accountants) relating to (i) the
filing, printing and mailing of the Form S-4 and the Joint Proxy Statement
(including SEC filing fees); and
A-I-48
<PAGE>
(ii) the filings of the pre-merger notification and report forms under the HSR
Act (including filing fees).
8.11 Affiliates.
As soon as practicable after the date hereof, the Company shall deliver to
Acquiror a letter identifying all persons who are, at the time this Agreement is
submitted for adoption by the shareholders of the Company, "affiliates" of the
Company for purposes of Rule 145 under the Securities Act. The Company shall use
its reasonable efforts to cause each such person to deliver to Acquiror as of
the Closing Date, a written agreement substantially in the form attached as
Exhibit A hereto.
8.12 AMEX Listing.
Acquiror shall use its reasonable best efforts to cause the Acquiror Common
Stock to be issued in connection with the Merger to be approved for listing on
the AMEX, subject to official notice of issuance, as promptly as practicable
after the date hereof, and in any event prior to the Closing Date.
8.13 Stockholder Litigation.
Each of the Company and Acquiror shall give the other the reasonable
opportunity to participate in the defense of any stockholder litigation against
or in the name of the Company or Acquiror, as applicable, and/or their
respective directors relating to the transactions contemplated by this
Agreement.
8.14 Tax Treatment.
Each of Acquiror and the Company shall use its respective best efforts
(including, without limitation, providing information and providing for itself
and obtaining from its affiliates reasonable and necessary representations and
covenants in connection with the tax opinions required by Article IX) and
Acquiror shall cause the Surviving Corporation to use its best efforts to cause
the Merger to qualify as a reorganization under the provisions of Section 368(a)
of the Code and shall treat the Merger as a tax free reorganization on its tax
returns.
8.15 Fairness Opinion.
Each of the Acquiror and the Company shall use their respective best
efforts to cause to be delivered to each of their respective stockholders a
fairness opinion dated the date of the Joint Proxy Statement.
8.16 Credit Facilities.
The Company shall use its best commercial efforts to assist and cooperate
with Acquiror in Acquiror's termination (including the release of all collateral
relating thereto) of (i) the U.K. Credit Agreement, dated as of April 23, 1997,
between Midland Bank and Lynwood Scientific Developments Ltd. (now Lynwood
Rugged Systems Limited) and
A-I-49
<PAGE>
(ii) the Amended and Restated Credit Agreement, dated as of April 12, 1995, as
amended, by and among the Company, Chemical Bank, a New York banking corporation
("Chemical"), The Bank of New York, a New York banking corporation ("BNY"), each
of the other financial institutions which from time to time becomes a party
thereto, BNY, as Administrative Agent, and Chemical, as Collateral Agent.
8.17 Patent, Trademark and Copyright Filings.
The Company shall use its best commercial efforts to assist and cooperate
with Acquiror in Acquiror's preparation and filing of documents relating to the
Company's Patents, Trademarks and Copyrights with the United States Patent and
Trademark Office and the United States Copyright Office.
8.18 Convertible Notes.
The Company shall use its best commercial efforts to (a) obtain the
consents of holders of at least 90% of the aggregate principal amount of the
Convertible Notes outstanding as of the date hereof to convert all of their
Convertible Notes to Company Common Stock immediately prior to the Effective
Time and successfully complete such conversion immediately prior to the
Effective Time; provided, that in connection with its consent solicitation, the
Company may offer an additional payment with respect to each Convertible Note of
no more than the present value of the interest that would have accrued to
February 15, 1999 on the outstanding principal amount of each Convertible Note
discounted at 9.5% (the "Discount Rate"); (b) obtain the consents of holders of
at least 75% of the aggregate principal amount of the Convertible Notes
outstanding immediately prior to the Effective Time in accordance with the terms
of the Convertible Notes and the terms of the Indenture to (i) eliminate as of
the Effective Time (1) Section 6(f) (1996 EBITDA Adjustment), (2) Section 9
(Covenants) in its entirety, (3) Section 10(a)(iii)-(v) (Events of Default), (4)
Section 11(a)-(c) (Certain Consequences Upon Default-Defaulted Interest,
Additional Director Nominee and Additional Warrants), (5) Section 13(b),
(d)-(h), (j)-(k) (Definitions--Change in Control, Consolidated Net Income,
GAAP, Indebtedness, Lien, 1996 EBITDA, Permitted Investments and Permitted
Lien), (6) Section 16(a)-(b) (Miscellaneous) of the Convertible Notes, (7)
Article 4 (Covenants) in its entirety, other than Section 4.1 (Payment of
Securities) and Section 4.13 (Stay, Extension and Usury Laws), (8) Section
6.1(iii)-(v) (Events of Default) and (9) Section 8.1(2) (Termination of
Company's Obligations) of the Indenture, and (ii) amend Section 8.1 (Termination
of Company's Obligations) of the Indenture to change the date of "February 23,
1999" therein to "the earlier of September 30, 1998 or the effective date of any
merger of the Company approved by its Board of Directors;" and (c) obtain the
consents of at least a majority of the holders of the Convertible Notes to
permit the removal of the Convertible Notes from the registration requirements
of the United States securities laws and the scope of the Trust Indenture Act of
1939, as amended.
A-I-50
<PAGE>
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approvals. The Company Shareholder Approval and the
Acquiror Stockholder Approval shall have been obtained.
(b) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or shall
have expired.
(c) No Injunctions or Restraints. No judgment, order, decree,
statute, law, ordinance, rule or regulation entered, enacted, promulgated,
enforced or issued by any court or other governmental entity of competent
jurisdiction or other legal restraint or prohibition (collectively,
"Restraints") shall be in effect preventing the consummation of the Merger.
(d) Governmental Action. No action or proceeding shall be instituted
by any governmental authority seeking to prevent consummation of the Merger or
seeking material damages in connection with the transactions contemplated hereby
which continues to be outstanding.
(e) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order and no stop order or similar restraining order shall be
threatened or entered by the SEC or any state securities administration
preventing the Merger.
(f) AMEX Listing. The shares of Acquiror Common Stock issuable to the
Company's shareholders as contemplated by this Agreement shall have been
approved for listing on the AMEX, subject to official notice of issuance.
(g) Convertible Note Consents. The Company shall have obtained all
necessary consents of holders of the Convertible Notes required by the terms of
the Convertible Notes to the sale by the Company of all of the issued and
outstanding capital stock of Wilcom.
9.2 Conditions to Obligations of Acquiror.
The obligation of Acquiror to effect the Merger is further subject to
satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company set forth herein shall be true and correct both when
made and
A-I-51
<PAGE>
on and as of the Closing Date, as if made on and as of such time (except to the
extent expressly made as of an earlier date, in which case as of such date). If
applicable, the Company shall deliver to Acquiror a complete Disclosure
Schedule, updated as of the Closing Date.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
(c) No Material Adverse Change. At any time after December 31, 1997,
there shall not have occurred any material adverse change, in the reasonable
judgment of Acquiror, in the general affairs, business, management, operations,
assets and liabilities or prospects of the Company and its Material Subsidiaries
taken as a whole or in the condition (financial or otherwise) of the Company or
any Material Subsidiary.
(d) Governmental Consents. All necessary consents and approvals of
any federal, state or local governmental authority or any other third party
required for the consummation of the transactions contemplated by this Agreement
shall have been obtained, except for such consents and approvals the failure to
obtain which individually or in the aggregate would not have a material adverse
effect on the Surviving Corporation or materially impair the ability of the
Company to fulfill its obligations under this Agreement.
(e) Affiliate Letters. Acquiror shall have received a written
agreement substantially in the form attached as Exhibit A hereto from each of
the persons specified pursuant to Section 8.11.
(f) Shareholders' Agreement. Each of the shareholders of the Company
listed on Section 9.2(f) of the Disclosure Schedule shall have entered into a
Shareholder's Agreement with Acquiror (the "Shareholder's Agreement"), and each
Shareholder's Agreement is in full force and effect.
(g) Sale of Wilcom, Inc. The (i) sale by the Company of all of the
issued and outstanding capital stock of Wilcom, Inc. to Wilcom Acquisition Corp.
(the "Wilcom Sale") pursuant to the Stock Purchase Agreement (which has been
defined as the Wilcom Agreement and a form of which is attached hereto as
Exhibit B) to be entered into among Wilcom Acquisition Corp., as Buyer, and the
Company, as Seller, shall have been consummated on terms and conditions
negotiated at arm's-length satisfactory to Acquiror; (ii) representations and
warranties of the Company set forth in the Wilcom Agreement shall be true and
correct both when made and on and as of the closing date thereunder, as if made
on and as of such time (except to the extent expressly made as of an earlier
date, in which case as of such date); (iii) Company shall have received the
fairness opinion of Commonwealth to the effect that as of its date, the terms
and conditions of the Wilcom Sale are fair from a financial point of view to the
shareholders of the Company; and (iv) Company shall, in accordance with the
Wilcom Agreement,
A-I-52
<PAGE>
take such actions as may be reasonably requested by Acquiror with respect to the
Tax treatment of the Wilcom Sale.
(h) Convertible Notes. The Company shall have (i) obtained the
consents of holders of at least 90% of the aggregate principal amount of the
Convertible Notes outstanding as of the date hereof to convert all of their
Convertible Notes to Company Common Stock immediately prior to the Effective
Time and successfully complete such conversion immediately prior to the
Effective Time; provided, that in connection with its consent solicitation, the
Company may offer an additional payment with respect to each Convertible Note of
no more than the present value of the interest that would have accrued to
February 15, 1999 on the outstanding principal amount of each Convertible Note
discounted at the Discount Rate; (ii) obtained the consents of holders of at
least 75% of the aggregate principal amount of the Convertible Notes outstanding
as of the date hereof in accordance with the terms of the Convertible Notes and
the terms of the Indenture to (A) eliminate as of the Effective Time (1) Section
6(f) (1996 EBITDA Adjustment), (2) Section 9 (Covenants) in its entirety, (3)
Section 10(a)(iii)-(v) (Events of Default), (4) Section 11(a)-(c) (Certain
Consequences Upon Default - Defaulted Interest, Additional Director Nominee and
Additional Warrants), (5) Section 13(b), (d)-(h), (j)-(k) (Definitions - Change
in Control, Consolidated Net Income, GAAP, Indebtedness, Lien, 1996 EBITDA,
Permitted Investments and Permitted Lien), (6) Section 16(a)-(b) (Miscellaneous)
of the Convertible Notes, (7) Article 4 (Covenants) in its entirety, other than
Section 4.1 (Payment of Securities) and Section 4.13 (Stay, Extension and Usury
Laws), (8) Section 6.1(iii)-(v) (Events of Default) and (9) Section 8.1(2)
(Termination of Company's Obligations) of the Indenture, and (B) amend Section
8.1 (Termination of Company's Obligations) of the Indenture to change the date
of "February 23, 1999" therein to "the earlier of September 30, 1998 or the
effective date of any merger of the Company approved by its Board of Directors;"
and (iii) obtained the consents of at least a majority of the holders of the
Convertible Notes outstanding as of the date hereof to permit the removal of the
Convertible Notes from the registration requirements under the United States
securities laws and the scope of the Trust Indenture Act of 1939, as amended.
(i) Mellon Consent. Pursuant to the Revolving Credit Loan and Term
Loan Agreement, dated as of October 29, 1997, among Acquiror, DRS Technologies
Canada Company/Compagnie DRS Technologies Canada and DRS Technologies Canada,
Inc., as the Co-Borrowers, and Mellon Bank, N.A., as the Agent and as a Lender,
Mellon Bank Canada, as a Lender, and the Other Lenders Thereafter Signatory
Thereto, as Lenders, Acquiror shall have obtained the written consent of the
Requisite Lenders (as defined therein) to the Merger.
(j) Employee Benefits. The Company shall have duly terminated,
without liability or cost to the Company or any or its subsidiaries, the
eligibility of officers and their spouses, children and dependents to retiree
medical benefits under that certain resolution of the Minutes of the Board of
Directors Meeting of the Company dated March 5, 1986 relating to continued
medical coverage and shall have obtained any necessary consents with respect to
such termination; notwithstanding the foregoing, the
A-I-53
<PAGE>
Company shall provide medical benefits for Malcom D. Widenor and Walter Lipkin
(and each of their respective spouses until such spouse becomes eligible for
Medicare).
(k) Tax Opinion. Acquiror shall have received an opinion of Arnold &
Porter, in form and substance reasonably satisfactory to it, to the effect that
the Merger when consummated in accordance with the terms of this Agreement will
qualify as a reorganization within the meaning of Section 368(a) of the Code.
Acquiror and the Company shall provide Arnold & Porter with the facts,
representations and assumptions (including without limitation the standard
representations set forth in Revenue Procedure 86-42, 1986-2 C.B. 772) on which
Arnold & Porter may rely in rendering its opinion, which facts, representations
and assumptions will be consistent with the state of facts Acquiror and the
Company believe will exist at the Effective Time.
(l) Officer's Certificate. Acquiror shall have received, on and as of
the Effective Date, from the Company an officer's certificate, executed by the
Chief Executive Officer and the Chief Financial Officer of the Company (in their
respective capacities as such) dated the Effective Date, as to the satisfaction
of the conditions in paragraphs (a), (b), (c), (d) and (e) of this Section.
(m) Legal Opinion. Acquiror shall have received, on and as of the
Effective Date, an opinion of Whitman Breed Abbott & Morgan LLP, in form and
substance reasonably satisfactory to it.
9.3 Conditions to Obligations of the Company.
The obligation of the Company to effect the Merger is further subject to
satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Acquiror and Merger Sub set forth herein shall be true and correct
both when made and at and as of the Closing Date, as if made at and as of such
time (except to the extent expressly made as of an earlier date, in which case
as of such date).
(b) Performance of Obligations of Acquiror and Merger Sub. Acquiror
and Merger Sub shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the Closing
Date.
(c) No Material Adverse Change. At any time after March 31, 1998,
there shall not have occurred any material adverse change, in the reasonable
judgment of the Company, in the general affairs, management, business,
operations, assets, condition (financial or otherwise) or prospects of Acquiror
and its subsidiaries.
(d) Governmental Consents. All necessary consents and approvals of
any federal, state or local governmental authority or any other third party
required for the consummation by Acquiror of the transactions contemplated by
this Agreement shall have been obtained except for such consents and approvals
the failure to obtain which,
A-I-54
<PAGE>
individually or in the aggregate, would not materially impair the ability of
Acquiror to fulfill its obligations under this Agreement.
(e) Tax Opinion. The Company shall have received an opinion of
Whitman Breed Abbott & Morgan LLP, in form and substance reasonably satisfactory
to it, to the effect that (1) the Merger when consummated in accordance with the
terms of this Agreement will qualify as a reorganization within the meaning of
Section 368(a) of the Code; (2) no gain or loss will be recognized by a
shareholder of the Company who exchanges all of the shareholder's Company Common
Stock solely for Acquiror Common Stock (except with respect to cash received in
lieu of a fractional share interest in Acquiror Common Stock); (3) the tax basis
of the Acquiror Common Stock received by a shareholder of the Company who
exchanges all of their Company Common Stock solely for Acquiror Common Stock in
the Merger will be the same as the tax basis of the Company Common Stock
surrendered in exchange therefor (reduced by any amount allocable to a
fractional share interest for which cash is received); (4) the holding period of
the shares of Acquiror Common Stock to be received by a shareholder of the
Company will include the period during which such shareholder held the shares of
Company Common Stock surrendered in exchange therefor, provided the Company
Common Stock surrendered is held as a capital asset at the Effective Time; and
(5) no gain or loss will be recognized by a holder of Warrants1 who exchanges
such Warrants for warrants representing rights to acquire shares of Acquiror
Common Stock on substantially the same terms and conditions as contained in the
Warrants surrendered in exchange therefor. Acquiror and the Company shall
provide Whitman Breed Abbott & Morgan LLP with the facts, representations and
assumptions (including without limitation the standard representations set forth
in Revenue Procedure 86-42, 1986-2 C.B. 772) on which Whitman Breed Abbott &
Morgan LLP may rely in rendering its opinion, which facts, representations and
assumptions will be consistent with the state of facts Acquiror and the Company
believe will exist at the Effective Time.
(f) Officer's Certificate. The Company shall have received from
Acquiror, on and as of the Effective Date, an officer's certificate, executed by
the Chief Executive Officer and the Chief Financial Officer of the Company (in
their respective capacities as such) dated the Effective Date, as to the
satisfaction of the conditions in paragraphs (a), (b), (c) and (d) of this
Section.
(g) Legal Opinion. The Company shall have received, on and as of the
Effective Date, an opinion of Arnold & Porter, in form and substance reasonably
satisfactory to it.
- --------------
(1) If applicable, separate opinions should be given with respect to the
Warrants and the Warrants to purchase shares of Company Common Stock at an
exercise price of $3.00.
A-I-55
<PAGE>
ARTICLE X
TERMINATION
10.1 Termination.
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of this Agreement by either the Company's
shareholders or the Acquiror's stockholders:
(a) by mutual written consent of the Company and Acquiror;
(b) by either the Company or Acquiror;
(i) if the Merger shall not have been consummated by December
31, 1998, unless the Merger has not occurred by such time solely by reason of
the failure by the SEC to give timely approval to the Joint Proxy Statement or
the Form S-4 or by reason of the conditions set forth in Sections 9.1(b) or
9.2(e) having not yet been satisfied, in which case as soon as possible after
the SEC has given approval to the Joint Proxy Statement or the Form S-4 if
consented to by Acquiror (such consent not to be unreasonably withheld);
(ii) if the Company Shareholder Approval shall not have been
obtained at a Company Shareholder Meeting duly convened therefor or at any
adjournment or postponement thereof; or
(iii) if any Restraint having any of the effects set forth in
Section 9.1(c) shall be in effect and shall have become final and
non-appealable;
(c) by the Company, if Acquiror shall have breached or failed to
perform in any material respect any of its representations, warranties,
covenants or other agreements contained in this Agreement;
(d) by the Company, if it elects to terminate this Agreement in
accordance with Section 8.6(b); provided, that it has complied with all
provisions thereof, including the notice provisions therein, and that it
complies with applicable requirements relating to the payment (including the
timing of any payment) of Acquiror's expenses and the termination fee required
by Section 10.2(b)-(c);
(e) by Acquiror, if the Company shall have breached or failed to
perform in any material respect any of its representations, warranties,
covenants or other agreements (other than Section 8.6) contained in this
Agreement;
(f) by Acquiror, if (i) Section 8.6 shall be breached by the Company
or any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative of the Company,
and the Company shall have failed promptly to terminate the activity giving rise
to such breach and use best efforts to cure such breach, or (ii) the Company
shall breach Section 8.6 by failing to promptly notify
A-I-56
<PAGE>
Acquiror as required thereunder; provided, in the case of (i), the Company shall
comply with applicable requirements relating to the payment (including the
timing of any payment) of Acquiror's expenses and the termination fee required
by Section 10.2(b)-(c);
(g) by Acquiror if (i) the Board of Directors of the Company or any
committee thereof shall have withdrawn or modified in a manner adverse to
Acquiror its approval or recommendation of the Merger or this Agreement, or
failed to reconfirm its recommendation within fifteen business days after a
written request to do so, or approved or recommended any Company Takeover
Proposal or (ii) the Board of Directors of the Company or any committee thereof
shall have resolved to take any of the foregoing actions; provided, that in the
case of clauses (i) or (ii), the Company shall comply with applicable
requirements relating to the payment (including the timing of any payment) of
Acquiror's expenses and the termination fee required by Section 10.2(b)-(c); or
(h) by the Company if the Board of Directors of Acquiror or any
committee thereof shall have withdrawn or modified in a manner adverse to the
Company its approval or recommendation of the Merger or this Agreement;
provided, that no event giving rise to Acquiror's right to terminate this
Agreement under Sections 10.1(e), 10.1(f) or 10.1(g) shall have occurred.
10.2 Effect of Termination.
(a) The termination of this Agreement shall become effective upon
delivery to the other party of written notice thereof. In the event of the
termination of this Agreement pursuant to Section 10.1, this Agreement shall
become void and have no effect, with no liability on the part of any party
(except as provided in paragraphs (b) and (c) below) or its stockholders or
directors or officers in respect thereof except for agreements which survive the
termination of this Agreement and except for liability that Acquiror or the
Company might have arising from a breach of this Agreement.
(b) In the event of a termination of this Agreement by the Company
pursuant to Section 10.1(d) or by Acquiror pursuant to Sections 10.1(f)-(g),
then the Company shall (i) within two (2) business days promptly reimburse
Acquiror by wire transfer of immediately available funds to an account specified
by Acquiror for any out-of-pocket expenses incurred by Acquiror (including
without limitation fees and expenses of outside professionals) not previously
reimbursed (in any case all such expenses not to exceed in the aggregate
$300,000) and (ii) promptly pay Acquiror a termination fee of $1.5 million if
Acquiror becomes entitled to such termination fee pursuant to Section 10.2(c).
(c) In the event the Company enters into a definitive Company
Acquisition Agreement related to a Company Takeover Proposal at any time prior
to six months after the termination of the Letter of Intent dated April 3, 1998
(the "Letter of Intent") between Acquiror and the Company or this Agreement with
any third party that was in contact, directly or indirectly, with the Company
during the period that the Letter of Intent was in effect, regardless of whether
the transactions contemplated by such Company Acquisition Agreement are
consummated or are more favorable than the
A-I-57
<PAGE>
transactions contemplated under this Agreement, then the Company shall within
two (2) business days of entering into such Company Acquisition Agreement pay
Acquiror by wire transfer of immediately available funds to an account specified
by Acquiror a termination fee of $1.5 million and to promptly reimburse Acquiror
for any of its out-of-pocket expenses (including without limitation fees and
expenses of outside professionals) not previously reimbursed (in any case all
such expenses not to exceed in the aggregate $300,000); provided, however, that
such termination fee shall not be payable if (i) the conditions set forth in
Sections 9.1(a)-(b) and 9.2(e) were not satisfied by December 31, 1998, unless
such conditions were not satisfied due to the failure by the Company to use its
best efforts or (ii) if this Agreement was terminated pursuant to Section
10.1(c).
ARTICLE XI
MISCELLANEOUS
11.1 Non-Survival of Representations and Warranties.
None of the representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time. This Section 11.1 shall not limit any covenant or agreement of the parties
which by its terms contemplates performance after the Effective Time.
11.2 Closing and Waiver.
(a) Unless this Agreement shall have been terminated in accordance
with the provisions of Section 10.1 hereof, a closing (the "Closing" and the
date and time thereof being the "Closing Date") will be held as soon as
practicable after the conditions set forth in Sections 9.1, 9.2 and 9.3 shall
have been satisfied or waived. The Closing will be held at the offices of Arnold
& Porter, 399 Park Avenue, New York, New York or at such other places as the
parties may agree. Simultaneously therewith, the Certificate of Merger will be
filed.
(b) At any time prior to the Effective Date, any party hereto may
(i) extend the time for the performance of any of the obligations or other acts
of any other party hereto; (ii) waive any inaccuracies in the representations
and warranties of the other party contained herein or in any document delivered
pursuant hereto; and (iii) waive compliance with any of the agreements of any
other party or with any conditions to its own obligations contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing duly authorized by and
signed on behalf of such party.
11.3 Notices.
(a) Any notice or communication to any party hereto shall be duly
given if in writing and delivered in person or mailed by first class mail
(registered or certified, return receipt requested), facsimile or overnight air
courier guaranteeing next day delivery, to such other party's address.
A-I-58
<PAGE>
If to Acquiror or Merger Sub:
DRS Technologies, Inc.
5 Sylvan Way
Parsippany, New Jersey 07054
Facsimile No.: (973) 898-4730
Attention: Nina Laserson Dunn, Esq.
with a copy to:
Arnold & Porter
399 Park Avenue
New York, New York 10022
Facsimile No.: (212) 713-1399
Attention: Vijay S. Tata, Esq.
If to the Company:
NAI Technologies, Inc.
c/o Richard A. Schneider
23 Old Town Lane
Halesite, New York 11743
Facsimile No.: (516) 385-0815
with a copy to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue, 28th Floor
New York, New York 10166
Attention: David F. Kroenlein, Esq.
Facsimile No.: (212) 351-3131
(b) All notices and communications will be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five (5)
business days after being deposited in the mail, if mailed; when sent, if
sent by facsimile; and the next business day after timely delivery to the
courier, if sent by overnight air courier guaranteeing next day delivery.
11.4 Counterparts.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
11.5 Interpretation.
The headings of articles and sections herein are for convenience of
reference, do not constitute a part of this Agreement, and shall not be deemed
to limit or affect any of
A-I-59
<PAGE>
the provisions hereof. As used in this Agreement, "person" means any individual,
corporation, limited or general partnership, joint venture, association, joint
stock company, trust, unincorporated organization or government or any agency or
political subdivision thereof; "subsidiary" of any person means (i) a
corporation more than 50% of the outstanding voting stock of which is owned,
directly or indirectly, by such person or by one or more other subsidiaries of
such person or by such person and one or more subsidiaries thereof; or (ii) any
other person (other than a corporation) in which such person, or one or more
other subsidiaries of such person or such person and one or more other
subsidiaries thereof, directly or indirectly, have at least a majority ownership
and voting power relating to the policies, management and affairs thereof; and
"voting stock" of any person means capital stock of such person which ordinarily
has voting power for the election of directors (or persons performing similar
functions) of such person, whether at all times or only so long as no senior
class of securities has such voting power by reason of any contingency.
11.6 Amendment.
This Agreement may be amended by the parties at any time before or after
any required approval of matters presented in connection with the Merger by each
of the stockholders of the Company and Acquiror; provided, however, that after
any such approval, there shall not be made any amendment that by law requires
further approval by such stockholders without the further approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
11.7 No Third Party Beneficiaries.
Nothing in this Agreement shall confer any rights upon any person or entity
that is not a party or permitted assignee of a party to this Agreement.
11.8 Governing Law.
Except as the laws of the State of Delaware are by their terms applicable,
this Agreement shall be governed by, and construed in accordance with, the laws
of the State of New York without regard to principles of conflicts of laws.
11.9 Entire Agreement.
This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all other prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof.
11.10 Validity.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.
A-I-60
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to
be executed by their respective duly authorized officers all as of the day and
year first above written.
DRS TECHNOLOGIES, INC.
By: /s/ MARK S. NEWMAN
----------------------------
Name: Mark S. Newman
Title: President, Chairman and
Chief Executive Officer
DRS MERGER SUB, INC.
By: /s/ NINA LASERSON DUNN
----------------------------
Name: Nina Laserson Dunn
Title: Vice President and Secretary
NAI TECHNOLOGIES, INC.
By: /s/ ROBERT A. CARLSON
----------------------------
Name: Robert A. Carlson
Title: Chief Executive Officer
A-I-61
<PAGE>
EXHIBIT A
Form of Company Affiliate Letter
DRS Technologies, Inc.
5 Sylvan Way
Parsippany, New Jersey 07054
Ladies and Gentlemen:
The undersigned, a holder of shares of common stock, par value $0.10 per
share ("Company Common Stock"), of NAI Technologies, Inc., a New York
corporation (the "Company"), is entitled to receive in connection with the
merger (the "Merger") between the Company and a direct wholly owned subsidiary
of DRS Technologies, Inc. ("Acquiror") shares of common stock, par value $0.01
per share ("Acquiror Common Stock"), of Acquiror. The undersigned acknowledges
that the undersigned may be deemed an "affiliate" of the Company within the
meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933,
as amended (the "Act"), although nothing contained herein should be construed as
an admission of such fact.
If in fact the undersigned is an affiliate under the Act, the undersigned's
ability to sell, assign or transfer the shares received by the undersigned
pursuant to the Merger may be restricted unless such transaction is registered
under the Act or an exemption from such registration is available. The
undersigned understands that such exemptions are limited and the undersigned has
obtained advice of counsel as to the nature and conditions of such exemptions,
including information with respect to the applicability to the sale of such
securities of Rules 144 and 145(d) promulgated under the Act.
The undersigned hereby represents to and covenants with Acquiror that the
undersigned will not sell, assign or transfer any of the Acquiror Common Stock
received by the undersigned pursuant to the Merger except (i) pursuant to an
effective registration statement under the Act; (ii) in conformity with the
limitations specified by Rules 144 and Rule 145(d); or (iii) in a transaction
that, in the opinion of counsel reasonably satisfactory to Acquiror or as
described in a "no-action" or interpretive letter from the Staff of the
Securities and Exchange Commission (the "SEC"), is not required to be registered
under the Act.
It is understood that the undersigned has no present intention to sell the
Acquiror Common Stock acquired by the undersigned pursuant to the Merger. The
undersigned agrees that the undersigned will not sell, transfer or otherwise
dispose of any Company Common Stock for 30 days prior to the effective date of
the Merger or any Acquiror Common Stock received by the undersigned in the
Merger until after such time as results covering at least 30 days of combined
operations of the Company and Acquiror have been published by Acquiror, in the
form of a quarterly earnings report, a report to the SEC on Form 10-K, 10-Q or
8-K, or any other public filing or announcement which includes such combined
results of operations.
A-I-62
<PAGE>
In the event of a sale or other disposition by the undersigned of Acquiror
Common Stock pursuant to Rule 145(d)(1), the undersigned will supply Acquiror
with evidence of compliance with such Rule, in the form of a letter in the form
of Annex I hereto. The undersigned understands that Acquiror may instruct its
transfer agent to withhold the transfer of any Acquiror Common Stock disposed of
by the undersigned, but that upon receipt of such evidence of compliance the
transfer agent shall effectuate the transfer of the shares sold as indicated in
the letter.
The undersigned acknowledges and agrees that appropriate legends will be
placed on certificates representing the Acquiror Common Stock received by the
undersigned pursuant to the Merger or held by a transferee thereof, which
legends will be removed by delivery of substitute certificates upon receipt of
an opinion in form and substance reasonably satisfactory to Acquiror from
independent counsel reasonably satisfactory to Acquiror to the effect that such
legends are no longer required for the purposes of the Act or the fourth
paragraph of this letter.
The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the distribution, sale, transfer or other disposition of the Acquiror
Common Stock and (ii) the receipt by Acquiror of this letter is an inducement
and a condition to Acquiror's obligations to consummate the Merger.
Very truly yours,
A-I-63
<PAGE>
Annex I to Exhibit A
[Date]
DRS Technologies, Inc.
On _____________ the undersigned sold _____________ shares of common stock,
par value $0.01 per share, of DRS Technologies, Inc. ("Acquiror"). The shares
were received by the undersigned in connection with the merger of a direct
wholly owned subsidiary of Acquiror with and into NAI Technologies Inc.
Based upon the most recent report or statement filed by Acquiror with the
Securities and Exchange Commission, the shares sold by the undersigned were
within the prescribed limitations set forth in paragraph (e) of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Act").
The undersigned hereby represents that the shares were sold in "brokers'
transactions" within the meaning of Section 4(4) of the Act or in transactions
directly with a "market maker" as that term is defined in Section 3(a)(38) of
the Securities Exchange Act of 1934, as amended. The undersigned further
represents that the undersigned has not solicited or arranged for the
solicitation of orders to buy the shares, and that the undersigned has not made
any payment in connection with the offer or sale of the shares to any person
other than to the broker who executed the order in respect of such sale.
Very truly yours,
A-I-64
<PAGE>
EXHIBIT B
STOCK PURCHASE AGREEMENT
among
WILCOM ACQUISITION CORP.,
Buyer,
NAI TECHNOLOGIES, INC.,
Seller,
and
WILCOM, INC.,
the Company
Dated as of August [ ], 1998
A-I-65
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
DEFINITIONS
Section 1.1 Definition of Certain Terms ................................... 1
Section 1.2 Construction .................................................. 6
ARTICLE II
SALE AND PURCHASE OF THE SHARES
Section 2.1 Place and Date ................................................ 6
Section 2.2 Purchase Price ................................................ 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE COMPANY
Section 3.1 Corporate Status .............................................. 7
Section 3.2 Authorization, etc. ........................................... 7
Section 3.3 Capital Stock of the Company .................................. 7
Section 3.4 No Conflicts, etc ............................................. 8
Section 3.5 Financial Statements .......................................... 8
Section 3.6 Taxes ......................................................... 9
Section 3.7 Litigation .................................................... 9
Section 3.8 Compliance with Laws; Governmental Approvals and Consents .... 9
Section 3.9 Contracts ..................................................... 10
Section 3.10 Product Warranties ............................................ 10
Section 3.11 Intellectual Property ......................................... 10
Section 3.12 Insurance; Bank Accounts; Property, Plant and Equipment ....... 10
Section 3.13 Employee Benefit Plans and Related Matters .................... 11
Section 3.14 Brokers, Finders, etc. ........................................ 11
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1 Corporate Status .............................................. 11
Section 4.2 Authorization, etc. ........................................... 12
Section 4.3 No Conflicts, etc. ............................................ 12
Section 4.4 Litigation .................................................... 12
Section 4.5 Brokers, Finders, etc. ........................................ 12
ARTICLE V
COVENANTS
Section 5.1 Covenants of Seller and the Company ........................... 13
Section 5.2 Covenants of Buyer ............................................ 14
Section 5.3 Environmental Matters ......................................... 15
A-I-66
<PAGE>
Page
----
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Condition to Obligations of Each Party ........................ 15
Section 6.2 Conditions to Obligations of Buyer ............................ 15
Section 6.3 Conditions to Obligations of Seller and the Company ........... 17
ARTICLE VII
EMPLOYEE BENEFIT PLANS; TAX MATTERS
Section 7.1 Employee Benefit Plans ........................................ 18
Section 7.2 Tax Matters ................................................... 19
ARTICLE VIII
TERMINATION
Section 8.1 Termination ................................................... 21
Section 8.2 Effect of Termination ......................................... 21
ARTICLE IX
MISCELLANEOUS
Section 9.1 Non-survival of Representations and Warranties ................ 22
Section 9.2 Procedures with Respect to Third-Party Claims ................. 22
Section 9.3 Expenses ...................................................... 23
Section 9.4 Severability .................................................. 23
Section 9.5 Notices ....................................................... 23
Section 9.6 Headings ...................................................... 25
Section 9.7 Entire Agreement .............................................. 25
Section 9.8 Counterparts .................................................. 25
Section 9.9 Governing Law, etc. ........................................... 25
Section 9.10 Binding Effect ................................................ 25
Section 9.11 Assignment .................................................... 25
Section 9.12 No Third Party Beneficiaries .................................. 26
Section 9.13 Amendment; Waivers, etc. ...................................... 26
A-I-67
<PAGE>
SCHEDULES
---------
SCHEDULE 3.1 Foreign Qualification
SCHEDULE 3.4 Conflicts/Consents
SCHEDULE 3.5 December Balance Sheet/June Balance Sheet
SCHEDULE 3.6 Taxes
SCHEDULE 3.7 Litigation
SCHEDULE 3.8(a) Compliance with Laws
SCHEDULE 3.8(b) Governmental Approvals and Other Consents
SCHEDULE 3.9 Material Contracts
SCHEDULE 3.10 Product Warranties
SCHEDULE 3.11(a) Intellectual Property
SCHEDULE 3.11(b) Intellectual Property Claims
SCHEDULE 3.12(a) Insurance
SCHEDULE 3.12(b) Bank Accounts
SCHEDULE 3.12(c) Property, Plant and Equipment
SCHEDULE 3.12(d) Accounts Receivable
SCHEDULE 3.12(e) Accounts Payable
SCHEDULE 3.12(f) Inventories
SCHEDULE 3.13(a) Employee Benefit Plans
SCHEDULE 3.13(c) Employment Disputes
SCHEDULE 3.13(d) Directors and Officers
SCHEDULE 5.1(b) Conduct of Business
A-I-68
<PAGE>
STOCK PURCHASE AGREEMENT, dated as of September 21, 1998, among
Wilcom Acquisition Corp., a Delaware corporation ("Buyer"), Wilcom, Inc., a New
York corporation (the "Company"), and NAI Technologies, Inc., a New York
corporation ("Seller").
R E C I T A L S :
The Company is in the business of manufacturing, marketing or
selling test instrumentation for testing analog, optical and digital
transmission systems over fiber and copper cable and telephone transmission
products which are used primarily to enhance and improve the quality and/or
speed of voice, video and digital data transmission over copper cables (the
"Company Products").
Seller owns all the issued and outstanding shares (the "Shares") of
common stock, par value $1.00 per share (the "Common Stock"), of the Company.
Buyer wishes to purchase the Shares and Seller wishes to sell the
Shares to Buyer.
NOW, THEREFORE, in consideration of the mutual covenants,
representations and warranties made herein and other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definition of Certain Terms. The terms defined in this
Section 1.1, whenever used in this Agreement, shall have the respective meanings
indicated below for all purposes of this Agreement.
"$2.50 Warrants": has the meaning set forth in Section 2.2.
"$3.00 Warrants": has the meaning set forth in Section 2.2.
"Affiliate": of a Person means any other Person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such Person or, as to any natural person, is a member
of such Person's immediate family. "Control" (including the terms "controlled
by" and "under common control with") means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
policies of that Person, whether through the ownership of voting securities, by
contract or credit arrangement, as trustee or executor, or otherwise.
A-I-69
<PAGE>
"Agreement": means this Stock Purchase Agreement (including the
Schedules), as the same from time to time may be amended, supplemented or
waived.
"Applicable Law": means all applicable provisions of all (i)
constitutions, treaties, statutes, laws (including the common law), rules,
regulations, ordinances, codes or orders of any Governmental Authority, (ii)
Governmental Approvals, and (iii) orders, decisions, injunctions, judgments,
awards and decrees of or agreements with any Governmental Authority.
"Balance Sheets": has the meaning set forth in Section 3.5(b).
"Buyer": has the meaning set forth in the first paragraph of this
Agreement.
"Buyer Plans": has the meaning set forth in Section 7.1(b).
"Closing": has the meaning set forth in Section 2.1.
"Closing Date": has the meaning set forth in Section 2.1.
"Code": means the Internal Revenue Code of 1986, as amended.
"Common Stock": has the meaning set forth in Recital B at the head
of this Agreement.
"Company": has the meaning set forth in the first paragraph of this
Agreement.
"Company Products": has the meaning set forth in Recital A at the
head of this Agreement.
"Consent": means any consent, approval, authorization, waiver,
permit or filing with any Person, including any Governmental Authority.
"Contract": means any agreement, lease, instrument or other similar
document that is binding on any person or its property under Applicable Law.
"Debt": means, as to any Person, all obligations for payment of
principal, interest, with respect to money borrowed, incurred or assumed
(including guarantees), and other similar obligations in the nature of a
borrowing by which such Person will be obligated to pay.
"December Balance Sheet": has the meaning set forth in Section
3.5(a).
"$" or "dollars": means lawful money of the United States of
America.
A-I-70
<PAGE>
"DRS": means DRS Technologies, Inc., a Delaware corporation.
"Employee Benefit Plans": has the meaning set forth in Section
3.13(a).
"Environmental Laws": means the Comprehensive Environmental
Response, Compensation and Liability Act; the Clean Air Act; the Clean Water
Act; the Resource Conservation and Recovery Act; the Toxic Substances Control
Act; the Spill Compensation and Control Act; OSHA; and all other federal, state
or local laws regulating contamination or pollution of the air, water or ground;
together with any amendments, modifications or extensions thereof and
regulations, rules, orders or guidelines thereunder prior to the date hereof and
any law thereunder of, or issued by, any Governmental Authority.
"Environmental Liabilities and Costs": means all Losses imposed by,
under or pursuant to Environmental Laws, including all fees, disbursements and
expenses of counsel, court costs and expert witness fees, based on, arising out
of or otherwise in respect of (i) the ownership or operation of the Company or
Real Property, by Seller, and (ii) the environmental conditions existing on the
Closing Date on, under, above, or about any Real Property owned, leased or
operated by Seller.
"ERISA": means the Employee Retirement Income Security Act of 1974,
as amended.
"GAAP": means accounting principles generally accepted in the United
States applied on a consistent basis (except as may be indicated in the Balance
Sheets or in the notes thereto).
"Governmental Approval": means any Consent of, with or to any
Governmental Authority.
"Governmental Authority": means any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including any governmental authority, agency, department, board,
commission or instrumentality of the United States, any State of the United
States or any political subdivision thereof, and any tribunal or arbitrator(s)
of competent jurisdiction, and any self-regulatory organization.
"Hazardous Substances": means pollutants or a substance defined as a
"hazardous waste", "contaminant" or "toxic substance" under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. Section
9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of
1986 (PL 99-499); the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601, et
seq.; the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C.
Section 6901, et seq.; the Clean Water Act, 33 U.S.C. Section 1251, et seq.;
comparable
A-I-71
<PAGE>
provisions of any applicable state or local law; and in the rules or
regulations adopted and guidelines promulgated pursuant to said laws as in
effect at the date hereof.
"include", "includes" and "including": shall be construed as if
followed by the phrase "without being limited to".
"Indemnified Party": has the meaning set forth in Section 9.2.
"Indemnifying Party": has the meaning set forth in Section 9.2.
"Intellectual Property": has the meaning set forth in Section
3.11(a).
"IRS": means the Internal Revenue Service.
"June Balance Sheet": has the meaning set forth in Section 3.5(b).
"Lien": means any mortgage, pledge, hypothecation, claim, security
interest, encumbrance, voting trust agreement, lien, right of first refusal,
charge or other restriction or limitation.
"Losses": means any and all claims, liabilities, obligations,
losses, fines, costs, judgments, penalties, proceedings, deficiencies or damages
(whether absolute, accrued, conditional or otherwise and whether or not
resulting from third party claims), including out of pocket expenses, court
costs, consulting fees, expert witness fees and reasonable attorneys' fees
incurred in the investigation or defense of any of the same.
"Material Adverse Effect": means any event, circumstance,
occurrence, fact, condition, change or effect that is materially adverse to the
business, operations, results of operations, financial condition, properties,
assets or liabilities of the Company, Seller or Buyer, as the case may be.
"Material Contract": has the meaning set forth in Section 3.9(a).
"Merger": means the merger of Merger Sub with and into Seller with
Seller continuing as the surviving corporation, pursuant to the Merger
Agreement.
"Merger Agreement": means the Agreement and Plan of Merger, dated as
of August __, 1998, among Seller, DRS and Merger Sub.
"Merger Sub": means DRS Merger Sub, Inc., a New York corporation and
a direct wholly-owned subsidiary of DRS.
"NAI Common Stock": means the common stock, par value $0.10 per
share, of Seller.
A-I-72
<PAGE>
"NAI Credit Agreement": means the Credit Agreement, dated as of
April 12, 1995, among Seller, The Bank of New York and Chemical Bank, as
amended, modified or supplemented prior to the date hereof.
"Notes": means the $[ ] aggregate principal amount of 12%
Subordinated Convertible Promissory Notes due January 15, 2001 issued by Seller.
"Notice": has the meaning set forth in Section 9.5.
"Permitted Liens": means Liens (i) disclosed in the June Balance
Sheet, if any, but excluding liens pursuant to the NAI Credit Agreement; (ii)
for current taxes not yet due and payable; and (iii) incurred in the ordinary
course of business.
"Person": means any natural person, firm, partnership, association,
corporation, company, limited liability company, trust, business trust,
Governmental Authority or other entity.
"Purchase Price": has the meaning set forth in Section 2.2(b).
"Real Property": of any Person means all the right, title and
interest of such Person in and to land, improvements and fixtures, including all
the right, title and interest of such Person as lessee or licensee in, to and
under leases or licenses of land, improvements and/or fixtures.
"Release": means any releasing, disposing, discharging, injecting,
spilling, leaking, leaching, pumping, dumping, emitting, escaping, emptying,
seeping, dispersal, migration, transporting, placing and the like, including the
moving of any materials through, into or upon, any land, soil, surface water,
ground water or air, or otherwise entering into the environment.
"Seller": has the meaning set forth in the first paragraph of this
Agreement.
"Seller Indemnitees": has the meaning set forth in Section 5.3.
"Seller's Tax Determinations": has the meaning set forth in Section
7.2(j).
"Shares": has the meaning set forth in Recital B at the head of this
Agreement and also shall include any securities issued or issuable with respect
to the Shares, by way of a stock dividend, stock split, combination of shares,
recapitalization, restructuring, merger, consolidation or other reorganization
of the Company.
"Tax Return": means any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
A-I-73
<PAGE>
"Taxes": means any federal, state, provincial, local or foreign
income, alternative, minimum, accumulated earnings, personal holding company,
franchise, withholding, estimated or other similar tax, duty or other
governmental charge or assessment or deficiencies thereof, and including any
interest, penalties or additions to tax attributable to the foregoing.
"Treasury Regulations": means the regulations prescribed pursuant to
the Code.
"WARN" means the Worker Adjustment and Retraining Notification Act,
as amended.
Section 1.2 Construction. All references herein to a Section,
Article or Schedule are to a Section, Article or Schedule of or to this
Agreement, unless otherwise indicated.
ARTICLE II
SALE AND PURCHASE OF THE SHARES
Section 2.1 Place and Date. Subject to the terms and conditions set
forth in this Agreement, on the Closing Date, Seller will sell the Shares to
Buyer, and Buyer will purchase the Shares from Seller. The closing of the sale
and purchase of the Shares (the "Closing") shall take place immediately prior to
the effective time of the Merger (unless the parties to the Merger Agreement
otherwise agree in writing) at the same place as the closing of the Merger or at
such specific time and place as may be agreed upon by the parties hereto. The
day on which the Closing actually occurs is herein sometimes referred to as the
"Closing Date."
Section 2.2 Purchase Price. On the terms and subject to the
conditions set forth in this Agreement, Buyer agrees to (i) pay to Seller at the
Closing $150,000 and (ii) surrender to Seller (a) warrants to purchase 1,700,000
shares of NAI Common Stock at an exercise price of $2.50 per share (the "$2.50
Warrants") and (b) warrants to purchase 300,000 shares of NAI Common Stock at an
exercise price of $3.00 per share (the "$3.00 Warrants" and, together with the
$150,000 and the $2.50 Warrants, the "Purchase Price"). Seller shall designate
in writing to Buyer at least three days prior to any scheduled date of payment
its United States bank account to which the cash payment is to be made.
A-I-74
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE COMPANY
Seller and the Company jointly and severally represent and warrant
to Buyer as follows:
Section 3.1 Corporate Status. (a) Each of the Company and Seller is
a corporation duly incorporated, validly existing and in good standing under the
laws of the state of its incorporation, with full corporate power and authority
to carry on its business as currently conducted. Each of the Company and Seller
is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction listed on Schedule 3.1.
(b) Seller has delivered to Buyer true, complete and correct copies
of the Company's articles of incorporation and by-laws in each case as amended
and in effect on the date hereof and on the Closing Date. The Company is not in
violation of its articles of incorporation or by-laws. The minute and stock
books of the Company, which have been made available to the Buyer for its
inspection, are true and complete.
Section 3.2 Authorization, etc. Each of the Company and Seller has
all requisite power and authority (corporate or otherwise) to execute and
deliver this Agreement, to perform fully its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery by
the Company and Seller of this Agreement, and the consummation of the
transactions contemplated hereby, have been duly authorized by all requisite
corporate action of the Company and Seller, respectively. Each of the Company
and Seller has duly executed and delivered this Agreement. This Agreement is a
legal, valid and binding obligation of each of the Company and Seller,
enforceable against it in accordance with its terms, subject to general
equitable principles and except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws of general application relating to creditors' rights.
Section 3.3 Capital Stock of the Company. (a) The Company's
authorized capital stock consists of 1,000 shares of Common Stock, par value
$1.00 per share, and all of such shares of Common Stock are issued and
outstanding.
(b) All the issued and outstanding shares of the Company are owned,
beneficially and of record, by Seller, are validly issued, fully paid and
nonassessable and were not issued in violation of any preemptive rights.
(c) Other than this Agreement, there are no outstanding
subscriptions, options, rights, warrants, stock-based or stock-related awards,
convertible, exercisable or exchangeable securities, or other agreements or
commitments obligating the Company or Seller to issue, grant, award, purchase,
acquire, sell or transfer any shares of the Company's capital stock of any class
or other securities of the Company (including any agreement or commitment
obligating the
A-I-75
<PAGE>
Company to enter into any employee compensation arrangement based on any
valuation or transaction price of, or change of ownership in, shares of its
capital stock), and the Company and Seller shall not issue, grant, award,
purchase, acquire, sell or transfer such capital stock or other securities prior
to the Closing. There are no voting trusts, proxies or other agreements or
understandings to which the Company or Seller is a party with respect to the
voting of capital stock of the Company.
(d) Seller is the sole owner, beneficially and of record, of all the
Common Stock and has good and valid title to all the Common Stock, free and
clear of all Liens of any kind as of the date hereof, except pursuant to the NAI
Credit Agreement. The consent of the holders of the Notes, as contemplated by
Section 6.3(a), is required to convey the Common Stock. Upon delivery to Buyer
at the Closing of certificates representing the Shares, duly endorsed in blank,
or accompanied by stock powers duly endorsed in blank, in proper form for
transfer, together with guaranties of Seller's signature thereon, good and valid
title to the Shares will pass to Buyer, free and clear of all Liens of any kind,
other than those arising from acts of Buyer. Other than this Agreement, the
Common Stock, including the Shares, is not subject to any voting commitment or
understanding restricting or otherwise relating to voting, dividend rights or
the disposition of such shares or otherwise.
(e) The Company does not own, directly or indirectly, any interest
or investment (whether in equity or debt) in any Person.
Section 3.4 No Conflicts, etc. Except as set forth in Schedule 3.4,
the execution, delivery and performance by Seller and the Company of this
Agreement, and the consummation of the transactions contemplated hereby, do not
and will not conflict with or result in a material violation of or a default
under (with or without the giving of notice or the lapse of time or both) any
term or provision under (i) the articles of incorporation or by-laws of Seller
or the Company, (ii) any Applicable Law applicable to Seller or the Company or
any of its properties or assets or (iii) any Contract to which Seller or the
Company is a party or by which Seller or the Company or any of its properties or
assets is bound, except, in the case of clauses (i), (ii) and (iii) above, for
violations and defaults that, individually and in the aggregate, have not and
shall not materially impair the ability of Seller or the Company to perform its
obligations under this Agreement and except as set forth in Schedule 3.4. Except
as may be specified in Schedule 3.4, no Governmental Approval or other Consent
is required to be obtained or made by Seller or the Company in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
Section 3.5 Financial Statements. Seller has delivered to Buyer
(a) the unaudited balance sheet of the Company at December 31, 1997, a copy of
which is attached hereto as Schedule 3.5 (the "December Balance Sheet"), and
(b) the unaudited balance sheet of the Company at June 27, 1998 for the
six-month period ended June 27, 1998, a copy of which is attached hereto as
Schedule 3.5 (the "June Balance Sheet" and, together with the December Balance
Sheet, the "Balance Sheets"). Except as noted therein in the Balance Sheets, the
Balance Sheets fairly
A-I-76
<PAGE>
represent in all material respects the books and records of the Company and have
been prepared in accordance with GAAP. Each of the Balance Sheets fairly
represents in all material respects the financial position of the Company as of
the date of the respective Balance Sheet (but does not contain any explanatory
footnotes).
Section 3.6 Taxes. (a) Except as set forth in Schedule 3.6, the
Company has duly and timely filed (taking into account all extensions of due
dates) all Tax Returns with respect to Taxes where the failure to so file would
have a Material Adverse Effect on the Company. All Taxes owed by the Company
(whether or not shown on any Tax Return) have been duly and timely paid or
adequate provision or reserves have been made for the payment of such Taxes.
(b) Except as set forth on Schedule 3.6, the Company has withheld
the proper amounts from employees with respect to all cash compensation paid to
employees for all periods in compliance in all material respects with the
withholding provisions of the applicable Tax law.
Section 3.7 Litigation. Except as set forth on Schedule 3.7, there
is no action, claim, demand, suit, proceeding, arbitration or investigation,
civil, criminal, regulatory or otherwise, in law or in equity, pending or, to
the knowledge of Seller, threatened against or relating to the Company in
connection with the conduct of the Company's business that would be reasonably
expected to result in a Material Adverse Effect on the Company or any litigation
against Seller or the Company challenging this Agreement or action taken or to
be taken by Seller or the Company in connection herewith or the consummation of
the transactions contemplated hereby or would be reasonably expected to impair
the ability of Seller or the Company to perform its obligations under this
Agreement.
Section 3.8 Compliance with Laws; Governmental Approvals and
Consents. (a) Except as disclosed in Schedule 3.8(a), the Company has
substantially complied in all material respects with all Applicable Laws,
including Environmental Laws to the actual knowledge of Seller in reliance upon
the previously conducted Phase I Audit and certain publicly available filings,
for which noncompliance, default or violation would be reasonably expected to
result in a Material Adverse Effect on the Company.
(b) Schedule 3.8(b) sets forth all Governmental Approvals and other
Consents regarding the conduct of the business as currently conducted by the
Company for which the failure to have such Governmental Approvals and Consents
would have a Material Adverse Effect on the Company. Except as set forth in
Schedule 3.8(b), all such Governmental Approvals and Consents have been duly
obtained and are in full force and effect, and the Company is in compliance in
all material respects with each of such Governmental Approvals and Consents held
by it.
A-I-77
<PAGE>
Section 3.9 Contracts. Schedule 3.9 contains a list of all Contracts
to which the Company is a party, or under which any of its property is bound,
and which involve annual payments of $30,000 or more (the "Material Contracts").
Such Material Contracts or true and correct copies thereof have been provided to
Buyer. To Seller's knowledge, all the Material Contracts are in full force and
effect.
Section 3.10 Product Warranties. Except as set forth in Schedule
3.10, (a) there are no express written warranties with respect to the products
of the Company, and (b) there are no pending or, to the knowledge of Seller,
threatened claims with respect to any such warranty. Schedule 3.10 sets forth a
list of all pending or, to the knowledge of Seller, threatened product warranty
claims in excess of $50,000.
Section 3.11 Intellectual Property. (a) The Company possesses the
necessary rights to use any licenses, patents, patent applications, copyrights,
trademarks, trademark applications and trade names material to the conduct of
its business as presently conducted (the "Intellectual Property"). Schedule
3.11(a) sets forth a list of all Intellectual Property. True and correct copies
of the patents, patent applications, trademarks, trademark applications and
licenses available to the Company in written form and listed in Schedule 3.11(a)
have been provided to Buyer.
(b) Except as set forth in Schedule 3.11(b), there are no pending
or, to Seller's knowledge, threatened claims with respect to any Intellectual
Property against the Company which would be reasonably expected to have a
Material Adverse Effect on the Company. Except as set forth in Schedule 3.11(b),
there are no pending or, to Seller's knowledge, threatened bona fide claims of
infringement by the Company with respect to any Intellectual Property which
would be reasonably expected to have a Material Adverse Effect.
Section 3.12 Insurance; Bank Accounts; Property, Plant and
Equipment. (a) Schedule 3.12(a) contains a true, complete and correct list of
all insurance policies maintained by the Company with respect to the properties
and assets of the Company, including all Real Property.
(b) Schedule 3.12(b) contains a true, complete and correct list of
all bank accounts maintained by the Company and all signatories thereon.
(c) Schedule 3.12(c) contains a true, complete and correct list of
the property, plant and equipment reflected on the June Balance Sheet.
(d) Schedule 3.12(d) contains a true, complete and correct list of
the accounts receivables of the Company as of August __, 1998.
(e) Schedule 3.12(e) contains a true, complete and correct list of
the accounts payables of the Company as of August __, 1998.
A-I-78
<PAGE>
(f) Schedule 3.12(f) contains a true, complete and correct list of
the inventories of the Company as of August __, 1998.
Section 3.13 Employee Benefit Plans and Related Matters. (a)
Schedule 3.13(a) lists each material pension, retirement, profit sharing,
deferred compensation, bonus, stock option, stock purchase, severance pay, or
other employee benefit plan, including any "employee benefit plan" as defined in
Section 3(3) of ERISA, which the Company or an ERISA Affiliate maintains,
sponsors, or contributes to and under which employees or former employees of the
Company (or their beneficiary) are covered ("Employee Benefit Plans"). For
purposes of this Section 3.13, any reference to the term "ERISA Affiliate" shall
be deemed to refer to any entity which, together with the Company, would be
deemed to be a "single employer" under Section 414 of the Code. Seller has made
available to Buyer true, correct and complete copies of each Employee Benefit
Plan.
(b) Except where noncompliance would not have a Material Adverse
Effect on the Company, each of the Employee Benefit Plans listed in Schedule
3.13(a) is in compliance in all material respects with all applicable provisions
of ERISA, the Code and other Applicable Law.
(c) Except as set forth in Schedule 3.13(c), to the actual knowledge
of Seller in reliance upon publicly available filings in the appropriate New
Hampshire jurisdiction, there are no pending suits, claims or actions asserted
by any current or former employee of the Company relating to or arising out of
any conduct, action or event occurring prior to the date hereof with respect to
the employment or termination of employment of any such current or former
employee of the Company.
(d) Schedule 3.13(d) contains a true, complete and correct list of
the officers and directors of the Company as of the date hereof.
Section 3.14 Brokers, Finders, etc. All negotiations relating to
this Agreement, and the transactions contemplated hereby, have been carried on
without the participation of any Person acting on behalf of Seller or the
Company or their Affiliates in such manner as to give rise to any valid claim
against Buyer for any brokerage or finder's commission, fee or similar
compensation upon consummation of the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and the Company as follows:
Section 4.1 Corporate Status. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation and is
A-I-79
<PAGE>
duly qualified to do business and is qualified to do business and is in good
standing as a foreign corporation in the State of New Hampshire.
Section 4.2 Authorization, etc. Buyer has the corporate power and
authority to execute and deliver this Agreement, to perform fully its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery by Buyer of this Agreement, and the consummation of
the transactions contemplated hereby, have been duly authorized by all requisite
corporate action of Buyer. Buyer has duly executed and delivered this Agreement.
This Agreement is a legal, valid and binding obligation of Buyer, enforceable
against it in accordance with its terms, subject to general equitable principles
and except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application relating to creditors' rights.
Section 4.3 No Conflicts, etc. The execution, delivery and
performance by Buyer of this Agreement, and the consummation of the transactions
contemplated hereby, do not and will not conflict with or result in a violation
of or default under (with or without the giving of notice or the lapse of time
or both) (i) the certificate of incorporation or by-laws of Buyer, (ii) any
Applicable Law applicable to Buyer or any of its properties or assets, or
(iii) any material contract, agreement or other instrument applicable to Buyer
or any of its properties or assets, except for violations and defaults that,
individually and in the aggregate, have not and shall not materially impair the
ability of Buyer to perform its obligations under this Agreement. No
Governmental Approval or other Consent is required to be obtained or made by
Buyer in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
Section 4.4 Litigation. There is no action, claim, demand, suit,
proceeding, arbitration, grievance, citation, summons, subpoena, inquiry or
investigation, civil, criminal, regulatory or otherwise, in law or equity,
pending or, to Buyer's knowledge, threatened by or against or affecting Buyer
(i) in connection with or relating to the transactions contemplated by this
Agreement or any action taken or to be taken by Buyer in connection herewith or
the consummation of the transactions contemplated hereby or (ii) which would be
reasonably expected to impair the ability of Buyer to perform its obligations
under this Agreement.
Section 4.5 Brokers, Finders, etc. All negotiations relating to this
Agreement, and the transactions contemplated hereby, have been carried on
without the participation of any Person acting on behalf of Buyer or its
Affiliates in such manner as to give rise to any valid claim against Seller for
any brokerage or finder's commission, fee or similar compensation upon
consummation of the transactions contemplated hereby.
A-I-80
<PAGE>
ARTICLE V
COVENANTS
Section 5.1 Covenants of Seller and the Company. (a) Public
Announcements. Except as appropriate in the Seller's filings and announcements
relating to the Merger or otherwise required by Applicable Law, neither the
Company nor Seller shall make any public announcement in respect of this
Agreement or the transactions contemplated hereby without the prior written
consent of Buyer, which consent shall not be unreasonably withheld.
(b) Conduct of Business. From the date hereof to the Closing Date,
except as set forth in Schedule 5.1(b) or otherwise expressly permitted by this
Agreement or as otherwise consented to by Buyer in writing, the Company shall,
and Seller shall cause the Company to:
(i) carry on the business of the Company in
the ordinary course of business consistent with the conduct of the
business of the Company since June 27, 1998;
(ii) not grant any increase in the
compensation (including incentive or bonus compensation) of any
employee of the Company or, except as required by Applicable Law,
institute, adopt or amend any compensation or benefit plan, policy,
program or arrangement or collective bargaining agreement applicable
to any employee, except in the ordinary course of business
consistent with past practice;
(iii) not enter into any new employment
agreement or commitment (including any commitment to pay retirement
or other benefits) to or with any of the employees of the Company,
except in the ordinary course of business consistent with past
practice;
(iv) not sell, assign, license, dispose of or
transfer any of the assets of the Company having a fair market value
of at least $30,000 individually or $75,000 in the aggregate other
than sales of the Company's products in the ordinary course of
business consistent with past practice, or incur any liabilities or
obligations (including liabilities with respect to indebtedness,
capital leases or guarantees thereof) in excess of $30,000
individually or $50,000 in the aggregate, except in the ordinary
course of business consistent with past practice; or
(v) not (A) create any Liens on any of the
assets of the Company except for Permitted Liens or (B) make any
modifications of or changes in or terminate any existing Material
Contract other than as may be required to consummate the
transactions contemplated hereby, except in the ordinary course of
business consistent with past practice.
A-I-81
<PAGE>
(c) Access and Information. Prior to the Closing, Seller shall give
Buyer and its respective accountants, counsel, consultants, employees and agents
reasonable access during normal business hours and upon reasonable prior notice
to the personnel, properties, books and records of the Company.
(d) Further Assurances. Following the Closing, Seller and the
Company shall, from time to time, execute and deliver such additional
instruments, documents, conveyances or assurances and take such other actions as
shall be reasonably necessary, or otherwise reasonably requested by Buyer, to
confirm and assure the rights and obligations provided for in this Agreement and
render effective the consummation of the transactions contemplated hereby.
(e) Noncompete. Buyer and Seller each acknowledge that the Company
manufactures, markets or sells the Company Products. Seller agrees that, if the
Closing occurs, for a period of two years following the date hereof, Seller will
not directly or indirectly (i) manufacture, market or sell products, which are
competitive with Company Products, in any market in which the Company Products
are currently sold or marketed or (ii) induce or solicit any natural Person who
is an employee of the Company as of the Closing Date to terminate his or her
employment with the Company or (iii) call on any of the Company's customers or
suppliers for the purpose of soliciting, diverting, or taking away any of such
customers or suppliers of the Company or terminating, curtailing or otherwise
limiting their business relationship with the Company. Nothing herein shall
limit Seller's relationships or contacts with any customers or suppliers of the
Company who are also customers or suppliers of Seller with respect to products
and services other than the Company Products.
The parties hereto agree that the provisions of this Section 5.1(e)
are reasonable. If a court determines, however, that any provision of this
Section 5.1(e) is unreasonable, either in period of time, geographical area or
otherwise, then the parties hereto agree that the provisions of this Section
5.1(e) should be interpreted and enforced to the maximum extent which such court
deems reasonable.
(f) Pre-Closing Actions. As promptly as practicable, Seller and the
Company shall use commercially reasonable efforts to take all actions and to do
all things necessary, proper or advisable to consummate the transactions
contemplated hereby by the Closing Date.
Section 5.2 Covenants of Buyer. (a) Public Announcements. Except as
required by Applicable Law, Buyer shall not, and shall not permit its Affiliates
to, make any public announcement in respect of this Agreement or the
transactions contemplated hereby without the prior written consent of Seller,
which consent shall not be unreasonably withheld.
A-I-82
<PAGE>
(b) Pre-Closing Actions. As promptly as practicable, Buyer shall use
commercially reasonable efforts to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated
hereby by the Closing Date.
(c) Further Assurances. Following the Closing, Buyer shall, from
time to time, execute and deliver such additional instruments, documents,
conveyances or assurances and take such other actions as shall be reasonably
necessary, or otherwise reasonably requested by Seller, to confirm and assure
the rights and obligations provided for in this Agreement and render effective
the consummation of the transactions contemplated hereby.
Section 5.3 Environmental Matters. From and after the Closing, Buyer
shall assume any and all Environmental Liabilities and Costs arising from or
relating to conditions existing or events occurring in connection with the
property or assets of the Company, whether such events or conditions existed or
occurred before, on or after the Closing Date, and Buyer shall indemnify Seller,
its officers, directors, employees, agents, advisers, lenders, representatives
and Affiliates (collectively, the "Seller Indemnitees") from and against all
claims, liabilities, obligations, losses, fines, costs, judgments, penalties,
proceedings, deficiencies or damages resulting from or arising out of such
Environmental Liabilities and Costs.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Condition to Obligations of Each Party. The obligations
of the parties to consummate the transactions contemplated hereby at the Closing
shall be subject to the condition that consummation of the transactions
contemplated hereby shall not have been restrained, enjoined or otherwise
prohibited by any Applicable Law, including any order, injunction, decree or
judgment of any court or other Governmental Authority. No court or other
Governmental Authority shall have determined that any Applicable Law makes
illegal the consummation of the transactions contemplated hereby, and no
proceeding with respect to the application of any such Applicable Law to such
effect shall be pending.
Section 6.2 Conditions to Obligations of Buyer. The obligations of
Buyer to consummate the transactions contemplated hereby at the Closing shall be
subject to the fulfillment (or waiver by Buyer) on or prior to the Closing Date
of the following additional conditions:
(a) Representations; Performance. Each of the representations and
warranties of Seller and the Company contained in this Agreement shall be true
and correct in all material respects on the date hereof and at and as of the
Closing Date as though made on and as of the Closing Date. Seller and the
Company each shall have duly performed and complied in all material respects
with all agreements and
A-I-83
<PAGE>
conditions required by this Agreement to be performed or
complied with by it prior to or on the Closing Date. Seller and the Company each
shall have delivered to Buyer a certificate, dated the Closing Date and signed
by its duly authorized officer, to the foregoing effect.
(b) Consents. Seller and the Company shall have obtained and shall
have delivered to Buyer copies of all Governmental Approvals and Consents set
forth in Schedule 3.8(b) for which the failure to have such Governmental
Approvals and Consents would have a Material Adverse Effect on the Company,
including specifically and without limitation the required consent of holders of
the Notes and the lenders under the NAI Credit Agreement.
(c) Corporate Proceedings. All corporate and other proceedings of
the Company and Seller in connection with this Agreement and the transactions
contemplated hereby, and all documents and instruments incident thereto, shall
be reasonably satisfactory in form and substance to Buyer and its counsel, and
Buyer and its counsel shall have received all such documents and instruments, or
copies thereof, certified by the secretary of the Company and Seller, as
appropriate.
(d) Certificate of Status. Buyer shall have received copies of (i)
the articles of incorporation, as amended through the Closing Date, of the
Company, certified as of a recent date by the Secretary of State of the State of
New York, (ii) a long form certificate of good standing for the Company from
each of the Secretary of State of the State of New York and the State of New
Hampshire (or any other jurisdiction listed on Schedule 3.1), as of a recent
date, (iii) a copy of the by-laws of the Company, as in effect on the Closing
Date, certified by the Secretary of the Company, and (iv) a certificate of the
Secretary of the Company as to the officers and directors of the Company.
(e) Certificates for Shares. Seller shall have delivered to Buyer at
the Closing the certificates representing the Shares, duly endorsed in blank or
accompanied by stock powers duly endorsed in blank, in proper form for transfer,
together with guaranties of Seller's signature thereon, together with any
applicable stock transfer taxes, which certificates shall be submitted
immediately by Buyer to the Company for transfer. The Company shall have
delivered to Buyer certificates representing the Shares, registered in the name
of Buyer, duly executed by the Company.
(f) UCC Releases. The Company shall have obtained releases on form
UCC-3 or other appropriate form of all financing statements filed against the
Company as a debtor under the Uniform Commercial Code of any jurisdiction or
with respect to the property or assets of the Company (other than any such
financing statements filed in respect of Permitted Liens), which in the case of
the releases to be delivered by the lenders under the NAI Credit Agreement shall
be delivered simultaneously with the closing of the Merger, and evidence of the
filing thereof shall be provided to Buyer.
A-I-84
<PAGE>
(g) Resignations. All the directors and officers of the Company
shall have resigned effective as of the Closing and individuals designated by
Buyer shall have been elected or appointed as directors and officers of the
Company, effective as of the Closing. Such persons and Seller shall have
released the Company from all claims against the Company. Such persons shall be
removed as signatories on bank accounts and custody accounts.
(h) Opinion. Buyer shall have received the opinion, dated the
Closing Date, of Whitman Breed Abbott & Morgan LLP, special counsel to the
Seller, in form and substance reasonably satisfactory to the Buyer with respect
to the matters set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7 and 3.8 (as to
Consents).
(i) Intercompany Obligations. The balance of the intercompany debt
(receivable) (between the Company and Seller) reflected on the balance sheet of
the Company at the Closing Date shall be written off as of the Closing Date;
provided that any change in such intercompany balance shall be incured in the
ordinary course of business consistent with past practice.
(j) Corporate Records. Seller shall deliver or cause the Company to
deliver to Buyer, all minute books, stock records, the corporate seal and other
records of the Company and all keys or other means of access to the property of
the Company.
Section 6.3 Conditions to Obligations of Seller and the Company. The
obligations of Seller and the Company to consummate the transactions
contemplated hereby at the Closing shall be subject to the fulfillment (or
waiver by Seller and the Company) on or prior to the Closing Date of the
following additional conditions:
(a) Noteholders' Consent. The consent to the transactions
contemplated hereby shall have been obtained from the lenders under the NAI
Credit Agreement and from the holders of at least 75% of the aggregate principal
amount of the Notes.
(b) Stockholder Approval. The approval of the Merger by a majority
of the stockholders of each of Seller and DRS at its respective special meeting
of stockholders shall have been obtained.
(c) Representations; Performance. Each of the representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects on the date hereof and at and as of the Closing Date as though
made on and as of the Closing Date. Buyer shall have duly performed and complied
in all material respects with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to or on the Closing
Date. Buyer shall have delivered to Seller and the Company a certificate, dated
the Closing Date and signed by its duly authorized officer, to the foregoing
effect.
A-I-85
<PAGE>
(d) Consents. Buyer shall have obtained and shall have delivered to
Seller copies of all Governmental Approvals and Consents required to be obtained
by Buyer in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.
(e) Corporate Proceedings. All corporate proceedings of Buyer in
connection with this Agreement and the transactions contemplated hereby, and all
documents and instruments incident thereto, shall be reasonably satisfactory in
form and substance to Seller and the Company and their counsel, and Seller, the
Company and their counsel shall have received all such documents and
instruments, or copies thereof, certified if requested, as may be reasonably
requested.
(f) Purchase Price. Buyer shall have delivered the Purchase Price,
including any certificates representing the $2.50 Warrants and the $3.50
Warrants duly endorsed in proper form for transfer, together with guaranties of
the signature of the holders thereof.
ARTICLE VII
EMPLOYEE BENEFIT PLANS; TAX MATTERS
Section 7.1 Employee Benefit Plans.
(a) Employee Benefit Plan Participation. Except as otherwise
required by Applicable Law, all employees of the Company shall cease active
participation in (and accrual of additional benefits under) all Employee Benefit
Plans as of the Closing Date.
(b) Welfare Benefits. On and after the Closing Date and through the
first anniversary of the Closing Date, Buyer shall cause all employees of the
Company to be covered by welfare benefit plans, policies and arrangements
maintained by Buyer ("Buyer Plans"). Buyer Plans that provide health and medical
benefits shall have terms and conditions such that neither Seller nor any
Employee Benefit Plan nor any administrator thereof shall incur any liability or
obligation under Part 6 of Title I of ERISA or Section 4980B of the Code with
respect to any employee of the Company on or after the Closing Date. With
respect to the medical, dental, vision and life insurance benefits made
available to employees of the Company under Buyer's Plans, (i) no preexisting
condition exclusion shall apply except to the extent such exclusion actually
applied to limit, restrict or deny medical, dental, vision or life insurance
coverage to employees of the Company before the Closing Date under the Employee
Benefit Plans immediately prior to the Closing Date, and (ii) any deductible,
co-insurance or maximum out-of-pocket payments made by an employee of the
Company under the Employee Benefit Plans for any given qualification period
prior to the Closing Date shall be credited to such employee of the Company, and
shall reduce the amount of any such deductible, co-insurance or maximum
out-of-pocket payments under the Buyer's Plans during a similar qualification
period. Nothing in this Section 7.1(b) shall be construed to require Buyer to
provide employees of the Company with
A-I-86
<PAGE>
any stock-based plans relating to equity securities (or their equivalent, such
as phantom stock of SARs) or any incentive bonus programs based on the
achievement of financial targets.
(c) WARN Act. Buyer shall provide any required notice under the
Worker Adjustment and Retraining Notification Act ("WARN") and any other
Applicable Law and shall otherwise comply with any such statute with respect to
any "plant closing" or "mass layoff" (as defined in WARN) or similar event
affecting employees of the Company and occurring on or after the Closing Date or
arising as a result of the transactions hereby contemplated. Buyer shall
indemnify the Seller Indemnitees from and against all claims, liabilities,
obligations, losses, fines, costs, judgments, penalties, proceedings,
deficiencies or damages resulting from or arising out of any action taken by
Buyer which may trigger adjudication under WARN.
(d) Employment Liabilities. Buyer shall be responsible for all
liabilities and obligations in connection with any suit, claim, action or cause
of action asserted by any current or former employee of the Company relating to
or arising out of any conduct, action or event occurring on or prior to the
Closing Date with respect to the employment or termination of employment of any
such current or former employee of the Company.
Section 7.2 Tax Matters. (a) Federal Income Taxes. Seller shall
include the results of operations of the Company through the Closing in Seller's
consolidated U.S. federal income tax returns, and shall make timely (taking into
account permitted extensions and except where Seller has duly challenged such
payments) all payments required in connection therewith.
(b) State and Local Income Taxes. Seller shall make timely (taking
into account permitted extensions and except where Seller has duly challenged
such payments) all state and local income tax filings and payments for the
Company for tax periods ending on or before the Closing Date.
(c) Allocation of Tax Liability. All Taxes attributable to the
operations of the Company through the Closing Date shall be borne by Seller and
any refunds or credits or rights to refunds or credits with respect thereto
(including interest and penalties) shall be the property of Seller.
(d) Post Closing Taxes. All Taxes attributable to the Company for
the period subsequent to Closing shall be the responsibility of the Company or
Buyer.
(e) Payments. The Company shall be responsible to pay all Taxes
relating to the Company which are due after the Closing Date, excluding income
taxes (relating to periods prior to the Closing Date) to be paid by Seller
pursuant to Sections 7.2(a) and (b). Any such Taxes to be borne by Seller
pursuant to the provisions of Section 7.2(c), but which are paid by the Company,
shall be reimbursed by Seller to
A-I-87
<PAGE>
the Company no later than 10 business days after the Company notifies Seller it
has made such payment.
(f) Allocations. To the extent Taxes relate to a period both before
and after the Closing Date, such Taxes shall be reasonably allocated between
Seller and the Company in the most appropriate manner to reflect Taxes arising
with respect to the period prior to the Closing Date and Taxes arising with
respect to the period after the Closing Date.
(g) Reimbursements. If either party pays any Taxes to be borne by
the other party under this Section 7.2, the other party shall promptly reimburse
such party for the Taxes paid. If, in preparing Tax filings or payments after
Closing, it appears to Buyer or the Company that Seller will be asked to pay
additional Taxes, Buyer and/or the Company shall so notify Seller and provide
Seller a reasonable opportunity to review any related returns prior to filing
them and paying the Tax. If either party receives any refunds or credits which
are the property of the other party under this Section 7.2, such party shall
promptly pay the amount of such refunds or credits to the other party. As soon
as practicable after the Closing, Seller shall furnish to Buyer copies of the
Company's portion of the final income tax information included in Seller's
combined federal income tax return and in any consolidated or combined state
income tax return required to be filed by Seller after the Closing relating
solely to the operations of the Company through the Closing Date.
(h) Tax Sharing Agreements. Any tax sharing agreement between Seller
and the Company will be terminated as of the Closing Date and will have no
further effect for any taxable year (whether the current year, a future year, or
a past year).
(i) Cooperation. Buyer shall, and shall require the Company, to make
available to Seller and its representatives all records and materials reasonably
required by it to pursue or contest any Tax matters and shall provide reasonable
cooperation to Seller in such case, including having personnel of the Company
provide reasonable assistance to Seller, consistent with the manner in which
such matters would have been dealt with prior to Closing. Seller shall make
available to Buyer, the Company and their representatives those records and
materials relating to the Company for the periods prior to the Closing Date
reasonably required by them to prepare, pursue or contest any Tax matters
arising after Closing which have factual reference to the pre-Closing periods.
(j) Seller's Tax Determinations. Seller shall decide whether (i) to
treat for tax purposes the transactions contemplated by this Agreement as a sale
of stock or assets and (ii) to reattribute to Seller the losses attributable to
the Company, pursuant to the Treasury Regulations (collectively, "Seller's Tax
Determinations"). Buyer and the Company each shall take any actions required to
achieve the intended Tax-related results of Seller's Tax Determinations and
requested by Seller, including, but not limited to, the preparation and filing
of all elections, forms or other materials. Neither Buyer nor the Company shall
take, or cause to be taken, any action which may result in the failure to
achieve the intended Tax-related results of Seller's Tax Determinations or is
otherwise inconsistent with Seller's Tax Determinations, including, but not
limited to, the filing of any Tax return on behalf of Buyer or the Company.
A-I-88
<PAGE>
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated at any
time prior to the Closing Date:
(a) by the termination of the Merger Agreement in accordance with
Article 10 therein;
(b) by the written agreement of Buyer, Seller and the Company;
(c) by either Seller or Buyer by written notice to the other party
if the transactions contemplated hereby shall not have been consummated pursuant
hereto by 5:00Ep.m. New York City time on December 31, 1998, unless such date
shall have been extended by mutual written consent of Buyer, Seller and the
Company;
(d) by Buyer by written notice to Seller and the Company if (i) the
representations and warranties of Seller and the Company shall not have been
true and correct as of the date when made, or (ii) if any of the conditions set
forth in Section 6.1 or 6.2 shall not have been, or if it becomes apparent that
any of such conditions will not be, fulfilled by the Closing Date, unless such
failure shall be due to the failure of Buyer to perform or comply with any of
the covenants, agreements or conditions hereof to be performed or complied with
by it prior to the Closing; or
(e) by Seller by written notice to Buyer if (i) the representations
and warranties of Buyer shall not have been true and correct in all material
respects as of the date when made, or (ii) if any of the conditions set forth in
Section 6.1 or 6.3 shall not have been, or if it becomes apparent that any of
such conditions will not be, fulfilled by the Closing Date, unless such failure
shall be due to the failure of either Seller or the Company to perform or comply
with any of the covenants, agreements or conditions hereof to be performed or
complied with by it prior to the Closing.
Section 8.2 Effect of Termination. If this Agreement is terminated
pursuant to the provisions of Section 8.1, then this Agreement shall become void
and have no effect, without any liability to any Person in respect hereof or of
the transactions contemplated hereby on the part of any party hereto, or any of
its directors, officers, employees, agents, consultants, representatives,
advisers, stockholders or Affiliates.
A-I-89
<PAGE>
ARTICLE IX
MISCELLANEOUS
Section 9.1 Non-survival of Representations and Warranties. None of
the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Closing Date; provided,
however, the representation set forth in second sentence of Section 3.3(d)
hereof shall survive the Closing, but any recovery with respect thereto shall be
limited to an amount equal to the cash portion of the Purchase Price. This
Section 9.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Closing Date.
Section 9.2 Procedures with Respect to Third-Party Claims. In the
case of any claim asserted by a third party against a party entitled to
indemnification under this Agreement (the "Indemnified Party"), notice shall be
given by the Indemnified Party to the party required to provide indemnification
(the "Indemnifying Party") as soon as practicable after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and the
Indemnified Party shall permit the Indemnifying Party (at the expense of such
Indemnifying Party) to assume the defense of any third party claim or any
litigation with a third party resulting therefrom; provided, however, that
(i) the counsel for the Indemnifying Party who shall conduct the defense of such
claim or litigation shall be subject to the approval of the Indemnified Party
(which approval shall not be unreasonably withheld or delayed), (b) the
Indemnified Party may participate in such defense at such Indemnified Party's
expense, and (c) the omission by any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its indemnification
obligation under this Agreement except and only to the extent that such
Indemnifying Party is actually and materially damaged as a result of such
failure to give notice. Except with the prior consent of the Indemnified Party,
no Indemnifying Party, in the defense of any such claim or litigation, shall
consent to entry of any judgment or enter into any settlement that provides for
injunctive or other nonmonetary relief affecting the Indemnified Party or that
does not include as an unconditional term thereof the giving by each claimant or
plaintiff to such Indemnified Party of a general release from all liability with
respect to such claim or litigation. If the Indemnified Party shall in good
faith determine that the Indemnified Party may have available to it one or more
defenses or counterclaims that are inconsistent with one or more of those that
may be available to the Indemnifying Party in respect of such claim or any
litigation relating thereto, the Indemnified Party shall have the right to
employ counsel, separate from counsel employed by the Indemnifying Party and to
participate therein, but the fees and expenses of such counsel employed by the
Indemnified Party shall be at its expense. The Indemnified Party shall not
settle such claim or litigation without the prior consent of the Indemnifying
Party, such consent not to be unreasonably withheld or delayed. If the
Indemnifying Party does not accept the defense of any matter as above provided,
the Indemnified Party shall have the full right to defend against any such claim
or demand at the sole cost of the Indemnifying Party and shall be entitled to
settle or agree to pay in full such claim or demand. In any event, the
Indemnifying Party and the Indemnified Party shall reasonably cooperate in the
defense of any claim
A-I-90
<PAGE>
or litigation subject to this Article IX and the records of
each shall be reasonably available to the other with respect to such defense.
Section 9.3 Expenses. Seller and the Company, on the one hand, and
Buyer, on the other hand, shall bear their respective expenses, costs and fees
(including attorneys' and auditors' fees) in connection with the transactions
contemplated hereby, including the preparation, execution and delivery of this
Agreement and compliance herewith, whether or not the transactions contemplated
hereby shall be consummated.
Section 9.4 Severability. If any provision of this Agreement,
including any phrase, sentence, clause, Section or subsection is inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering the provision in question inoperative or unenforceable in any other
case or circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.
Section 9.5 Notices. All notices, requests, demands, approvals,
consents, waivers and other communications required or permitted to be given
under this Agreement (each, a "Notice") shall be in writing and shall be
(a) delivered personally, (b) mailed by first-class, registered or certified
mail, return receipt requested, postage prepaid, (c) sent by next-day or
overnight mail or delivery, or (d) sent by facsimile transmission, provided that
the original copy thereof also is sent by certified or registered mail.
(i) if to Buyer, to:
Wilcom Acquisition Corp.
P.O. Box 2850
Southampton, New York 11969
Facsimile: (516) 287-4473
Attention: Charles S. Holmes
with a copy to:
Brown Raysman Millstein
Felder & Steiner LLP
120 West 45th Street
New York, New York 10036
Facsimile: (212) 840-2429
Attention: Sarah Hewitt, Esq.
A-I-91
<PAGE>
(ii) if to Seller, to:
NAI Technologies, Inc.
23 Old Town Lane
Halesite, New York 11743
Facsimile: (516) 385-0815
Attention: (516) 385-3252
with a copy to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Facsimile: (212) 351-3131
Attention: David F. Kroenlein, Esq.
(iii) if to the Company, to:
Wilcom, Inc.
P.O. Box 508
Laconia, NH 03247
Facsimile: (603) 524-3735
Attention: (603) 524-2622
with copies to:
NAI Technologies, Inc.
23 Old Town Lane
Halesite, New York 11743
Facsimile: (516) 385-0815
Attention: (516) 385-3252
and
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Facsimile: (212) 351-3131
Attention: David F. Kroenlein, Esq.
or, in each case, at such other address as may be specified in a Notice to the
other parties hereto. All Notices shall be deemed effective and given upon
receipt.
A-I-92
<PAGE>
Section 9.6 Headings. The headings contained in this Agreement are
for purposes of convenience only and shall not affect the meaning or
interpretation of this Agreement.
Section 9.7 Entire Agreement. This Agreement (including the
Schedules hereto) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof.
Section 9.8 Counterparts. This Agreement may be executed (including
by facsimile transmission) with counterpart signature pages or in several
counterparts, each of which shall be deemed an original and all of which shall
together constitute one and the same instrument.
Section 9.9 Governing Law, etc. This Agreement shall be governed in
all respects, including as to validity, interpretation and effect, by the
internal laws of the State of New York without giving effect to the conflict of
laws rules thereof. Each of Buyer, Seller and the Company hereby irrevocably
submits to the jurisdiction of the courts of the State of New York located in
New York County, and the Federal courts of the United States of America located
in the Southern District of New York solely in respect of the interpretation and
enforcement of the provisions of this Agreement and of the documents referred to
in this Agreement, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any of such
documents may not be enforced in or by said courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a New York State or Federal court. Each of
Buyer, Seller and the Company hereby consents to and grants any such court
jurisdiction over the person of such parties and over the subject matter of any
such dispute and agrees that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in Section 9.5, or in
such other manner as may be permitted by law, shall be valid and sufficient
service thereof.
Section 9.10 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.
Section 9.11 Assignment. This Agreement shall not be assignable or
otherwise transferable by Buyer or Seller without the prior written consent of
the other; provided, however, that Buyer may assign this Agreement to any of its
Affiliates (it being understood and agreed that no such assignment by Buyer
pursuant to this proviso shall relieve Buyer of any of its obligations
hereunder); provided further, however, that from and after the Closing, Buyer
shall have the right to assign this Agreement to any Person (it being understood
and agreed that no such assignment
A-I-93
<PAGE>
by Buyer pursuant to this proviso shall relieve Buyer of any of its obligations
hereunder).
Section 9.12 No Third Party Beneficiaries. Except as otherwise
provided in this Agreement, nothing in this Agreement shall confer any rights
upon any Person other than the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.
Section 9.13 Amendment; Waivers, etc. No discharge of this
Agreement, and no waiver hereunder, shall be valid or binding unless set forth
in writing and duly executed by the party against whom enforcement of the
discharge or waiver is sought. Any such waiver shall constitute a waiver only
with respect to the specific matter described in such writing and shall in no
way impair the rights of the party granting such waiver in any other respect or
at any other time. Neither the waiver by any of the parties hereto of a breach
of or a default under any of the provisions of this Agreement, nor the failure
by any of the parties, on one or more occasions, to enforce any of the
provisions of this Agreement or to exercise any right or privilege hereunder,
shall be construed as a waiver of any other breach or default of a similar
nature, or as a waiver of any of such provisions, rights or privileges
hereunder.
A-I-94
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
Buyer:
WILCOM ACQUISITION CORP.
By:____________________________________
Name:
Title:
Seller:
NAI TECHNOLOGIES, INC.
By:______________________________________
Name:
Title:
Company:
WILCOM, INC.
By:____________________________________
Name:
Title:
A-I-95
<PAGE>
ANNEX A-II
December 22, 1998
NAI Technologies, Inc.
282 New York Avenue
Huntington, New York 11743
Dear Ladies and Gentlemen:
Reference is hereby made to the Agreement and Plan of Merger, dated as of
August 26, 1998 (the "Merger Agreement"), among DRS Technologies, Inc., a
Delaware corporation ("DRS"), DRS Merger Sub, Inc., a New York corporation
("Merger Sub"), and NAI Technologies, Inc. ("NAI"). Initially capitalized terms
used herein without definition shall have the meanings assigned to them in the
Merger Agreement.
DRS, Merger Sub and NAI wish to extend the date for the consummation of the
Merger from December 31, 1998 to February 4, 1999. Accordingly, DRS, Merger Sub
and NAI each hereby agrees that the Merger Agreement be and hereby is amended as
follows:
1. Section 10.1(b)(i) of the Merger Agreement is hereby amended so that
the reference to "December 31, 1998" appearing in the first sentence
of clause (i) is replaced with "February 4, 1999"; and
2. Section 10.2(c) of the Merger Agreement is hereby amended so that the
reference to "December 31, 1998" appearing in clause (i) of the
proviso at the end of subsection (c) is replaced with "February 4,
1999".
Except as specifically amended hereby, the Merger Agreement shall, in all
respects, remain in full force and effect.
A-II-1
<PAGE>
Please sign where noted below to confirm the foregoing agreement.
Very truly yours,
DRS TECHNOLOGIES, INC.
By: /s/ NINA LASERSON DUNN
-----------------------------------------
Name: Nina Laserson Dunn
Title: Executive Vice President,
General Counsel and Secretary
DRS MERGER SUB, INC.
By: /s/ NINA LASERSON DUNN
----------------------------------------
Name: Nina Laserson Dunn
Title: Executive Vice President
General Counsel and Secretary
ACCEPTED AND AGREED:
NAI TECHNOLOGIES, INC.
By: /s/ RICHARD A. SCHNEIDER
--------------------------------
Name: Richard A. Schneider
Title: Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
A-II-2
<PAGE>
ANNEX A-III
January 21, 1999
NAI Technologies, Inc.
282 New York Avenue
Huntington, New York 11743
Dear Ladies and Gentlemen:
Reference is hereby made to the Agreement and Plan of Merger, dated as of
August 26, 1998 (the "Merger Agreement"), among DRS Technologies, Inc., a
Delaware corporation ("DRS"), DRS Merger Sub, Inc., a New York corporation
("Merger Sub"), and NAI Technologies, Inc. ("NAI"), as amended by the letter
agreement, dated December 22, 1998, among DRS, Merger Sub and NAI. Initially
capitalized terms used herein without definition shall have the meanings
assigned to them in the Merger Agreement.
DRS, Merger Sub and NAI wish to extend the date for the consummation of the
Merger from February 4, 1999 to February 17, 1999. Accordingly, DRS, Merger Sub
and NAI each hereby agrees that the Merger Agreement be and hereby is amended as
follows:
2. Section 10.1(b)(i) of the Merger Agreement is hereby amended so
that the reference to "February 4, 1999" appearing in the first
sentence of clause (i) is replaced with "February 17, 1999"; and
2. Section 10.2(c) of the Merger Agreement is hereby amended so that the
reference to "February 4, 1999" appearing in clause (i) of the proviso
at the end of subsection (c) is replaced with "February 17, 1999".
Except as specifically amended hereby, the Merger Agreement shall, in all
respects, remain in full force and effect.
A-III-1
<PAGE>
NAI Technologies, Inc.
January 21, 1999
Page 2
Please sign where noted below to confirm the foregoing agreement.
Very truly yours,
DRS TECHNOLOGIES, INC.
By: /s/ Nina Laserson Dunn
----------------------
Name: Nina Laserson Dunn
Title: Executive Vice President,
General Counsel and Secretary
DRS MERGER SUB, INC.
By: /s/ Nina Laserson Dunn
----------------------
Name: Nina Laserson Dunn
Title: Executive Vice President
General Counsel and Secretary
ACCEPTED AND AGREED:
NAI TECHNOLOGIES, INC.
By: /s/ Richard A. Schneider
------------------------
Name: Richard A. Schneider
Title: Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
A-III-2
<PAGE>
ANNEX B-I
[LETTERHEAD OF MCFARLAND DEWEY]
July 21, 1998
Board of Directors
DRS Technologies, Inc.
5 Sylvan Way
Parsippany, NJ 07054
Gentlemen:
DRS Technologies, Inc. ("DRS") and NAI Technologies, Inc. ("NAI") have
proposed entering into an Agreement and Plan of Merger among DRS, its wholly
owned subsidiary ("Merger Sub") and NAI, as outlined in the latest draft dated
July 10, 1998 (the "Merger Agreement") pursuant to which NAI will be merged into
DRS in a transaction (the "Merger") in which each outstanding share of NAI's
common stock, par value $.10 per share (the "NAI Shares"), will be converted
into the right to receive 0.23 shares (the "Exchange Ratio") and no more than
0.25 under certain circumstances as set forth in the Merger Agreement of the
common stock of DRS, par value $0.01 per share (the "DRS Shares").
You have asked us whether, in our opinion, the Exchange Ratio is fair from
a financial point of view to the shareholders of DRS, other than NAI and its
affiliates. We assume for purposes of this opinion that the exchange ratio will
be .25.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to DRS and NAI that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of DRS and NAI, as well as the amount and timing of the cost
savings expected to result from the Merger (the "Expected Expense
Reductions") furnished to us by DRS and NAI, respectively;
(3) Conducted discussions with members of senior management and
representatives of DRS and NAI concerning the matters described in
clauses
B-I-1
<PAGE>
1 and 2 above, as well as their respective businesses and prospects
before and after giving effect to the Merger and the Expected
Expense Reductions;
(4) Reviewed the market prices and valuation multiples for DRS Shares and
NAI Shares and compared them with those of certain publicly traded
companies that we deemed to be relevant;
(5) Reviewed the results of operations of DRS and NAI and compared them
with those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Participated in certain discussions and negotiations among
representatives of DRS and NAI and their financial and legal advisors;
(8) Reviewed the potential pro forma financial impact of the Merger;
(9) Reviewed the latest draft Merger Agreement which we are advised
reflects all material aspects of the final Merger Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of DRS or NAI or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of DRS or NAI. With respect
to the financial forecast information and the Expected Expense Reductions
furnished to or discussed with us by DRS or NAI, we have assumed that they have
been reasonably prepared and reflect the best currently available estimates and
judgment of DRS's or NAI's management as to the expected future financial
performance of DRS or NAI, as the case may be, and the Expected Expense
Reductions. We have further assumed that the Merger will be accounted for as a
purchase under generally accepted accounting principles and that it will qualify
as a tax-free reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
B-I-2
<PAGE>
We are acting as financial advisor to DRS in connection with the Merger and
will receive a fee from DRS for our services, which is contingent upon the
consummation of the Merger. We will receive no separate fee for this opinion. In
1995, we acted as financial advisor to DRS with respect to a potential merger
with NAI which was never completed. We have, in the past, provided financial
advisory and financing services to DRS, and may continue to do so, and have
received, and may receive, fees for the rendering of such services. In addition,
DRS has agreed to indemnify us for certain liabilities arising out of our
engagement.
This opinion is for the use and benefit of the Board of Directors of DRS.
Our opinion does not address the merits of the underlying decision by DRS to
engage in the Merger and does not constitute a recommendation to any stockholder
as to how such stockholder should vote on the proposed Merger or any matter
related thereto.
We are not expressing any opinion herein as to the prices at which DRS
Shares or NAI Shares will trade following the announcement or consummation of
the Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange Ratio is fair from a financial point of view
to the shareholders of DRS, other than NAI and its affiliates.
Very truly yours,
MCFARLAND DEWEY & CO., LLC
by: /s/ ALAN ROBERTS MCFARLAND
--------------------------------
Alan Roberts McFarland, Member
B-I-3
<PAGE>
ANNEX B-II
McFARLAND DEWEY & CO., LLC
230 PARK AVENUE
NEW YORK, NEW YORK 10169-1450
-------
TELEPHONE (212) 867-4949
FACSIMILE (212) 867-0334
E-MAIL: [email protected] January 25, 1999
Board of Directors
DRS Technologies, Inc.
5 Sylvan Way
Parsippany, NJ 07054
Gentlemen:
On July 21, 1998 McFarland Dewey expressed its opinion that the merger and
corresponding exchange ratio of NAI Technologies, Inc. ("NAI") by DRS
Technologies, Inc. ("DRS") was fair to the shareholders of DRS from a financial
point of view. In affirming such opinion we have reviewed our prior opinion and
its supporting materials, in light of the changes since July in market price and
conditions. We reviewed the final merger agreement dated August 26, 1998 between
DRS and NAI. We also held discussions with various members of DRS management
concerning the change in DRS's business and financial condition as a result of
the October 20, 1998 acquisition of Raytheon's Focal Plane Array business.
Following the above review, as of the date hereof, we affirm our opinion
dated July 21, 1998.
Very truly yours,
McFARLAND DEWEY & CO., LLC
/s/ ALAN ROBERTS McFARLAND
--------------------------
Alan Roberts McFarland
Member
B-II-1
<PAGE>
ANNEX C
[LOGO]
July 7, 1998
The Board of Directors
NAI Technologies, Inc.
282 New York Avenue
Huntington, NY 11473
We understand that NAI Technologies, Inc. ("NAI" or the "Company"), DRS
Corporation ("DRS"), and Merger Sub, Inc., ("Merger Sub" or the "Purchaser"), a
wholly-owned subsidiary of DRS, will enter into a Merger Agreement (the "Merger
Agreement"). Pursuant to the Merger Agreement, NAI will be merged with and into
the Merger Sub, with NAI being the surviving corporation in the Merger and
continuing as a direct wholly-owned subsidiary of DRS, and (a) each outstanding
share of NAI Common Stock will be exchanged for not less than .23 shares of DRS
Common Stock (the "Exchange Ratio" or "Offer"); provided however, that if the
(a) average of the reported closing prices per share of DRS Common Stock for the
consecutive 60-day period ending two business days before the effective date of
the merger (the "DRS Closing Date Market Price") falls below $12.00 per share
and the (ii) the ratio of (x) the average of the reported closing prices per
share of NAI's Common Stock for the consecutive 60-day period ending two
business days before the effective date of the merger (the "NAI Closing Date
Market Price") to (y) the DRS Closing Date Market Price is no less than .18,
then the Exchange Ratio shall be .25. As a condition of the Merger Agreement,
each outstanding warrant to purchase NAI Common Stock will be converted into a
warrant to purchase DRS Common Stock as would be issuable, at the Exchange
Ratio, in respect of the shares of NAI common stock issuable upon exercise of
such NAI warrant in accordance with its terms as of the effective date of the
Merger; additionally, each outstanding note convertible into NAI common stock
will be converted into a note convertible into such number of shares of DRS
Common Stock issuable upon conversion of such note in accordance with its terms
as of the effective date of the merger (collectively the "Ancillary
Conversions").
As a condition precedent to the Offer, DRS has required that NAI sell all of the
capital stock of its wholly-owned subsidiary, Wilcom, Inc. ("Wilcom") on terms
and conditions negotiated, at arm's-length, satisfactory to DRS as set forth in
the draft Wilcom Stock Purchase Agreement dated June 30, 1998.
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of the Company of the proposed Offer. You have also
requested that we render to you an opinion as to the fairness, from a financial
point of view, to the same shareholders of the terms and conditions of the
proposed disposition of Wilcom as a condition precedent to the Offer. You have
not requested us to render an opinion with respect to the Ancillary Conversions.
C-1
<PAGE>
NAI Technologies, P.2
July 7, 1998
In connection with the preparation of this opinion, we have not been authorized
by the Board to solicit, nor have we solicited, third-party indications of
interest with respect to a business combination or other extraordinary
transaction involving the purchase of the Company or any of its subsidiaries or
assets. As such, we are not in a position to state or recommend that this Offer
represents the best possible or potential highest price offer. Rather, our
opinion is limited to whether the Offer and the terms and conditions of the
disposition of Wilcom are fair, from a financial point of view, to the
stockholders of the Company.
For purposes of the opinion set forth herein we have, inter alia:
(i) reviewed certain publicly available historical financial and operating
data concerning the Company including its Annual Report to
Stockholders and Annual Report on Form 10-K for the year ended
December 31, 1997 and the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998;
(ii) reviewed certain publicly available historical financial and operating
data of DRS including its Annual Report to Stockholders and Annual
Report on Form 10-K for the year ended March 31, 1998 and the
Quarterly Reports on Form 10-Q for the quarters ended December 31,
1997 and September 30, 1997;
(iii) interviewed certain members of senior management of the Company to
discuss the prospects for the Company's business;
(iv) interviewed certain members of senior management of DRS to discuss the
prospects for DRS's business;
(v) reviewed certain information of the Company, including financial
forecasts relating to the business, earnings, cash flow, assets and
prospects of the Company prepared by the management of the Company;
(vi) reviewed certain publicly available financial, operating and stock
market data concerning certain companies engaged in businesses which
the Company's management deemed relatively comparable to those of the
Company;
(vii) inquired as to the financial terms of certain recent transactions
management deemed relevant to our inquiry;
(viii) reviewed the historical market prices and trading volumes of the
Company's shares of Common Stock;
(ix) reviewed the historical market prices and trading volumes of DRS's
shares of Common Stock;
(x) reviewed a draft of the Merger Agreement, dated April 27, 1998;
C-2
<PAGE>
NAI Technologies, P.3
July 7, 1998
(xi) reviewed a draft of the Wilcom Stock Purchase Agreement, dated June
30, 1998;
(xii) reviewed a draft of the Joint Proxy Statement/Prospectus of the
Company and DRS, dated June 26, 1998 (the Joint Proxy
Statement/Prospectus); and,
(xiii) conducted such other financial studies, analyses and investigations
we deemed appropriate.
We have, with your approval, assumed that the Merger Agreement, Wilcom Stock
Purchase Agreement and the Joint Proxy Statement/Prospectus when executed in
definitive form by the parties thereto will each conform in all material
respects to the drafts of such agreements, which we have previously reviewed.
In connection with our review and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of the financial and other
information provided to us by the Company and DRS and their respective
management teams. We have not assumed any responsibility for independent
verification of such information. We have not made any independent appraisal of
the assets or liabilities of the Company, and no such appraisal has been
provided to us. We have not conducted or assumed responsibility for conducting a
physical inspection of any of the properties or facilities of either DRS or NAI,
nor have we made or obtained or assumed any responsibility for making or
obtaining any independent evaluations or appraisals of such properties or
facilities.
With respect to the financial forecasts provided to us by the Company and DRS,
management of each company has represented to us, and we have assumed that such
forecasts (and assumptions and bases therefore) have been prepared in good faith
and represent each management's best currently available estimate as to the
future financial performance of the Company and DRS respectively. We express no
opinion with respect to such projections, forecasts, and analyses or the
assumptions upon which they are based. Furthermore we have assumed that the
management teams from both companies are unaware of any information or facts
that would make the information provided to us incomplete or misleading.
Additionally, our opinion is necessarily based on economic, financial, market
and other conditions as they exist and can be evaluated as of the date hereof.
This letter and the opinion expressed herein are for the benefit of the Board of
Directors. Neither this letter nor opinion constitutes a recommendation to any
stockholder of the Company with respect to whether such stockholder should vote
for the merger or accept the Exchange Ratio, and should not be relied upon by
any stockholder as such.
This letter and opinion are for the information of the Board of Directors of the
Company for use in its consideration of the fairness from a financial point of
view of the Exchange Ratio to the public shareholders of the Company and in its
consideration of the fairness of the disposition of Wilcom. This letter and
opinion may not be used for any other purpose or referred to without
C-3
<PAGE>
NAI Technologies, P.4
July 7, 1998
our prior written consent. Notwithstanding the foregoing, the Company may
include this letter and opinion in its entirety as an exhibit to the Joint Proxy
Statement and Prospectus.
As you are aware, Commonwealth has previously represented three separate
companies, including the Company for which Charles S. Holmes currently serves as
an officer or director and is also a significant shareholder. Mr. Holmes is the
control person of the entity that is purchasing Wilcom.
Commonwealth Associates, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwriting, private
placements and private investments. Commonwealth will receive a fee for its
services in providing this opinion, a portion of which is payable upon the
earlier of a) the time its opinion is first published, quoted or publicly
referred to in any proxy statement or other public document or, b) the
consummation of the disposition of Wilcom. In addition, Commonwealth itself,
shareholders, partners and employees of Commonwealth own or have owned a
significant amount of the Company's convertible notes and publicly traded
warrants. Such notes and warrants are convertible and exercisable into common
stock of the Company at respective prices per common share of $2.00 and $2.50.
In addition, in the ordinary course of business Commonwealth may trade the
Company's common stock for its own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in the Company's
common stock.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, we are of the opinion that, as of the date hereof,
(i) the Offer, and (ii) the proposed disposition of Wilcom, are fair from a
financial point of view, to the stockholders of the Company.
Sincerely,
COMMONWEALTH ASSOCIATES
C-4
<PAGE>
ANNEX D
DRS TECHNOLOGIES, INC.
1996 OMNIBUS PLAN
1. Establishment and Purpose.
There is hereby adopted the DRS Technologies, Inc. 1996 Omnibus Plan (the
"Plan"). This Plan is intended to promote the interests of the Company (as
defined below) and the stockholders of DRS Technologies, Inc. ("DRS") by
providing officers and other employees of the Company (including directors who
are also employees of the Company) with appropriate incentives and rewards to
encourage them to enter into and continue in the employ of the Company and to
acquire a proprietary interest in the long-term success of the Company; to
compensate DRS's non-employee directors and provide incentives to such
non-employee directors which are directly linked to increases in stock value;
and to reward the performance of individual officers, other employees,
consultants and non-employee directors in fulfilling their personal
responsibilities for long-range achievements.
2. Definitions.
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Agreement" shall mean the written agreement between DRS and a
Participant evidencing an Incentive Award.
(b) "Board of Directors" shall mean the Board of Directors of DRS.
(c) "Cause" shall mean (1) the willful and continued failure by the
Participant substantially to perform his or her duties and obligations to
the Company (other than any such failure resulting from his or her
incapacity due to physical or mental illness); (2) the willful engaging by
the Participant in misconduct which is materially injurious to the Company;
(3) the commission by the Participant of a felony; or (4) the commission by
the Participant of a crime against the Company which is materially
injurious to the Company. For purposes of this Section 2(c), no act, or
failure to act, on a Participant's part shall be considered "willful"
unless done, or omitted to be done, by the Participant in bad faith and
without reasonable belief that his or her action or omission was in the
best interest of the Company. Determination of Cause shall be made by the
Committee in its sole discretion.
(d) A "Change in Control" shall be deemed to have occurred if the event set
forth in any one of the following paragraphs shall have occurred:
(1) any Person is or becomes the "Beneficial Owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of DRS (not including in the securities Beneficially
Owned by such Person any securities acquired directly from the
Company) representing 25% or more of DRS's then outstanding
securities, excluding any Person who becomes such a Beneficial
Owner in connection with a transaction described in clause (i) of
paragraph (3) below; or
(2) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, on the Effective Date, constitute the Board of Directors 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 DRS) whose appointment
or election by the Board of Directors or nomination for election
by DRS'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 Effective Date or whose appointment,
election or nomination for election was previously so approved or
recommended; or
D-1
<PAGE>
(3) there is consummated a merger or consolidation of the Company
with any other corporation other than (i) a merger or
consolidation which would result in the voting securities of DRS
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 75% of the combined voting power of
the voting securities of DRS or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of DRS (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of DRS not including in the securities
Beneficially Owned by such Person any securities acquired
directly from the Company) representing 25% or more of the
combined voting power of DRS's then outstanding securities; or
(4) the stockholders of DRS approve a plan of complete liquidation or
dissolution of DRS or there is consummated an agreement for the
sale or disposition by DRS of all or substantially all of DRS's
assets, other than a sale or disposition by DRS of all or
substantially all of DRS's assets to an entity, at least 75% of
the combined voting power of the voting securities of which are
owned by Persons in substantially the same proportions as their
ownership of DRS immediately prior to such sale.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and any regulations promulgated thereunder.
(f) "Committee" shall mean the Stock Option Committee of the Board of
Directors. The Committee shall consist of two or more persons, each of whom
is an "outside director" within the meaning of Section 162(m) of the Code
and a "disinterested person" within the meaning of Rule 16b-3.
(g) "Company" shall mean, collectively, DRS and each of its Subsidiaries
now held or hereinafter acquired.
(h) "Company Stock" shall mean the common stock of DRS, par value $.01 per
share.
(i) "Disability" shall mean: (1) any physical or mental condition that
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company and applicable to him or her; (2)
when used in connection with the exercise of an Incentive Stock Option
following termination of employment, disability within the meaning of
Section 22(e)(3) of the Code; or (3) such other condition as may be
determined in the sole discretion of the Committee to constitute
Disability.
(j) "Effective Date" shall mean the date upon which this Plan is adopted by
the Board of Directors.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(l) "Executive Officer" shall have the meaning set forth in Rule 3b-7
promulgated under the Exchange Act.
(m) The "Fair Market Value" of a share of Company Stock, as of a date of
determination, shall mean (1) the closing sales price per share of Company
Stock on the national securities exchange on which such stock is
principally traded for the last preceding date on which there was a sale of
such stock on such exchange, or (2) if the shares of Company Stock are not
listed or admitted to trading on any such exchange, the closing price as
reported by the NASDAQ Stock Market for the last preceding date on which
there was a sale of such stock on such exchange, or (3) if the shares of
Company Stock are not then listed on the NASDAQ Stock Market, the average
of the highest reported bid and lowest reported asked prices for the shares
of Company Stock as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System for the last preceding date on
which there was a sale of such stock in such market, or (4) if the shares
of Company Stock are not then listed on a national securities exchange or
traded in an over-
D-2
<PAGE>
the-counter market or the value of such shares is not otherwise
determinable, such value as determined by the Committee in good faith.
(n) "Incentive Award" shall mean any Option, Tandem SAR, Stand-Alone SAR,
Restricted Stock, Phantom Stock, Stock Bonus or Other Award granted
pursuant to the terms of the Plan.
(o) Incentive Stock Option" shall mean an Option that is an "incentive
stock option" within the meaning of Section 422 of the Code, or any
successor provision, and that is designated by the Committee as an
Incentive Stock Option.
(p) "Initial Director" shall mean a Non-Employee Director of DRS who is a
member of the Board of Directors on the Effective Date.
(q) "Issue Date" shall mean the date established by DRS on which
certificates representing shares of Restricted Stock shall be issued by DRS
pursuant to the terms of Section 10(e).
(r) "Non-Employee Director" shall mean a member of the Board of Directors
who is not an employee of the Company.
(s) "Non-Qualified Stock Option" shall mean an Option other than an
Incentive Stock Option.
(t) "Option" shall mean an option to purchase shares of Company Stock
granted pursuant to Section 7 (or, with respect to a Non-Employee Director,
pursuant to Section 14 hereof).
(u) "Other Award" shall mean an award granted pursuant to Section 13
hereof.
(v) "Partial Exercise" shall mean an exercise of an Incentive Award for
less than the full extent permitted at the time of such exercise.
(w) "Participant" shall mean (1) an employee or consultant of the Company
to whom an Incentive Award is granted pursuant to the Plan, (2) with
respect to Non-Qualified Stock Options granted under Section 14 hereof,
each Non-Employee Director and (3) upon the death of an individual
described in (1) or (2), his or her successors, heirs, executors and
administrators, as the case may be.
(x) "Person" shall have the meaning set forth in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (1) the Company, (2) a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, (3) an underwriter temporarily holding securities pursuant to an
offering of such securities, (4) a corporation owned, directly or
indirectly, by the stockholders of DRS in substantially the same
proportions as their ownership of stock of DRS, (5) First Pacific Advisors
Inc., (6) Palisade Capital Management, LLC, or (7) Taglich Brothers,
D'Amadeo, Wagner and Co., Inc.
(y) "Phantom Stock" shall mean the right, granted pursuant to Section 11,
to receive in cash or shares the Fair Market Value of a share of Company
Stock.
(z) "Reload Option" shall mean a Non-Qualified Stock Option granted
pursuant to Section 7(c)(5).
(aa) "Restricted Stock" shall mean a share of Company Stock which is
granted pursuant to the terms of Section 10 hereof and which is subject to
the restrictions set forth in Section 10(c).
(bb) "Rule 16b-3" shall mean the Rule 16b-3 promulgated under the Exchange
Act, as amended from time to time.
(cc) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
D-3
<PAGE>
(dd) "Stand-Alone SAR" shall mean a stock appreciation right which is
granted pursuant to Section 9 and which is not related to any Option.
(ee) "Stock Bonus" shall mean a bonus payable in shares of Company Stock
granted pursuant to Section 12.
(ff) "Subsequent Director" shall mean a Non-Employee Director of DRS who
becomes a member of the Board of Directors subsequent to the Effective
Date.
(gg) "Subsidiary" shall mean a "subsidiary corporation" within the meaning
of Section 424(f) of the Code.
(hh) "Tandem SAR" shall mean a stock appreciation right which is granted
pursuant to Section 8 and which is related to an Option.
(ii) "Vesting Date" shall mean the date established by the Committee on
which a share of Restricted Stock or Phantom Stock may vest.
3. Stock Subject to the Plan
(a) Shares Available for Awards
The maximum number of shares of Company Stock reserved for issuance
under the Plan shall be 1,400,000 shares (subject to adjustment as
provided herein). Such shares may be authorized but unissued Company
Stock or authorized and issued Company Stock held in DRS's treasury.
The Committee may direct that any stock certificate evidencing shares
issued pursuant to the Plan shall bear a legend setting forth such
restrictions on transferability as may apply to such shares pursuant
to the Plan.
The grant of a Tandem SAR, a Stand-Alone SAR or Phantom Stock shall
not reduce the number of shares of Company Stock with respect to
which Incentive Awards may be granted pursuant to the Plan.
(b) Individual Limitation
The total number of shares of Company Stock subject to Incentive
Awards (including Incentive Awards which may be payable in cash but
denominated as shares of Company Stock, i.e., Stand-Alone SARs and
Phantom Stock), awarded to any employee during any tax year of the
Company, shall not exceed 200,000 shares (subject to adjustment as
provided herein). Determinations under the preceding sentence shall be
made in a manner that is consistent with Section 162(m) of the Code.
(c) Adjustment for Change in Capitalization.
In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Company Stock, or
other property), recapitalization, Company Stock split, reverse
Company Stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate
transaction or event, affects the Company Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement
of the rights of Participants under the Plan, then the Committee shall
make such equitable changes or adjustments as it deems necessary or
appropriate to any or all of (1) the number and kind of shares of
Company Stock which may thereafter be issued in connection with
Incentive Awards, (2) the number and kind of shares of Company Stock
issued or issuable in respect of outstanding Incentive Awards, (3) the
exercise price, grant price or purchase price relating to any
Incentive Award, and (4) the maximum number of shares subject to
Incentive Awards which may be
D-4
<PAGE>
awarded to any employee during any tax year of the Company; provided
that, with respect to Incentive Stock Options, such adjustment shall
be made in accordance with Section 424 of the Code.
(d) Re-use of Shares.
The following shares of Company Stock shall again become available for
Incentive Awards: except as provided below, any shares subject to an
Incentive Award that remain unissued upon the cancellation, surrender,
exchange or termination of such award for any reason whatsoever; and
any shares of Restricted Stock forfeited. Notwithstanding the
foregoing, upon the exercise of any Incentive Award granted in tandem
with any other Incentive Awards, such related Awards shall be
cancelled to the extent of the number of shares of Company Stock as to
which the Incentive Award is exercised and such number of shares shall
no longer be available for Incentive Awards under the Plan.
4. Administration of the Plan.
The Plan shall be administered by the Committee. The Committee shall have
the authority in its sole discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, the authority to grant Incentive Awards; to determine the persons to
whom and the time or times at which Incentive Awards shall be granted; to
determine the type and number of Incentive Awards to be granted, the number of
shares of Stock to which an Award may relate and the terms, conditions,
restrictions and performance criteria relating to any Incentive Award; to
determine whether, to what extent, and under what circumstances an Incentive
Award maybe settled, cancelled, forfeited, exchanged, or surrendered; to make
adjustments in the performance goals in recognition of unusual or non-recurring
events affecting the Company or the financial statements of the Company (to the
extent not inconsistent with Section 162(m) of the Code, if applicable), or in
response to changes in applicable laws, regulations, or accounting principles;
to construe and interpret the Plan and any Incentive Award; to prescribe, amend
and rescind rules and regulations relating to the Plan; to determine the terms
and provisions of Agreements; and to make all other determinations deemed
necessary or advisable for the administration of the Plan; provided, however,
that the Committee may not exercise discretion under any provision of the Plan
with respect to Non-Qualified Stock Options granted to Non-Employee Directors
pursuant to Section 14 of the Plan, to the extent that such discretion is
inconsistent with Rule 16b-3.
The Committee may, in its absolute discretion, without amendment to the
Plan, (a) except with regard to Non-Qualified Stock Options granted to
Non-Employee Directors pursuant to Section 14 hereof, accelerate the date on
which any Option or Stand-Alone SAR granted under the Plan becomes exercisable,
waive or amend the operation of Plan provisions respecting exercise after
termination of employment or otherwise adjust any of the terms of such Option or
Stand-Alone SAR, and (b) accelerate the Vesting Date or Issue Date, or waive any
condition imposed hereunder, with respect to any share of Restricted Stock,
Phantom Stock or other Incentive Award or otherwise adjust any of the terms
applicable to any such Incentive Award.
No member of the Committee shall be liable for any action, omission or
determination relating to the Plan, and the Company shall indemnify (to the
extent permitted under Delaware law and the bylaws of the Company) and hold
harmless each member of the Committee and each other director or employee of the
Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated against any cost or expense
(including counsel fees) or liability (including any sum paid in settlement of a
claim with the approval of the Committee) arising out or any action, omission or
determination relating to the Plan, unless, in either case, such action,
omission or determination was taken or made by such member, director or employee
in bad faith and without reasonable belief that it was in the best interests of
the Company.
5. Eligibility.
The persons who shall be eligible to receive Incentive Awards pursuant to
the Plan shall be such employees of the Company (including officers of the
Company, whether or not they are directors of DRS) and consultants of
D-5
<PAGE>
the Company as the Committee shall select from time to time. Non-Qualified Stock
Options shall be granted to Non-Employee Directors in accordance with the
provisions of Section 14 hereof.
6. Awards Under the Plan; Agreement.
The Committee may grant Options, Tandem SARs, Stand-Alone SARs, shares of
Restricted Stock, shares of Phantom Stock, Stock Bonuses and Other Awards in
such amounts and with such terms and conditions as the Committee shall
determine, subject to the provisions of the Plan. Non-Qualified Stock Options
shall be granted to Non-Employee Directors in accordance with Section 14 hereof.
Each Incentive Award granted under the Plan (except an unconditional Stock
Bonus) shall be evidenced by an Agreement which shall contain such provisions as
the Committee may in its sole discretion deem necessary or desirable. By
accepting an Incentive Award, a Participant thereby agrees that the award shall
be subject to all of the terms and provisions of the Plan and the applicable
Agreement.
7. Options.
(a) Identification of Options.
Each Option shall be clearly identified in the applicable Agreement as
either an Incentive Stock Option or a Non-Qualified Stock Option.
(b) Exercise Price.
Each Agreement with respect to an Option shall set forth the amount
(the "option exercise price") payable by the grantee to the Company
upon exercise of the Option. The option exercise price per share shall
be determined by the Committee; provided, however, that in the case of
an Incentive Stock Option, the option exercise price shall in no event
be less than the Fair Market Value of a share of Company Stock on the
date the Option is granted.
(c) Term and Exercise of Options.
(1) Unless the applicable Agreement provides otherwise, an Option
shall become cumulatively exercisable as to 25 percent of the
shares covered thereby on each of the first, second, third and
fourth anniversaries of the date of grant. The Committee shall
determine the expiration date of each Option; provided, however,
that no Incentive Stock Option shall be exercisable more than 10
years after the date of grant. Unless the applicable Agreement
provides otherwise, no Option shall be exercisable prior to the
first anniversary of the date of grant.
(2) An Option may be exercised for all or any portion of the shares
as to which it is exercisable, provided that no Partial Exercise
of an Option shall be for an aggregate exercise price of less
than $1,000. The Partial Exercise of an Option shall not cause
the expiration, termination or cancellation of the remaining
portion thereof.
(3) An Option shall be exercised by delivering notice to DRS's
principal office, to the attention of its Secretary. Such notice
shall be accompanied by the applicable Agreement, shall specify
the number of shares of Company Stock with respect to which the
Option is being exercised and the effective date of the proposed
exercise and shall be signed by the Participant or other person
then having the right to exercise the Option. Payment for shares
of Company Stock purchased upon the exercise of an Option shall
be made on the effective date of such exercise by one or a
combination of the following means: (i) in cash or by personal
check, certified check, bank cashier's check or wire transfer;
(ii) subject to the approval of the Committee, in shares of
Company Stock owned by the Participant for at least six months
prior to the date of exercise and valued at their Fair
D-6
<PAGE>
Market Value on the effective date of such exercise; or (iii)
subject to the approval of the Committee, by such other provision
as the Committee may from time to time authorize. Any payment in
shares of Company Stock shall be effected by the delivery of such
shares to the Secretary of DRS, duly endorsed in blank or
accompanied by stock powers duly executed in blank, together with
any other documents and evidences as the Secretary of DRS shall
require.
(4) Certificates for shares of Company Stock purchased upon the
exercise of an Option shall be issued in the name of the
Participant or other person entitled to receive such shares, and
delivered to the Participant or such other person as soon as
practicable following the effective date on which the Option is
exercised.
(5) The Committee shall have the authority to specify, at the time of
grant or, with respect to Non-Qualified Stock Options, at or
after the time of grant, that a Participant shall be granted a
new Non-Qualified Stock Option (a "Reload Option") for a number
of shares equal to the number of shares surrendered by the
Participant upon exercise of all or a part of an Option in the
manner described in Section 7(c)(3)(ii) above, subject to the
availability of shares of Company Stock under the Plan at the
time of such exercise; provided, however, that no Reload Option
shall be granted to a Non-Employee Director. Reload Options shall
be subject to such conditions as may be specified by the
Committee in its discretion, subject to the terms of the Plan.
(d) Limitations on Incentive Stock Options.
(1) To the extent that the aggregate Fair Market Value of shares of
Company Stock with respect to which Incentive Stock Options are
exercisable for the first time by a Participant during any
calendar year under the Plan and any other stock option plan of
the Company (or any Subsidiary) shall exceed $100,000, such
Options shall be treated as Non-Qualified Stock Options. Such
Fair Market Value shall be determined as of the date on which
each such Incentive Stock Option is granted.
(2) No Incentive Stock Option may be granted to an individual if, at
the time of the proposed grant, such individual owns (or is
attributed to own by virtue of the Code) stock possessing more
than ten percent of the total combined voting power of all
classes of stock of the Company or any Subsidiary unless (i) the
exercise price of such Incentive Stock Option is at least 110
percent of the Fair Market Value of a share of Company Stock at
the time such Incentive Stock Option is granted and (ii) such
Incentive Stock Option is not exercisable after the expiration of
five years from the date such Incentive Stock Option is granted.
(e) Effect of Termination of Employment.
(1) Unless the applicable Agreement provides otherwise, in the event
that the employment of a Participant with the Company shall
terminate for any reason other than Cause, Disability or death,
(i) Options granted to such Participant, to the extent that they
are exercisable at the time of such termination, shall remain
exercisable until the date that is three months after such
termination, on which date they shall expire, and (ii) Options
granted to such Participant, to the extent that they were not
exercisable at the time of such termination, shall expire at the
close of business on the date of such termination. The
three-month period described in this Section 7(e)(1) shall be
extended to one year from the date of such termination in the
event of the Participant's death during such three-month period.
Notwithstanding the foregoing, no Option shall be exercisable
after the expiration of its term.
D-7
<PAGE>
(2) Unless the applicable Agreement provides otherwise, in the event
that the employment of a Participant with the Company shall
terminate on account of the Disability or death of the
Participant, (i) Options granted to such Participant, to the
extent that they were exercisable at the time of such
termination, shall remain exercisable until the first anniversary
of such termination, on which date they shall expire, and (ii)
Options granted to such Participant, to the extent that they were
not exercisable at the time of such termination, shall expire at
the close of business on the date of such termination; provided,
however, that no Option shall be exercisable after the expiration
of its term.
(3) In the event of the termination of a Participant's employment for
Cause, all outstanding Options granted to such Participant shall
expire at the commencement of business on the date of such
termination.
(f) Acceleration of Exercise Date Upon Change in Control.
Upon the occurrence of a Change in Control, each Option granted under
the Plan and outstanding at such time shall become fully and
immediately exercisable and shall remain exercisable until its
expiration, termination or cancellation.
8. Tandem SARs.
The Committee may grant in connection with any Option granted hereunder,
except a Non-Qualified Stock Option granted to a Non-Employee Director pursuant
to Section 14 hereof, one or more Tandem SARs relating to a number of shares of
Company Stock less than or equal to the number of shares of Company Stock
subject to the related Option. A Tandem SAR granted in connection with an Option
must be granted at the same time that such Option is granted; provided, however,
that a Tandem SAR granted in connection with a Non-Qualified Stock Option may be
granted subsequent to the time that such Non-Qualified Stock Option is granted.
(a) Benefit Upon Exercise.
The exercise of a Tandem SAR with respect to any number of shares of
Company Stock shall entitle the Participant to a cash payment, for
each such share, equal to the excess of (1) the Fair Market Value of a
share of Company Stock on the exercise date over (2) the option
exercise price of the related Option. Such payment shall be made as
soon as practicable after the effective date of such exercise.
(b) Term and Exercise of Tandem SAR.
(1) A Tandem SAR shall be exercisable only if and to the extent that
its related Option is exercisable.
(2) The exercise of a Tandem SAR with respect to a number of shares
of Company Stock shall cause the immediate and automatic
cancellation of its related Option with respect to an equal
number of shares. The exercise of an Option, or the cancellation,
termination or expiration of an Option (other than pursuant to
this Section 8(b)(2)), with respect to a number of shares of
Company Stock shall cause the automatic and immediate
cancellation of any related Tandem SARs to the extent of the
number of shares of Company Stock subject to such Option which is
so exercised, cancelled, terminated or expired.
(3) A Tandem SAR may be exercised for all or any portion of the
shares as to which it is exercisable; provided, that no Partial
Exercise of a Tandem SAR shall be for an aggregate exercise price
of less than $1,000.
D-8
<PAGE>
(4) No Tandem SAR shall be assignable or transferable otherwise than
together with its related Option.
(5) A Tandem SAR shall be exercised by delivering notice to DRS's
principal office, to the attention of its Secretary. Such notice
shall be accompanied by the applicable Agreement, shall specify
the number of shares of Company Stock with respect to which the
Tandem SAR is being exercised and the effective date of the
proposed exercise and shall be signed by the Participant or other
person then having the right to exercise the Option to which the
Tandem SAR is related.
9. Stand-Alone SARs.
(a) Exercise Price.
The exercise price per share of a Stand-Alone SAR shall be determined
by the Committee at the time of grant, but shall in no event be less
than the Fair Market Value of a share of Company Stock on the date of
grant.
(b) Benefit Upon Exercise.
The exercise of a Stand-Alone SAR with respect to any number of shares
of Company Stock shall entitle the Participant to a payment, for each
such share, equal to the excess of (1) the Fair Market Value of a
share of Company Stock on the exercise date over (2) the exercise
price of the Stand-Alone SAR. Such payments shall be made as soon as
practicable after such exercise, in cash and/or shares of Company
Stock, as determined by the Committee.
(c) Term and Exercise of Stand-Alone SARs.
(1) Unless the applicable Agreement provides otherwise, a Stand-Alone
SAR shall become cumulatively exercisable as to 25 percent of the
shares covered thereby on each of the first, second, third and
fourth anniversaries of the date of grant. The Committee shall
determine the expiration date of each Stand-Alone SAR. Unless the
applicable Agreement provides otherwise, no Stand-Alone SAR shall
be exercisable prior to the first anniversary of the date of
grant.
(2) A Stand-Alone SAR may be exercised for all or any portion of the
shares as to which it is exercisable; provided, that no Partial
Exercise of a Stand-Alone SAR shall be for an aggregate exercise
price of less than $1,000.
(3) A Stand-Alone SAR shall be exercised by delivering notice to
DRS's principal office, to the attention of its Secretary. Such
notice shall be accompanied by the applicable Agreement, shall
specify the number of shares of Company Stock with respect to
which the Stand-Alone SAR is being exercised, and the effective
date of the proposed exercise, and shall be signed by the
Participant.
(d) Effect of Termination of Employment.
The provisions set forth in Section 7(e) with respect to the exercise
of Options following termination of employment shall apply as well to
such exercise of Stand-Alone SARs.
(e) Acceleration of Exercise Date Upon Change in Control.
D-9
<PAGE>
Upon the occurrence of a Change in Control, any Stand-Alone SAR
granted under the Plan and outstanding at such time shall become fully
and immediately exercisable and shall remain exercisable until its
expiration, termination or cancellation.
10. Restricted Stock.
(a) Issue Date and Vesting Date.
At the time of the grant of shares of Restricted Stock, the Committee
shall establish an Issue Date or Issue Dates and a Vesting Date or
Vesting Dates with respect to such shares. The Committee may divide
such shares into classes and assign a different Issue Date and/or
Vesting Date for each class. If the grantee is employed by the Company
on an Issue Date (which may be the date of grant), the specified
number of shares of Restricted Stock shall be issued in accordance
with the provisions of Section 10(e). Provided that all conditions to
the vesting of a share of Restricted Stock imposed pursuant to Section
10(b) are satisfied, and except as provided in Section 10(g), upon the
occurrence of the Vesting Date with respect to a share of Restricted
Stock, such share shall vest and the restrictions of Section 10(c)
shall lapse.
(b) Conditions to Vesting.
At the time of the grant of shares of Restricted Stock, the Committee
may impose such restrictions or conditions to the vesting of such
shares as it, in its absolute discretion, deems appropriate.
(c) Restrictions on Transfer Prior to Vesting.
Prior to the vesting of a share of Restricted Stock, no transfer of a
Participant's rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall be permitted.
Immediately upon any attempt to transfer such rights, such share, and
all of the rights related thereto, shall be forfeited by the
Participant.
(d) Dividends on Restricted Stock.
The Committee in its discretion may require that any dividends paid on
shares of Restricted Stock be held in escrow until all restrictions on
such shares have lapsed.
(e) Issuance of Certificates.
(1) Reasonably promptly after the Issue Date with respect to shares
of Restricted Stock, DRS shall cause to be issued a stock
certificate, registered in the name of the Participant to whom
such shares were granted, evidencing such shares; provided that
DRS shall not cause such a stock certificate to be issued unless
it has received a stock power duly endorsed in blank with respect
to such shares. Each such stock certificate shall bear the
following legend:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK
REPRESENTED HEREBY ARE SUBJECT TO THE RESTRICTIONS, TERMS AND
CONDITIONS (INCLUDING FORFEITURE PROVISIONS AND RESTRICTIONS
AGAINST TRANSFER) CONTAINED IN THE DRS TECHNOLOGIES, INC. 1996
OMNIBUS PLAN AND AN AGREEMENT ENTERED INTO BETWEEN THE REGISTERED
OWNER OF SUCH SHARES AND DRS. A COPY OF THE PLAN AND AGREEMENT IS
ON FILE IN THE OFFICE OF THE SECRETARY OF DRS, 5 SYLVAN WAY,
PARSIPPANY, NEW JERSEY 07054.
Such legend shall not be removed until such shares vest pursuant to
the terms hereof.
D-10
<PAGE>
(2) Each certificate issued pursuant to this Section 10(e), together
with the stock powers relating to the shares of Restricted Stock
evidenced by such certificate, shall be held by DRS unless the
Committee determines otherwise.
(f) Consequences of Vesting.
Upon the vesting of a share of Restricted Stock pursuant to the terms
hereof, the restrictions of Section 10(c) shall lapse with respect to
such share. Reasonably promptly after a share of Restricted Stock
vests, DRS shall cause to be delivered to the Participant to whom such
shares were granted, a certificate evidencing such share, free of the
legend set forth in Section 10(e).
(g) Effect of Termination of Employment.
(1) Subject to such other provision as the Committee may set forth in
the applicable Agreement, and to the Committee's amendment
authority pursuant to Section 4, upon the termination of a
Participant's employment for any reason other than Cause, any and
all shares to which restrictions on transferability apply shall
be immediately forfeited by the Participant and transferred to,
and reacquired by, DRS; provided that if the Committee, in its
sole discretion, shall within thirty (30) days after such
termination of employment notify the Participant in writing of
its decision not to terminate the Participant's rights in such
shares, then the Participant shall continue to be the owner of
such shares subject to such continuing restrictions as the
Committee may prescribe in such notice. In the event of a
forfeiture of shares pursuant to this section, DRS shall repay to
the Participant (or the Participant's estate) any amount paid by
the Participant for such shares. In the event that DRS requires a
return of shares, it shall also have the right to require the
return of all dividends paid on such shares, whether by
termination of any escrow arrangement under which such dividends
are held or otherwise.
(2) In the event of the termination of a Participant's employment for
Cause, all shares of Restricted Stock granted to such Participant
which have not vested as of the date of such termination shall
immediately be returned to DRS, together with any dividends paid
on such shares, in return for which DRS shall repay to the
Participant any amount paid by the Participant for such shares.
(h) Effect of Change in Control.
Upon the occurrence of a Change in Control, all outstanding shares of
Restricted Stock which have not theretofore vested shall immediately
vest and all restrictions on such shares shall immediately lapse.
(i) Special Provisions Regarding Awards.
Notwithstanding anything to the contrary contained herein, Restricted
Stock granted pursuant to this Section 10 to Executive Officers may be
based on the attainment by DRS or the Company (or a Subsidiary or
division of DRS if applicable) of performance goals pre-established by
the Committee, based on one or more of the following criteria: (1) a
specified percentage return on total stockholder equity; (2) a
specified percentage increase in earnings per share of Company Stock;
(3) a specified percentage increase in net income (before or after
taxes); (4) a specified percentage increase in earnings before
interest, taxes, depreciation and amortization; (5) a specified
percentage increase in earnings before interest and income taxes, as
adjusted for corporate office overhead expense allocation; (6) a
specified percentage increase in revenues; (7) a specified minimum
return on assets; and (8) such other criteria as the stockholders of
DRS may approve; in each case, as determined in accordance with
generally accepted accounting principles.
D-11
<PAGE>
Such shares of Restricted Stock shall be released from restrictions
only after the attainment of such performance measures has been
certified by the Committee.
11. Phantom Stock.
(a) Vesting Date.
At the time of the grant of shares of Phantom Stock, the Committee
shall establish a Vesting Date or Vesting Dates with respect to such
shares. The Committee may divide such shares into classes and assign a
different Vesting Date for each class. Provided that all conditions to
the vesting of a share of Phantom Stock imposed pursuant to Section
11(c) are satisfied, and except as provided in Section 11(d), upon the
occurrence of the Vesting Date with respect to a share of Phantom
Stock, such share shall vest.
(b) Benefit Upon Vesting.
Upon the vesting of a share of Phantom Stock, the Participant shall be
entitled to receive, within 30 days of the date on which such share
vests, an amount, in cash and/or shares of Company Stock, as
determined by the Committee, equal to the sum of (1) the Fair Market
Value of a share of Company Stock on the date on which such share of
Phantom Stock vests and (2) the aggregate amount of cash dividends
paid with respect to a share of Company Stock during the period
commencing on the date on which the share of Phantom Stock was granted
and terminating on the date on which such share vests.
(c) Conditions to Vesting.
At the time of the grant of shares of Phantom Stock, the Committee may
impose such restrictions or conditions to the vesting of such shares
as it, in its absolute discretion, deems appropriate.
(d) Effect of Termination of Employment.
Subject to such other provision as the Committee may set forth in the
applicable Agreement, and to the Committee's amendment authority
pursuant to Section 4, shares of Phantom Stock that have not vested,
together with any dividends credited on such shares, shall be
forfeited upon the Participant's termination of employment for any
reason.
(e) Effect of Change in Control.
Upon the occurrence of a Change in Control, all outstanding shares of
Phantom Stock which have not theretofore vested shall immediately vest
and payment in respect of such shares shall be made in accordance with
the terms of this Plan.
(f) Special Provisions Regarding Awards.
Notwithstanding anything to the contrary contained herein, the vesting
of Phantom Stock granted pursuant to this Section 11 to Executive
Officers may be based on the attainment by DRS or the Company (or a
Subsidiary or division of DRS if applicable) of one or more of the
performance criteria set forth in Section 10(i) hereof, in each case,
as determined in accordance with generally accepted accounting
principles. No payment in respect of any such Phantom Stock award will
be paid to an Executive Officer until the attainment of the respective
performance measures have been certified by the Committee.
12. Stock Bonuses.
In the event that the Committee grants a Stock Bonus, a certificate for the
shares of Company Stock comprising such Stock Bonus shall be issued in the name
of the Participant to whom such grant was made and
D-12
<PAGE>
delivered to such Participant as soon as practicable after the date on which
such Stock Bonus is payable. Executive Officers shall be eligible to receive
Stock Bonus grants hereunder only after a determination of eligibility is made
by the Committee, in its sole discretion.
13. Other Awards.
Other forms of Incentive Awards ("Other Awards") valued in whole or in part
by reference to, or otherwise based on, Company Stock may be granted either
alone or in addition to other Incentive Awards under the Plan. Subject to the
provisions of the Plan, the Committee shall have sole and complete authority to
determine the persons to whom and the time or times at which such Other Awards
shall be granted, the number of shares of Company Stock to be granted pursuant
to such Other Awards and all other conditions of such Other Awards.
14. Non-Employee Director Formula Stock Options.
The provisions of this Section 14 shall apply only to grants of
Non-Qualified Stock Options to Non-Employee Directors, and, to the extent
required by Rule 16b-3, shall not be amended more than every six months, other
than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations promulgated
thereunder.
(a) General.
Non-Employee Directors shall receive Non-Qualified Stock Options under
the Plan. The exercise price per share of Company Stock purchasable
under Non-Qualified Stock Options granted to Non-Employee Directors
shall be the Fair Market Value of a share of Company Stock on the date
of grant. No Non-Qualified Stock Option granted to a Non-Employee
Director may be subject to an acceleration of exercisability except
upon a Change in Control as described in Section 7(f).
(b) Initial Grants to Subsequent Directors.
Each Subsequent Director shall, at the time such director becomes a
member of the Board of Directors, be granted automatically a
Non-Qualified Stock Option to purchase 5,000 shares of Company Stock.
(c) Subsequent Grants to Directors.
On the date of each annual meeting of the stockholders of DRS
subsequent to the annual meeting immediately following the Effective
Date, each continuing Initial Director will be granted automatically a
Non-Qualified Stock Option to purchase 2,500 shares of Company Stock;
provided, however, that in no event shall a continuing Initial
Director be granted Non-Qualified Stock Options to purchase more than
2,500 shares of Company Stock under the Plan or any other stock option
plan of the Company during any tax year of the Company. On the date of
each annual meeting of the stockholders of DRS subsequent to a
Subsequent Director's becoming a member of the Board of Directors,
such Subsequent Director shall be granted automatically a
Non-Qualified Stock Option to purchase 2,500 shares of Company Stock.
(d) Method and Time of Payment.
The Option exercise price shall be paid in full, at the time of
exercise, in cash (including cash received from the Company as
compensation or, in the discretion of the Committee, cash borrowed
from the Company on such terms and subject to such conditions as the
Committee shall prescribe), in shares of Company Stock having a Fair
Market Value equal to such Option exercise price, in a combination of
cash and Company Stock or through a cashless exercise procedure.
D-13
<PAGE>
(e) Term and Exercisability.
Each Non-Qualified Stock Option granted under this Section 14 shall
(1) be exercisable as to 100% of the shares of Company Stock covered
thereby on the first anniversary of the date that the Non-Qualified
Stock Option is granted and (2) expire ten years from the date of
grant.
(f) Termination.
In the event of the termination of a Non-Employee Director's service
with DRS other than for Cause, any Non-Qualified Stock Option granted
to such Non-Employee Director under this Section 14, to the extent
that it is exercisable on the date of such termination, may be
exercised by such Non-Employee Director (or, if applicable, by his or
her executors, administrator, legatees or distributees) until the
earlier of (1) the date that is two years from the date of such
termination or (2) the expiration of such Non-Qualified Stock Option.
In the event of the termination of a Non-Employee Director's service
with DRS for Cause, all outstanding Non-Qualified Stock Options
granted to such Non-Employee Director shall expire at the commencement
of business on the date of such termination.
15. Rights as a Stockholder.
No person shall have any rights as a stockholder with respect to any shares
of Company Stock covered by or relating to any Incentive Award until the date of
issuance of a stock certificate with respect to such shares. Except as otherwise
expressly provided in Section 3(c), no adjustment to any Incentive Award shall
be made for dividends or other rights for which the record date occurs prior to
the date such stock certificate is issued.
16. No Special Employment Rights; No Right to Incentive Award.
Nothing contained in the Plan or any Agreement shall confer upon any
Participant any right with respect to the continuation of employment by the
Company or interfere in any way with the right of the Company, subject to the
terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
Participant.
No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee's granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant any other Incentive Award
to such Participant or other person at any time or preclude the Committee from
making subsequent grants to such Participant or any other person.
17. Securities Matters.
(a) DRS shall be under no obligation to effect the registration pursuant to
the Securities Act of any interests in the Plan or any shares of Company
Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, DRS shall not
be obligated to cause to be issued or delivered any certificates evidencing
shares of Company Stock pursuant to the Plan unless and until DRS is
advised by its counsel that the issuance and delivery of such certificates
is in compliance with all applicable laws, regulations of governmental
authority and the requirements of any securities exchange on which shares
of Company Stock are traded. The Committee may require, as a condition of
the issuance and delivery of certificates evidencing shares of Company
Stock pursuant to the terms hereof, that the recipient of such shares make
such agreements and representations, and that such certificates bear such
legends, as the Committee, in its sole discretion, deems necessary or
desirable.
(b) The transfer of any shares of Company Stock hereunder shall be
effective only at such time as counsel to DRS shall have determined that
the issuance and delivery of such shares is in compliance with all
applicable laws, regulations of governmental authority and the requirements
of any securities exchange on which shares of Company Stock are traded. The
Committee may, in its sole discretion, defer the
D-14
<PAGE>
effectiveness of any transfer of shares of Company Stock hereunder in order
to allow the issuance of such shares to be made pursuant to registration or
an exemption from registration or other methods for compliance available
under federal or state securities laws. The Committee shall inform the
Participant in writing of its decision to defer the effectiveness of a
transfer. During the period of such deferral in connection with the
exercise of an Option, the Participant may, by written notice, withdraw
such exercise and obtain the refund of any amount paid with respect
thereto.
18. Withholding Taxes.
Whenever cash is to be paid pursuant to an Incentive Award, the Company
shall have the right to deduct therefrom an amount sufficient to satisfy any
federal, state and local withholding requirements related thereto.
Whenever shares of Company Stock are to be delivered pursuant to an
Incentive Award, the Company shall have the right to require the Participant to
remit to the Company in cash an amount sufficient to satisfy any federal, state
and local withholding tax requirements related thereto. With the approval of the
Committee, a Participant may satisfy the foregoing requirement by electing to
have the Company withhold from delivery shares of Company Stock having a value
equal to the amount of tax to be withheld. Such shares shall be valued at their
Fair Market Value on the date of which the amount of tax to be withheld is
determined (the "Tax Date"). Fractional share amounts shall be settled in cash.
Such a withholding election may be made with respect to all or any portion of
the shares to be delivered pursuant to an Incentive Award.
19. Notification of Election Under Section 83(b) of the Code.
If any Participant shall, in connection with the acquisition of shares of
Company Stock under the Plan, make the election permitted under Section 83(b) of
the Code (i.e., an election to include in gross income in the year of transfer
the amounts specified in Section 83(b)), such Participant shall notify the
Company of such election within 10 days of filing notice of the election with
the Internal Revenue Service, in addition to any filing and a notification
required pursuant to regulation issued under the authority of Section 83(b) of
the Code.
20. Notification Upon Disqualifying Disposition Under Section 421(b) of the
Code.
Each Agreement with respect to an Incentive Stock Option shall require the
Participant to notify the Company of any disposition of shares of Company Stock
issued pursuant to the exercise of such Option under the circumstances described
in Section 421(b) of the Code (relating to certain disqualifying dispositions),
within 10 days of such disposition.
21. Amendment or Termination of the Plan.
The Board of Directors may, at any time, suspend or terminate the Plan or
revise or amend it in any respect whatsoever; provided, however, that
stockholder approval shall be required if and to the extent required by Rule
16b-3 or by any comparable or successor exemption under which the Board of
Directors believes it is appropriate for the Plan to qualify, or if and to the
extent the Board of Directors determines that such approval is appropriate for
purposes of satisfying Sections 162(m) or 422 of the Code. Incentive Awards may
be granted under the Plan prior to the receipt of such stockholder approval but
each such grant shall be subject in its entirety to such approval and no award
may be exercised, vested or otherwise satisfied prior to the receipt of such
approval. Nothing herein shall restrict the Committee's ability to exercise its
discretionary authority pursuant to Section 4, which discretion may be exercised
without amendment to the Plan. No action hereunder may, without the consent of a
Participant, reduce the Participant's rights under any outstanding Incentive
Award.
22. Transfers Upon Death; Nonassignability.
Upon the death of a Participant, outstanding Incentive Awards granted to
such Participant may be exercised only by the executor or administrator of the
Participant's estate or by a person who shall have acquired the right to
D-15
<PAGE>
such exercise by will or by the laws of descent and distribution. No transfer of
an Incentive Award by will or the laws of descent and distribution shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such evidence
as the Committee may deem necessary to establish the validity of the transfer
and (b) an agreement by the transferee to comply with all the terms and
conditions of the Incentive Award that are or would have been applicable to the
Participant and to be bound by the acknowledgements made by the Participant in
connection with the grant of the Incentive Award.
During a Participant's lifetime, the Committee may permit the transfer,
assignment or other encumbrance of an outstanding Option unless (y) such Option
is an Incentive Stock Option and the Committee and the Participant intends that
it shall retain such status, or (z) such Option is meant to qualify for the
exemptions available under Rule 16b-3, nontransferability is necessary under
Rule 16b-3 in order for the award to so qualify and the Committee and the
Participant intend that it shall continue to so qualify. Subject to any
conditions as the Committee may prescribe, a Participant may, upon providing
written notice to the Secretary of DRS, elect to transfer any or all Options
granted to such Participant pursuant to the Plan to members of his or her
immediate family, including, but not limited to, children, grandchildren and
spouse or to trusts for the benefit of such immediate family members or to
partnerships in which such family members are the only partners; provided,
however, that no such transfer by any Participant may be made in exchange for
consideration.
23. Expenses and Receipts.
The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used for
general corporate purposes.
24. Failure to Comply.
In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant (or beneficiary) to comply with any of the terms and
conditions of the Plan or the applicable Agreement, unless such failure is
remedied by such Participant (or beneficiary) within ten days after notice of
such failure by the Committee, shall be grounds for the cancellation and
forfeiture of such Incentive Award, in whole or in part, as the Committee, in
its absolute discretion, may determine.
25. Effective Date and Term of Plan.
The Plan became effective on the Effective Date, but the Plan (and any
grants of Incentive Awards made prior to stockholder approval of the Plan) shall
be subject to the requisite approval of the stockholders of DRS. In the absence
of such approval, such Incentive Awards shall be null and void. Unless earlier
terminated by the Board of Directors, the right to grant Incentive Awards under
the Plan will terminate on the tenth anniversary of the Effective Date.
Incentive Awards outstanding at Plan termination will remain in effect according
to their terms and the provisions of the Plan.
26. Applicable Law.
Except to the extent preempted by any applicable federal law, the Plan will
be construed and administered in accordance with the laws of the State of
Delaware, without reference to its principles of conflicts of law.
27. Participant Rights.
No Participant shall have any claim to be granted any award under the Plan,
and there is no obligation for uniformity of treatment for Participants. Except
as provided specifically herein, a Participant or a transferee of an Incentive
Award shall have no rights as a stockholder with respect to any shares covered
by any award until the date of the issuance of a Company Stock certificate to
him or her for such shares.
28. Unfunded Status of Awards.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant pursuant to an Incentive Award, nothing contained in the Plan
D-16
<PAGE>
or any Agreement shall give any such Participant any rights that are greater
than those of a general creditor of the Company.
29. No Fractional Shares.
No fractional shares of Company Stock shall be issued or delivered pursuant
to the Plan. The Committee shall determine whether cash, other Incentive Awards,
or other property shall be issued or paid in lieu of such fractional shares or
whether such fractional shares or any rights thereto shall be forfeited or
otherwise eliminated.
30. Beneficiary.
A Participant may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. If no designated beneficiary
survives the Participant, the executor or administrator of the Participant's
estate shall be deemed to be the grantee's beneficiary.
31. Interpretation.
The Plan is designed and intended to comply with Rule l6b-3 and, to the
extent applicable, with Section 162(m) of the Code, and all provisions hereof
shall be construed in a manner to so comply.
32. Severability.
If any provision of the Plan is held to be invalid or unenforceable, the
other provisions of the Plan shall not be affected but shall be applied as if
the invalid or unenforceable provision had not been included in the Plan.
D-17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Set forth below is a description of certain provisions of the Registrant's
Amended and Restated Certificate of Incorporation, as amended (the "Amended and
Restated Certificate of Incorporation"), the Registrant's Amended and Restated
Bylaws (the "Bylaws") and the General Corporation Law of the State of Delaware,
as such provisions relate to the indemnification of the directors and officers
of the Registrant. This description is intended only as a summary and is
qualified in its entirety by reference to the Amended and Restated Certificate
of Incorporation, the Bylaws, and the General Corporation Law of the State of
Delaware.
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant shall, to the full extent permitted by Sections 102 and 145
of the General Corporation Law of the State of Delaware, as amended from time to
time, indemnify all persons whom it may indemnify pursuant thereto and
eliminates the personal liability of its directors to the full extent permitted
by Section 102(b)(7) of the General Corporation Law of the State of Delaware, as
amended from time to time.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify its directors and officers against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties, if such directors or officers acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In a
derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably incurred
by directors and officers in connection with the defense or settlement of an
action or suit, and only with respect to a matter as to which they shall have
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made if such person shall have been adjudged liable for negligence or
misconduct in the performance of his respective duties to the corporation,
although the court in which the action or suit was brought may determine upon
application that the defendant officers or directors are reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the ability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of August 26, 1998, among the
Registrant, DRS Merger Sub, Inc. and NAI Technologies, Inc. ("NAI"),
without disclosure schedules (included as Annex A to the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement). The
Registrant agrees to furnish supplementally a copy of any omitted schedule
to the Commission upon request.
4.1 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Registrant.
4.2 Amended and Restated Certificate of Incorporation of the Registrant, as
filed April 1, 1996 (incorporated by reference to Exhibit 3.4 to the
Registrant's Registration Statement No. 33-64641, Post-Effective
Amendment No. 1).
4.3 Amended and Restated By-Laws of the Registrant, as of April 1, 1996
(incorporated by reference to Exhibit 3.8 to the Registrant's
Registration Statement No. 33-64641, Post-Effective Amendment No. 1).
4.4 Form of Assumption of the Registrant, together with form of Warrant to
purchase Common Stock of NAI.
4.5 Form of Warrant to purchase Common Stock of the Registrant.
5.1 Opinion of Nina Laserson Dunn, Esq. as to the legality of the securities
being registered pursuant to this Registration Statement.
8.1 Opinion regarding tax matters.
15.1 Letter regarding Unaudited Interim Financial Information (included in the
consents filed as Exhibits 23.1 and 23.2 hereto).
23.1 Consent of KPMG LLP, the Registrant's accountants.
23.2 Consent of KPMG LLP, NAI's accountants.
23.3 Consent of Nina Laserson Dunn, Esq. (included in the opinion filed as
Exhibit 5.1 hereto).
23.4 Consent of McFarland Dewey & Co., LLC.
23.5 Consent of Commonwealth Associates.
23.6 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney of the directors and certain officers of the Registrant.
99.1 Consent of C. Shelton James.
99.2 Form of proxy of the Registrant.
99.3 Form of proxy of NAI.
(b) Financial Statement Schedules
Financial Statement Schedules have been omitted because, with respect to
the Registrant, they are not applicable or not required, and, with respect to
NAI, the information is included elsewhere in NAI's consolidated financial
statements, including the notes thereto, which are included in the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement.
(c) The information provided pursuant to Item 4(b) of this Registration
Statement on Form S-4 is furnished as Annexes B and C to the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act 1934)
that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(2) That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes
that such reoffering prospectus will contain the information called for
by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form;
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and
(4) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to any existing provision or
arrangement whereby the Registrant may indemnify a director, officer or
controlling person of the Registrant against liabilities arising under
the Securities Act, or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this Form S-4 under the Securities Act,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and DRS
being acquired involved therein, that was not the subject of and included
in this Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Parsippany, State of New Jersey, on January 25, 1999.
Date: DRS TECHNOLOGIES, INC.
January 25, 1999 By: /s/ NINA LASERSON DUNN
---------------------------------
Nina Laserson Dunn
Executive Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Mark S. Newman* Chairman of the Board January 25, 1999
- ----------------------- of Directors, President and
Mark S. Newman Chief Executive Officer
Nancy R. Pitek* Vice President, Finance and January 25, 1999
- ----------------------- Treasurer
Nancy R. Pitek
Stuart F. Platt* Director January 25, 1999
- -----------------------
Stuart F. Platt
Ira Albom* Director January 25, 1999
- -----------------------
Ira Albom
Steven S. Honigman* Director January 25, 1999
- -----------------------
Steven S. Honigman
Donald C. Fraser* Director January 25, 1999
- -----------------------
Donald C. Fraser
II-4
<PAGE>
William F. Heitmann* Director January 25, 1999
- ---------------------------
William F. Heitmann
Mark N. Kaplan* Director January 25, 1999
- ---------------------------
Mark N. Kaplan
Eric J. Rosen* Director January 25, 1999
- ---------------------------
Eric J. Rosen
*By: /s/ NINA LASERSON DUNN Attorney-in-fact** January 25, 1999
----------------------
Nina Laserson Dunn
**By Power-of-Attorney
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of August 26, 1998, among the
Registrant, DRS Merger Sub, Inc. and NAI Technologies, Inc. ("NAI"),
without disclosure schedules (included as Annex A to the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement). The
Registrant agrees to furnish supplementally a copy of any omitted schedule
to the Commission upon request.
4.1 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Registrant.
4.2 Amended and Restated Certificate of Incorporation of the Registrant, as
filed April 1, 1996 (incorporated by reference to Exhibit 3.4 to the
Registrant's Registration Statement No. 33-64641, Post-Effective Amendment
No. 1).
4.3 Amended and Restated By-Laws of the Registrant, as of April 1, 1996
(incorporated by reference to Exhibit 3.8 to the Registrant's Registration
Statement No. 33-64641, Post-Effective Amendment No. 1).
4.4 Form of Assumption of the Registrant, together with form of Warrant to
purchase Common Stock of NAI.
4.5 Form of Warrant to purchase Common Stock of the Registrant.
5.1 Opinion of Nina Laserson Dunn, Esq. as to the legality of the securities
being registered pursuant to this Registration Statement.
8.1 Opinion regarding tax matters.
15.1 Letter regarding Unaudited Interim Financial Information (included in the
consents filed as Exhibits 23.1 and 23.2 hereto).
23.1 Consent of KPMG LLP, the Registrant's accountants.
23.2 Consent of KPMG LLP, NAI's accountants.
23.3 Consent of Nina Laserson Dunn, Esq. (included in the opinion filed as
Exhibit 5.1 hereto).
23.4 Consent of McFarland Dewey & Co., LLC.
23.5 Consent of Commonwealth Associates.
23.6 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney of the directors and certain officers of the Registrant.
99.1 Consent of C. Shelton James.
99.2 Form of proxy of the Registrant.
99.3 Form of proxy of NAI.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIAGNOSTIC/RETRIEVAL SYSTEMS, INC.
As authorized by Sections 242 and 103 of the Delaware General Corporation
Law, the undersigned being the duly authorized officer of the above corporation,
hereby amends the Amended and Restated Certificate of Incorporation thereof, as
follows:
Article FIRST of the Amended and Restated Certificate of Incorporation is
hereby amended to read as follows:
FIRST: The name of the corporation is DRS TECHNOLOGIES, INC. (hereinafter
called the "corporation").
The undersigned hereby certifies that the foregoing amendment has been
adopted by the unanimous vote of the board of directors and the affirmative vote
of the stockholders of the corporation in accordance with the provisions of
Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, this Certificate of Amendment has been signed this 8th
day of August, 1997.
/s/ Nancy R. Pitek
-----------------------------
NANCY R. PITEK,
Vice President
<PAGE>
EXHIBIT 4.4
FORM OF ASSUMPTION
DRS TECHNOLOGIES, INC., a Delaware corporation ("DRS" or the "Company"),
HEREBY assumes the obligations of NAI Technologies, Inc., a New York corporation
("NAI"), under the attached Warrant to purchase Common Stock (the "Warrant")
issued to __________, or registered assigns (the "Holder"), on _________, 19__
by NAI, which is the surviving corporation after its merger with DRS Merger Sub,
Inc., a New York corporation.
DRS HEREBY FURTHER agrees that the Warrant shall hereafter constitute the
right to acquire the number of shares of common stock, par value $.01 per share
(the "Common Stock"), of DRS equal to the product of [0.25] [0.23] and _____,
the number of shares of NAI's common stock, par value $0.10 per share (the "NAI
Common Stock"), formerly subject to the Warrant (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares).
DRS HEREBY FURTHER agrees that the Warrant shall hereafter constitute the
right to acquire such number of shares of Common Stock at a price per share of
$[10.00] [10.87], which is equal to the aggregate exercise price for such shares
of NAI Common Stock for which the Warrant was formerly exercisable (the product
of $_____ and _____, or $_____) divided by the number of full shares of Common
Stock deemed to be purchasable pursuant to the Warrant; provided, however, that
the number of shares of Common Stock that may be purchased upon exercise of the
Warrant shall not include any fractional shares and, upon the last such exercise
of the Warrant, a cash payment shall be made for any fractional shares based
upon the per share average of the highest and lowest sale price of Common Stock
on the Nasdaq National Market on the date of such exercise.
DRS TECHNOLOGIES, INC.
Date: [ ] By:
---------------------------------
Name:
Title:
<PAGE>
NO. B-____ _______ SHARES
NAI TECHNOLOGIES, INC.
WARRANT TO PURCHASE COMMON STOCK
VOID AFTER 5:30 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
FOR VALUE RECEIVED, NAI TECHNOLOGIES, INC., a New York corporation (the
"Company"), hereby agrees to sell upon the terms and on the conditions
hereinafter set forth, but no later than 5:30 p.m., New York City time, on the
Expiration Date (as hereinafter defined) to __________________________, or
registered assigns (the "Holder"), under the terms as hereinafter set forth, One
Hundred Eight Thousand One Hundred Seventy (108,170) fully paid and
non-assessable shares of the Company's Common Stock, par value $.10 per share
(the "Warrant Stock"), at a purchase price per share of Two and 50/100 Dollars
($2.50) (the "Warrant Price"), pursuant to this warrant (this "Warrant"). The
number of shares of Warrant Stock to be so issued and the Warrant Price are
subject to adjustment in certain events as hereinafter set forth. The term
"Common Stock" shall mean, when used herein, unless the context otherwise
requires, the stock and other securities and property at the time receivable
upon the exercise of this Warrant.
This Warrant is one of a series of the Company's Warrants to purchase
Common Stock (collectively, the "Warrants"), issued pursuant to that certain
Confidential Private Placement Memorandum, dated December 15, 1995, as
supplemented (the "Memorandum"). Capitalized terms used and not otherwise
defined herein shall have the respective meanings attributed thereto in Section
10.
1. Exercise of Warrant.
(a) The Holder may exercise this Warrant according to its terms by
surrendering this Warrant to the Company at the address set forth in Section 11,
the subscription form attached hereto having then been duly executed by the
Holder, accompanied by cash, certified check or bank draft in payment of the
purchase price, in lawful money of the United States of America, for the number
of shares of the Warrant Stock specified in the subscription form, or as
otherwise provided in this Warrant prior to 5:30 p.m., New York City time, on
February 15, 2002 (the "Expiration Date").
<PAGE>
(b) This Warrant may be exercised in whole or in part so long as any
exercise in part hereof would not involve the issuance of factional shares of
Warrant Stock. If exercised in part, the Company shall deliver to the Holder a
new Warrant, identical in form, in the name of the Holder, evidencing the right
to purchase the number of shares of Warrant Stock as to which this Warrant has
not been exercised, which new Warrant shall be signed by the Chairman and Chief
Executive Officer or the President and the Secretary or the Assistant Secretary
of the Company. The term Warrant as used herein shall include any subsequent
Warrant issued as provided herein.
(c) No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. The Company shall pay cash in lieu of
fractions with respect to the Warrants based upon the fair market value of such
fractional shares of Common Stock (which shall be the closing price of such
shares on the exchange or market on which the Common Stock is then traded) at
the time of exercise of this Warrant.
(d) In the event of any exercise of the rights represented by this Warrant,
a certificate or certificates for the Warrant Stock so purchased, registered in
the name of the Holder, shall be delivered to the Holder within a reasonable
time after such rights shall have been so exercised. The person or entity in
whose name any certificate for the Warrant Stock is issued upon exercise of the
rights represented by this Warrant shall for all purposes be deemed to have
become the holder of record of such shares immediately prior to the close of
business on the date on which the Warrant was surrendered and payment of the
Warrant Price and any applicable taxes was made, irrespective of the date of
delivery of such certificate, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the opening
of business on the next succeeding date on which the stock transfer books are
open. Except as provided in Section 4 hereof, the Company shall pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on exercise of this Warrant.
2. Disposition of Warrant Stock and Warrant.
(a) The Holder hereby acknowledges that this Warrant and any Warrant Stock
purchased pursuant hereto are not being registered (i) under the Act on the
ground that the issuance of this Warrant is exempt from registration under
Section 4(2) of the Act as not involving any public offering or (ii) under any
applicable state securities law because the issuance of this Warrant does not
involve any public offering; and that the Company's reliance on the Section 4(2)
exemption of the Act and under applicable state securities laws is predicated in
part on the representations hereby made to the Company by the Holder that it is
acquiring this Warrant and will acquire the Warrant Stock for investment for its
own account, with no present intention of dividing its participation with others
or reselling or otherwise distributing the same, subject, nevertheless, to any
requirement of law that the disposition of its property shall at all times be
within its control.
2
<PAGE>
The Holder hereby agrees that it will not sell or transfer all or any part
of this Warrant and/or Warrant Stock unless and until it shall first have given
notice to the Company describing such sale or transfer and furnished to the
Company either (i) an opinion, reasonably satisfactory to counsel for the
Company, of counsel (skilled in securities matters, selected by the Holder and
reasonably satisfactory to the Company) to the effect that the proposed sale or
transfer may be made without registration under the Act and without registration
or qualification under any state law, or (ii) an interpretative letter from the
Securities and Exchange Commission to the effect that no enforcement action will
be recommended if the proposed sale or transfer is made without registration
under the Act.
(b) If, at the time of issuance of the shares issuable upon exercise of
this Warrant, no registration statement is in effect with respect to such shares
under applicable provisions of the Act, the Company may at its election require
that the Holder provide the Company with written reconfirmation of the Holder's
investment intent and that any stock certificate delivered to the Holder of a
surrendered Warrant shall bear legends reading substantially as follows:
"TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN THE WARRANT PURSUANT TO WHICH THESE
SHARES WERE PURCHASED FROM THE COMPANY. COPIES OF THOSE RESTRICTIONS ARE ON
FILE AT THE PRINCIPAL OFFICES OF THE COMPANY, AND NO TRANSFER OF SUCH
SHARES OR OF THIS CERTIFICATE, OR OF ANY SHARES OR OTHER SECURITIES (OR
CERTIFICATES THEREFOR) ISSUED IN EXCHANGE FOR OR IN RESPECT OF SUCH SHARES,
SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND CONDITIONS THEREIN SET
FORTH SHALL HAVE BEEN COMPLIED WITH."
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT."
3
<PAGE>
In addition, so long as the foregoing legend may remain on any stock certificate
delivered to the Holder, the Company may maintain appropriate "stop transfer"
orders with respect to such certificates and the shares represented thereby on
its books and records and with those to whom it may delegate registrar and
transfer functions.
3. Reservation of Shares. The Company hereby agrees that at all times there
shall be reserved for issuance upon the exercise of this Warrant such number of
shares of its Common Stock as shall be required for issuance upon exercise of
this Warrant. The Company further agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will be duly
authorized and will, upon issuance and against payment of the exercise price, be
validly issued, fully paid and non-assessable, free from all taxes, liens,
charges and preemptive rights with respect to the issuance thereof, other than
taxes, if any, in respect of any transfer occurring contemporaneously with such
issuance and other than transfer restrictions imposed by federal and state
securities laws.
4. Exchange, Transfer, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations, entitling the
Holder or Holders thereof to purchase in the aggregate the same number of shares
of Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the assignee named in such instrument of assignment and
this Warrant shall promptly be canceled. This Warrant may be divided or combined
with other Warrants that carry the same rights upon presentation hereof at the
office of the Company or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued and signed by the Holder hereof.
5. Capital Adjustments. This Warrant is subject to the following further
provisions:
(a) Recapitalization, Reclassification and Succession. If any
recapitalization of the Company or reclassification of its Common Stock or any
merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or of any successor corporation's assets to any other
corporation or business entity (any such corporation or other business entity
being included within the meaning of the term "successor corporation") shall be
effected, at any time while this Warrant remains outstanding and unexpired,
then, as a condition of such recapitalization, reclassification, merger,
consolidation, sale or transfer, lawful and adequate provision shall be made
whereby the Holder of this Warrant thereafter shall have the right to receive
upon the exercise hereof as provided in Section 1 and in lieu of the shares of
Common Stock immediately theretofore issuable upon the exercise of this Warrant,
such shares of capital stock, securities or other property as may be issued or
payable with respect to or in exchange for
4
<PAGE>
a number of outstanding shares of Common Stock equal to the number of shares of
Common Stock immediately theretofore issuable upon the exercise of this Warrant
had such recapitalization, reclassification, merger, consolidation, sale or
transfer not taken place, and in each such case, the terms of this Warrant shall
be applicable to the shares of stock or other securities or property receivable
upon the exercise of this Warrant after such consummation.
(b) Subdivision or Combination of Shares. If the Company at any time while
this Warrant remains outstanding and unexpired shall subdivide or combine its
Common Stock, the number of shares of Warrant Stock purchasable upon exercise of
this Warrant and the Warrant Price shall be proportionately adjusted.
(c) Stock Dividends and Distributions. If the Company at any time while
this Warrant is outstanding and unexpired shall issue or pay the holders of its
Common Stock, or take a record of the holders of its Common Stock for the
purpose of entitling them to receive, a dividend payable in, or other
distribution of, Common Stock, then (i) the Warrant Price shall be adjusted in
accordance with Section 5(e) and (ii) the number of shares of Warrant Stock
purchasable upon exercise of this Warrant shall be adjusted to the number of
shares of Common Stock that Holder would have owned immediately following such
action had this Warrant been exercised immediately prior thereto.
(d) Stock and Rights Offering to Shareholders. If at any time after the
date of issuance of this Warrant, the Company shall issue or sell, or fix a
record date for the purposes of entitling holders of its Common Stock to
receive, (i) Common Stock or (ii) rights, options or warrants entitling the
holders thereof to subscribe for or purchase Common Stock (or securities
convertible or exchangeable into or exercisable for Common Stock), in any such
case, at a price per share (or having a conversion, exchange or exercise price
per share) that is less than the closing price per share of the Company's Common
Stock on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or traded on any such exchange,
on the National Market System (the "National Market System") of the National
Association of Securities Dealers Automated Quotations System ("Nasdaq"), or if
not listed or traded on any such exchange or system, the average of the bid and
asked price per share on Nasdaq or, if such quotations are not available, the
fair market value per share of the Company's Common Stock as reasonably
determined by the Board of Directors of the Company (the "Closing Price") on the
date of such issuance or sale or on such record date then, immediately after the
date of such issuance or sale or on such record date, (x) the Warrant Price
shall be adjusted in accordance with Section 5(e), and (y) the number of shares
of Warrant Stock purchasable upon exercise of this Warrant shall be adjusted to
that number determined by multiplying the number of shares of Warrant Stock
purchasable upon exercise of this Warrant immediately before the date of such
issuance or sale or such record date by a fraction, the denominator of which
will be the number of shares of Common Stock outstanding on such date plus the
number of shares of Common Stock that the aggregate offering price of the total
number of shares so offered for subscription or purchase (or the aggregate
initial conversion price, exchange price or
5
<PAGE>
exercise price of the convertible securities or exchangeable securities or
rights, options or warrants, as the case may be, so offered) would purchase at
such Closing Price, and the numerator of which will be the number of shares of
Common Stock outstanding on such date plus the number of additional shares of
Common Stock offered for subscription or purchase (or into which the convertible
or exchangeable securities or rights, options or warrants so offered are
initially convertible or exchangeable or exercisable, as the case may be).
If the Company shall at any time after the date of issuance of this Warrant
distribute to all holders of its Common Stock any shares of capital stock of the
Company (other than Common Stock) or evidences of its indebtedness or assets
(excluding cash dividends or distributions paid from retained earnings or
current year's or prior year's earnings of the Company) or rights or warrants to
subscribe for or purchase any of its securities (excluding those referred to in
the immediately preceding paragraph) (any of the foregoing being hereinafter in
this paragraph called the "Securities"), then in each such case, the Company
shall reserve shares or other units of such securities for distribution to the
Holder upon exercise of this Warrant so that, in addition to the shares of the
Common Stock to which such Holder is entitled, such Holder will receive upon
such exercise the amount and kind of such Securities which such Holder would
have received if the Holder had, immediately prior to the record date for the
distribution of the Securities, exercised this Warrant.
(e) Warrant Price Adjustment. Whenever the number of shares of Warrant
Stock purchasable upon exercise of this Warrant is adjusted, as herein provided,
the Warrant Price payable upon the exercise of this Warrant shall be adjusted to
that price determined by multiplying the Warrant Price immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the number of
shares of Warrant Stock purchasable upon exercise of this Warrant immediately
prior to such adjustment, and (ii) the denominator of which shall be the number
of shares of Warrant Stock purchasable upon exercise of this Warrant immediately
thereafter.
(f) 1996 EBITDA Adjustment. The Warrant Price shall additionally be
adjusted in the following circumstances:
(i) if the Company shall achieve 1996 EBITDA (as such term is defined
in Section 10) in an amount of less than $6,000,000, the Warrant Price
shall be reduced to $2.00 per share; and
(ii) if the Company shall achieve 1996 EBITDA in an amount of less
than $4,750,000 (together with the $6,000,000 amount referred to above, the
"Adjusted Amounts"), the Warrant Price shall be reduced to $1.50 per share;
provided, however, that in the event the Company sells all of the capital stock
or all or substantially all of the assets of one or more of its Subsidiaries in
1996, the Adjusted Amounts for 1996 will be reduced by the amount or amounts set
forth in Schedule A hereto in respect of the Subsidiary or Subsidiaries so
involved. In the event any such sale
6
<PAGE>
occurs during 1996, the applicable Adjusted Amount will be reduced by
multiplying it by a fraction, the numerator of which is the number of days of
the year remaining after any such sale and the denomination is 365.
(g) Certain Shares Excluded. The number of shares of Common Stock
outstanding at any given time for purposes of the adjustments set forth in this
Section 5 shall exclude any shares then directly or indirectly held in the
treasury of the Company.
(h) Deferral and Cumulation of De Minimis Adjustments. The Company shall
not be required to make any adjustment pursuant to this Section 5 if the amount
of such adjustment would be less than one percent (1%) of the Warrant Price in
effect immediately before the event that would otherwise have given rise to such
adjustment. In such case, however, any adjustment that would otherwise have been
required to be made shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to not less than one percent (1%) of the Warrant
Price in effect immediately before the event giving rise to such next subsequent
adjustment.
(i) Duration of Adjustment. Following each computation or readjustment as
provided in this Section 5, the new adjusted Warrant Price and number of shares
of Warrant Stock purchasable upon exercise of this Warrant shall remain in
effect until a further computation or readjustment thereof is required.
6. Notice to Holders.
(a) Notice of Record Date. In case:
(i) the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time receivable upon the exercise of
this Warrant) for the purpose of entitling them to receive any dividend
(other than a cash dividend payable out of earned surplus of the Company)
or other distribution, or any right to subscribe for or purchase any shares
of stock of any class or any other securities, or to receive any other
right;
(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation
with or merger of the Company into another corporation, or any conveyance
of all or substantially all of the assets of the Company to another
corporation; or
(iii) of any voluntary dissolution, liquidation or winding-up of the
Company;
then, and in each such case, the Company will mail or cause to be mailed to the
Holder hereof at the time outstanding a notice specifying, as the case may be,
(i) the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and
7
<PAGE>
stating the amount and character of such dividend, distribution or right, or
(ii) the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place, and
the time, if any, is to be fixed, as of which the holders of record of Common
Stock (or such stock or securities at the time receivable upon the exercise of
this Warrant) shall be entitled to exchange their shares of Common Stock (or
such other stock or securities) for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, conveyance,
dissolution or winding-up. Such notice shall be mailed at least thirty (30) days
prior to the record date therein specified, or if no record date shall have been
specified therein, at least thirty (30) days prior to such specified date.
(b) Certificate of Adjustment. Whenever any adjustment shall be made
pursuant to Section 5 hereof, the Company shall promptly make a certificate
signed by its Chairman and Chief Executive Officer, its President or a Vice
President and by its Treasurer or Assistant Treasurer or its Secretary or
Assistant Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the Warrant Price and number of shares of Warrant Stock
purchasable upon exercise of this Warrant after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
(by first class mail, postage prepaid) to the Holder of this Warrant.
7. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
evidence satisfactory to it, in the exercise of its reasonable discretion, of
the ownership and the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to the Company and, in the case of mutilation, upon surrender and
cancellation thereof, the Company will execute and deliver in lieu thereof,
without expense to the Holder, a new Warrant of like tenor dated the date
hereof.
8. Warrant Holder Not a Shareholder. The Holder of this Warrant, as such,
shall not be entitled by reason of this Warrant to any rights whatsoever as a
shareholder of the Company.
9. Registration Rights. This Warrant and the shares of Common Stock
issuable upon exercise of this Warrant will be accorded the registration rights
under the Act set forth in that certain Registration Rights Agreement between
the Company and the Holders, a form of which agreement is being furnished
concurrently herewith.
10. Definitions. As used herein, unless the context otherwise requires, the
following terms have the respective meanings:
(a) "Affiliate": with respect to any Person, the following: (i) any other
Person that at such time directly or indirectly through one or more
intermediaries controls, or is controlled by or is under common control with
such first Person or (ii) any Person beneficially owning or holding, directly or
indirectly, 10% or more of any class of voting or equity interests of the
Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly
8
<PAGE>
or indirectly, 10% of more of any class of voting or equity interests. As used
in such definition, "controls", "controlled by" and "under common control", as
used with respect to a Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise.
(b) "Consolidated Net Income": the net income (or deficit) of the Company
and its Subsidiaries for any period (taken as a cumulative whole) after
deducting, without duplication, all operating expenses, provisions for all taxes
and reserves (including reserves for deferred income taxes) and all other proper
deductions, all determined in accordance with GAAP on a consolidated basis,
after eliminating all intercompany items and after deducting portions of income
properly attributable to outside minority interests, if any, in any
Subsidiaries; provided, however, that there shall be excluded (i) any income or
deficit of any other Person accrued prior to the date it becomes a Subsidiary or
merges into or consolidates with the Company or another Subsidiary of the
Company, (ii) the income (or deficit) of any other Person (other than a
Subsidiary of the Company) in which the Company or any Subsidiary has any
ownership interest, except to the extent that any such income has been actually
received by the Company or such Subsidiary in the form of cash dividends or
similar distributions, (iii) any deferred credit or amortization thereof from
the acquisition of any properties of assets of any other Person, (iv) any
aggregate net income (but not any aggregate net loss) during such period arising
from the sale, exchange or other distribution of capital assets (such term to
include all fixed assets, whether tangible or intangible, all inventory sold in
conjunction with the disposition of fixed assets and all securities), (v) any
income resulting from the write-up of assets after the date hereof, (vi) any
gains properly classified as extraordinary in accordance with GAAP, (vii)
proceeds of life insurance policies to the extent such proceeds exceed premiums
paid to maintain such life insurance policies, (viii) any income of a Subsidiary
which is unavailable for the payment of dividends, and (ix) any gain arising
form the acquisition of securities, or the extinguishment of any indebtedness of
the Company or any of its Subsidiaries or the termination of an employee benefit
plan.
(c) "GAAP": United States generally accepted accounting principles,
consistently applied.
(d) "Indebtedness": at any time and with any respect to any Person, (i) all
indebtedness of such Person for borrowed money, (ii) all indebtedness of such
Person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business,
provided that the same shall not be overdue (i.e., the earlier of ninety (90)
days from the invoice date or the date the obligee commences an action to
recover such amounts), or if overdue, are being contested in good faith and by
appropriate proceedings), (iii) all obligations of such Person evidenced by
notes, bonds, debentures or other similar instruments (other than performance,
surety and appeal bonds arising in the ordinary course of business), (iv) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement
9
<PAGE>
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (v) all obligations of
such Person under leases which have been or should be, in accordance with GAAP,
recorded as capital leases, to the extent required to be so recorded, (vi) all
reimbursement, payment or similar obligations of such Person, contingent or
otherwise, under acceptance, letter of credit or similar facilities (vii) all
Indebtedness referred to in clauses (i) through (vi) above guaranteed directly
or indirectly by such Person including without limitation through any agreement
(A) to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (B) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss in respect of such Indebtedness,
(C) to supply funds to or in any other manner invest in the debtor (including
any agreement to pay for property or services irrespective of whether such
property is received or such services are rendered) or (D) otherwise to assure a
creditor against loss in respect of such Indebtedness, and (viii) all
Indebtedness referred to in clauses (i) through (vii) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness.
(e) "Lien": any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind whatsoever.
(f) "1996 EBITDA: Consolidated Net Income of the Company and its
Subsidiaries, for the fiscal year ended December 31, 1996, plus, to the extent
deducted in determining such Consolidated Net Income and without duplication,
(i) the sum for such period, of (a) the aggregate amount of all interest
(including capitalized interest) accrued or to accrue (whether or not actually
paid) during such period in respect of any Indebtedness of the Company and its
Subsidiaries, (b) any amortized discount in respect of any such Indebtedness
issued at discount, and (c) any fees or commissions payable in connection with
any letters of credit; (ii) current and deferred taxes on income and profit;
(iii) depreciation; and (iv) amortization.
(g) "Person": any natural person, corporation, division of a corporation,
partnership, limited liability company, trust, joint venture, association,
company, estate, unincorporated organization or government or any agency or
political subdivision thereof.
(h) "Subsidiaries": with respect to any Person, any corporation,
association or other business entity (whether now existing or hereafter
organized) of which at least a majority of the securities or other ownership
interests having ordinary voting power for the election of directors is, at the
time as of which any determination is being made, owned or controlled by such
Person or one or more subsidiaries of such Person.
10
<PAGE>
11. Notices. Any notice required or contemplated by this Warrant shall be
deemed to have been duly given if transmitted by registered or certified mail,
return receipt requested, to the Company at 2405 Trade Centre Avenue, Longmont,
Colorado 80503, Attention: President, or to the Holder at the name and address
set forth in the Warrant Register maintained by the Company.
12. Choice of Law. THIS WARRANT IS ISSUED UNDER AND SHALL FOR ALL PURPOSES
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed
on its behalf, in its corporate name and by its duly authorized officer, as of
this _____ day of _____________ 1996.
NAI TECHNOLOGIES, INC.
By: ________________________________
Richard A. Schneider
Executive Vice President,
Treasurer and Secretary
11
<PAGE>
Schedule A
Section 5(f) Adjusted Amounts
Wilcom, Inc ........................................................ $ 838,000
Codar Technology, Inc. ............................................. $2,805,000
NAI Technologies - Systems Division Corporation .................... $ 607,000
Lynwood Scientific Developments Limited ............................ $1,833,000
12
<PAGE>
SUBSCRIPTION FORM
The undersigned, the Holder of the attached Warrant, hereby irrevocably
elects to exercise purchase rights represented by such Warrant for, and to
purchase thereunder, the following number of shares of Common Stock of NAI
TECHNOLOGIES, INC.:
Number of Shares Purchase Price Per Share
The undersigned herewith makes payment of $_____________ therefor, and
requests that certificates for such shares (and any warrants or other property
issuable upon such exercise) be issued in the name of and delivered to
______________________ whose address is________________________________________
_______________________________________________________________________________
_______________________________________ (social security or taxpayer
identification number ________________) and, if such shares shall not include
all of the shares issuable under such warrant, that a new warrant of like tenor
and date for the balance of the shares issuable thereunder be delivered to the
undersigned.
HOLDER:
------------------------
Signature
------------------------
Signature, if jointly held
------------------------
Date
13
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, ____________________________________________________________
hereby sells, assigns and transfers unto
Name____________________________________________________________________________
(Please typewrite or print in block letters)
Social Security or Taxpayer Identification Number_______________________________
the right to purchase shares of Common Stock of NAI TECHNOLOGIES, INC., a New
York corporation, represented by this Warrant to the extent of shares as to
which such right is exercisable and does hereby irrevocably constitute and
appoint _________________________________, Attorney, to transfer the same on the
books of the Company with full power of substitution in the premises.
DATED:__________________
--------------------------
Signature
--------------------------
Signature, if jointly held
Witness:
- ---------------------
14
<PAGE>
NO. B-____ _______ SHARES
DRS TECHNOLOGIES, INC.
WARRANT TO PURCHASE COMMON STOCK
--------------------------------
VOID AFTER 5:30 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE
THIS WARRANT AND ANY SHARES ISSUED UPON THE EXERCISE OF THIS WARRANT
ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 2 OF
THIS WARRANT.
FOR VALUE RECEIVED, DRS TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), hereby agrees to sell upon the terms and on the conditions
hereinafter set forth, but no later than 5:30 p.m., New York City time, on the
Expiration Date (as hereinafter defined) to __________________________, or
registered assigns (the "Holder"), under the terms as hereinafter set forth,
______________________________ (______) fully paid and non-assessable shares of
the Company's Common Stock, par value $.01 per share (the "Warrant Stock"), at a
purchase price per share of [Ten and 87/100 Dollars ($10.87)][Ten Dollars
($10.00)] (the "Warrant Price"), pursuant to this warrant (this "Warrant"). The
number of shares of Warrant Stock to be so issued and the Warrant Price are
subject to adjustment in certain events as hereinafter set forth. The term
"Common Stock" shall mean, when used herein, unless the context otherwise
requires, the stock and other securities and property at the time receivable
upon the exercise of this Warrant.
This Warrant is one of a series of the Company's Warrants to purchase
Common Stock (collectively, the "Warrants"), issued pursuant to that certain
Agreement and Plan of Merger, dated as of August 26, 1998, by and among the
Company, NAI Technologies, Inc. and DRS Merger Sub, Inc. (the "Agreement").
Capitalized terms used and not otherwise defined herein shall have the
respective meanings attributed to such terms in the Agreement.
1. Exercise of Warrant.
(a) The Holder may exercise this Warrant according to its terms by
surrendering this Warrant to the Company at the address set forth in Section 10,
the subscription form attached hereto having then been duly executed by the
Holder, accompanied by cash, certified check or bank draft in payment of the
purchase price, in lawful money of the United States of America, for the number
of shares of the Warrant Stock specified in the subscription form, or as
otherwise provided in this Warrant prior to 5:30 p.m., New York City time, on
February 15, 2002 (the "Expiration Date").
(b) This Warrant may be exercised in whole or in part so long as any
exercise in part hereof would not involve the issuance of factional shares of
Warrant Stock. If exercised in part, the Company shall deliver to the Holder a
1
<PAGE>
new Warrant, identical in form, in the name of the Holder, evidencing the right
to purchase the number of shares of Warrant Stock as to which this Warrant has
not been exercised, which new Warrant shall be signed by the Chairman and Chief
Executive Officer or the President and the Secretary or the Assistant Secretary
of the Company. The term Warrant as used herein shall include any subsequent
Warrant issued as provided herein.
(c) No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. The Company shall pay cash in lieu of
fractions with respect to the Warrants based upon the fair market value of such
fractional shares of Common Stock (which shall be the closing price of such
shares on the exchange or market on which the Common Stock is then traded) at
the time of exercise of this Warrant.
(d) In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the Warrant Stock so purchased,
registered in the name of the Holder, shall be delivered to the Holder within a
reasonable time after such rights shall have been so exercised. The person or
entity in whose name any certificate for the Warrant Stock is issued upon
exercise of the rights represented by this Warrant shall for all purposes be
deemed to have become the holder of record of such shares immediately prior to
the close of business on the date on which the Warrant was surrendered and
payment of the Warrant Price and any applicable taxes was made, irrespective of
the date of delivery of such certificate, except that, if the date of such
surrender and payment is a date when the stock transfer books of the Company are
closed, such person shall be deemed to have become the holder of such shares at
the opening of business on the next succeeding date on which the stock transfer
books are open. Except as provided in Section 4 hereof, the Company shall pay
any and all documentary stamp or similar issue or transfer taxes payable in
respect of the issue or delivery of shares of Common Stock on exercise of this
Warrant.
2. Disposition of Warrant Stock and Warrant. If, at the time of issuance of the
shares issuable upon exercise of this Warrant, no registration statement is in
effect with respect to such shares under applicable provisions of the Securities
Act of 1933, as amended (the "Act"), the Company may at its election require
that any stock certificate delivered to the Holder of a surrendered Warrant bear
legends reading substantially as follows:
"TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN THE WARRANT PURSUANT TO WHICH THESE
SHARES WERE PURCHASED FROM THE COMPANY. COPIES OF THOSE RESTRICTIONS ARE ON
FILE AT THE PRINCIPAL OFFICES OF THE COMPANY, AND NO TRANSFER OF SUCH
SHARES OR OF THIS CERTIFICATE, OR OF ANY
2
<PAGE>
SHARES OR OTHER SECURITIES (OR CERTIFICATES THEREFOR) ISSUED IN EXCHANGE
FOR OR IN RESPECT OF SUCH SHARES, SHALL BE EFFECTIVE UNLESS AND UNTIL THE
TERMS AND CONDITIONS THEREIN SET FORTH SHALL HAVE BEEN COMPLIED WITH."
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT
REQUIRED UNDER THE ACT."
In addition, so long as the foregoing legend may remain on any stock certificate
delivered to the Holder, the Company may maintain appropriate "stop transfer"
orders with respect to such certificates and the shares represented thereby on
its books and records and with those to whom it may delegate registrar and
transfer functions.
3. Reservation of Shares. The Company hereby agrees that at all times there
shall be reserved for issuance upon the exercise of this Warrant such number of
shares of its Common Stock as shall be required for issuance upon exercise of
this Warrant. The Company further agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will be duly
authorized and will, upon issuance and against payment of the exercise price, be
validly issued, fully paid and non-assessable, free from all taxes, Liens,
charges and preemptive rights with respect to the issuance thereof, other than
taxes, if any, in respect of any transfer occurring contemporaneously with such
issuance and other than transfer restrictions imposed by federal and state
securities laws.
4. Exchange, Transfer, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations, entitling the
Holder or Holders thereof to purchase in the aggregate the same number of shares
of Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the assignee named in such instrument of assignment and
this Warrant shall promptly be canceled. This Warrant may be divided or combined
with other Warrants that carry the same rights upon presentation hereof at the
office of the Company or at the office of its stock transfer agent, if any,
3
<PAGE>
together with a written notice specifying the names and denominations in which
new Warrants are to be issued and signed by the Holder hereof.
5. Capital Adjustments. This Warrant is subject to the following further
provisions:
(a) Recapitalization, Reclassification and Succession. If any
recapitalization of the Company or reclassification of its Common Stock or any
merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or of any successor corporation's assets to any other
corporation or business entity (any such corporation or other business entity
being included within the meaning of the term "successor corporation") shall be
effected, at any time while this Warrant remains outstanding and unexpired,
then, as a condition of such recapitalization, reclassification, merger,
consolidation, sale or transfer, lawful and adequate provision shall be made
whereby the Holder of this Warrant thereafter shall have the right to receive
upon the exercise hereof as provided in Section 1 and in lieu of the shares of
Common Stock immediately theretofore issuable upon the exercise of this Warrant,
such shares of capital stock, securities or other property as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
Common Stock equal to the number of shares of Common Stock immediately
theretofore issuable upon the exercise of this Warrant had such
recapitalization, reclassification, merger, consolidation, sale or transfer not
taken place, and in each such case, the terms of this Warrant shall be
applicable to the shares of stock or other securities or property receivable
upon the exercise of this Warrant after such consummation.
(b) Subdivision or Combination of Shares. If the Company at any time while
this Warrant remains outstanding and unexpired shall subdivide or combine its
Common Stock, the number of shares of Warrant Stock purchasable upon exercise of
this Warrant and the Warrant Price shall be proportionately adjusted.
(c) Stock Dividends and Distributions. If the Company at any time while
this Warrant is outstanding and unexpired shall issue or pay the holders of its
Common Stock, or take a record of the holders of its Common Stock for the
purpose of entitling them to receive, a dividend payable in, or other
distribution of, Common Stock, then (i) the Warrant Price shall be adjusted in
accordance with Section 5(e) and (ii) the number of shares of Warrant Stock
purchasable upon exercise of this Warrant shall be adjusted to the number of
shares of Common Stock that Holder would have owned immediately following such
action had this Warrant been exercised immediately prior thereto.
(d) Stock and Rights Offering to Stockholders. If at any time after the
date of issuance of this Warrant, the Company shall issue or sell, or fix a
record date for the purposes of entitling holders of its Common Stock to
receive, (i) Common Stock or (ii) rights, options or warrants entitling the
holders thereof to subscribe for or purchase Common Stock (or securities
convertible or exchangeable into or exercisable for Common Stock), in any such
case, at a price per share (or having a conversion, exchange or exercise price
4
<PAGE>
per share) that is less than the closing price per share of the Company's Common
Stock on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or traded on any such exchange,
on the National Market System (the "National Market System") of the National
Association of Securities Dealers Automated Quotations System ("Nasdaq"), or if
not listed or traded on any such exchange or system, the average of the bid and
asked price per share on Nasdaq or, if such quotations are not available, the
fair market value per share of the Company's Common Stock as reasonably
determined by the Board of Directors of the Company (the "Closing Price") on the
date of such issuance or sale or on such record date then, immediately after the
date of such issuance or sale or on such record date, (x) the Warrant Price
shall be adjusted in accordance with Section 5(e), and (y) the number of shares
of Warrant Stock purchasable upon exercise of this Warrant shall be adjusted to
that number determined by multiplying the number of shares of Warrant Stock
purchasable upon exercise of this Warrant immediately before the date of such
issuance or sale or such record date by a fraction, the denominator of which
will be the number of shares of Common Stock outstanding on such date plus the
number of shares of Common Stock that the aggregate offering price of the total
number of shares so offered for subscription or purchase (or the aggregate
initial conversion price, exchange price or exercise price of the convertible
securities or exchangeable securities or rights, options or warrants, as the
case may be, so offered) would purchase at such Closing Price, and the numerator
of which will be the number of shares of Common Stock outstanding on such date
plus the number of additional shares of Common Stock offered for subscription or
purchase (or into which the convertible or exchangeable securities or rights,
options or warrants so offered are initially convertible or exchangeable or
exercisable, as the case may be).
If the Company shall at any time after the date of issuance of this
Warrant distribute to all holders of its Common Stock any shares of capital
stock of the Company (other than Common Stock) or evidences of its Indebtedness
or assets (excluding cash dividends or distributions paid from retained earnings
or current year's or prior year's earnings of the Company) or rights or warrants
to subscribe for or purchase any of its securities (excluding those referred to
in the immediately preceding paragraph) (any of the foregoing being hereinafter
in this paragraph called the "Securities"), then in each such case, the Company
shall reserve shares or other units of such securities for distribution to the
Holder upon exercise of this Warrant so that, in addition to the shares of the
Common Stock to which such Holder is entitled, such Holder will receive upon
such exercise the amount and kind of such Securities which such Holder would
have received if the Holder had, immediately prior to the record date for the
distribution of the Securities, exercised this Warrant.
(e) Warrant Price Adjustment. Whenever the number of shares of Warrant
Stock purchasable upon exercise of this Warrant is adjusted, as herein provided,
the Warrant Price payable upon the exercise of this Warrant shall be adjusted to
that price determined by multiplying the Warrant Price immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the number of
shares of Warrant Stock purchasable upon exercise of this Warrant immediately
5
<PAGE>
prior to such adjustment, and (ii) the denominator of which shall be the number
of shares of Warrant Stock purchasable upon exercise of this Warrant immediately
thereafter.
(f) Certain Shares Excluded. The number of shares of Common Stock
outstanding at any given time for purposes of the adjustments set forth in this
Section 5 shall exclude any shares then directly or indirectly held in the
treasury of the Company.
(g) Deferral and Cumulation of De Minimis Adjustments. The Company shall
not be required to make any adjustment pursuant to this Section 5 if the amount
of such adjustment would be less than one percent (1%) of the Warrant Price in
effect immediately before the event that would otherwise have given rise to such
adjustment. In such case, however, any adjustment that would otherwise have been
required to be made shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to not less than one percent (1%) of the Warrant
Price in effect immediately before the event giving rise to such next subsequent
adjustment.
(h) Duration of Adjustment. Following each computation or readjustment as
provided in this Section 5, the new adjusted Warrant Price and number of shares
of Warrant Stock purchasable upon exercise of this Warrant shall remain in
effect until a further computation or readjustment thereof is required.
6. Notice to Holders.
(a) Notice of Record Date. In case:
(i) the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time receivable upon the
exercise of this Warrant for the purpose of entitling them to
receive any dividend (other than a cash dividend payable out of
earned surplus of the Company) or other distribution, or any right
to subscribe for or purchase any shares of stock of any class or any
other securities, or to receive any other right;
(ii) of any capital reorganization of the Company, any reclassification
of the capital stock of the Company, any consolidation with or
merger of the Company into another corporation, or any conveyance of
all or substantially all of the assets of the Company to another
corporation; or
(iii) of any voluntary dissolution, liquidation or winding-up of the
Company;
then, and in each such case, the Company will mail or cause to be mailed to the
Holder hereof at the time outstanding a notice specifying, as the case may be,
(i) the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the date on which such reorganization,
6
<PAGE>
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any, is to be fixed, as of which
the holders of record of Common Stock (or such stock or securities at the time
receivable upon the exercise of this Warrant) shall be entitled to exchange
their shares of Common Stock (or such other stock or securities) for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, dissolution or winding-up. Such notice shall
be mailed at least thirty (30) days prior to the record date therein specified,
or if no record date shall have been specified therein, at least thirty (30)
days prior to such specified date.
(b) Certificate of Adjustment. Whenever any adjustment shall be made
pursuant to Section 5 hereof, the Company shall promptly make a certificate
signed by its Chairman and Chief Executive Officer, its President or a Vice
President and by its Treasurer or Assistant Treasurer or its Secretary or
Assistant Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the Warrant Price and number of shares of Warrant Stock
purchasable upon exercise of this Warrant after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
(by first class mail, postage prepaid) to the Holder of this Warrant.
7. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
evidence satisfactory to it, in the exercise of its reasonable discretion, of
the ownership and the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to the Company and, in the case of mutilation, upon surrender and
cancellation thereof, the Company will execute and deliver in lieu thereof,
without expense to the Holder, a new Warrant of like tenor dated the date
hereof.
8. Warrant Holder Not a Stockholder. The Holder of this Warrant, as such, shall
not be entitled by reason of this Warrant to any rights whatsoever as a
stockholder of the Company.
9. Definitions. As used herein, unless the context otherwise requires, the
following terms have the respective meanings:
(a) "GAAP": United States generally accepted accounting principles,
consistently applied.
(b) "Indebtedness": at any time and with any respect to any Person, (i)
all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business,
provided that the same shall not be overdue (i.e., the earlier of ninety (90)
days from the invoice date or the date the obligee commences an action to
recover such amounts), or if overdue, are being contested in good faith and by
appropriate proceedings), (iii) all obligations of such Person evidenced by
notes, bonds, debentures or other similar instruments (other than performance,
7
<PAGE>
surety and appeal bonds arising in the ordinary course of business), (iv) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (v) all obligations of such Person under leases which have been or
should be, in accordance with GAAP, recorded as capital leases, to the extent
required to be so recorded, (vi) all reimbursement, payment or similar
obligations of such Person, contingent or otherwise, under acceptance, letter of
credit or similar facilities, (vii) all Indebtedness referred to in clauses (i)
through (vi) above guaranteed directly or indirectly by such Person including
without limitation through any agreement (A) to pay or purchase such
Indebtedness or to advance or supply funds for the payment or purchase of such
Indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property, or
to purchase or sell services, primarily for the purpose of enabling the debtor
to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss in respect of such Indebtedness, (C) to supply funds
to or in any other manner invest in the debtor (including any agreement to pay
for property or services irrespective of whether such property is received or
such services are rendered) or (D) otherwise to assure a creditor against loss
in respect of such Indebtedness, and (viii) all Indebtedness referred to in
clauses (i) through (vii) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness.
(c) "Lien": any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind whatsoever.
(d) "Person": any natural person, corporation, division of a corporation,
partnership, limited liability company, trust, joint venture, association,
company, estate, unincorporated organization or government or any agency or
political subdivision thereof.
(e) "Subsidiaries": with respect to any Person, any corporation,
association or other business entity (whether now existing or hereafter
organized) of which at least a majority of the securities or other ownership
interests having ordinary voting power for the election of directors is, at the
time as of which any determination is being made, owned or controlled by such
Person or one or more subsidiaries of such Person.
10. Notices. Any notice required or contemplated by this Warrant shall be deemed
to have been duly given if transmitted by registered or certified mail, return
receipt requested, to the Company at 5 Sylvan Way, Parsippany, New Jersey 07054,
Attention: President, or to the Holder at the name and address set forth in the
Warrant Register maintained by the Company.
8
<PAGE>
11. Choice of Law. THIS WARRANT IS ISSUED UNDER AND SHALL FOR ALL PURPOSES BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed
on its behalf, in its corporate name and by its duly authorized officer, as of
this _____ day of _____________ 1999.
DRS TECHNOLOGIES, INC.
By:_____________________
Name:
Title:
9
<PAGE>
SUBSCRIPTION FORM
The undersigned, the Holder of the attached Warrant, hereby irrevocably
elects to exercise purchase rights represented by such Warrant for, and to
purchase thereunder, the following number of shares of Common Stock of DRS
TECHNOLOGIES, INC.:
Number of Shares Purchase Price Per Share
---------------- ------------------------
The undersigned herewith makes payment of $_____________ therefor, and
requests that certificates for such shares (and any warrants or other property
issuable upon such exercise) be issued in the name of and delivered to
______________________ whose address is_______________________________________
(social security or taxpayer identification number ________________) and, if
such shares shall not include all of the shares issuable under such warrant,
that a new warrant of like tenor and date for the balance of the shares issuable
thereunder be delivered to the undersigned.
HOLDER:
------------------------
Signature
------------------------
Signature, if jointly held
------------------------
Date
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, _____________________________________________ hereby sells,
assigns and transfers unto
Name________________________________________________________ ___________
(Please typewrite or print in block letters)
Social Security or Taxpayer Identification Number______________________________
the right to purchase shares of Common Stock of DRS TECHNOLOGIES, INC., a
Delaware corporation, represented by this Warrant to the extent of shares as to
which such right is exercisable and does hereby irrevocably constitute and
appoint _________________________________, Attorney, to transfer the same on the
books of the Company with full power of substitution in the premises.
DATED:__________________
-----------------------
Signature
-----------------------
Signature, if jointly held
Witness:
- ---------------------
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF DRS TECHNOLOGIES, INC.]
December 23, 1998
Board of Directors
DRS Technologies, Inc.
5 Sylvan Way
Parsippany, New Jersey 07054
Ladies and Gentlemen:
I am general counsel to DRS Technologies, Inc., a Delaware corporation (the
"Company"), in connection with the Company's filing pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), of the Registration Statement on
Form S-4 (the "Registration Statement"), relating to the shares of common stock,
par value $.01 per share (the "Common Stock"), of the Company, and the Warrants
to purchase Common Stock (the "Warrants") of the Company to be issued in
connection with the merger of DRS Merger Sub, Inc., a New York corporation and
direct wholly-owned subsidiary of the Company ("Merger Sub"), with and into NAI
Technologies, Inc., a New York corporation ("NAI"), pursuant to the Agreement
and Plan of Merger, dated as of August 26, 1998 (the "Merger Agreement"), among
the Company, Merger Sub and NAI.
I have examined such corporate records of the Company, including its Amended
and Restated Certificate of Incorporation, as amended, its Amended and Restated
By-Laws and resolutions of its Board of Directors, as well as such other
documents as I deemed necessary for rendering the opinion hereinafter expressed.
On the basis of the foregoing, I am of the opinion that the Common Stock
and the Warrants have been duly authorized by the Board of Directors of the
Company, and that, when issued in accordance with the provisions of the Merger
Agreement, the Common Stock will be legally issued, fully paid and
nonassessable, and the Warrants will constitute legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except to the extent that such enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium, receivership or other
similar laws affecting or relating to the enforcement of creditors' rights
generally or by equitable principles (regardless of whether enforcement is
sought in a proceeding in equity or at law).
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name therein.
Sincerely yours,
/s/ NINA LASERSON DUNN, ESQ.
-------------------------------------
Nina Laserson Dunn, Esq.
Executive Vice President,
General Counsel and Secretary
DRS Technologies, Inc.
<PAGE>
January 25, 1999
NAI Technologies, Inc.
282 New York Avenue
Huntington, New York 11473
DRS Technologies Inc.
5 Sylvan Way
Parsippany, New Jersey 07054
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed merger of DRS Merger Sub, Inc. ("Merger Sub"), a
direct wholly owned subsidiary of DRS Technologies Inc. ("DRS"), with and
into NAI Technologies Inc. ("NAI) (the "Merger").
FACTS
A. NAI
NAI is a corporation organized and in good standing under the laws of the
State of New York. It was incorporated in New York in 1954.
NAI, through its wholly-owned subsidiaries, designs, manufactures and
markets rugged computer systems, advanced peripheral products, intelligent
terminals, high performance work stations, TEMPEST computer systems (which
suppress certain radiation to prevent external detectors from reading the data
being transcribed) and telecommunications test equipment and transmission
products.
NAI's Common Stock is traded on the Nasdaq. In addition to its Common
Stock, NAI has (i) outstanding options issued to employees to purchase 637,419
shares of NAI Common
<PAGE>
-2-
NAI Technologies, Inc.
Stock under NAI Stock Option Plan at exercise prices ranging from $1.875 to
$8.33 as of September 26, 1998, and 30,000 shares of NAI Common Stock under the
NAI Stock Option Plan at an exercise price of $2.50 as of September 26, 1998;
(ii) warrants to purchase up to a maximum of 4,119,700 shares of Common Stock at
an exercise price of $2.50 (the NAI Warrants); (iii) outstanding warrants to
purchase up to a maximum of 300,000 shares of Common Stock at a price of $3.00
per share (the "Additional Warrants"); and (iv) outstanding 12% Convertible
Subordinated Promissory Notes due January 15, 2001 convertible into NAI Common
Stock (the "Convertible Notes").
B. DRS
DRS was incorporated in 1968 and is a diversified high-technology company
serving government and commercial niche markets worldwide.
DRS develops and manufactures a variety of leading edge systems and
components used for the processing, display and storage of data. These include
combat display workstations, electronic sensor systems, digital imaging systems,
electro-optical systems, ship communications and flight safety systems. DRS also
provides a wide range of technical support and depot level services. DRS'
defense electronics products serve all branches of the U.S. Armed Services and
certain international military forces. DRS' commerical and industrial products
are used mainly by the airline, banking, computer disk drive, security,
transportation, retail sales and broadcast industries.
DRS Common Stock is traded on the American Stock Exchange.
C. DRS Merger Sub, Inc.
DRS Merger Sub, Inc. is a newly formed New York corporation and a direct
wholly-owned subsidiary of DRS created solely for the purpose of facilitating
the acquisition of NAI by DRS.
D. The Merger
The terms of the Merger are contained in the Agreement and Plan of Merger
dated as of August 26, 1998 (the "Merger Agreement"). Terms not otherwise
defined in this letter shall have the meanings assigned to them in the Merger
Agreement.
You have directed us to assume in preparing this opinion that (1) the
Merger will be consummated in accordance with the terms, conditions and other
provisions of the Merger Agreement, and (2) all of the factual information,
descriptions, representations and assumptions set forth (i) in this letter (an
advance copy of which has been provided to you), (ii) in the Merger Agreement,
(iii) in all letters and certificates delivered in connection with the closing
of the Merger transaction and (iv) in the Joint Proxy Statement/Prospectus
pertaining to the Merger (the "Joint Proxy Statement/Prospectus") as filed
<PAGE>
-3-
NAI Technologies, Inc.
with the Securities and Exchange Commission, are accurate and complete and will
be accurate and complete at the time the Merger becomes effective (the
"Effective Time"). We have not independently verified any factual matters
relating to the Merger in connection with or apart from our preparation of this
opinion and, accordingly, our opinion does not take into account any matters not
set forth herein which might have been disclosed by independent verification.
Pursuant to the Merger Agreement, Merger Sub will be merged, in accordance
with the applicable provisions of the New York Corporation Law, with and into
NAI with NAI as the surviving corporation. The Merger is subject to approval as
required by law by the NAI shareholders at a special meeting. We have assumed
for the purposes of this opinion that NAI will be listed on the Nasdaq as of the
time of the special meeting and the record date.
At the Effective Time: (i) Merger Sub will be merged with and into NAI,
(ii) the separate corporate existence of Merger Sub will cease, and (iii) except
for fractional shares, each share of NAI Common Stock then issued and
outstanding will be converted into the right to receive 0.23 shares of DRS
Common Stock (the "Exchange Ratio"), subject to adjustment as described in the
Merger Agreement and the Joint Proxy Statement/Prospectus. If, prior to the
Effective Time, DRS should split or combine the DRS Common Stock, or pay a stock
dividend or other stock distribution in shares of DRS Common Stock, or otherwise
change the DRS Common Stock into any other securities, or make any other
dividend or distribution on the DRS Common Stock, then the Exchange Ratio will
be appropriately adjusted to reflect such split, combination, dividend or other
distribution or change.
No fractional shares of DRS Common Stock will be issued in the Merger. Each
holder of NAI Common Stock who otherwise would be entitled to receive a fraction
of a share of DRS Common Stock will receive, instead, cash equal to such
holder's proportionate interest in the net proceeds from the sale or sales of
the aggregate shares of fractional DRS Common Stock issued in the Merger (in the
manner set forth in section 3.3 of the Merger Agreement). Except for cash
exchanged in lieu of issuing fractional shares of DRS Common Stock, no cash will
be exchanged for shares of NAI Common Stock or shares of Merger Sub Common Stock
pursuant to the Merger.
It is a condition to the Merger that the holders of at least 90% of the
aggregate principal amount of the Convertible Notes outstanding as of August 26,
1998 convert their NAI Convertible Notes into shares of NAI Common Stock prior
to the completion of the Merger. All remaining holders of NAI Convertible Notes
will have the right to convert such notes to DRS Common Stock at the Exchange
Ratio.
At the Effective Time, all options and warrants (other than the Additional
Warrants) granted by NAI which are outstanding immediately prior to the Merger
shall be converted into options and warrants to purchase shares of DRS Common
Stock on the same terms and conditions as are in effect immediately prior to the
Merger, adjusted as provided in Section 3.1 of the Merger Agreement.
<PAGE>
-4-
NAI Technologies, Inc.
Prior to the Effective Time, NAI will sell all issued and outstanding
shares of the capital stock of Wilcom, Inc., a New York corporation and
wholly-owned subsidiary of NAI, to Wilcom Acquisition Corp., a Delaware
corporation in which Mr. Charles S. Holmes, a current director of NAI, owns
capital stock. The purchase price will consist of (i) $150,000, (ii) the
surrender of the Additional Warrants and (iii) the surrender of 1,700,000 NAI
Warrants held by Mr. Holmes.
F. Representations and Assumptions.
We have also relied with your permission on the following additional
representations and/or assumptions;
1. The Merger will be effected for bona fide business reasons.
2. The fair market value of DRS stock and other consideration received by
each NAI shareholder will be approximately equal to the fair market value of NAI
stock surrendered in the exchange.
3. In the Merger, an amount of NAI Common Stock equal in value to at least
50 percent of the value of all of the formerly outstanding NAI Common Stock will
be exchanged for DRS Common Stock.
4. The only consideration that will be issued by DRS pursuant to the Merger
in exchange for shares of NAI Common Stock will be shares of DRS Common Stock
and cash in lieu of fractional shares of DRS Common Stock.
5. Prior to and in connection with the Merger, none of the NAI Common Stock
will be redeemed.
6. Prior to and in connection with the Merger, no distributions (other than
regular dividend distributions consistent with historic practices) will be made
with respect to any of the NAI Common Stock.
7. After the Merger, no dividends or distributions will be made to the
former NAI shareholders by DRS, other than regular or normal dividend
distributions made with regard to all shares of DRS Common Stock.
8. Prior to and in connection with the Merger, no corporation that is
related(1) to NAI will acquire any of the NAI Common Stock.
- ----------
(1) For purposes of this letter, the determination of whether two corporations
are "related" is made pursuant to the provisions of Regulations section
1.368-1(e).
<PAGE>
-5-
NAI Technologies, Inc.
9. In connection with the Merger, no corporation that is related to DRS
will acquire any of the NAI Common Stock or any of the DRS Common Stock
exchanged in the Merger for NAI Common Stock.
10. DRS has no plan or intention to sell or otherwise dispose of, or to
permit the sale or other disposition of, any of the assets of NAI acquired in
the Merger, including any assets of any NAI Subsidiary or other Affiliate,
except for dispositions made in the ordinary course of business, or transfers
described in section 368(a)(2)(C) or Regulations section 1.368-2(k). No
Subsidiary or other Affiliate of DRS (including any NAI Subsidiary or other
Affiliate acquired pursuant to the Merger) has any plan or intention to sell or
otherwise dispose of any of the assets of NAI or any NAI Subsidiary or other
Affiliate, except for dispositions made in the ordinary course of business. NAI
and NAI's Subsidiaries and other Affiliates have not and will not sell or
otherwise dispose of assets in anticipation of the Merger, other than the sale
of the capital stock of Wilcom or in the ordinary course of business.
11. Following the transaction, NAI will hold at least 90 percent of the
fair market value of its net assets and at least 70 percent of the fair market
value of its gross assets and at least 90 percent of the fair market value of
Merger Sub's net assets and at least 70 percent of the fair market value of
Merger Sub's gross assets held immediately prior to the transaction. For
purposes of this representation, amounts paid by NAI or Merger Sub to
dissenters, amounts paid by NAI or Merger Sub to shareholders who receive cash
or other property, amounts used by NAI or Merger Sub to pay reorganization
expenses, and all redemptions and distributions (except for regular, normal
dividends) made by NAI will be included as assets of NAI or Merger Sub,
respectively, immediately prior to the transaction.
12. Prior to the Merger, DRS will be in control of Merger Sub within the
meaning of Section 368(c)(2).
13. DRS has no plan or intention to reacquire any of its stock in the
transaction.
14. Merger Sub will have no liabilities assumed by NAI, and will not
transfer to NAI any assets subject to liabilities in the transaction.
15. NAI has no plan or intention to issue additional shares of its stock
that would result in DRS losing control of NAI within the meaning of Section
368(c).
16. Following the transaction, NAI will continue its historic business and
use a significant portion of its historic business assets in a business.
- ----------
(2) All Section references are to the Internal Revenue Code of 1986, as
amended.
<PAGE>
-6-
NAI Technologies, Inc.
17. NAI, Merger Sub, DRS and the shareholders of NAI will pay their
respective expenses, if any, incurred in connection with the transaction.
18. There is no intercorporate indebtedness existing between DRS and NAI or
between Merger Sub and NAI that was issued, acquired or will be settled at a
discount.
19. In the Merger, shares of NAI stock representing control of NAI, as
defined in Section 368(c), will be exchanged solely for voting stock of DRS. For
purposes of this representation, shares of NAI stock exchanged for cash or other
property originating with DRS or NAI will be treated as outstanding NAI stock on
the date of the transaction.
20. Immediately following the Merger, NAI will not have outstanding any
warrants, options, convertible securities or any other type of right pursuant to
which any person could acquire stock in NAI that, if exercised or converted,
would affect DRS' acquisition or retention of control of NAI, as defined in
Section 368(c).
21. DRS does not own, nor has it owned during the past five years, any
shares of the stock of NAI.
22. Neither DRS, NAI nor Merger Sub is an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv).
23. On the date of the transaction, the fair market value of the assets of
NAI will exceed the sum of its liabilities, plus the amount of the liabilities,
if any, to which the assets are subject.
24. NAI is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A).
25. None of the compensation received by any NAI shareholders for services
performed for NAI or any NAI subsidiary or other affiliate is or will be
separate consideration for, or allocable to, any of their shares of NAI Common
Stock surrendered in the Merger. None of the DRS Common Stock received pursuant
to the Merger by any shareholder of NAI in exchange for the shareholder's shares
of NAI Common Stock is or will be in exchange for, or in consideration of, any
employment, consulting or similar arrangement between such shareholder and NAI,
DRS or any subsidiary or other affiliate thereof for services rendered or to be
rendered by such shareholder. Any compensation paid or to be paid to any NAI
shareholder who will be an employee of DRS or any subsidiary or other affiliate
thereof after the Merger will be in consideration of services actually rendered
and will be commensurate with amounts paid to third parties bargaining at
arm's-length for similar services.
26. The payment of cash in lieu of issuing fractional shares of DRS Common
Stock is solely for the purpose of avoiding the expense and inconvenience to DRS
of issuing fractional
<PAGE>
NAI Technologies, Inc. -7-
shares of DRS Common Stock and does not represent separately bargained-for
consideration. In addition, this cash payment will not be made pro rata to all
NAI shareholders. The total cash consideration that will be paid in the Merger
to NAI shareholders in lieu of issuing fractional shares of DRS Common Stock
will not exceed 1 percent of the total consideration that will be issued in the
Merger to NAI shareholders in exchange for their shares of NAI Common Stock. The
fractional share interests of each NAI shareholder will be aggregated, and no
NAI shareholder will receive cash in an amount equal to or greater than the
value of one full share of DRS Common Stock.
OPINION
Assuming that the Merger is consummated in accordance with the terms and
conditions set forth in the Merger Agreement and based on the facts set forth in
the Letters and this letter (including all assumptions and representations) and
subject to the qualifications and other matters set forth herein, it is our
opinion that for federal income tax purposes the Merger will constitute a
reorganization within the meaning of section 368(a), with the following material
federal income tax consequences:
(1) No gain or loss will be recognized by DRS, Merger Sub or NAI as a
result of the Merger (except for amounts resulting from changes in
method of tax accounting or the operation of the rules under section
1502 of the Code);
(2) No gain or loss will be recognized by an NAI shareholder upon the
exchange of all of such NAI shareholder's shares solely for DRS
Common Stock, except that an NAI shareholder who receives cash
proceeds in lieu of a fractional share interest in DRS Common Stock
will recognize gain or loss equal to the difference between such
proceeds and the tax basis allocated to the fractional share
interest, and such gain or loss will constitute capital gain or loss
if such shareholder's shares with respect to which gain or loss is
recognized are held as a capital asset at the Effective Time;
(3) The tax basis of the DRS Common Stock received by an NAI shareholder
who exchanges his or her NAI Common Stock for DRS Common Stock will
be the same as such shareholder's tax basis in the NAI Common Stock
surrendered in exchange therefor less the portion of such basis, if
any, allocable to fractional shares;
(4) The tax holding period of the DRS Common Stock (including any
fractional share interest) received by an NAI shareholder will
include the period during which the NAI Common Stock surrendered in
exchange therefor was held (provided, that such NAI Common Stock was
held by such shareholder as a capital asset at the Effective Time);
and
<PAGE>
NAI Technologies, Inc. -8-
(5) No gain or loss will be recognized by a holder of NAI Warrants on
the exchange of NAI Warrants for DRS Warrants.
Our opinion is limited to the foregoing federal income tax consequences of
the Merger, which are the only matters as to which you have requested our
opinion. We do not address any other federal income tax consequences of the
Merger or other matters of federal law and have not considered matters
(including state or local tax consequences) arising under the laws of any
jurisdiction other than matters of federal law arising under the laws of the
United States.
Our opinion is based on the understanding that the relevant facts are, and
will be at the Effective Time, as set forth or referred to in this letter. If
this understanding is incorrect or incomplete in any respect, our opinion could
be affected. Certain of the assumptions and representations upon which we have
relied involve the resolution of inherently factual questions and the drawing of
inferences from all of the facts and circumstances. It is impossible to predict
what factual conclusions and inferences the Internal Revenue Service or the
courts may draw. Our opinion is based on the characterization of the facts as
expressed in the assumptions and representations set forth or referred to
herein.
Our opinion is also based on the Code, Treasury Regulations, case law, and
Internal Revenue Service rulings as they now exist, none of which squarely
addresses every precise factual circumstance present in the connection with the
Merger but all of which, taken together, in our opinion provide a sufficient
legal basis for our opinions set forth herein. However, the possibility exists
that our opinion as to the proper application of the law to the facts of the
Merger would not be accepted by the Internal Revenue Service or would not
prevail in court. In addition, the authorities upon which we have relied are all
subject to change and such change may be made with retroactive effect. We can
give no assurance that after any such change, our opinion would not be
different.
We undertake no responsibility to update or supplement our opinion.
We hereby consent to the filing with the Securities and Exchange Commission
of this opinion as an exhibit to the Registration Statement on Form S-4 and to
the reference to our firm under the heading "THE MERGER--Material U.S. Federal
Income Tax Consequences" in the Joint Proxy Statement/Prospectus contained
therein. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
WHITMAN BREED ABBOTT & MORGAN
<PAGE>
NAI Technologies, Inc. -9-
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
DRS Technologies, Inc.
We consent to the use of our reports incorporated by reference in the
Registration Statement (No. 333-69751) and to the reference to our firm under
the headings "Experts" and "Selected Financial Data" in the Joint Proxy
Statement/Prospectus.
/s/ KPMG LLP
Short Hills, New Jersey
January 21, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NAI Technologies, Inc.:
We consent to the use in this Registration Statement on Form S-4 of DRS
Technologies, Inc. of our report on NAI Technologies, Inc. financial statements
and schedule dated February 9, 1998, except for Note 2 which is as of November
6, 1998, and to the reference to our firm under the headings "Experts" and
"Selected Financial Data" in the Prospectus.
KPMG LLP
Melville, New York
January 22, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF MCFARLAND DEWEY & CO., LLC
We hereby consent to the use of our name and to the description of our
opinion letter, dated July 21, 1998, and our letter, dated January 25, 1999,
subsequently confirming our opinion as of January 25, 1999 under the captions
"THE PROPOSED MERGER-Opinion of DRS Financial Advisor" and "THE PROPOSED
MERGER-Background of the Merger; Material Contacts Between the Parties" in, and
to the inclusion of such letters as Annexes B-I and B-II to, the Joint Proxy
Statement/Prospectus of DRS Technologies, Inc. and NAI Technologies, Inc., which
Joint Proxy Statement/Prospectus is part of the Registration Statement on Form
S-4 of DRS Technologies, Inc. By giving such consent we do not thereby admit
that we are experts with respect to any part of such Registration Statement
within the meaning of the term "expert" as used in, or that we come within the
category of persons whose consent is required under, the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
MCFARLAND DEWEY & CO., LLC
/s/ McFarland Dewey & Co., LLC
New York, New York
January 25, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF COMMONWEALTH ASSOCIATES
We hereby consent to the use of our name and to the reference to our
opinion letter, dated July 7, 1998 under the captions "THE PROPOSED
MERGER-Opinion of NAI Financial Advisor" and "THE PROPOSED MERGER-Background of
the Merger; Material Contacts Between the Parties" in, and to the inclusion of
such opinion letter as Annex C to, the Joint Proxy Statement/Prospectus of DRS
Technologies, Inc. and NAI Technologies, Inc., which Joint Proxy
Statement/Prospectus is part of the Registration Statement on Form S-4 of DRS
Technologies, Inc. By giving such consent we do not thereby admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "expert" as used in, or that we come within the category of
persons whose consent is required under the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
COMMONWEALTH ASSOCIATES
/s/ Commonwealth Associates
New York, New York
December 23, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
DRS Technologies, Inc. on Form S-4 (No. 333-69751) of our report dated October
8, 1998, on our audits of the Statement of Assets to be Acquired and Liabilities
to be Assumed as of December 31, 1997 of the EOS Business of Raytheon Company
and the Statement of Direct Revenues and Direct Operating Expenses for the year
ended December 31, 1997, which report is incorporated by reference in the Report
on Form 8-K of DRS Technologies, Inc. dated January 4, 1999, as amended. We also
consent to the references to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
January 19, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints and authorizes Mark S. Newman and
Nina Laserson Dunn, and each of them, each with full power to act without the
other, his or her true and lawful attorney-in-fact and agent, each with full
power of substitution or resubstitution for such person and in his or her name,
place and stead, in any and all capacities, to sign and file any of the
documents referred to below relating to the registration with the Securities and
Exchange Commission (the "Commission") and listing on the American Stock
Exchange ("AMEX") additional shares of the Common Stock, $0.10 par value per
share, of DRS Technologies, Inc. (the "Company") and together with the Company's
Warrants to purchase shares of the Company's Common Stock to be issued upon the
effectiveness of the merger of NAI Technologies, Inc. with and into DRS Merger
Sub, Inc., a wholly-owned subsidiary of the Company, such documents being: a
Registration Statement to be filed with the Commission and an additional listing
application with AMEX and any and all further amendments or supplements
(including post-effective amendments) to any of the foregoing, with all exhibits
and documents required to be filed in connection therewith.
Each of the undersigned further grants unto each of said attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully as
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or
his or her substitutes, may lawfully do or cause to be done by virtue thereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this power of attorney this
24th day of December, 1998.
/s/ MARK S. NEWMAN /s/ STEVEN S. HONIGMAN
- ------------------------------------- -----------------------------------
Mark S. Newman Steven S. Honigman
Chairman of the Board, Director, Director
President and Chief Executive Officer
/s/ NANCY R. PITEK /s/ DONALD C. FRASER
- ------------------------------------- -----------------------------------
Nancy R. Pitek Donald C. Fraser
Treasurer Director
/s/ STUART F. PLATT /s/ WILLIAM F. HEITMANN
- ------------------------------------- -----------------------------------
Stuart F. Platt William F. Heitmann
Director Director
/s/ IRA ALBOM /s/ MARK N. KAPLAN
- ------------------------------------- -----------------------------------
Ira Albom Mark N. Kaplan
Director Director
/s/ ERIC J. ROSEN
- -------------------------------------
Eric J. Rosen
Director
<PAGE>
EXHIBIT 99.1
CONSENT OF C. SHELTON JAMES
I hereby consent to (i) being named as a nominee as a director of DRS
Technologies, Inc. ("DRS") in the Joint Proxy Statement/Prospectus of DRS and
NAI Technologies, Inc. ("NAI"); and (ii) this Consent being filed as an exhibit
to the Registration Statement on Form S-4 of DRS, of which the Joint Proxy
Statement/Prospectus of DRS and NAI forms a part.
Very truly yours,
/s/ C. SHELTON JAMES
-----------------------
C. Shelton James
<PAGE>
DRS TECHNOLOGIES, INC.
Proxy Solicited on Behalf of the Board of Directors
For the Special Meeting of Stockholders to Be Held February 4, 1999
The undersigned, revoking all previous proxies, appoints Mark S. Newman
and Nina Laserson Dunn, and each of them, acting unanimously if more than one be
present, attorneys and proxies of the undersigned, with power of substitution,
to represent the undersigned at the special meeting of stockholders of DRS
Technologies, Inc. (the "Company") to be held on February 11, 1999 or at any and
all adjournments or postponements thereof, and to vote all shares of common
stock of DRS which the undersigned is entitled to vote, as designated below.
This proxy when properly executed will be voted in the manner directed by
the undersigned stockholder. If no direction is made, this proxy will be voted
"FOR" proposals 1 and 2. Please sign exactly as name appears on the reverse
side. When shares are held by joint tenants, both should sign. When as attorney,
executor, administrator, trustee or guardian, please give full title of such. If
a corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by general
partner or other authorized person.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS:
FOR AGAINST ABSTAIN
1. To approve and authorize the transactions [ ] [ ] [ ]
contemplated by the merger agreement.
2. To approve the amendment to DRS' 1996 [ ] [ ] [ ]
Omnibus Plan.
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
This proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder. If no direction is made, this proxy will be voted
"FOR" Items 1 and 2.
Date:
--------------------------------------
-------------------------------------------
Signature
-------------------------------------------
Signature of joint holder, if any
Please sign as your name appears on the
left. Executors, administrators, trustees,
etc., should give full title as such. If the
signer is a corporation, please sign full
corporate name by a duly authorized officer.
PLEASE DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE>
NAI TECHNOLOGIES, INC.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 11, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert A. Carlson and Richard A. Schneider, and
each other, proxies of the undersigned, with full power of substitution, to
vote all common stock of NAI Technologies, Inc., a New York corporation (the
"Company"), the undersigned is entitled to vote at the Special Meeting of
Shareholders of the Company to be held at 200 Park Avenue, New York, New York
10166, on February 11, 1999 at 9:00 a.m. (local time), or any adjournment
thereof, with all the powers the undersigned would have if personally present on
the following matters:
1. PROPOSAL TO APPROVE AND AUTHORIZE THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. IN THEIR DISCRETION, THE ABOVE-NAMED PROXIES ARE AUTHORIZED TO VOTE IN
ACCORDANCE WITH THEIR OWN JUDGMENT UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED "FOR" ITEM 1 AND THE PROXIES WILL USE THEIR DISCRETION WITH RESPECT TO ANY
MATTERS REFERRED TO IN ITEM 2.
The undersigned hereby acknowledges receipt of a copy of the accompanying Notice
of Annual Meeting of Shareholders and Proxy Statement and hereby revokes any
Proxy or Proxies heretofore given. You may strike out the persons named as
proxies and designate a person of your choice, and may send this Proxy directly
to such person.
SIGNATURES________________________________________________DATED:__________, 1999
NOTE: Please complete, date and sign exactly as your name appears hereon.
When signing as attorney, administrator, executor, guardian, trustee or
corporate official, please add your title. If shares are held jointly,
each holder should sign.
PLEASE DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
