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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
L-3 COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3812, 3663, 3679 13-3937436
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
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600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
CHRISTOPHER C. CAMBRIA
L-3 COMMUNICATIONS CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
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VINCENT PAGANO, JR. KIRK A. DAVENPORT
SIMPSON THACHER & BARTLETT LATHAM & WATKINS
425 LEXINGTON AVENUE 885 THIRD AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 455-2000 (212) 906-1200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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(c)
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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED UNIT PRICE(1) REGISTRATION FEE
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Senior Subordinated Notes
due 2008 .................. $150,000,000 100% $150,000,000 $44,250
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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EXPLANATORY NOTE
THIS REGISTRATION STATEMENT COVERS THE REGISTRATION OF $150,000,000
AGGREGATE PRINCIPAL AMOUNT OF % SENIOR SUBORDINATED NOTES DUE 2008 (THE
"NOTES") OF L-3 COMMUNICATIONS CORPORATION. THIS REGISTRATION STATEMENT ALSO
COVERS THE REGISTRATION OF THE NOTES FOR RESALE BY LEHMAN BROTHERS INC. IN
MARKET-MAKING TRANSACTIONS. THE COMPLETE PROSPECTUS RELATING TO THE OFFER
(THE "PROSPECTUS") FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY NOTE. FOLLOWING
THE PROSPECTUS ARE CERTAIN PAGES OF THE PROSPECTUS RELATING SOLELY TO SUCH
MARKET-MAKING TRANSACTIONS (THE "MARKET-MAKING PROSPECTUS"), INCLUDING
ALTERNATE FRONT AND BACK COVER PAGES, AND ALTERNATE SECTIONS ENTITLED
"PROSPECTUS SUMMARY--THE NOTES OFFERING", "USE OF PROCEEDS" AND
"UNDERWRITING". IN ADDITION, THE MARKET-MAKING PROSPECTUS WILL NOT INCLUDE
THE FOLLOWING CAPTIONS (OR THE INFORMATION SET FORTH UNDER SUCH CAPTIONS) IN
THE PROSPECTUS: "PROSPECTUS SUMMARY--CONCURRENT COMMON STOCK OFFERING" AND
"CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS". ALL OTHER SECTIONS OF THE
PROSPECTUS WILL BE INCLUDED IN THE MARKET-MAKING PROSPECTUS.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
Subject to Completion, dated , 1998
PROSPECTUS
$150,000,000
[L-3 COMMUNICATIONS LOGO]
L-3 COMMUNICATIONS CORPORATION
% SENIOR SUBORDINATED NOTES DUE 2008
INTEREST PAYABLE AND
The % Senior Subordinated Notes due 2008 (the "Notes") are being
offered (the "Notes Offering") by L-3 Communications Corporation ("L-3
Communications"), a wholly-owned subsidiary of L-3 Communications Holdings,
Inc. ("Holdings"). Interest on the Notes will be payable semi-annually on
and of each year, commencing , 1998. The Notes will be
redeemable at the option of L-3 Communications, in whole or in part, at any
time on or after , 2003, at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the date of redemption. In addition,
prior to , 2001, L-3 Communications may redeem up to 35% of the aggregate
principal amount of Notes at the redemption price set forth herein plus
accrued and unpaid interest, if any, through the redemption date with the net
cash proceeds of one or more Equity Offerings (as defined). The Notes will
not be subject to any mandatory sinking fund.
In the event of a Change of Control (as defined), each holder of Notes
will have the right, at the holder's option, to require L-3 Communications to
purchase such holder's Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase. See "Description of the Notes".
The Notes will be general unsecured obligations of L-3 Communications,
subordinate in right of payment to all existing and future Senior Debt (as
defined) of L-3 Communications. As of December 31, 1997, after giving pro
forma effect to the 1998 Acquisitions (as defined) and the Offerings (as
defined), and application of the net proceeds therefrom, L-3 Communications
would have had approximately $433.6 million of indebtedness outstanding, of
which $58.6 million would have been Senior Debt (excluding letters of
credit). See "Capitalization". The payment of principal, premium, if any, and
interest on the Notes will be guaranteed on a senior subordinated basis by
all of L-3 Communications' Restricted Subsidiaries (as defined), other than
Foreign Subsidiaries (as defined).
Concurrently with the Notes Offering, Holdings is publicly offering in the
United States and internationally shares of its Common Stock, par
value $.01 per share (the "Common Stock"). The closing of the Notes Offering
is conditioned upon the closing of the offering of Common Stock (the "Common
Stock Offering" and, together with the Notes Offering, the "Offerings").
Prior to the consummation of the Common Stock Offering, affiliates of Lehman
Brothers Inc. own 50.1% of the capital stock of Holdings. See "Ownership of
Capital Stock".
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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Per Note..... $ $ $
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Total ....... $ $ $
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(1) Plus accrued interest, if any, from the date of issuance to the date of
delivery.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting expenses payable by the Company estimated at $ .
The Notes are offered, subject to prior sale, when, as and if issued to
and accepted by the Underwriters and subject to certain conditions. It is
expected that delivery of the Notes will be made in book-entry form through
the facilities of The Depository Trust Company, on or about , 1998,
against payment therefor in immediately available funds.
LEHMAN BROTHERS BANCAMERICA ROBERTSON STEPHENS
, 1998
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[PHOTOGRAPHS OF SELECTED PRODUCTS OF THE COMPANY]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED
HEREBY AT LEVELS WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING". IN ADDITION, LEHMAN BROTHERS INC.'S
ABILITY TO MAKE A MARKET IN THE NOTES WILL BE SUBJECT TO THE AVAILABILITY OF
A CURRENT MARKET-MAKING PROSPECTUS.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
As used in this Prospectus, unless the context requires otherwise: (i)
"Holdings" means L-3 Communications Holdings, Inc., (ii) "L-3" or the
"Company" means Holdings, its wholly-owned operating subsidiary, L-3
Communications Corporation, their predecessors, and the businesses acquired
in the 1998 Acquisitions (as defined), (iii) "L-3 Communications" means L-3
Communications Corporation, (iv) "L-3 Acquisition" means the purchase of the
Company from Lockheed Martin Corporation in April 1997 described under
"--History", (v) "1998 Acquisitions" means the recently completed acquisition
of STS (as defined) and the pending acquisitions of ILEX (as defined) and
Ocean Systems (as defined) described under "--Recent Developments" and (vi)
unless otherwise indicated, "pro forma" financial data reflect the L-3
Acquisition, the 1998 Acquisitions and the Offerings as if such transactions
had occurred in the beginning of the period indicated.
THE COMPANY
L-3 is a leading merchant supplier of sophisticated secure communication
systems and specialized communication products including secure, high data
rate communication systems, microwave components, avionics and ocean systems,
and telemetry, instrumentation and space products. These systems and products
are critical elements of virtually all major communication, command and
control, intelligence gathering and space systems. The Company's systems and
specialized products are used to connect a variety of airborne, space, ground
and sea-based communication systems and are incorporated into the
transmission, processing, recording, monitoring and dissemination functions
of these communication systems. The Company's customers include the U.S.
Department of Defense (the "DoD"), selected U.S. government (the
"Government") intelligence agencies, major aerospace/defense prime
contractors, foreign governments and commercial customers. In 1997, L-3 had
pro forma sales of $894.0 million and pro forma EBITDA (as defined) of $95.1
million. The Company's pro forma funded backlog as of December 31, 1997 was
$638.1 million. These results reflect internal growth as well as the
execution of the Company's strategy of acquiring businesses that complement
or extend L-3's product lines.
The Company's business areas enjoy proprietary technologies and
capabilities and have leading positions in their respective primary markets.
Management has organized the Company's operations into two primary business
areas: Secure Communication Systems and Specialized Communication Products.
In 1997, the Secure Communication Systems and Specialized Communication
Products business areas generated approximately $456.0 million and $438.0
million of pro forma sales, respectively, and $52.3 million and $42.8 million
of pro forma EBITDA, respectively. In addition, the Company is seeking to
expand its products and technologies in commercial markets. See "--Emerging
Commercial Products" below.
SECURE COMMUNICATION SYSTEMS. L-3 is the established leader in secure,
high data rate communications in support of military and other national
agency reconnaissance and surveillance applications. The Company's Secure
Communication Systems operations are located in Salt Lake City, Utah, Camden,
New Jersey and Shrewsbury, New Jersey. These operations are predominantly
cost plus, sole source contractors supporting long-term programs for the U.S.
Armed Forces and classified customers. The Company's major secure
communication programs and systems include: secure data links for airborne,
satellite, ground-and sea-based information collection and transmission;
strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information and related support contracts
for military and national agency intelligence efforts; as well as secure
telephone and network equipment. The Company believes that it has developed
virtually every high bandwidth data link used by the military for
surveillance and reconnaissance in operation today. L-3 is also a leading
supplier of communication software support services to military and related
government intelligence markets. In addition to these core Government
programs, L-3 is leveraging its technology base by expanding into related
commercial communication equipment markets, including applying its high data
rate communications and archiving technology to the medical image archiving
market and its wireless communication expertise to develop local wireless
loop telecommunications equipment.
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SPECIALIZED COMMUNICATION PRODUCTS. This business area includes (i)
Microwave Components, (ii) Avionics and Ocean Systems and (iii) Telemetry,
Instrumentation and Space Products operations of the Company.
Microwave Components. L-3 is the preeminent worldwide supplier of
commercial off-the-shelf, high performance microwave components and frequency
monitoring equipment. L-3's microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. L-3 also provides
state-of-the-art communication components including channel amplifiers and
frequency filters for the commercial communications satellite market.
Approximately 76% of Microwave Components sales is made to commercial
customers, including Loral Space & Communications, Ltd., Motorola, Inc.
("Motorola"), Lucent Technologies Inc. ("Lucent"), AT&T Corp. ("AT&T") and
Lockheed Martin Corporation ("Lockheed Martin").
Avionics and Ocean Systems. Avionics and Ocean Systems include the
Company's Aviation Recorders, Display Systems, Antenna Systems and Acoustic
Undersea Warfare Systems operations. L-3 is the world's leading manufacturer
of commercial cockpit voice and flight data recorders ("black boxes"). These
recorders are sold under the Fairchild brand name both on an original
equipment manufacturer ("OEM") basis to aircraft manufacturers as well as
directly to the world's major airlines for their existing fleets of aircraft.
L-3 recorders are also installed on military transport aircraft throughout
the world. L-3 provides military and high-end commercial displays for use on
a number of DoD programs including the F-14, V-22, F-117 and E-2C. Further,
L-3 manufactures high performance surveillance antennas and related equipment
for U.S. Air Force, U.S. Army and U.S. Navy aircraft including the F-15,
F-16, AWACS, E-2C and B-2, as well as the U.K.'s maritime patrol aircraft.
L-3 is also one of the world's leading product suppliers of acoustic undersea
warfare systems and airborne dipping sonar systems to the U.S. and over 20
foreign navies.
Telemetry, Instrumentation and Space Products. The Company's Telemetry,
Instrumentation and Space Products operations develop and manufacture
commercial off-the-shelf, real-time data collection and transmission products
and components for missile, aircraft and space-based electronic systems.
These products are used to gather flight parameter data and other critical
information and transmit it from air or space to the ground. Telemetry
products are also used for range safety and training applications to simulate
battlefield situations. L-3 is also a leading global satellite communications
systems and services provider offering systems and services used in satellite
transmission of voice, video and data.
EMERGING COMMERCIAL PRODUCTS. Building upon its core technical expertise
and capabilities, the Company is seeking to expand into several closely
aligned commercial business areas and applications. Emerging Commercial
Products currently include the following three niche markets: (i) medical
archiving and simulation systems; (ii) local wireless loop telecommunications
equipment; and (iii) airport security equipment. These commercial products
were developed based on technology used in the Company's military businesses
with relatively small incremental financial investments. The Company is
applying its technical capabilities in high data rate communications and
archiving technology developed in its Secure Communication Systems area to
the medical image archiving market through a partnership with the General
Electric Company's ("GE") medical systems business ("GE Medical Systems").
Based on secure, high data rate communication technology also developed in
its Secure Communication Systems area, the Company has developed local
wireless loop telecommunications equipment that is primarily designed for
emerging market countries and rural areas where voice and data communication
infrastructure is inadequate or non-existent. L-3 made its initial shipment
of the local wireless loop telecommunications equipment in January 1998. In
addition, the Federal Aviation Administration (the "FAA") has awarded the
Company a development contract for next generation airport security equipment
for explosive detection. L-3 has shipped two prototype test units and FAA
certification testing is expected to commence in the first half of 1998. To
date, revenues generated from L-3's Emerging Commercial Products have not
been, in the aggregate, material to the Company.
INDUSTRY OVERVIEW
The defense industry has recently undergone significant changes
precipitated by ongoing federal budget pressures and new roles and missions
to reflect changing strategic and tactical threats. Since the
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mid-1980's, the overall U.S. defense budget has declined in real dollars. In
response, the DoD has focused its resources on enhancing its military
readiness, joint operations and digital command and control communications by
incorporating advanced electronics to improve the performance, reduce
operating cost and extend the life expectancy of its existing and future
platforms. The emphasis on system interoperability, force multipliers and
providing battlefield commanders with real-time data is increasing the
electronics content of nearly all of the major military procurement and
research programs. As a result, the DoD's budget for communications and
defense electronics is expected to grow. According to Federal Sources, an
independent private consulting group, the defense budget for command,
control, communications and intelligence ("C(3)I") is expected to increase
from $31.0 billion in the fiscal year ended September 30, 1997 to $42.0
billion in the fiscal year ended September 30, 2002, a compound annual growth
rate of 6.3%.
The industry has also undergone dramatic consolidation resulting in the
emergence of three dominant prime system contractors (The Boeing Company
("Boeing"), Lockheed Martin and Raytheon Company ("Raytheon")). One outgrowth
of this consolidation among the remaining major prime contractors is their
desire to limit purchases of products and sub-systems from one another.
However, there are numerous essential products, components and systems that
are not economical for the major prime contractors to design, develop or
manufacture for their own internal use which creates opportunities for
merchant suppliers such as L-3. As the prime contractors continue to evaluate
their core competencies and competitive position, focusing their resources on
larger programs and platforms, the Company expects the prime contractors to
continue to exit non-strategic business areas and procure these needed
elements on more favorable terms from independent, commercially oriented
merchant suppliers. Recent examples of this trend include divestitures of
certain non-core businesses by AlliedSignal Inc. ("AlliedSignal"), Ceridian
Corporation ("Ceridian"), Lockheed Martin and Raytheon.
The prime contractors' focus on cost control is also driving increased use
of commercial off-the-shelf products for upgrades of existing systems and in
new systems. The Company believes the prime contractors will continue to be
under pressure to reduce their costs and will increasingly seek to focus
their resources and capabilities on major systems, turning to commercially
oriented merchant suppliers to produce sub-systems, components and products.
Going forward, successful merchant suppliers will use their resources to
complement and support, rather than compete with the prime contractors. L-3
anticipates the relationship between the major prime contractors and their
primary suppliers will, as in the automotive and commercial aircraft
industry, develop into critical partnerships encompassing increasingly
greater outsourcing of non-core products and systems by the prime contractors
to their key merchant suppliers and increasing supplier participation in the
development of future programs. Early involvement in the upgrading of
existing systems and the design and engineering of new systems incorporating
these outsourced products will provide mezzanine suppliers, including the
Company, with a competitive advantage in securing new business and provide
the prime contractors with significant cost reduction opportunities through
coordination of the design, development and manufacturing processes.
BUSINESS STRATEGY
In 1997, management successfully integrated the business units of Lockheed
Martin it acquired in the L-3 Acquisition and enhanced the Company's
operating efficiency through reduced overhead expenses and facility
rationalization. These efforts resulted in improvements in sales,
profitability and competitive contract award win rates. Going forward, L-3
intends to leverage its market position, diverse program base and favorable
mix of cost plus to fixed price contracts to enhance its profitability and to
establish itself as the premier merchant supplier of communication systems
and products to the major prime contractors in the aerospace/defense industry
as well as the Government. The Company's strategy to continue to achieve its
objectives includes:
o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. Management has developed
strong relationships with virtually all of the prime contractors, the DoD
and other major government agencies, enabling L-3 to identify business
opportunities and anticipate customer needs. As an independent merchant
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supplier, the Company anticipates its growth will be driven by expanding
its share of existing programs and by participating in new programs.
Management identifies opportunities where it believes it will be able to
use its strong relationships to increase its business presence and allow
its customers to reduce their costs. The Company also expects to benefit
from increased outsourcing by prime contractors who in the past may have
limited their purchases to captive suppliers and who are now expected to
view L-3's capabilities on a more favorable basis given its status as an
independent company. L-3's independent status positions it to be the
desired merchant supplier to multiple bidders on prime contract bids. As
an example of the Company's merchant supplier strategy, L-3 equipment is
included in all three prime contractor bids for the Airborne Standoff
Radar ("ASTOR") program in the United Kingdom and both prime contractor
bids for the DoD's Joint Air Surface Standoff Missile ("JASSM") program.
o SUPPORT CUSTOMER REQUIREMENTS. A significant portion of L-3's sales
are derived from high-priority, long-term programs and from programs for
which the Company has been the incumbent supplier, and in many cases acted
as the sole provider, over many years. Approximately 65% of the Company's
total pro forma 1997 sales were generated from sole source contracts.
L-3's customer satisfaction and excellent performance record are evidenced
by its performance-based award fees exceeding 90% on average over the past
two years. Management believes prime contractors will increasingly award
long-term, sole source, outsourcing contracts to the merchant supplier
they believe is most capable on the basis of quality, responsiveness,
design, engineering and program management support as well as cost.
Reflecting L-3's strong competitive position, the Company (excluding the
1998 Acquisitions) has experienced a contract award win rate in 1997 in
excess of 60% on new competitive contracts for which it competes and in
excess of 90% on contracts for which it is the incumbent. The Company
intends to continue to align its research and development, manufacturing
and new business efforts to complement its customers' requirements and
provide state-of-the-art products.
o ENHANCE OPERATING MARGINS. Since the L-3 Acquisition in April 1997,
management has reduced corporate administrative and facilities expenses,
increased sales and improved competitive contract award win rates.
Enhancement of operating margins was primarily due to efficient management
and elimination of significant corporate expense allocations which existed
prior to the L-3 Acquisition. Pro forma EBITDA (excluding the 1998
Acquisitions) as a percentage of sales improved from 12.5% in 1996 to
13.4% in 1997. Management intends to continue to enhance its operating
performance by reducing overhead expenses, continuing consolidation and
increasing productivity.
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. L-3 has developed
strong, proprietary technical capabilities that have enabled it to capture
a number one or two market position in most of its key business areas,
including secure, high data rate communications systems, solid state
aviation recorders, telemetry, instrumentation and space products,
advanced antenna systems and high performance microwave components. Over
the past three years, the Company has invested over $150.0 million in
Company-sponsored independent research and development, including bid and
proposal costs, in addition to making substantial investments in its
technical and manufacturing resources. Further, the Company has a highly
skilled workforce including approximately 2,000 engineers. Management is
applying the Company's technical expertise and capabilities into several
closely aligned commercial business areas and applications, such as
medical imaging archive management, wireless telephony and airport
security equipment and will continue to explore other similar commercial
opportunities.
o MAINTAIN DIVERSIFIED BUSINESS MIX. The Company enjoys a diverse
business mix with a limited program exposure, a favorable balance of cost
plus and fixed price contracts, a significant sole source follow-on
business and an attractive customer profile. The Company's largest
program, representing 10% of 1997 pro forma sales, is a long-term, sole
source, cost plus contract for the U-2 Program. No other program
represented more than 5% of pro forma 1997 sales. Further, the Company's
pro forma
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sales mix of contracts in 1997 was 36% cost plus and 64% fixed price,
providing the Company with a favorable mix of predictable profitability
(cost plus) and higher margin (fixed price) business. L-3 also enjoys an
attractive customer mix of defense and commercial business, with DoD
related sales accounting for 62% and commercial and federal (non-DoD)
sales accounting for 38% of 1997 pro forma sales. The Company intends to
leverage this favorable business profile to expand its merchant supplier
business base.
o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent industry
consolidation has essentially eliminated traditional middle-tier
aerospace/defense companies. This level of consolidation is now beginning
to draw the concern of the DoD and federal anti-trust regulators. In 1997,
a number of mezzanine companies were sold: Computing Devices International
division of Ceridian to General Dynamics Corp. ("General Dynamics"), Kaman
Sciences Corp. ("Kaman Sciences") to ITT Industries, Inc. ("ITT"), BDM
International, Inc. ("BDM") to TRW Inc. ("TRW") and TASC Inc., a
subsidiary of Primark Corporation, to Litton Industries, Inc. ("Litton").
As a result, the Company anticipates that the consolidation of the smaller
participants in the defense industry will create attractive complementary
acquisition candidates for L-3 in the future as these companies continue
to evaluate their core competencies and competitive position. L-3 intends
to vertically enhance its product base through internal research and
development efforts as well as selective acquisitions and horizontally add
to its product base through acquisitions in areas synergistic with L-3's
present technology. The Company seeks to acquire potential targets with
the following criteria: (i) significant market position in its business
area, (ii) product offerings which complement and/or extend those of L-3
and (iii) positive future growth and earnings prospects.
RECENT DEVELOPMENTS
Since the formation of the Company in April 1997, the Company has actively
pursued its acquisition strategy. The Company recently purchased the assets
and liabilities of STS and announced the pending acquisitions of ILEX and
Ocean Systems. The total purchase price for these acquisitions is $146.4
million of cash, subject to certain post-closing adjustments, and in one case
certain additional consideration based on post-closing performance. The
Company intends to finance these acquisitions through the use of its existing
cash balances as well as through borrowings under the $375 million Senior
Credit Facilities (as defined). These three businesses complement and extend
L-3's product offerings.
ILEX Systems
On , 1998, L-3 Communications purchased the assets of ILEX Systems
("ILEX") for $51.9 million in cash plus additional consideration based on
post-closing performance. In 1997, ILEX had sales of $63.5 million. ILEX is a
leading supplier of communication software support services to military and
related government intelligence markets. ILEX also provides environmental
consulting, software and systems engineering services and complementary
products to several commercial markets. ILEX complements L-3's Secure
Communication Systems business area by adding software expertise in critical
C(3)I programs and increasing the number of the Company's skilled workforce
by adding approximately 500 software system engineers and scientists.
Ocean Systems
On , 1998, L-3 Communications purchased the assets of the Ocean
Systems business ("Ocean Systems") of AlliedSignal for $67.5 million in cash.
In 1997, Ocean Systems had sales of $73.0 million. Ocean Systems is one of
the world's leading products suppliers of acoustic undersea warfare systems,
having designed, manufactured and supported a broad range of compact,
lightweight, high performance acoustic systems for navies around the world
for over 40 years. Ocean Systems is the leading products supplier of airborne
dipping sonar systems in the world with substantial market share of the
sector and systems in service with the U.S. and 20 foreign navies. Ocean
Systems also produces several sea systems products including towed array
sonar, integrated side-looking sonar, acoustic jammers, mine
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detection and torpedo defense systems and supplies commercial navigation and
hydrographic survey systems worldwide. Ocean Systems is further supported by
its ELAC Nautik GmbH ("ELAC") operations located in Kiel, Germany. ELAC
manufactures a broad range of naval defense products including submarine,
torpedo and navigation sonars as well as survey and navigation systems for
the commercial nautical products industry. Ocean Systems expands L-3's
leading products and capabilities into the undersea and anti-submarine
warfare market place.
Satellite Transmission Systems
On February 5, 1998, L-3 Communications purchased the assets of the
Satellite Transmission Systems division ("STS") of California Microwave, Inc.
for $27.0 million. For the fiscal year ended June 30, 1997, STS had sales of
$68.0 million. STS is a leading global satellite communications systems and
services provider. Its customers include foreign post, telephone and
telegraph administrations, domestic and international prime communications
infrastructure contractors, telecommunications and satellite service
providers, broadcasters and media-related companies, government agencies and
large corporations. STS expands L-3's ability to apply its products and
provides networking capability to L-3's wireless communications products
business. STS also opens new opportunities in broader, international markets.
The Company considers and executes strategic acquisitions on an ongoing
basis and may be evaluating acquisitions or engaged in acquisition
negotiations at any given time. As of the date hereof, the Company has
completed, has reached agreement on or is in discussions regarding certain
acquisitions, in addition to the 1998 Acquisitions, that are either
individually or in the aggregate not material to the financial condition or
results of operations of the Company.
HISTORY
Holdings and L-3 Communications were formed in April 1997 by Mr. Frank C.
Lanza, the former President and Chief Operating Officer of Loral Corporation
("Loral"), Mr. Robert V. LaPenta, the former Senior Vice President and
Controller of Loral (collectively, "Senior Management"), Lehman Brothers
Capital Partners III, L.P. and its affiliates (the "Lehman Partnership") and
Lockheed Martin to acquire (the "L-3 Acquisition") substantially all of the
assets and certain liabilities of (i) nine business units previously
purchased by Lockheed Martin as part of its acquisition of Loral in April
1996 (the "Loral Acquired Businesses") and (ii) one business unit,
Communication Systems -- East (formerly known as Communication Systems --
Camden), purchased by Lockheed Martin as part of its acquisition of the
aerospace business of GE ("GE Aerospace") in April 1993 (collectively, the
"Businesses"). L-3 Communications is a wholly-owned subsidiary of Holdings.
Prior to the consummation of the Common Stock Offering, Messrs. Lanza and
LaPenta and certain other members of management collectively own 15.9%; the
Lehman Partnership owns 50.1%; and Lockheed Martin owns 34.0% of the
outstanding capital stock of Holdings.
8
<PAGE>
THE NOTES OFFERING
Securities Offered ............ $150,000,000 aggregate principal amount of
% Senior Subordinated Notes due 2008 (the
"Notes").
Maturity ...................... , 2008.
Interest Payment Dates ........ and , commencing , 1998.
Optional Redemption ........... The Notes may be redeemed at the option of
L-3 Communications, in whole or in part, on
or after , 2003, at the redemption
prices set forth herein, plus accrued and
unpaid interest, if any, to the date of
redemption.
In addition, prior to , 2001, L-3
Communications may redeem up to an aggregate
of 35% of the Notes originally issued at a
redemption price of % of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption,
with the net cash proceeds of one or more
Equity Offerings; provided, however, that at
least 65% in aggregate principal amount of
the Notes originally issued remain
outstanding following such redemption.
Change of Control ............. In the event of a Change of Control (as
defined), the holders of the Notes will have
the right to require L-3 Communications to
purchase their Notes at a price equal to
101% of the aggregate principal amount
thereof, plus accrued and unpaid interest,
if any, to the date of purchase.
Ranking ....................... The Notes will be general unsecured
obligations of L-3 Communications,
subordinate in right of payment to all
current and future Senior Debt including all
obligations of L-3 Communications and its
subsidiaries under the Senior Credit
Facilities (as defined). At December 31,
1997, on a pro forma basis after giving
effect to the L-3 Acquisition, the 1998
Acquisitions and the Offerings, L-3
Communications would have had $433.6 million
of indebtedness outstanding, of which $58.6
million would have been Senior Debt
(excluding letters of credit). Borrowings
under the Senior Credit Facilities will be
secured by substantially all of the assets
of L-3 Communications as well as the capital
stock of L-3 Communications and its
subsidiaries. See "Risk Factors --
Substantial Leverage" and "--Subordination".
Covenants ..................... The Indenture pursuant to which the Notes
will be issued (the "Indenture") will
contain certain covenants that, among other
things, limit the ability of L-3
Communications and its Restricted
Subsidiaries to incur additional
Indebtedness and issue preferred stock, pay
dividends or make other distributions,
repurchase Equity Interests (as defined) or
subordinated Indebtedness, create certain
liens, enter into certain transactions with
affiliates, sell assets of L-3
Communications or its Restricted
Subsidiaries,
9
<PAGE>
issue or sell Equity Interests of L-3
Communications' Restricted Subsidiaries or
enter into certain mergers and
consolidations. In addition, under certain
circumstances, L-3 Communications will be
required to offer to purchase Notes at a
price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest,
if any, to the date of purchase, with the
proceeds of certain Asset Sales (as
defined). See "Description of the Notes".
Use of Proceeds ............... The Company intends to use the net proceeds
from the Notes Offering, together with the
net proceeds from the Common Stock Offering
contributed to L-3 Communications, to repay
a substantial portion of its existing
indebtedness under the Senior Credit
Facilities and for general corporate
purposes, including potential acquisitions.
See "Use of Proceeds".
For a discussion of certain risk factors that should be considered in
connection with an investment in the Notes, see "Risk Factors".
CONCURRENT COMMON STOCK OFFERING
Common Stock Offering ......... L-3 Communications' parent company,
Holdings, is concurrently offering to the
public shares of its Common Stock
(excluding underwriters' over-allotment
option). The closing of the Notes Offering
is conditioned upon the closing of the
Common Stock Offering.
10
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA AND HISTORICAL FINANCIAL DATA
The summary unaudited pro forma data as of December 31, 1997 and for the
year then ended have been derived from, and should be read in conjunction
with, the unaudited pro forma condensed consolidated financial statements
included elsewhere herein. The unaudited pro forma statement of operations
and other data reflect the L-3 Acquisition, the 1998 Acquisitions and the
Offerings as if these transactions had occurred on January 1, 1997 for the
statement of operations and other data. The balance sheet data reflect the
1998 Acquisitions, the Offerings and the contribution to L-3 Communications
of the net proceeds of the Common Stock Offering as if such transactions had
occurred on December 31, 1997.
The summary consolidated (combined) financial data have been derived from
the audited financial statements for the respective periods.
These selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated (Combined) Financial Statements of the
Company and the Combined Financial Statements of the Loral Acquired
Businesses included elsewhere herein.
<TABLE>
<CAPTION>
1997 YEAR ENDED DECEMBER 31,
---------------------- ----------------------------
YEAR ENDED NINE THREE
DECEMBER 31, MONTHS MONTHS
1997 ENDED ENDED
PRO FORMA DEC. 31(1) MARCH 31 1996(2) 1995(3) 1994(3)
-------------- ---------- ---------- ------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ................................... $894.0 $546.5 $158.9 $543.1 $166.8 $218.9
Operating income ........................ 58.3 55.9 7.9 43.7 4.7 8.4
Interest expense, net(4) ................ 43.9 28.5 8.4 24.2 4.5 5.5
Provision (benefit) for income taxes(4) 4.2 10.7 (0.2) 7.8 1.2 2.3
Net income (loss)........................ 10.2 16.7 (0.3) 11.7 (1.0) 0.6
BALANCE SHEET DATA:
Working capital ......................... $138.9 $131.8 $ 98.8 $ 21.1 $ 19.3
Total assets ............................ 896.0 703.4 593.3 228.5 233.3
Invested equity ......................... -- -- 473.6 194.7 199.5
Shareholders' equity..................... 224.7 117.7 -- -- --
OTHER DATA:
EBITDA(5) ............................... $ 95.1 $ 78.1 $ 15.7 $ 71.8 $ 16.3 $ 19.9
Depreciation expense .................... 22.0 13.3 4.5 14.9 5.5 5.4
Amortization expense .................... 14.8 8.9 3.3 13.2 6.1 6.1
Capital expenditures .................... 19.9 11.9 4.3 13.5 5.5 3.7
Ratios of:
Earnings to fixed charges(6)............ 1.3x
EBITDA to cash interest expense(7) ..... 2.3x
Net debt to EBITDA(8)................... 4.0x
</TABLE>
- ------------
(1) Reflects the L-3 Acquisition effective April 1, 1997.
(2) Reflects ownership of Loral's Communication Systems -- West and
Specialized Communication Products businesses commencing April 1, 1996.
(3) Reflects ownership of Communication Systems -- East by Lockheed Martin
effective April 1, 1993.
(4) For periods prior to April 1, 1997, interest expense and income tax
(benefit) provision were allocated from Lockheed Martin.
(5) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt
issuance costs). EBITDA is not a substitute for operating income, net
income and cash flow from operating activities as determined in
accordance with generally accepted accounting principles as a measure
of profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful indicator of
the Company's ability to meet debt service and capital expenditure
requirements.
(6) For purposes of this computation, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest on
indebtedness plus that portion of lease rental expense representative
of the interest element.
(7) For purposes of this computation, cash interest expense consists of pro
forma interest expense excluding amortization of deferred debt issuance
costs.
(8) Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
11
<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following factors before
deciding to invest in the Notes.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged as a result of substantial indebtedness
incurred in connection with the L-3 Acquisition and the 1998 Acquisitions.
After giving pro forma effect to the L-3 Acquisition, the 1998 Acquisitions
and the Offerings, the Company would have had $433.6 million of indebtedness
outstanding, of which $58.6 million would have been Senior Debt (excluding
letters of credit), and the Company's ratio of earnings to fixed charges
would have been 1.3x for the year ended December 31, 1997. The Company may
incur additional indebtedness in the future, subject to limitations imposed
by the Senior Credit Facilities and the Indentures (as defined).
Based upon the current level of operations and anticipated improvements,
management believes that the Company's cash flow from operations, together
with proceeds from the Offerings and available borrowings under the Revolving
Credit Facility, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, research and development expenditures,
program and other discretionary investments, interest payments and scheduled
principal payments for the foreseeable future, at least for the next three
years. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels or that currently
anticipated improvements will be achieved. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
debt, it may be required to sell assets, reduce capital expenditures,
refinance all or a portion of its existing debt (including the 1997 Notes and
the Notes) or obtain additional financing. The Company's ability to make
scheduled principal payments of, to pay interest on or to refinance its
indebtedness (including the 1997 Notes and the Notes) depends on its future
performance and financial results, which, to a certain extent, are subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. There can be no assurance that sufficient funds
will be available to enable the Company to service its indebtedness,
including the Notes, or make necessary capital expenditures and program and
other discretionary investments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The degree to which the Company is leveraged could have important
consequences to Holders of the Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes including capital expenditures, research and
development expenditures, and program and other discretionary investments;
(ii) the Company's ability to obtain additional financing in the future could
be limited; (iii) certain of the Company's borrowings are at variable rates
of interest, which could result in higher interest expense in the event of
increases in interest rates; (iv) the Company may be more vulnerable to
downturns in its business or in the general economy and may be restricted
from making acquisitions, introducing new technologies and products or
exploiting business opportunities; and (v) the Senior Credit Facilities and
the Indentures contain financial and restrictive covenants that limit, among
other things, the ability of the Company to borrow additional funds, dispose
of assets or pay cash dividends. Failure by the Company to comply with such
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on the Company. In addition, the degree
to which the Company is leveraged could prevent it from repurchasing all
Notes tendered to it upon the occurrence of a Change in Control, which would
constitute an Event of Default under the Indenture. See "Description of the
Notes" and "Description of Certain Indebtedness".
ACQUISITION STRATEGY
The Company's strategy includes pursuing additional acquisitions that will
complement its business. There can be no assurance, however, that the Company
will be able to identify additional acquisition candidates on commercially
reasonable terms or at all or that, if consummated, any anticipated benefits
will be realized from such future acquisitions. In addition, the availability
of additional acquisition
12
<PAGE>
financing cannot be assured and, depending on the terms of such additional
acquisitions, could be restricted by the terms of the Senior Credit
Facilities and/or the Indentures.
The process of integrating acquired operations, including the 1998
Acquisitions, into the Company's existing operations may result in unforeseen
operating difficulties and may require significant financial and managerial
resources that would otherwise be available for the ongoing development or
expansion of the Company's existing operations. Possible future acquisitions
by the Company could result in the incurrence of additional debt, contingent
liabilities and amortization expenses related to goodwill and other
intangible assets, all of which could materially adversely affect the
Company's financial condition and operating results.
SIGNIFICANT CUSTOMERS
The Company's sales are predominantly derived from contracts with agencies
of, and prime contractors to, the Government. Although DoD procurement
spending has declined from the mid-1980s resulting in delays for some new
program starts, program stretch-outs and program cancellations, the U.S.
defense budget began to stabilize in fiscal 1996. In 1997, the Company
performed under approximately 150 contracts with value exceeding $1.0 million
for the Government. Pro forma sales in 1997 to the Government, including pro
forma sales to the Government through prime contractors, were $651.1 million,
representing approximately 73% of the Company's corresponding sales. The
Company's largest Government program, a cost plus, sole source contract for
support of the U-2 Program of the DoD, contributed 10% of pro forma sales for
1997. No other program represented more than 5% of the Company's pro forma
sales in 1997. The loss of all or a substantial portion of sales to the
Government would have a material adverse effect on the Company's income and
cash flow. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Government Contracts".
Pro forma sales by the Company to Lockheed Martin were $81.6 million in
1997 or 9.1% of the Company's total pro forma sales. The loss of all or a
substantial portion of such sales to Lockheed Martin would have a material
adverse effect on the Company's income and cash flow.
RISKS INHERENT IN GOVERNMENT CONTRACTS
The reduction in the U.S. defense budget in the early 1990s has caused
most defense-related government contractors to experience declining revenues,
increased pressure on operating margins and, in certain cases, net losses.
The Company's businesses taken as a whole experienced a substantial decline
in sales during such period. A significant decline in U.S. military
expenditures in the future could materially adversely affect the Company's
sales and earnings. The loss or significant curtailment of a material program
in which the Company participates could also materially adversely affect the
Company's future sales and earnings and thus the Company's ability to meet
its financial obligations.
Companies engaged primarily in supplying defense-related equipment and
services to government agencies are subject to certain business risks
peculiar to the defense industry. These risks include, among other things,
the ability of the Government to: (i) suspend unilaterally the Company from
receiving new contracts pending resolution of alleged violations of
procurement laws or regulations, (ii) terminate existing contracts, (iii)
audit the Company's contract-related costs and fees, including allocated
indirect costs, and (iv) control and potentially prohibit the export of the
Company's products.
All of the Company's Government contracts are, by their terms, subject to
termination by the Government either for its convenience or for default of
the contractor. Termination for convenience provisions provide only for the
recovery by the Company of costs incurred or committed, settlement expenses
and profit on work completed prior to termination. Termination for default
provisions provide for the contractor to be liable for excess costs incurred
by the Government in procuring undelivered items from another source. In
addition to the right of the Government to terminate, Government contracts
are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds for a given program on a
fiscal-year basis even though contract performance may take more than one
year. Consequently, at the outset of a major program, the contract is usually
partially
13
<PAGE>
funded, and additional monies are normally committed to the contract by the
procuring agency only if, as and when appropriations are made by Congress for
future fiscal years. Foreign defense contracts generally contain comparable
provisions relating to termination at the convenience of the government.
The Company is subject to audit and review by the Government of its costs
and performance on, and accounting and general business practices relating
to, Government contracts. The Company's contract related costs and fees,
including allocated indirect costs, are subject to adjustment based on the
results of such audits. In addition, under Government purchasing regulations,
certain of the Company's costs, including certain financing costs, goodwill,
portions of research and development costs, and certain marketing expenses
may not be reimbursable under Government contracts. Further, as a government
contractor, the Company is also subject to investigation, legal action and/or
liability that would not apply to a commercial company.
The Company is subject to risks associated with the frequent need to bid
on programs in advance of design completion (which may result in unforeseen
technological difficulties and/or cost overruns), the substantial time and
effort required for relatively unproductive design and development, design
complexity and rapid obsolescence, and the constant necessity for design
improvement. The Company obtains many of its Government contracts through a
process of competitive bidding. There can be no assurance that the Company
will continue to be successful in winning competitively awarded contracts or
that awarded contracts will generate sufficient sales to result in
profitability for the Company. See "Business -- Major Customers" and
"--Government Contracts".
In addition to these Government contract risks, many of the Company's
products and systems require licenses from Government agencies for export
from the United States, and certain of the Company's products currently are
not permitted to be exported. There can be no assurance that the Company will
be able to gain any and all licenses required to export its products, and
failure to receive the required licenses could materially reduce the
Company's ability to sell its products outside the United States.
RISKS ASSOCIATED WITH FIXED PRICE CONTRACTS
The Company's products and services are provided primarily through fixed
price or cost plus contracts. Approximately 64% of the Company's pro forma
sales in 1997 were attributable to fixed price contracts. The financial
results of long-term fixed price contracts are recognized using the
cost-to-cost percentage-of-completion method. As a result, revisions in
revenues and profit estimates are reflected in the period in which the
conditions that require such revisions become known and are estimable. The
risks inherent in long-term fixed price contracts include the difficulty of
forecasting costs and schedules, contract revenues that are related to
performance in accordance with contract specifications and potential for
component obsolescence in connection with long-term procurements. Failure to
anticipate technical problems, estimate costs accurately or control costs
during performance of a fixed price contract may reduce the Company's
profitability or cause a loss. Although the Company believes that adequate
provisions for losses for its fixed price contracts are reflected in its
financial statements, no assurance can be given that these provisions are
adequate or that losses on fixed price and time-and-material contracts will
not occur in the future.
TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT
The communication equipment industry for defense applications and in
general is characterized by changing technology. The Company's ability to
compete successfully in this market will depend on its ability to design,
develop, manufacture, assemble, test, market and support new products and
enhancements on a timely and cost-effective basis. The Company has
historically obtained technology from substantial customer-sponsored research
and development as well as from internally funded research and development;
however, there can be no assurance that the Company will continue to maintain
comparable levels of customer-sponsored research and development in the
future. See "Business -- Research and Development". Substantial funds have
been allocated to capital expenditures and programs and other discretionary
investments in the past and will continue to be required in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". There can be no assurance
14
<PAGE>
that the Company will successfully identify new opportunities and continue to
have financial resources to develop new products in a timely or
cost-effective manner, or that products and technologies developed by others
will not render the Company's products and systems obsolete or
non-competitive.
ENTRY INTO COMMERCIAL BUSINESS
The Company's revenues historically have been derived principally from
business with the DoD and other government agencies. In addition to
continuing to pursue this major market area, the Company intends to pursue a
strategy that leverages its technical capabilities and expertise into related
commercial markets. Certain of the Company's commercial products, such as
fixed wireless loop communication equipment, medical image archiving
equipment and airport security equipment, have only been recently introduced
or are in the early stages of development. As such, these new products are
subject to certain risks, including the need to develop and maintain
marketing, sales and customer support capabilities, to secure third-party
manufacturing and distribution arrangements, to obtain certification, to
respond to rapid technological advances and, ultimately, to customer
acceptance of these products and product performance. The Company's efforts
to expand its presence in the commercial market will require significant
resources including capital and management time. There can be no assurance
that the Company will be successful in addressing these risks or in
developing these commercial business opportunities.
COMPETITION
The communications equipment industry for defense applications and as a
whole is highly competitive. Declining defense budgets and increasing
pressures for cost reductions have precipitated a major consolidation in the
defense industry. The DoD's increased use of commercial off-the-shelf
products and components in military equipment is expected to increase the
entrance of new competitors. In addition, consolidation has resulted in
delays in contract funding or awards and significant predatory pricing
pressures associated with increased competition and reduced funding. The
Company expects that the emergence of merchant suppliers will increase
competition for OEM business. The Company's ability to compete for defense
contracts depends to a large extent on the effectiveness and innovativeness
of its research and development programs, its ability to offer better program
performance than its competitors at a lower cost to the Government customer
and its readiness in facilities, equipment and personnel to undertake the
programs for which it competes. In some instances, programs are sole source
or work directed by the Government to a single supplier. In such cases, there
may be other suppliers who have the capability to compete for the programs
involved, but they can only enter or reenter the market if the Government
should choose to reopen the particular program to competition. Many of the
Company's competitors are larger and have substantially greater financial and
other resources than the Company. See "Business -- Competition".
LIMITED OPERATING HISTORY
Prior to the L-3 Acquisition, the Company's operations were conducted as
divisions of Lockheed Martin, Loral, Unisys Corp. ("Unisys") and GE
Aerospace. Following the L-3 Acquisition in April 1997, the Company has
operated independently of Lockheed Martin and has provided many corporate
services on a stand-alone basis that were previously provided by Lockheed
Martin, including research and development, marketing, and general and
administrative services including tax, treasury, management information
systems, human resources and legal services. Lockheed Martin currently
provides certain management information systems services to certain divisions
of the Company. There can be no assurance that the actual corporate services
costs incurred in operating the Company will not exceed historical charges or
that the Company will be able to obtain similar services on comparable terms.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of the Company's management, including Messrs. Lanza and
LaPenta, and its ability to attract and retain other highly qualified
management and technical personnel. Messrs. Lanza and LaPenta invested $15
million to
15
<PAGE>
purchase 15% of the initial capital stock of Holdings. Holdings has entered
into employment agreements with Messrs. Lanza and LaPenta. See "Management --
Employment Agreements". The Company maintains key man life insurance to cover
Messrs. Lanza and LaPenta. The Company also faces competition for management
and technical personnel from other companies and organizations. There can be
no assurance that the Company will continue to be successful in hiring and
retaining key personnel. See "Management -- Directors and Executive
Officers".
ENVIRONMENTAL LIABILITIES
The Company's operations are subject to various federal, state and local
environmental laws and regulations relating to the discharge, storage,
treatment, handling, disposal and remediation of certain materials,
substances and wastes used in its operations. The Company continually
assesses its obligations and compliance with respect to these requirements.
Management believes that the Company's current operations are in substantial
compliance with all applicable environmental laws and permits. The Company
does not believe that its environmental compliance expenditures will have a
material adverse effect on its financial condition or the results of its
operations.
Pursuant to the L-3 Acquisition Agreement (as defined), the Company has
agreed to assume certain on-site and off-site environmental liabilities
related to events or activities occurring prior to the L-3 Acquisition.
Lockheed Martin has agreed to retain all environmental liabilities for all
facilities no longer used by the Businesses and to indemnify fully the
Company for such prior site environmental liabilities. Lockheed Martin has
also agreed, for the first eight years following April 1997, to pay 50% of
all costs incurred by the Company above those reserved for on the Company's
balance sheet at April 1997 relating to certain Company-assumed environmental
liabilities and, for the seven years thereafter, to pay 40% of certain
reasonable operation and maintenance costs relating to any environmental
remediation projects undertaken in the first eight years. The Company is
aware of environmental contamination at two of the facilities acquired from
Lockheed Martin that will require ongoing remediation. In November 1997, the
Company sold one such facility located in Sarasota, Florida, while retaining
a leasehold interest in a portion of that facility, to Dames &
Moore/Brookhill LLC ("DMB") in a transaction in which DMB contractually
agreed to assume responsibility for further remediation of the Sarasota site.
Management believes that the Company has established adequate reserves for
the potential costs associated with the assumed environmental liabilities.
However, there can be no assurance that any costs incurred will be
reimbursable from the Government or covered by Lockheed Martin under the
terms of the L-3 Acquisition Agreement or that the Company's environmental
reserves will be sufficient.
BACKLOG
The Company's backlog represents orders under contracts which are
primarily with the Government. The Government enjoys broad rights to modify
unilaterally or terminate such contracts. Accordingly, most of the Company's
backlog is subject to modification and termination at the Government's will.
There can be no assurance that the Company's backlog will become revenues in
any particular period or at all. Further, there can be no assurance that the
margins on any contract included in backlog that does become revenue will be
profitable.
OWNERSHIP OF HOLDINGS AND L-3 COMMUNICATIONS
After giving effect to the Common Stock Offering, the Lehman Partnership
will own % of the outstanding voting stock of Holdings (or % if the
Underwriters' over-allotment option is exercised in full), which owns all of
the outstanding common stock of L-3 Communications. By virtue of such
ownership, the Lehman Partnership will have the power to influence
significantly the business and the affairs of Holdings and L-3 Communications
because of its significant voting power with respect to actions requiring
stockholder approval. The concentration in ownership of Holdings may preclude
Holdings from being acquired in a transaction not supported by Holdings'
principal stockholders, may render more difficult or discourage a proposed
merger or tender offer, may preclude a successful proxy contest or may
otherwise have an adverse effect on the market price of the Notes. See
"Ownership of Capital Stock".
16
<PAGE>
PENSION PLAN LIABILITIES
Pursuant to the L-3 Acquisition Agreement, Holdings and L-3 Communications
assumed certain liabilities relating to defined benefit pension plans for
present and former employees and retirees of certain businesses which were
transferred from Lockheed Martin to Holdings and L-3 Communications. Prior to
the consummation of the L-3 Acquisition, Lockheed Martin received a letter
from the Pension Benefit Guaranty Corporation (the "PBGC") which requested
information regarding the transfer of such pension plans and indicated that
the PBGC believed certain of such pension plans were underfunded using the
PBGC's actuarial assumptions (which assumptions resulted in a larger
liability for accrued benefits than the assumptions used for financial
reporting under Statement of Financial Accounting Standards Board No. 87,
"Accounting for Pension Costs" ("FASB 87")). The PBGC underfunding is related
to the Communication Systems--West, Aviation Recorders and Hycor pension
plans (collectively, the "Subject Plans"). As of December 31, 1997, the
Company calculated the net funding position of the Subject Plans and believes
them to be overfunded by approximately $5.9 million under ERISA (as defined)
assumptions, underfunded by approximately $10.2 million under FASB 87
assumptions and, on a termination basis, underfunded by as much as $57.5
million under PBGC assumptions.
L-3 Communications, Lockheed Martin and the PBGC entered into certain
agreements dated as of April 30, 1997 that include Lockheed Martin providing
a commitment to the PBGC with regard to the Subject Plans and L-3
Communications providing certain assurances to Lockheed Martin regarding such
plans. See "Business -- Pension Plans". The Company expects, based in part
upon discussions with its consulting actuaries, that any increase in pension
expenses or future funding requirements from those previously anticipated for
the Subject Plans would not be material. However, there can be no assurance
that the impact of any increased pension expenses or funding requirements
under this arrangement would not be material to the Company.
SUBORDINATION
L-3 Communications' obligations under the Notes are subordinate and junior
in right of payment to all existing and future Senior Debt of L-3
Communications. As of December 31, 1997, on a pro forma basis after giving
effect to the L-3 Acquisition, the 1998 Acquisitions and the Offerings, L-3
Communications would have had approximately $433.6 million of indebtedness
outstanding, of which $58.6 million would have been Senior Debt (excluding
letters of credit). Additional Senior Debt may be incurred by L-3
Communications from time to time, subject to certain restrictions. By reason
of such subordination, in the event of an insolvency, liquidation, or other
reorganization of L-3 Communications, the lenders under the Senior Credit
Facilities and other creditors who are holders of Senior Debt must be paid in
full before the holders of the Notes may be paid; accordingly, there may be
insufficient assets remaining after payment of prior claims to pay amounts
due on the Notes. In addition, under certain circumstances, no payments may
be made with respect to the Notes if a default exists with respect to certain
Senior Debt. The Notes rank pari passu with the 1997 Notes (as defined). See
"Description of the Notes -- Subordination".
RESTRICTIONS IMPOSED BY THE SENIOR CREDIT FACILITIES AND THE INDENTURES
The Senior Credit Facilities and the Indentures contain a number of
significant covenants that, among other things, restrict the ability of L-3
Communications to dispose of assets, incur additional indebtedness, repay
other indebtedness, pay dividends, make certain investments or acquisitions,
repurchase or redeem capital stock, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. There can be no assurance that such
restrictions will not adversely affect the Company's ability to finance its
future operations or capital needs or engage in other business activities
that may be in the interest of the Company. In addition, the Senior Credit
Facilities also require L-3 Communications to maintain compliance with
certain financial ratios, including total EBITDA to total interest expense
and total debt to total EBITDA, and limit capital expenditures by L-3
Communications. The ability of L-3 Communications to comply with such ratios
and limits may be affected by events beyond L-3 Communications' control. A
breach of any of these covenants or the inability of L-3 Communications to
comply with the required financial ratios or limits could result
17
<PAGE>
in a default under the Senior Credit Facilities. In the event of any such
default, the lenders under the Senior Credit Facilities could elect to
declare all borrowings outstanding under the Senior Credit Facilities,
together with accrued interest and other fees, to be due and payable, to
require L-3 Communications to apply all of its available cash to repay such
borrowings or to prevent L-3 Communications from making debt service payments
on other indebtedness (including the 1997 Notes and the Notes), any of which
would be an Event of Default under the Notes. If L-3 Communications were
unable to repay any such borrowings when due, the lenders could proceed
against their collateral. In connection with the Senior Credit Facilities,
L-3 Communications has granted the lenders thereunder a first priority lien
on substantially all of its assets. The lenders under the Senior Credit
Facilities will also have a first priority security interest in all of the
capital stock of L-3 Communications and its subsidiaries. If the indebtedness
under the Senior Credit Facilities, the 1997 Notes or the Notes were to be
accelerated, there can be no assurance that the assets of L-3 Communications
would be sufficient to repay such indebtedness in full. See "Description of
the Notes" and "Description of Certain Indebtedness".
FRAUDULENT CONVEYANCE
A portion of the indebtedness under the Notes is being incurred to repay
the interim financing for the 1998 Acquisitions and to repay the indebtedness
incurred under the Senior Credit Facilities in connection with the L-3
Acquisition. Management believes that the indebtedness of L-3 Communications
represented by the Notes is being incurred for proper purposes and in good
faith, and that, based on present forecasts and other financial information,
after the issuance of the Notes, L-3 Communications will be solvent, will
have sufficient capital for carrying on its business and will be able to pay
its debts as they mature. Notwithstanding management's belief, however, under
federal and state fraudulent transfer laws, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find
that, at the time of the incurrence of such indebtedness, L-3 Communications
was insolvent, was rendered insolvent by reason of such incurrence, was
engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, intended to incur, or believed that
it would incur, debts beyond its ability to pay such debts as they matured,
or intended to hinder, delay or defraud its creditors, and that the
indebtedness was incurred for less than reasonably equivalent value, then
such court could, among other things, (i) void all or a portion of L-3
Communications' obligations to the Holders of the Notes, the effect of which
would be that the Holders of the Notes might not be repaid in full and/or
(ii) subordinate L-3 Communications' obligations to the Holders of the Notes
to other existing and future indebtedness of L-3 Communications to a greater
extent than would otherwise be the case, the effect of which would be to
entitle such other creditors to which the Notes were not previously
subordinated to be paid in full before any payment could be made on the
Notes. See "--Substantial Leverage" above.
LIMITATION ON CHANGE OF CONTROL
The Indentures provide that, upon the occurrence of a Change of Control of
L-3 Communications or Holdings, L-3 Communications will make an offer to
purchase all of the Notes and the 1997 Notes at a price in cash equal to 101%
of the aggregate principal amount thereof together with accrued and unpaid
interest to the date of purchase. The Senior Credit Facilities currently
prohibit L-3 Communications from repurchasing any Notes or 1997 Notes except
with the proceeds of one or more Equity Offerings. The Senior Credit
Facilities also provide that certain change of control events with respect to
the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which L-3
Communications becomes a party may contain similar restrictions and
provisions. In the event a Change of Control event occurs at a time when L-3
Communications is prohibited from purchasing the Notes or the 1997 Notes, or
if L-3 Communications is required to make a Net Proceeds Offer (as defined)
pursuant to the terms of the Notes or the 1997 Notes, L-3 Communications
could seek the consent of its lenders to the purchase of the Notes or the
1997 Notes or could attempt to refinance the borrowings that contain such
prohibition. If L-3 Communications does not obtain such a consent or repay
such borrowings, L-3 Communications will remain prohibited from purchasing
the Notes or the 1997 Notes. In such case, L-3 Communications' failure to
make such an offer or to purchase tendered Notes or the 1997 Notes would
constitute an Event of Default under the
18
<PAGE>
Indenture or the 1997 Indenture. If, as a result thereof, a default occurs
with respect to any Senior Debt, the subordination provisions in the
Indenture would likely restrict payments to the holders of the Notes.
Finally, L-3 Communications' ability to pay cash to the holders of Notes or
the 1997 Notes upon a purchase may be limited by L-3 Communications'
then-existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required purchases.
Furthermore, the Change of Control provisions may in certain circumstances
make more difficult or discourage a takeover of the Company. See "Description
of the Notes --Repurchase at the Option of Holders -- Change of Control".
LACK OF MARKET FOR THE NOTES
There is no existing trading market for the Notes, and there can be no
assurance regarding the future development of a market for the Notes or the
ability of the Holders of the Notes to sell their Notes or the price at which
such Holders may be able to sell their Notes. If such market were to develop,
the Notes could trade at prices that may be higher or lower than their
initial offering price depending on many factors, including prevailing
interest rates, the Company's operating results and the market for similar
securities. The Underwriters have advised the Company that they currently
intend to make a market with respect to the Notes. However, the Underwriters
are not obligated to do so, and any market making with respect to the Notes
may be discontinued at any time without notice. Because Lehman Brothers Inc.
is an affiliate of the Company, Lehman Brothers Inc. will be required to
deliver a current "market-maker" prospectus and otherwise comply with the
registration requirements of the Securities Act in connection with any
secondary market sale of the Notes, which may affect its ability to continue
market-making activities. See "Underwriting". No assurance can be given as to
the liquidity of or the trading market for the Notes.
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements concerning the
Company's operations, economic performance and financial condition, including
in particular, the likelihood of the Company's success in developing and
expanding its business and the realization of sales from backlog. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of
which are beyond the control of the Company, and reflect future business
decisions which are subject to change. Some of these assumptions inevitably
will not materialize, and unanticipated events will occur which will affect
the Company's future results. All such forward looking statements are
qualified by reference to matters discussed under this section entitled "Risk
Factors".
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Notes Offering, are estimated to
be approximately $ , after deducting underwriting discounts, commissions
and estimated offering expenses.
The Company intends to use the net proceeds of the Notes Offering,
together with the net proceeds of the Common Stock Offering contributed to
L-3 Communications, to repay a substantial portion of its existing
indebtedness under the Senior Credit Facilities and for general corporate
purposes, including potential acquisitions. The borrowings under the Senior
Credit Facilities had been used by the Company to fund in part the L-3
Acquisition and the 1998 Acquisitions. The weighted average interest rate
under the Term Loan Facilities was 7.99% at February 24, 1998. Amounts repaid
under the Revolving Credit Facility will be available to be reborrowed by the
Company from time to time for, among other reasons, general corporate
purposes or to finance future acquisitions. See "Description of Certain
Indebtedness -- Senior Credit Facilities".
SOURCES AND USES OF FUNDS
($ in millions)
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS AMOUNT
- --------------------- -------- ----------------------------------------- --------
<S> <C> <C> <C>
Notes Offering ....... $150.0 Cash on hand ............................. $ 50.0
Common Stock
Offering............. 100.0 Repayment of Term Loan Facilities ....... 115.0
Repayment of Revolving Credit Facility(1). 71.5
Expenses of the Offerings(2).............. 13.5
-------- --------
Total Sources......... $250.0 Total Uses ............................... $250.0
======== ========
</TABLE>
- ------------
(1) Availability under the Revolving Credit Facility at any given time is
$200.0 million, less the amount of outstanding borrowings and
outstanding letters of credit. Upon consummation of the Offerings, the
Company will have available under its Revolving Credit Facility $200.0
million less amounts outstanding for letters of credit.
(2) Expenses are estimated and include the underwriting discounts and
commissions of the Offerings.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 and as adjusted to give pro forma effect to the 1998
Acquisitions, the Offerings and the application of the net proceeds therefrom
as if these transactions had occurred on December 31, 1997. See "Use of
Proceeds" and "Unaudited Pro Forma Condensed Consolidated Financial
Information".
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
PRO FORMA
ACTUAL 1998 ACQUISITIONS PRO FORMA
-------- ----------------- -----------
($ IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents ............... $ 77.5 -- $ 50.0
======== ================= ===========
Current portion of long-term debt ....... $ 5.0 $ 5.3 $ 2.1
Revolving Credit Facility(1) ............ -- 71.5 --
Term Loan Facilities .................... 167.0 167.0 55.2
10 3/8% Senior Subordinated Notes due
2007 ................................... 225.0 225.0 225.0
% Senior Subordinated Notes due 2008 . -- -- 150.0
Industrial development bond ............. -- 1.3 1.3
-------- ----------------- -----------
Total debt ............................ $397.0 $470.1 $433.6
-------- ----------------- -----------
Shareholders' equity
Common Stock ........................... $125.0 $125.0 $217.0
Retained earnings....................... 16.7 16.7 16.7
Deemed distribution..................... (9.0) (9.0) (9.0)
-------- ----------------- -----------
Total shareholders' equity............. 132.7 132.7 224.7
-------- ----------------- -----------
Total capitalization................... $529.7 $602.8 $658.3
======== ================= ===========
</TABLE>
- ------------
(1) Availability under the Revolving Credit Facility at any given time is
$200.0 million, less the amount of outstanding borrowings and
outstanding letters of credit. Upon consummation of the Offerings, the
Company will have available under its Revolving Credit Facility $200.0
million less amounts outstanding for letters of credit.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the L-3 Acquisition, the 1998 Acquisitions the Offerings and the contribution
to the Company of the proceeds of the Common Stock Offering by Holdings
(collectively, the "Transactions"). The unaudited pro forma condensed
consolidated statement of operations gives effect to the Transactions as if
they had occurred as of January 1, 1997. The unaudited pro forma condensed
consolidated balance sheet gives effect to the Transactions as if they had
occurred as of December 31, 1997. The pro forma financial information is
based on (i) the consolidated financial statements of the Company for the
nine-month period ended December 31, 1997, (ii) the Combined Statement of
Operations of the Predecessor Company for the three-month period ended March
31, 1997 and (iii) the financial statements of the 1998 Acquisitions for the
year ended December 31, 1997, using the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to the unaudited pro
forma condensed consolidated financial statements.
The pro forma adjustments are based upon preliminary estimates. Actual
adjustments will be based on final appraisals and other analyses of fair
values and adjustment of the final purchase price. Changes between
preliminary and final allocations for the valuation of contracts-in-process,
inventories, fixed assets, pension liabilities and deferred taxes could be
material. The pro forma statement of operations does not reflect any cost
savings that management of the Company believes would have resulted had the
Transactions occurred on January 1, 1997. The pro forma financial information
should be read in conjunction with (i) the audited Consolidated (Combined)
Financial Statements of the Company and the Predecessor Company as of
December 31, 1997 and for the nine months ended December 31, 1997 and the
three months ended March 31, 1997, (ii) the audited financial statements of
STS for the year ended June 30, 1997, (iii) the unaudited condensed financial
statements of STS as of December 31, 1997 and for the six months ended
December 31, 1997 and 1996, (iv) the audited consolidated financial
statements of ILEX as of December 31, 1997 and for the year ended December
31, 1997 and (v) the audited combined financial statements of Ocean Systems
as of December 31, 1997 and for the year ended December 31, 1997, all of
which are included elsewhere herein. The unaudited pro forma condensed
financial information may not be indicative of the financial position and
results of operations of the Company that actually would have occurred had
the Transactions been in effect on the dates indicated or the financial
position and results of operations that may be obtained in the future.
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER
DATA
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
NINE MONTHS THREE MONTHS PRO FORMA
ENDED ENDED ADJUSTMENTS
DECEMBER 31, MARCH 31, L-3
1997 1997(1) ACQUISITION(1)
($ IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales............. $546.5 $158.9 $(1.8)
Costs and
expenses......... 490.6 151.0 (3.2)
-------------- -------------- ----------------
Operating
income (loss) . 55.9 7.9 1.4
Interest and
investment
income
(expense)........ 1.4 -- --
Interest expense . 29.9 8.4 1.5
-------------- -------------- ----------------
Income (loss)
before income
taxes.......... 27.4 (0.5) (0.1)
Income tax
expense
(benefit)........ 10.7 (0.2) --
-------------- -------------- ----------------
Net income
(loss)......... $ 16.7 $ (0.3) $(0.1)
============== ============== ================
OTHER DATA:
EBITDA(7)......... $ 78.1
Depreciation
expense.......... 13.3
Amortization
expense ......... 8.9
Capital
expenditures .... 11.9
Ratio of earnings
to fixed
charges(8)....... 1.8x
Ratio of
EBITDA(7) to
cash interest
expense(9)....... 2.8x
Ratio of net debt
to EBITDA(7).....
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
PRO FORMA -------------- COMPANY
L-3 1998 1998 BEFORE THE THE
ACQUISITION ACQUISITIONS(3) ACQUISITIONS OFFERINGS OFFERINGS PRO FORMA
------------- -------------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales............. $703.6 $190.4 $ -- $894.0 $ -- $894.0
Costs and
expenses......... 638.4 196.3 1.0 (4) 835.7 -- 835.7
------------- --------------- -------------- ------------ ----------- -----------
Operating
income (loss) . 65.2 (5.9) (1.0) 58.3 -- 58.3
Interest and
investment
income
(expense)........ 1.4 (0.1) (1.4)(5) (0.1) -- (0.1)
Interest expense . 39.8 0.5 5.2 (5) 45.5 (1.7)(5) 43.8
------------- --------------- -------------- ------------ ----------- -----------
Income (loss)
before income
taxes.......... 26.8 (6.5) (7.6) 12.7 1.7 14.4
Income tax
expense
(benefit)........ 10.5 (4.0) (3.0)(6) 3.5 0.7 (6) 4.2
------------- --------------- -------------- ------------ ----------- -----------
Net income
(loss)......... $ 16.3 $ (2.5) $(4.6) 9.2 $ 1.0 $ 10.2
============= =============== ============== ============ =========== ===========
OTHER DATA:
EBITDA(7)......... $ 95.1 $ 95.1
Depreciation
expense.......... 22.0 22.0
Amortization
expense ......... 14.8 14.8
Capital
expenditures .... 19.9 19.9
Ratio of earnings
to fixed
charges(8)....... 1.3x 1.3x
Ratio of
EBITDA(7) to
cash interest
expense(9)....... 2.2x 2.3x
Ratio of net debt
to EBITDA(7)..... 4.9x 4.0x
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
-------------- COMPANY
1998 1998 BEFORE THE THE
COMPANY ACQUISITIONS(3) ACQUISITIONS OFFERINGS OFFERINGS(5) PRO FORMA
--------- --------------- -------------- ------------ ------------ -----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 77.5 $ 4.9 $(82.4)(4) -- $ 50.0 $ 50.0
Contracts in process................. 167.2 85.2 (2.5)(4) $249.9 -- 249.9
Other current assets................. 22.7 2.0 -- 24.9 -- 24.7
--------- --------------- -------------- ------------ ------------ -----------
Total current assets............... 267.4 92.1 (84.9) 274.6 50.0 324.6
--------- --------------- -------------- ------------ ------------ -----------
Property, plant and equipment, net ... 83.0 24.9 (3.4)(4) 104.5 -- 104.5
Intangibles, primarily cost in excess
of net assets acquired, net of
amortization......................... 297.5 2.2 91.7 (4) 391.4 -- 391.4
Other assets.......................... 55.5 2.5 12.0 (6) 70.0 5.5 75.5
--------- --------------- -------------- ------------ ------------ -----------
Total assets....................... $703.4 $121.7 $ 15.4 $840.5 $ 55.5 $896.0
========= =============== ============== ============ ============ ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ... $ 5.0 $ 0.3 -- $ 5.3 $ (3.2) $ 2.1
Accounts payable and accrued
expenses............................ 68.6 30.6 -- 99.2 -- 99.2
Customer advances and amounts in
excess of costs incurred............. 34.5 16.2 -- 50.7 -- 50.7
Other current liabilities............ 27.5 6.2 -- 33.7 -- 33.7
--------- --------------- -------------- ------------ ------------ -----------
Total current liabilities.......... 135.6 53.3 -- 188.9 (3.2) 185.7
--------- --------------- -------------- ------------ ------------ -----------
Pension, postretirement benefits and
other liabilities.................... 43.1 11.0 -- 54.1 -- 54.1
Revolving credit facility............. -- -- $ 71.5 (2) 71.5 (71.5) --
Term loan facilities.................. 167.0 -- -- 167.0 (111.8) 55.2
Senior subordinated notes............. 225.0 -- -- 225.0 150.0 375.0
Industrial development bond........... -- 1.3 -- 1.3 1.3
Shareholders' equity.................. 132.7 56.1 (56.1) 132.7 92.0 224.7
--------- --------------- -------------- ------------ ------------ -----------
Total liabilities and
shareholders' equity.............. $703.4 $121.7 $ 15.4 $840.5 $ 55.5 $896.0
========= =============== ============== ============ ============ ===========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following facts and assumptions were used in determining the pro forma
effect of the Transactions.
1. The Company's historical financial statements reflect the results of
operations of the Company since the effective date of the L-3 Acquisition,
April 1, 1997, and the Predecessor Company historical financial statements
reflect the results of operations of the Predecessor Company for the three
months ended March 31, 1997. The adjustments made to the pro forma
statement of operations for the three months ended March 31, 1997,
relating to the Predecessor Company are: (a) the elimination of $1.8
million of sales and $1.8 million of costs and expenses related to the
Hycor business, (b) a reduction to costs and expenses of $0.8 million to
record amortization expenses on the excess of the L-3 Acquisition purchase
price over net assets acquired of $303.2 million over 40 years, net of the
reversal of amortization expenses of intangibles included in the
Predecessor Company historical financial statements, (c) a reduction to
costs and expenses of $0.6 million to record estimated pension cost on a
separate company basis net of the reversal of the allocated pension cost
included in the Predecessor Company historical financial statements and
(d) a net increase to interest expense of $1.5 million, comprised of a
$0.2 million reduction related to the Hycor business which was acquired as
part of the L-3 Acquisition and which has been accounted for as "net
assets of acquired business held for sale", and a net $1.7 million
increase related to the Company's assumed cost of borrowing rate of 10.15%
and borrowings of $400.0 million compared to an assumed cost of borrowing
rate of 7.10% and borrowings of $473.6 million reflected in the historical
financial statements of the Predecessor Company. A statutory (federal,
state and foreign) tax rate of 39.0% was assumed on these pro forma
adjustments.
2. On February 5, 1998, L-3 Communications purchased the assets of STS for
$27.0 million of cash. On February 10, 1998, L-3 Communications entered
into a definitive agreement to purchase substantially all the assets of
ILEX for $51.9 million of cash plus additional consideration contingent
upon post-acquisition performance of ILEX. On December 22, 1997, L-3
Communications entered into a definitive agreement to purchase the assets
of Ocean Systems for $67.5 million of cash. The ILEX and Ocean Systems
acquisitions are expected to close in the first quarter of 1998.
All of the aforementioned purchase prices are subject to adjustment based
upon the actual closing net assets or working capital as defined. For
purposes of the pro forma financial information, the aggregate purchase
prices (including estimated expenses of $2.6 million) for the 1998
Acquisitions of $149.0 million were assumed to be financed using cash on
hand of $77.5 million and initially using $71.5 million of borrowings
under the Revolving Credit Facility. See Note 5 for the pro forma effects
of the Offerings on interest expense and long-term debt including the
Revolving Credit Facility.
3. The pro forma statement of operations and the pro forma balance sheet
include the following historical financial data for the 1998 Acquisitions.
Such data have been derived from each entity's historical financial
statements included elsewhere herein.
The pro forma statement of operations includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
OCEAN 1998
STS(A) ILEX SYSTEMS ACQUISITIONS
-------- ------- --------- --------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Sales.................................... $53.9 $63.5 $73.0 $190.4
Costs and expenses....................... 61.7 55.9 78.7 196.3
-------- ------- --------- --------------
Operating (loss) income................ (7.8) 7.6 (5.7) (5.9)
Interest and investment income
(expense)............................... -- (0.2) 0.1 (0.1)
Interest expense......................... -- -- 0.5 0.5
-------- ------- --------- --------------
Income (loss) before income taxes ..... (7.8) 7.4 (6.1) (6.5)
Income tax (benefit) provision .......... (2.1) 0.5 (2.4) (4.0)
-------- ------- --------- --------------
Net (loss) income...................... $(5.7) $ 6.9 $(3.7) $ (2.5)
======== ======= ========= ==============
</TABLE>
- ------------
(a) Represents fiscal year ended June 30, 1997 plus the six month period
ended December 31, 1997 minus the six month period ended December 31,
1996.
24
<PAGE>
For the 1998 Acquisitions, the pro forma balance sheet includes the
following historical financial data:
<TABLE>
<CAPTION>
OCEAN 1998
STS ILEX SYSTEMS ACQUISITIONS
------- ------- --------- --------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... -- $ 4.9 -- $ 4.9
Contracts in process............................................ $32.6 13.2 $39.4 85.2
Other current assets............................................ -- 0.3 1.7 2.0
------- ------- --------- --------------
Total current assets........................................... 32.6 18.4 41.1 92.1
------- ------- --------- --------------
Property, plant and equipment, net............................... 7.2 0.9 16.8 24.9
Intangibles, primarily cost in excess of net assets acquired,
net of amortization............................................. -- 0.4 1.8 2.2
Other assets..................................................... -- 0.1 2.4 2.5
------- ------- --------- --------------
Total assets................................................... $39.8 $19.8 $62.1 $121.7
======= ======= ========= ==============
LIABILITIES AND NET ASSETS
Current liabilities:
Current portion of long-term debt............................... $ 0.2 $ 0.1 -- $ 0.3
Accounts payable and accrued expenses........................... 6.5 5.4 $18.7 30.6
Customer advances and amounts in excess of costs incurred ...... -- -- 16.2 16.2
Other current liabilities....................................... 3.7 2.5 -- 6.2
------- ------- --------- --------------
Total current liabilities...................................... 10.4 8.0 34.9 53.3
------- ------- --------- --------------
Pension, postretirement benefits and other liabilities .......... -- -- 11.0 11.0
Industrial development bond...................................... 1.3 -- -- 1.3
Net assets....................................................... 28.1 11.8 16.2 56.1
------- ------- --------- --------------
Total liabilities and net assets............................... $39.8 $19.8 $62.1 $121.7
======= ======= ========= ==============
</TABLE>
4. The aggregate estimated excess of purchase price over fair value of net
assets acquired of the 1998 Acquisitions of $93.9 million relates to Ocean
Systems ($51.8 million) and ILEX ($42.1 million) and is being amortized
over 40 years resulting in a pro forma charge of $2.3 million per annum.
The pro forma balance sheet includes an incremental increase to costs in
excess of net assets acquired of $91.7 million after considering acquired
cost in excess of net assets acquired of $2.2 million included in the 1998
Acquisitions historical financial statements.
Other adjustments to the pro forma balance sheet include reductions to
cash of $82.4 million representing the use of $77.5 million of the
Company's historical cash assumed to have been used to fund partially the
1998 Acquisitions and the elimination of $4.9 million of cash included in
the 1998 Acquisitions historical financial statements but not acquired by
the Company. Contracts-in-process pro forma adjustments include a net
reduction of $2.5 million to reflect $1.0 million of accounts receivable
not acquired relating to ILEX, an inventory write-up to fair value of $3.5
million primarily related to finished goods at Ocean Systems and a
reduction of $5.0 million relating to the valuation of acquired
contracts-in-process at contract price, less the estimated cost to
complete and an allowance for normal profit margin on the Company's effort
to complete such contracts. The pro forma balance sheet includes a
reduction to fixed assets of $3.4 million to eliminate net book value of
the Ocean Systems Sylmar facility which will not be acquired by L-3
Communications. The fair value of other fixed assets is not expected to
differ materially from their historical carrying amounts. The pro forma
statement of operations does not reflect any adjustments related to the
inventory write-up and the valuation of acquired contracts-in-process
since such adjustments are neither recurring nor material.
25
<PAGE>
A net increase of $1.0 million was made to the costs and expenses data in
the pro forma statement of operations relating to the 1998 Acquisitions,
comprised of the following:
<TABLE>
<CAPTION>
($ IN MILLIONS)
<S> <C> <C>
(a) Amortization expense of estimated purchase cost in excess of net assets $ 2.3
(b) Elimination of goodwill amortization expense included in the historical
financial statements for the 1998 Acquisitions......................... (2.1)
(c) Estimated annual rent expense on the Sylmar facility of Ocean Systems
which will not be acquired by L-3 Communications....................... 1.1
(d) Elimination of depreciation expense on buildings and improvements on
the Sylmar facility of Ocean Systems which will not be acquired by L-3
Communications......................................................... (0.3)
---------------
Total increase to costs and expenses.................................. $ 1.0
===============
</TABLE>
5. The pro forma adjustments for the 1998 Acquisitions include (a) the
elimination of $1.4 million of interest income included in the historical
financial statements of the Company to reflect the use of cash on hand to
fund partially the purchase price for the 1998 Acquisitions and (b) an
increase to interest expense of $5.2 million on debt incurred to fund the
remaining purchase prices for the 1998 Acquisitions. Pro forma adjustments
for the Offerings reflect a decrease to interest expense of $1.7 million
to reflect the reduction in debt from the use of proceeds. The details of
interest expense, after such pro forma adjustments follow:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
---------------------------------
PRO FORMA COMPANY
BEFORE THE OFFERINGS PRO FORMA
-------------------- -----------
($ IN MILLIONS)
<S> <C> <C>
Interest on Revolving Credit Facility (7.625% on $71.5 million) ......... $ 5.5 --
Interest on the 1997 Notes (10.375% on $225.0 million)................... 23.3 $23.3
Interest on the Notes (assumed 8.25% on $150.0 million).................. -- 12.4
Interest on borrowings under Term Loan Facilities (8.0% on $172.0
million
and $57.0 million, respectively)........................................ 14.0 4.5
Interest on industrial development bond (4.0% on $1.3 million) .......... 0.1 0.1
Commitment fee of 0.5% on unused Revolving Credit Facility .............. 0.6 1.0
Amortization of deferred debt issuance costs............................. 2.0 2.5
-------------------- -----------
Total pro forma interest expense ...................................... $45.5 $43.8
==================== ===========
</TABLE>
In accordance with SEC regulations, no interest income was assumed on the
$50.0 million cash balance in the Pro Forma or reflected in the pro forma
statement of operations.
The Offerings include the contribution of the proceeds of the and $150.0
million of Notes. The net proceeds from the Offerings of $236.5 million,
comprised of $150.0 million from the Notes Offering less estimated debt
issue costs of $5.5 million, and $100.0 million from the contribution of
the proceeds of the Common Stock Offering less estimated issuance expenses
of $8.0 million, have been assumed to reduce borrowings under the
Revolving Credit Facility and Term Loan Facilities by $186.5 million and
increase cash and cash equivalents by $50.0 million. The pro forma balance
sheet includes the following adjustments:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
-----------------
($ IN MILLIONS)
<S> <C>
Cash and cash equivalents ............................................... $ 50.0
=================
Senior subordinated notes (proceeds from the Notes)...................... 150.0
=================
Other assets (deferred debt issuance costs).............................. $ 5.5
=================
The net proceeds from the Offerings will be used to reduce borrowings
and were recorded as follows:
Current portion of long-term debt....................................... $ (3.2)
Revolving Credit Facility............................................... (71.5)
Term Loan Facilities.................................................... (111.8)
-----------------
$(186.5)
=================
Shareholders' equity:
Contribution of proceeds of sale of Common Stock offering by Holdings,
less expenses............................................................ $ 92.0
=================
</TABLE>
26
<PAGE>
6. The pro forma adjustments were tax-effected, as appropriate, using a
statutory (federal, state and foreign) tax rate of 39.0%. The pro forma
balance sheet includes an estimated $12.0 million of deferred tax assets
related principally to differences between book and tax bases of assumed
liabilities related to the 1998 Acquisitions.
7. EBITDA is defined as operating income plus depreciation expenses and
amortization expenses (excluding the amortization of debt issuance costs).
EBITDA is not a substitute for operating income, net income or cash flows
from operating activities as determined in accordance with generally
accepted accounting principles as a measure of profitability or liquidity.
EBITDA is presented as additional information because management believes
it to be a useful indicator of the Company's ability to meet debt service
and capital expenditure requirements.
Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
8. For purposes of this computation, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest on
indebtedness plus that portion of lease rental expense representative of
the interest element.
9. For purposes of this computation, cash interest expense consists of pro
forma interest expense excluding amortization of deferred debt issuance
costs.
27
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected unaudited pro forma data as of December 31, 1997 and for the
year then ended have been derived from, and should be read in conjunction
with, the unaudited pro forma condensed consolidated financial statements
included elsewhere herein. The unaudited pro forma statement of operations
and other data reflect the L-3 Acquisition, the 1998 Acquisitions and the
Offerings as if these transactions had occurred on January 1, 1997, for the
statement of operations and other data. The balance sheet data reflect the
1998 Acquisitions, the Offerings and the contribution to L-3 Communications
of the net proceeds of the Common Stock Offering as if they had occurred on
December 31, 1997.
The selected consolidated (combined) financial data as of December 31,
1997, 1996, 1995 and 1994, and for the nine months ended December 31, 1997,
the three months ended March 31, 1997 and the years ended December 31, 1996
and 1995 have been derived from the audited financial statements for the
respective periods.
The selected consolidated (combined) financial data as of December 31,
1993 and March 31, 1993, the nine months ended December 31, 1993 and the
three months ended March 31, 1993 have been derived from the unaudited
financial statements of Communication Systems -- East. In the opinion of the
Businesses' management, such unaudited financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position and results of operations of Communication
Systems -- East, also referred to as Lockheed Martin Communication Systems
Division in the Company's Consolidated (Combined) Financial Statements.
These selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated (Combined) Financial Statements of the
Company and the Loral Acquired Businesses included elsewhere herein.
<TABLE>
<CAPTION>
1997 YEAR ENDED DECEMBER 31,
---------------------- ----------------------------
NINE THREE
YEAR ENDED MONTHS MONTHS
DECEMBER 31, 1997 ENDED ENDED
PRO FORMA DEC. 31(1) MARCH 31 1996(2) 1995(3) 1994(3)
----------------- ---------- ---------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ................................... $894.0 $546.5 $158.9 $543.1 $166.8 $218.9
Operating income ........................ 58.3 55.9 7.9 43.7 4.7 8.4
Interest expense, net(5) ................ 43.9 28.5 8.4 24.2 4.5 5.5
Provision (benefit) for income taxes(5) 4.2 10.7 (0.2) 7.8 1.2 2.3
Net income (loss)........................ 10.2 16.7 (0.3) 11.7 (1.0) 0.6
BALANCE SHEET DATA:
Working capital ......................... $138.9 $131.8 $ 98.8 $ 21.1 $ 19.3
Total assets ............................ 896.0 703.4 593.3 228.5 233.3
Invested equity ......................... 473.6 194.7 199.5
Shareholders' equity..................... 224.7 118.1
OTHER DATA:
EBITDA(6) ............................... $ 95.1 $ 78.1 $ 15.7 $ 71.8 $ 16.2 $ 19.9
Depreciation expense .................... 22.0 13.3 4.5 14.9 5.5 5.4
Amortization expense .................... 14.8 8.9 3.3 13.2 6.1 6.1
Capital expenditures .................... 19.9 11.9 4.3 13.5 5.5 3.7
Ratios of:
Earnings to fixed charges(7)............ 1.3x
EBITDA to cash interest expense(8) ..... 2.3x
Net debt to EBITDA(9)................... 4.0x
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1993
-----------------------
NINE THREE
MONTHS MONTHS
ENDED ENDED
DEC. 31(3) MARCH 31(4)
---------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ................................... $200.0 $67.8
Operating income ........................ 12.4 5.1
Interest expense, net(5) ................ 4.1 --
Provision (benefit) for income taxes(5) 3.8 2.0
Net income (loss)........................ 4.5 3.1
BALANCE SHEET DATA:
Working capital ......................... $ 24.7 $22.8
Total assets ............................ 241.7 93.5
Invested equity ......................... 202.0 59.9
Shareholders' equity.....................
OTHER DATA:
EBITDA(6) ............................... $ 23.4 $ 7.0
Depreciation expense .................... 6.1 1.8
Amortization expense .................... 4.9 0.1
Capital expenditures .................... 2.6 0.8
Ratios of:
Earnings to fixed charges(7)............
EBITDA to cash interest expense(8) .....
Net debt to EBITDA(9)...................
</TABLE>
- ------------
(1) Reflects the L-3 Acquisition effective April 1, 1997.
(2) Reflects ownership of Loral's Communication Systems -- West and
Specialized Communication Products businesses commencing April 1, 1996.
(3) Reflects ownership of Communication Systems -- East by Lockheed Martin
effective April 1, 1993.
(4) Reflects ownership of Communication Systems--East by GE Aerospace. The
amounts shown herein include only those amounts as reflected in the
financial records of Communication Systems--East.
(5) For periods prior to April 1, 1997, interest expense and income tax
(benefit) provision were allocated from Lockheed Martin.
(6) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt
issuance costs). EBITDA is not a substitute for operating income, net
income and cash flow from operating activities as determined in
accordance with generally accepted accounting principles as a measure
of profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful indicator of
the Company's ability to meet debt service and capital expenditure
requirements.
(7) For purposes of this computation, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest on
indebtedness plus that portion of lease rental expense representative
of the interest element.
(8) For purposes of this computation, cash interest expense consists of pro
forma interest expense excluding amortization of deferred debt issuance
costs.
(9) Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The matters discussed herein may include "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties which could result in operating
performance that is materially different from management's projections. The
section of this Prospectus entitled "Risk Factors" should be read in
conjunction with this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
GENERAL
The Company is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products including
secure, high data rate communication systems, microwave components, avionics,
telemetry, instrumentation and space products. These systems and products are
critical elements of virtually all major communication, command and control,
intelligence gathering and space systems. The Company's systems and
specialized products are used to connect a variety of airborne, space, ground
and sea-based communication systems and are incorporated into the
transmission, processing, recording, monitoring and dissemination functions
of these communication systems. The Company's customers include the DoD,
selected Government intelligence agencies, major aerospace/ defense prime
contractors, foreign governments and commercial customers. The Company
operates primarily in one industry segment, electronic components and
systems.
All domestic government contracts and subcontracts of the Company are
subject to audit and various cost controls, and include standard provisions
for termination for the convenience of the Government. Multi-year Government
contracts and related orders are subject to cancellation if funds for
contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the relevant foreign government.
The defense industry has recently undergone significant changes
precipitated by ongoing federal budget pressures and new roles and missions
to reflect changing strategic and tactical threats. Since the mid-1980's, the
overall U. S. defense budget has declined in real dollars. In response, the
DoD has focused its resources on enhancing its military readiness, joint
operations and digital command and control communications by incorporating
advanced electronics to improve the performance, reduce operating cost and
extend the life expectancy of its existing and future platforms. The emphasis
on system interoperability, force multipliers and providing battlefield
commanders with real-time data is increasing the electronics content of
nearly all of the major military procurement and research programs. As a
result, the DoD's budget for communications and defense electronics is
expected to grow. According to Federal Sources, an independent private
consulting group, the defense budget for C(3)I is expected to increase from
$31.0 billion in the fiscal year ended September 30, 1997 to $42.0 billion in
the fiscal year ended September 30, 2002, a compound annual growth rate of
6.3%.
ACQUISITION HISTORY
The Company was formed to acquire substantially all of the assets of (i)
nine business units previously purchased by Lockheed Martin as part of its
acquisition of Loral in April 1996 (the "Loral Acquired Businesses") which
include eight business units of Loral ("Specialized Communications products")
and one business unit purchased by Loral as part of its acquisition of the
Defense Systems business of Unisys Corporation in May 1995 ("Communications
System --West"), and (ii) one business unit purchased by Lockheed Martin as
part of its acquisition of the aerospace business of General Electric Company
in April 1993 ("Communication Systems -- East"). Collectively, the Loral
Acquired Businesses and Communications Systems -- East comprise the
"Predecessor Company" or "Businesses".
29
<PAGE>
RESULTS OF OPERATIONS
The following information should be read in conjunction with Consolidated
(Combined) Financial Statements and the notes thereto.
The Company's financial statements reflect operations since the effective
date of the L-3 Acquisition, April 1, 1997; and the Predecessor Company's
results of operations for the three months ended March 31, 1997 and the year
ended December 31, 1996 which include the results of operations of the Loral
Acquired Businesses beginning on April 1, 1996, the effective date of that
acquisition by Lockheed Martin. Therefore, the results of operations for the
year ended December 31, 1996 reflect the results of operations of the Loral
Acquired Businesses for the nine months from April 1, 1996 to December 31,
1996. Accordingly, changes between periods for the year ended December 31,
1997 to the year ended December 31, 1996 of the Predecessor Company are
significantly affected by the timing of the L-3 Acquisition and Loral
Acquired Businesses acquisitions. See Note 4 to the Consolidated (Combined)
Financial Statements. The results of operations for the year ended December
31, 1995 and the period from January 1 to March 31, 1996 represent the
results of the Predecessor Company, which only comprise the results of
operations of Communications Systems -- East. Operating income of the Company
and the Predecessor Company are not directly comparable between periods as a
result of the effects of valuation of assets and liabilities recorded in
accordance with Accounting Principles Board Opinion No. 16 ("APB 16") by the
Company and the Predecessor Company, in the purchase accounting for the L-3
Acquisition and Loral Acquired Businesses acquisitions. Interest expense and
income taxes expense for the periods are not comparable and the impact of
interest expense and income taxes expense on the Company is discussed below.
As indicated in Note 6 to the Consolidated (Combined) Financial
Statements, effective April 1, 1997 the Company has accounted for the sale of
its Hycor business in accordance with FASB Emerging Issues Task Force Issue
No. 87-11 "Allocation of Purchase Price to Assets to Be Sold". Accordingly,
the results of operations of the Hycor business are not included in the
results of operations of the Company for the nine months ended December 31,
1997. Hycor is a business unit of the Loral Acquired Businesses, and,
accordingly, Hycor is only included in the results of operations of the
Predecessor Company beginning on April 1, 1996, the effective date of the
Loral Acquired Businesses acquisition by Lockheed Martin. On January 29,
1998, the Company sold the Hycor business, excluding land and buildings, for
$3.5 million in cash subject to adjustment based on final closing net assets.
The results of operations presented below exclude the results of
operations of the 1998 Acquisitions for the year ended December 31, 1997.
The results of operations of the Predecessor Company for the three months
ended March 31, 1997 and the years ended December 31, 1996 and 1995, include
certain costs and expenses allocated by Lockheed Martin for corporate office
expenses based primarily on the allocation methodology prescribed by
government regulations pertaining to government contractors. Interest expense
was allocated based on Lockheed Martin's actual weighted average consolidated
interest rate applied to the portion of the beginning of the year invested
equity deemed to be financed by consolidated debt based on Lockheed Martin's
debt to equity ratio on such date. The provision (benefit) for income taxes
was allocated to the Predecessor Company as if it were a separate taxpayer,
calculated by applying statutory rates to reported pre-tax income after
considering items that do not enter into the determination of taxable income
and tax credits related to the Predecessor Company. Also, pension and
post-employment benefit costs were allocated based on employee headcount.
Accordingly, the results of operations and financial position hereinafter of
the Predecessor Company may not be the same as would have occurred had the
Predecessor Company been an independent entity.
30
<PAGE>
The following table sets forth selected statement of operations data for
the Company and the Predecessor Company for the periods indicated.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------ -------------- --------------------------------------------------------------
THREE
MONTHS YEAR
NINE MONTHS NINE MONTHS THREE MONTHS ENDED ENDED
ENDED ENDED ENDED MARCH DECEMBER 31,
DECEMBER 31, DECEMBER 31, MARCH 31, 31, -------------------
1997 1996 1997 1996 1996 1995
------------ ------------ ------------ ------- -------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
SALES.............................. $546.5 $501.9 $158.9 $41.2 $543.1 $166.8
COSTS AND EXPENSES ................ 490.6 459.9 151.0 39.5 499.4 162.1
OPERATING INCOME .................. 55.9 42.0 7.9 1.7 43.7 4.7
NET INTEREST EXPENSE .............. 28.5 22.2 8.4 2.0 24.2 4.5
INCOME (LOSS) BEFORE INCOME TAXES 27.4 19.8 (0.5) (0.3) 19.5 .2
INCOME TAX PROVISION (BENEFIT) ... 10.7 7.6 (0.2) 0.2 7.8 1.2
NET INCOME (LOSS).................. 16.7 12.2 (0.3) (0.5) 11.7 (1.0)
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales for the nine months ended December 31, 1997 as compared to the
corresponding period in 1996 increased by $44.6 million, of which $30.5
million is attributable to the Loral Acquired Businesses and $14.1 million to
Communication Systems -- East. The increase in sales is attributable to
increased volume in sales of microwave components, CHBDLST, UAV programs,
F-14 display system contract, power supplies and P3-C Repair Depot. Operating
income for the nine months ended December 31, 1997 as compared to the
corresponding period in 1996 increased by $13.9 million, of which $5.8
million is attributable to the Loral Acquired Businesses and $8.1 million to
Communication Systems -- East. The increase in operating income for the nine
months ended December 31, 1997 is attributable to increased sales, improved
operating performance on sales of aviation recorders, passive microwave
components and display systems, the GEMnet product-line and P3-C Repair Depot
sales, partially offset by $3.3 million of cost of sales related to ongoing
certification efforts for the Company's Explosive Detection System ("EDS")
contract and lower sales volume on the U-2 Program.
Sales and operating income for the three months ended March 31, 1997
increased by $117.7 million and $6.2 million, respectively, as compared to
the corresponding period in 1996. The increases are attributable to the
acquisition of the Loral Acquired Businesses, offset by losses incurred on
three programs by Communication Systems -- East.
Sales and operating income of the Hycor business included in the
Predecessor Company's results of operations for the three months ended March
31, 1997 and the year ended December 31, 1996 were $1.8 million and nil, and
$7.5 million and $0.3 million, respectively.
Net interest expense for the nine months ended December 31, 1997 was $28.5
million representing interest expense on the Company's Senior Credit
Facilities, the 1997 Notes, and amortization of debt issuance costs, less
interest income of $1.4 million and interest expense of $0.6 million
allocated to the Hycor business net assets held for sale. Interest expense
for the three months ended March 31, 1997 and the prior period was $8.4
million and $24.2 million, respectively, and was allocated to the Predecessor
Company by applying Lockheed Martin's weighted average consolidated interest
rate to the portion of the Predecessor Company's invested equity account
deemed to be financed by Lockheed Martin's consolidated debt. The increase in
interest expense reflects higher interest rates on the third party debt, as
compared to the interest rate utilized to calculate interest expense by the
Predecessor Company.
The income tax provision for the nine months ended December 31, 1997
reflects the Company's effective income tax rate of 39%. For the three months
ended March 31, 1997 and in the prior period, income taxes were allocated to
the Predecessor Company by Lockheed Martin and the effective income tax rate
was significantly impacted by amortization of costs in excess of net assets
acquired, which were not deductible for income tax purposes. See Note 11 to
Consolidated (Combined) Financial Statements.
31
<PAGE>
SUPPLEMENTAL ANALYSIS OF ANNUAL RESULTS OF OPERATIONS OF THE COMPANY AND THE
PREDECESSOR COMPANY
As noted above, the Company's financial statements reflect operations
since the effective date of the L-3 Acquisition, April 1, 1997, and the
results of operations for the year ended December 31, 1996 represent the
results of operations of the Predecessor Company, and include the results of
operations of the Loral Acquired Businesses beginning on April 1, 1996, the
effective date of that acquisition. Accordingly, changes between periods for
the year ended December 31, 1997 to the year ended December 31, 1996 of the
Predecessor Company are significantly affected by the timing of these
acquisitions. To enable investors to better assess the trends in the results
of operations and to facilitate comparisons, the following presentation of
results of operations for the year ended December 31, 1997 were obtained by
aggregating, without adjustment, the historical results of operations of the
Predecessor Company for the period from January 1, 1997 through March 31,
1997 with the historical results of operations of the Company for the nine
months period from April 1, 1997 through December 31, 1997 (the "1997
period"), and the results of operations for the year ended December 31, 1996
were obtained by aggregating, without adjustments, the historical results of
operations of the Predecessor Company for the year ended December 31, 1996
with the historical results of operations of the Loral Acquired Businesses
for the period from January 1, 1996 through March 31, 1996 (the "1996
period"). All the historical results were derived from the audited financial
statements for respective periods included herein.
The following table sets forth historical selected statement of operations
data for the Company, Predecessor Company and the Loral Acquired Businesses
for the periods indicated and the related calendar year results of operation
data derived therefrom.
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR LORAL ACQUIRED
COMPANY COMPANY COMPANY BUSINESSES
-------------- -------------- -------------- --------------
YEAR
NINE MONTHS THREE MONTHS ENDED THREE MONTHS
ENDED ENDED DECEMBER ENDED
DECEMBER 31, MARCH 31, 1997 31, MARCH 31, 1996
1997 1997 PERIOD 1996 1996 PERIOD
-------------- -------------- -------- -------------- -------------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Sales.............. $546.5 $158.9 $705.4 $543.1 $132.2 $675.3
Costs and
expenses.......... 490.6 151.0 641.6 499.4 124.4 623.8
-------------- -------------- -------- -------------- -------------- --------
Operating income .. $ 55.9 $ 7.9 $ 63.8 $ 43.7 $ 7.8 $ 51.5
============== ============== ======== ============== ============== ========
EBITDA ............ $ 78.1 $ 15.7 $ 93.8 $ 71.8 $ 12.8 $ 84.6
============== ============== ======== ============== ============== ========
</TABLE>
Sales for the 1997 period increased to $705.4 million from $675.3 million
for the 1996 period. Operating income increased to $63.8 million in the 1997
period from $51.5 million in the 1996 period. Operating income is not
directly comparable between the periods as a result of the effects of
valuation of assets and liabilities in accordance with Accounting Principles
Opinion No. 16.
The sales increase in the 1997 period was primarily attributable to sales
of the Loral Acquired Businesses which increased by $18.1 million to $531.4
million in the 1997 period as compared to $513.3 million in the 1996 period.
This sales increase was primarily attributable to increased sales volume on
E2-C antenna program, the E2-C and F-14 display systems and passive microwave
components, additional production and shipments on CHBDL and UAV programs,
and partially offset by lower sales volume on the U-2 Program. Additionally,
sales of Communication Systems --East increased by $12.0 million to $174.0
million in the current period from $162.0 million in the 1996 period, and
were primarily attributable to increased sales of power supplies, the GEMnet
product line and the P3-C Repair Depot.
Operating income increased by 23.9% to $63.8 million in the 1997 period
from $51.5 million in the 1996 period. Operating income as a percentage of
sales increased to 9.0% in the 1997 period as compared to 7.6% in the 1996
period. The increase in operating income was largely attributable to cost
reductions, increased sales volume of the Loral Acquired Businesses and
operating improvements at Communications Systems -- East. Operating income
for the 1997 period also reflected fourth quarter cost of sales of $3.3
million related to on-going certification efforts for the Company's EDS
contract. Excluding these EDS costs, operating income would have been $67.1
million for the 1997 period and operating income as a percentage of sales
would have been 9.5%.
32
<PAGE>
EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs).
EBITDA is not a substitute for operating income, net income or cash flows
from operating activities as determined in accordance with generally accepted
accounting principles as a measure of profitability or liquidity. EBITDA is
presented as additional information because management believes it to be a
useful indicator of the Company's ability to meet debt service and capital
expenditure requirements. EBITDA for the 1997 period increased by $9.2
million to $93.8 million from $84.6 million from the 1996 period. EBITDA
margin, defined as EBITDA as a percentage of sales, increased to 13.3% for
the 1997 period from 12.5% for the 1996 period. The increases in EBITDA and
EBITDA margin were attributable to the items affecting the trends in
operating income between the 1997 period and 1996 period discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The results of operations of the Loral Acquired Businesses are reflected
in the results of operations of the Predecessor Company beginning on April 1,
1996, the effective date of that acquisition by Lockheed Martin. During 1996,
sales increased to $543.1 million from $166.8 million in 1995. Operating
income increased to $43.7 million compared with $4.7 million in 1995. Net
income increased to $11.7 million as compared to a net loss of $1.0 million
in 1995. The Loral Acquired Businesses contributed $13.6 million to net
income for the year ended December 31, 1996.
The sales increase in 1996 was attributable to the sales of the Loral
Acquired Businesses which contributed $381.1 million of the increase. Sales
of Communication Systems -East decreased in 1996 by $4.8 million as compared
to 1995 primarily due to lower volume on Aegis power supplies and SIGINT
system production, partially offset by Local Management Device/Key Processor
("LMD/KP") production startup.
The increase in 1996 operating income was largely attributable to the
Loral Acquired Businesses, which contributed $36.9 million of the increase.
Communication Systems -East operating income in 1996 increased $2.2 million
primarily due to improved operating performance on the Shipboard Telephone
Communications ("STC-2") program partially offset by increased costs on the
Space Station contract. As a percentage of sales, operating income increased
to 8.0% from 2.8%. This increase is attributable to the improvement in
Communication Systems -- East noted above, higher contract margins and
operating improvements in the Loral Acquired Businesses.
Allocated interest expense increased to $24.2 million in 1996 from $4.5
million in 1995 due primarily to the acquisition of the Loral Acquired
Businesses, which was assumed to be fully financed by debt, coupled with a
higher debt-to-equity ratio used in the allocation for Communication Systems
- -- East. See Note 9 to Consolidated (Combined) Financial Statements.
The effective income tax rate declined to 40% in 1996 as compared to 681%
in 1995. The 1995 effective rate was significantly impacted by non-deductible
amortization of costs in excess of net assets acquired. As a percentage of
income subject to tax, such amortization declined significantly in 1996.
LIQUIDITY AND CAPITAL RESOURCES
THE L-3 ACQUISITION
Effective April 1, 1997, the Company purchased the Businesses from
Lockheed Martin for $503.8 million, after a purchase price adjustment of
$21.2 million and acquisition costs of $8.0 million. On November 5, 1997 the
L-3 Acquisition Agreement was amended to finalize the purchase price
adjustment which amounted to $21.2 million of which $15.9 million was
received on April 30, 1997 and $5.3 million was received on November 7, 1997,
plus interest thereon. The amendment also included the assumption by the
Company of Lockheed Martin's rights and obligations under a contract for the
U.S. Army's Command and Control Vehicle ("C(2)V") Mission Module Systems
("MMS"), for which the Company received a cash payment of $12.2 million from
Lockheed Martin.
FINANCING
The L-3 Acquisition was funded by a combination of debt and equity. The
equity was provided by the Lehman Partnership, the Senior Management and $45
million by Lockheed Martin, which Lockheed
33
<PAGE>
Martin received as partial consideration for the L-3 Acquisition. The debt
consisted of $175 million of term loans facility under the Senior Credit
Facilities and $225 million of the 1997 Notes. The required principal
payments under the Term Loans Facilities are: $5.0 million in 1998, $11.0
million in 1999, $19.0 million in 2000, $25.0 million in 2001, $33.2 million
in 2002, $20.0 million in 2003, and $25.2 million in 2004, $24.9 million
2005, and $8.7 million in 2006. Interest payments on the Term Loan Facilities
vary in accordance with the type of borrowings and are made at a minimum
every three months. At December 31, 1997, the Senior Credit Facilities also
included a $100.0 million Revolving Credit Facility. In February 1998, the
Senior Credit Facilities were amended to, among other things, increase the
amount available under the revolving credit facility to $200.0 million, waive
certain excess cash flow prepayments, as defined, otherwise required, and
permit the incurrence of up to an additional $150.0 million of subordinated
debt. Other than upon a change of control or the occurrence of certain asset
sales, L-3 Communications will not be required to repurchase the 1997 Notes
until maturity on May 1, 2007. L-3 Communications is required to make
semi-annual interest payments with respect to the 1997 Notes.
The Company has a substantial amount of indebtedness. Based upon the
current level of operations, management believes that the Company's cash flow
from operations, together with available borrowings under the Revolving
Credit Facility, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, research and development expenditures,
program and other discretionary investments, interest payments and scheduled
principal payments for the foreseeable future including at least the next
three years. There can be no assurance, however, that the Company's business
will continue to generate cash flow at or above current levels or that
currently anticipated improvements will be achieved. If the Company is unable
to generate sufficient cash flow from operations in the future to service its
debt, it may be required to sell assets, reduce capital expenditures,
refinance all or a portion of its existing debt or obtain additional
financing. The Company's ability to make scheduled principal payments, to pay
interest on or to refinance its indebtedness depends on its future
performance and financial results, which, to a certain extent, are subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. There can be no assurance that sufficient funds
will be available to enable the Company to service its indebtedness,
including the 1997 Notes and the Notes, or make necessary capital
expenditures and program and discretionary investments.
On November 5, 1997, L-3 Communications completed its exchange offer
relating to the 1997 Notes and the holders of the 1997 Notes received
registered securities. The 1997 Notes are redeemable at the option of L-3
Communications, in whole or in part, at any time on or after May 1, 2002, at
various redemption prices plus accrued and unpaid interest to the applicable
redemption date. In addition, prior to May 1, 2000, L-3 Communications may
redeem up to 35% of the aggregate principal amount of the 1997 Notes at a
redemption price of 109.375% of the principal amount thereof, plus accrued
and unpaid interest to the redemption date with the net cash proceeds of one
or more equity offerings by Holdings that are contributed to L-3
Communications as common equity capital. See "Risk Factors -- Substantial
Leverage".
The Senior Credit Facilities and the 1997 Notes contain financial
covenants, which remain in effect so long as any amount is owed thereunder by
L-3 Communications. The financial covenants under the Senior Credit
Facilities require that (i) L-3 Communications' debt ratio, as defined, be
less than or equal to 5.50 for the quarter ended December 31, 1997, and that
the maximum allowable debt ratio, as defined, thereafter be further reduced
to less than or equal to 3.1 for the quarters ending after June 30, 2002, and
(ii) L-3 Communications' interest coverage ratio, as defined, be at least
1.85 for the quarter ended December 31, 1997, and thereafter increasing the
interest coverage ratio, as defined, to at least 3.10 for any fiscal quarters
ending after June 30, 2002. At December 31, 1997, L-3 Communications was and
has been in compliance with these covenants at all times.
To mitigate risks associated with changing interest rates on certain of
its debt, the Company entered into the interest rate cap and floor contracts
(the "interest rate agreements"). The Company manages exposure to
counterparty credit risk by entering into the interest rate agreements only
with major financial institutions that are expected to perform fully under
the terms of such agreements. Cash payments to (from) the Company and the
counterparties are made at the end of the quarter to the extent
34
<PAGE>
due under the terms of the interest rate agreements. Such payments are
recorded as adjustments to interest expense. The initial costs of the
interest rate agreements are capitalized as debt issue costs and amortized
into interest expense. See Note 8 to the Consolidated (Combined) Financial
Statements.
CASH FLOWS
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
-------------- -------------- ------------------
NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
------------------
1997 1997 1996 1995
-------------- -------------- --------- -------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Net cash from (used in)
operating activities .. $ 73.9 $(16.3) $ 30.7 $ 9.3
Net cash used in
investing activities .. (457.8) (4.3) (298.0) (5.5)
Net cash from financing
activities............. 461.4 20.6 267.3 (3.8)
</TABLE>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Cash provided by
operating activities of the Company for the nine months ended December 31,
1997 was $73.9 million. Cash provided by operations benefited from improved
operating results, effective management of contracts in process and increases
in accrued employment costs. Contracts in process declined by $18.2 million
to $167.2 million from April 1, 1997 to December 31, 1997, and was primarily
attributable to collections of and reductions in the levels of commercial and
affiliate receivables.
Net cash used in operating activities of the Predecessor Company was $16.3
million for the quarter ended March 31, 1997, resulting primarily from the
increase in contracts in process and decrease in current liabilities. Cash
flows used by the Loral Acquired Businesses was $10.2 million. Cash used for
operating activities by Communication Systems -- East amounted to $6.1
million.
Cash provided by operating activities of the Predecessor Company was $30.7
million in 1996 and $9.3 million in 1995. The increase of $21.4 million in
1996 was due primarily to the impact of the Loral Acquired Businesses which
were acquired by Lockheed Martin effective April 1, 1996. Earnings after
adjustment for non-cash items provided $36.7 million, offset by changes in
other operating assets and liabilities. Without the Loral Acquired
Businesses, cash provided by operating activities for Communication
Systems--East increased to $13.7 million in 1996, 46% over 1995.
The Company's current ratio at December 31, 1997 remained constant at 2.0:
1 as compared to the Predecessor Company's current ratio at December 31,
1996.
NET CASH USED IN INVESTING ACTIVITIES: Cash used in investing activities
for the nine months ended December 31, 1997 consisted primarily of $466.3
million paid by the Company for the L-3 Acquisition (See Note 1 to
Consolidated (Combined) Financial Statements); offset by proceeds from the
sale of the Company's Sarasota, Florida property of approximately $9.5
million and cash received in connection with the assumption of obligations
under the C(2)V MMS contract from Lockheed Martin of $12.2 million. During
the year ended December 31, 1996, $287.8 million was paid by the Predecessor
Company for the acquisition of the Loral Acquired Businesses. See Note 4 to
the Consolidated (Combined) Financial Statements. In addition, for the nine
months ended December 31, 1997 and the three months ended March 31, 1997,
$11.9 million and $4.3 million, respectively, was used for capital
expenditures, and $5.1 million and nil, respectively, for purchase of
investments. The Company typically makes capital expenditures related
primarily to improvement of manufacturing facilities and equipment. The
Company expects that its capital expenditures for 1998 will be approximately
$27.0 million.
35
<PAGE>
All transactions between the Businesses and Lockheed Martin have been
accounted as settled in cash at the time such transactions were recorded by
the Businesses. Accordingly, in 1996, cash flows reflect the purchase of the
Loral Acquired Businesses.
NET CASH PROVIDED BY FINANCING ACTIVITIES: Cash from financing activities
of the Company was $461.4 million for the nine months ended December 31,
1997, and was due to the debt incurred and proceeds from the issuance of
common stock which were issued to finance the L-3 Acquisition. See
"--Financing" above. Net cash from financing activities also reflects the
payment of debt issue costs of $15.6 million and $3.0 million of scheduled
debt payments of the Term Loan Facilities.
Prior to the L-3 Acquisition, the Businesses participated in the Lockheed
Martin cash management system, under which all cash was received and all
payments were made by Lockheed Martin. For purposes of the statements of cash
flows, all transactions with Lockheed Martin were deemed to have been settled
in cash at the time they were recorded by the Predecessor Company. Net cash
from (used in) financing activities of the Predecessor Company for the three
months ended March 31, 1997 and the years ended December 31, 1996 and 1995,
were approximately $20.6 million, $267.3 million and ($3.8) million,
respectively, and represent advances from (repayments to) Lockheed Martin,
the Predecessor Company's parent company.
1998 ACQUISITIONS
On February 5, 1998, the Company purchased the assets of STS for $27.0
million in cash, subject to adjustment based upon closing net assets. The
Company used its cash on hand to fund the purchase price.
On February 11, 1998, the Company entered into a definitive agreement to
purchase the assets of ILEX for $51.9 million of cash and additional
consideration based on post-acquisition performance of ILEX.
On December 22, 1997, the Company entered into a definitive agreement to
purchase the assets of Ocean Systems for $67.5 million of cash.
The acquisitions of ILEX and Ocean Systems are expected to close during
the first quarter of 1998. The Company intends to finance the purchase prices
using its cash on hand and available borrowings under its Revolving Credit
Facility.
The Company considers and executes strategic acquisitions on an ongoing
basis and may be evaluating acquisitions or engaged in acquisition
negotiations at any given time. As of the date hereof, the Company has
completed, has reached agreement on or is in discussions regarding certain
acquisitions, in addition to the 1998 Acquisitions, that are either
individually or in the aggregate not material to the financial condition of
results of operations of the Company.
BACKLOG
The Company's funded backlog at December 31, 1997 totaled $516.9 million,
as compared with the Predecessor Company's funded backlog at December 31,
1996 of $542.5 million. Funded orders, on a pro forma basis, for the Company
for 1997 were $711.5 million. The Predecessor Company's funded orders for
1996 were $619.5 million. It is expected that 86.0% of the backlog at
December 31, 1997 will be recorded as sales during 1998. However, there can
be no assurance that the Company's backlog will become revenues in any
particular period, if at all. See "Risk Factors -- Backlog". Approximately
81% of the total backlog at December 31, 1997 was directly or indirectly for
defense contracts for end use by the Government. Approximately $434.0 million
of total backlog was directly or indirectly for U.S. and foreign government
defense contracts, and approximately $19.5 million of total backlog was
directly or indirectly for U.S. and foreign government non-defense contracts.
Foreign customers account for approximately $34.6 million of the total
backlog.
RESEARCH AND DEVELOPMENT
Research and development, including bid and proposal, costs ("R&D costs")
sponsored by the Company was $28.9 million for the nine months ended December
31, 1997. R&D costs sponsored by the
36
<PAGE>
Predecessor Company were $12.0 million, $36.5 million and $9.8 million for
the three months ended March 31, 1997 and the years ended December 31, 1996
and 1995, respectively. The Loral Acquired Businesses sponsored R&D costs of
$5.6 million for the three months ended March 31, 1996 and $21.4 million for
the year ended December 31, 1995. Accordingly, the Company, Predecessor
Company and the Loral Acquired Businesses, in the aggregate, sponsored R&D
costs of $40.9 million, $42.1 million and $31.2 million, respectively, for
the years ended December 31, 1997, 1996 and 1995. Customer-funded research
and development was $117.1 million in 1997, as compared with $153.5 million
for 1996. The decrease in customer-funded research and development in 1997 is
due primarily to research and development programs existing in 1996 which
moved into the production phase during 1997.
CONTINGENCIES
See Note 13 to the Consolidated (Combined) Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set general purpose financial
statements. SFAS No. 131 establishes accounting standards for the way that
public business enterprises report information about operating segments and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. In February
1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits". SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefits plans. It does
not change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when SFAS No. 87 "Employers' Accounting for Pensions", SFAS No. 88
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" and SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" were issued. SFAS
132 suggests combined formats for presentation of pension and other
postretirement benefits disclosures. The Company is currently evaluating the
impact, if any, of SFAS No. 130, SFAS No. 131 and SFAS No. 132.
INFLATION
The effect of inflation on the Company's sales and earnings has not been
significant. Although a majority of the Company's sales are made under
long-term contracts, the selling prices of such contracts, established for
deliveries in the future, generally reflect estimated costs to be incurred in
these future periods. In addition, some contracts provide for price
adjustments through escalation clauses.
OTHER
The Company has assessed its financial and operational systems and is
developing plans to modify and/or replace those systems impacted by the year
2000 issue. A program is currently underway to address all affected systems
with a completion date prior to the year 2000. The Company currently
estimates that the total cost of this program will not in the aggregate be
material to the Company.
37
<PAGE>
BUSINESS
COMPANY OVERVIEW
L-3 is a leading merchant supplier of sophisticated secure communication
systems and specialized communication products including secure, high data
rate communication systems, microwave components, avionics and ocean systems,
and telemetry, instrumentation and space products. These systems and products
are critical elements of virtually all major communication, command and
control, intelligence gathering and space systems. The Company's systems and
specialized products are used to connect a variety of airborne, space, ground
and sea-based communication systems and are incorporated into the
transmission, processing, recording, monitoring and dissemination functions
of these communication systems. The Company's customers include the DoD,
selected Government intelligence agencies, major aerospace/defense prime
contractors, foreign governments and commercial customers. In 1997, L-3 had
pro forma sales of $894.0 million and pro forma EBITDA of $95.1 million. The
Company's pro forma funded backlog as of December 31, 1997 was $638.1
million. These results reflect internal growth as well as the execution of
the Company's strategy of acquiring businesses that complement or extend
L-3's product lines.
The Company's business areas enjoy proprietary technologies and
capabilities and have leading positions in their respective primary markets.
Management has organized the Company's operations into two primary business
areas: Secure Communication Systems and Specialized Communication Products.
In 1997, the Secure Communication Systems and Specialized Communication
Products business areas generated approximately $456.0 million and $438.0
million of pro forma sales, respectively, and $52.3 million and $42.8 million
of pro forma EBITDA, respectively. In addition, the Company is seeking to
expand its products and technologies in commercial markets. See " -- Emerging
Commercial Products" below.
SECURE COMMUNICATION SYSTEMS. L-3 is the established leader in secure,
high data rate communications in support of military and other national
agency reconnaissance and surveillance applications. The Company's Secure
Communication Systems operations are located in Salt Lake City, Utah, Camden,
New Jersey and Shrewsbury, New Jersey. These operations are predominantly
cost plus, sole source contractors supporting long-term programs for the U.S.
Armed Forces and classified customers. The Company's major secure
communication programs and systems include: secure data links for airborne,
satellite, ground-and sea-based information collection and transmission;
strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information and related support contracts
for military and national agency intelligence efforts; as well as secure
telephone and network equipment. The Company believes that it has developed
virtually every high bandwidth data link used by the military for
surveillance and reconnaissance in operation today. L-3 is also a leading
supplier of communication software support services to military and related
government intelligence markets. In addition to these core Government
programs, L-3 is leveraging its technology base by expanding into related
commercial communication equipment markets, including applying its high data
rate communications and archiving technology to the medical image archiving
market and its wireless communication expertise to develop local wireless
loop telecommunications equipment.
SPECIALIZED COMMUNICATION PRODUCTS. This business area includes (i)
Microwave Components, (ii) Avionics and Ocean Systems and (iii) Telemetry,
Instrumentation and Space Products operations of the Company.
Microwave Components. L-3 is the preeminent worldwide supplier of
commercial off-the-shelf, high performance microwave components and frequency
monitoring equipment. L-3's microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. L-3 also provides
state-of-the-art communication components including channel amplifiers and
frequency filters for the commercial communication satellite market.
Approximately 76% of Microwave Components sales is made to commercial
customers, including Loral Space & Communications, Ltd., Motorola, Lucent,
AT&T and Lockheed Martin.
38
<PAGE>
Avionics and Ocean Systems. Avionics and Ocean Systems include the
Company's Aviation Recorders, Display Systems, Antenna Systems and Acoustic
Undersea Warfare Systems operations. L-3 is the world's leading manufacturer
of commercial cockpit voice and flight data recorders ("black boxes"). These
recorders are sold under the Fairchild brand name both on an original
equipment manufacturer ("OEM") basis to aircraft manufacturers as well as
directly to the world's major airlines for their existing fleets of aircraft.
L-3 recorders are also installed on military transport aircraft throughout
the world. L-3 provides military and high-end commercial displays for use on
a number of DoD programs including the F-14, V-22, F-117 and E-2C. Further,
L-3 manufactures high performance surveillance antennas and related equipment
for U.S. Air Force, U.S. Army and U.S. Navy aircraft including the F-15,
F-16, AWACS, E-2C and B-2, as well as the U.K.'s maritime patrol aircraft.
L-3 is also one of the world's leading product suppliers of acoustic undersea
warfare systems and airborne dipping sonar systems to the U.S. and over 20
foreign navies.
Telemetry, Instrumentation and Space Products. The Company's Telemetry,
Instrumentation and Space Products operations develop and manufacture
commercial off-the-shelf, real-time data collection and transmission products
and components for missile, aircraft and space-based electronic systems.
These products are used to gather flight parameter data and other critical
information and transmit it from air or space to the ground. Telemetry
products are also used for range safety and training applications to simulate
battlefield situations. L-3 is also a leading global satellite communications
systems and services provider offering systems and services used in satellite
transmission of voice, video and data.
EMERGING COMMERCIAL PRODUCTS. Building upon its core technical expertise
and capabilities, the Company is seeking to expand into several closely
aligned commercial business areas and applications. Emerging Commercial
Products currently include the following three niche markets: (i) medical
archiving and simulation systems; (ii) local wireless loop telecommunications
equipment; and (iii) airport security equipment. These commercial products
were developed based on technology used in the Company's military businesses
with relatively small incremental financial investments. The Company is
applying its technical capabilities in high data rate communications and
archiving technology developed in its Secure Communication Systems area to
the medical image archiving market through a partnership with GE Medical
Systems. Based on secure, high data rate communications technology also
developed in its Secure Communication Systems area, the Company has developed
local wireless loop telecommunications equipment that is primarily designed
for emerging market countries and rural areas where voice and data
communication infrastructure is inadequate or non-existent. L-3 has completed
the development phase for the local wireless loop telecommunications
equipment and made its initial shipment in January 1998. In addition, the FAA
has awarded the Company a development contract for next generation airport
security equipment for explosive detection. L-3 has shipped two prototype
test units and FAA certification testing is expected to commence in the first
half of 1998. To date, revenues generated from L-3's Emerging Commercial
Products have not been, in the aggregate, material to the Company.
39
<PAGE>
The Company's systems and products are summarized in the following tables:
SECURE COMMUNICATION SYSTEMS (1997 PRO FORMA SALES: $456.0 MILLION)
<TABLE>
<CAPTION>
SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
- ------------------------------------- --------------------------------------- ----------------------------------------
<S> <C> <C>
SECURE HIGH DATA RATE COMMUNICATIONS
o Wideband data links o High performance, secure o Used on aircraft and naval ships and
communication links for interoperable unmanned aerial vehicles with military
tactical communication and and commercial satellites
reconnaissance
SATELLITE COMMUNICATION TERMINALS
o Ground-based satellite o Interoperable, transportable ground o Provide remote personnel with
communication terminals terminals for remote data links to communication links to distant forces
distant segments via commercial or
military satellites
SPACE COMMUNICATION AND SATELLITE CONTROL
o Satellite communication and o On-board satellite external o International Space Station; Earth
tracking systems communications, video systems, solid Observing Satellite; Landsat-7; Space
state recorders and ground support Shuttle; and National Oceanic and
equipment Atmospheric Administration weather
satellites
o Satellite command and control o Software integration, test and o Air Force satellite control network
sustainment and support maintenance support for Air Force and Titan IV launch system
satellite control network;
engineering support for satellite
launch systems
MILITARY COMMUNICATIONS
o Shipboard communication systems o Shipboard and ship-to-ship o Shipboard voice communications systems
communications for Aegis cruisers and destroyers and
fully automated Integrated Radio Room
(IRR) for ship-to-ship communications
on Trident submarines
o Digital battlefield communications o Communications on the move for o Communication systems for U.S. Army
tactical battlefield C(2)V
o Communication software support o Value added, critical software o ASAS, JSTARS and GUARDRAIL
services support for C(3)I systems
INFORMATION SECURITY SYSTEMS
o Secure Telephone Unit (STU o Secure and non-secure voice, data and o Office and battlefield secure and
III)/Secure Terminal Equipment video communication utilizing ISDN non-secure communication for armed
(STE) and ATM commercial network services, intelligence and security
technologies agencies
o Local management device/key o Provides electronic key material o User authorization and recognition and
processor (LMD/KP) accounting, system management and message encryption for secure
audit support functions for secure communication
data communication
o Information processing systems o Custom designed strategic and o Classified military and national
tactical signal intelligence systems agency intelligence efforts
that detect, collect, identify,
analyze and disseminate information
and related support contracts
- ------------------------------------- --------------------------------------- ----------------------------------------
</TABLE>
40
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS (1997 PRO FORMA SALES: $438.0 MILLION)
<TABLE>
<CAPTION>
PRODUCTIONS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
- --------------------------------------- --------------------------------------- ----------------------------------------
<S> <C> <C>
MICROWAVE COMPONENTS
o Passive components, mechanical o Radio transmission, switching and o Broad-band and narrow-band commercial
switches and wireless assemblies conditioning; antenna and base applications (PCS, cellular, SMR, and
station testing and monitoring paging infrastructure) sold under the
Narda brand name; and broad-
band military applications
o Safety products o Radio frequency (RF) monitoring and o Monitor cellular base station and
measurement industrial RF emissions frequency
monitoring
o Semiconductors (diodes, capacitors) o Radio frequency switches, limiters, o Various industrial and military end
voltage control, oscillators, uses, including commercial satellites,
harmonic generators avionics and specialty communication
products
o Satellite and wireless components o Satellite transponder control, o China Sat, Pan Am Sat, Telstar,
(channel amplifiers, transceivers, channel and frequency separation Sirius, Tempo, Tiros, Milstar, GPS and
converters, filters and multiplexers) LandSat
AVIONICS AND OCEAN SYSTEMS
Aviation Recorders
o Solid state cockpit voice and flight o Voice recorders continuously record o Installed on business and commercial
data recorders most recent 30-120 minutes of voice aircraft and certain military
and sounds from cockpit and aircraft transport aircraft; sold to both
inter-communications. Flight data aircraft OEMs and airlines under the
recorders record the last 25 hours of Fairchild brand name
flight parameters
Antenna Systems
o Ultra-wide frequency and advanced o Surveillance; radar detection o F-15, F-16, F-18, E-2C, P-3, C-130,
radar antenna systems and rotary B-2, AWACS, Apache, Cobra, Mirage
joints (France), Maritime Patrol (U.K.) and
Tornado (U.K.)
Display Systems
o Cockpit and mission display systems o High performance, ruggedized flat o E-2C, V-22, F-14, F-117, E-6B, C-130,
panel and cathode ray tube displays AWACS and JSTARS
Ocean Systems
o Airborne dipping sonar systems o Submarine detection and localization o SH-60, SH-2/3, AB-212, EH-101 and Lynx
Helicopters
o Submarine and surface ship towed o Submarine and surface ship detection o SSN, SSBN, DDG-963 and FFG-7
arrays and localization
o Torpedo defense systems o Torpedo detection and jamming o SSN, SSBN and DDG-963
o Mine countermeasure systems o Coastal and route survey o MCDV (Canada)
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
Airborne, Ground and Space Telemetry
o Aircraft, missile and satellite o Real time data acquisition, o JSF, F-15, F-18, F-22, Comanche,
telemetry systems measurement, processing, simulation, Nimrod (U.K.), Tactical Hellfire,
distribution, display and storage for Titan, EELV, A2100 and ATHENA
flight testing
o Training range telemetry systems o Battlefield simulation o Combat simulation
Space Products
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private networks,
systems supplier video and data direct to home uplinks, satellite news
gathering and wideband applications
- --------------------------------------- --------------------------------------- ----------------------------------------
</TABLE>
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INDUSTRY OVERVIEW
The defense industry has recently undergone significant changes
precipitated by ongoing federal budget pressures and new roles and missions
to reflect changing strategic and tactical threats. Since the mid-1980's, the
overall U.S. defense budget has declined in real dollars. In response, the
DoD has focused its resources on enhancing its military readiness, joint
operations and digital command and control communications by incorporating
advanced electronics to improve the performance, reduce operating cost and
extend the life expectancy of its existing and future platforms. The emphasis
on system interoperability, force multipliers and providing battlefield
commanders with real-time data is increasing the electronics content of
nearly all of the major military procurement and research programs. As a
result, the DoD's budget for communications and defense electronics is
expected to grow. According to Federal Sources, an independent private
consulting group, the defense budget for C(3)I is expected to increase from
$31.0 billion in the fiscal year ended September 30, 1997 to $42.0 billion in
the fiscal year ended September 30, 2002, a compound annual growth rate of
6.3%.
The industry has also undergone dramatic consolidation resulting in the
emergence of three dominant prime system contractors (Boeing, Lockheed Martin
and Raytheon). One outgrowth of this consolidation among the remaining major
prime contractors is their desire to limit purchases of products and
sub-systems from one another. However, there are numerous essential products,
components and systems that are not economical for the major prime
contractors to design, develop or manufacture for their own internal use
which creates opportunities for merchant suppliers such as L-3. As the prime
contractors continue to evaluate their core competencies and competitive
position, focusing their resources on larger programs and platforms, the
Company expects the prime contractors to continue to exit non-strategic
business areas and procure these needed elements on more favorable terms from
independent, commercially oriented merchant suppliers. Recent examples of
this trend include divestitures of certain non-core businesses by
AlliedSignal, Ceridian, Lockheed Martin and Raytheon.
The prime contractors' focus on cost control is also driving increased use
of commercial off-the-shelf products for upgrades of existing systems and in
new systems. The Company believes the prime contractors will continue to be
under pressure to reduce their costs and will increasingly seek to focus
their resources and capabilities on major systems, turning to commercially
oriented merchant suppliers to produce sub-systems, components and products.
Going forward, successful merchant suppliers will use their resources to
complement and support, rather than compete with the prime contractors. L-3
anticipates the relationship between the major prime contractors and their
primary suppliers will, as in the automotive and commercial aircraft
industry, develop into critical partnerships encompassing increasingly
greater outsourcing of non-core products and systems by the prime contractors
to their key merchant suppliers and increasing supplier participation in the
development of future programs. Early involvement in the upgrading of
existing systems and the design and engineering of new systems incorporating
these outsourced products will provide mezzanine suppliers, including the
Company, with a competitive advantage in securing new business and provide
the prime contractors with significant cost reduction opportunities through
coordination of the design, development and manufacturing processes.
BUSINESS STRATEGY
In 1997, management successfully integrated the business units of Lockheed
Martin it acquired in the L-3 Acquisition and enhanced the Company's
operating efficiency through reduced overhead expenses and facility
rationalization. These efforts resulted in improvements in sales,
profitability and competitive contract award win rates. Going forward, L-3
intends to leverage its market position, diverse program base and favorable
mix of cost plus to fixed price contracts to enhance its profitability and to
establish itself as the premier merchant supplier of communication systems
and products to the major prime contractors in the aerospace/defense industry
as well as the Government. The Company's strategy to continue to achieve its
objectives includes:
o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. Management has developed
strong relationships with virtually all of the prime contractors, the DoD
and other major government agencies, enabling L-3 to identify business
opportunities and anticipate customer needs. As an independent merchant
supplier, the Company anticipates its growth will be driven by expanding
its share of existing
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programs and by participating in new programs. Management identifies
opportunities where it believes it will be able to use its strong
relationships to increase its business presence and allow its customers to
reduce their costs. The Company also expects to benefit from increased
outsourcing by prime contractors who in the past may have limited their
purchases to captive suppliers and who are now expected to view L-3's
capabilities on a more favorable basis given its status as an independent
company. L-3's independent status positions it to be the desired merchant
supplier to multiple bidders on prime contract bids. As an example of the
Company's merchant supplier strategy, L-3 equipment is included in all
three prime contractor bids for the ASTOR program in the United Kingdom
and both prime contractor bids for the DoD's JASSM program.
o SUPPORT CUSTOMER REQUIREMENTS. A significant portion of L-3's sales
are derived from high-priority, long-term programs and from programs for
which the Company has been the incumbent supplier, and in many cases acted
as the sole provider, over many years. Approximately 65% of the Company's
total pro forma 1997 sales were generated from sole source contracts.
L-3's customer satisfaction and excellent performance record are evidenced
by its performance-based award fees exceeding 90% on average over the past
two years. Management believes prime contractors will increasingly award
long-term, sole source, outsourcing contracts to the merchant supplier
they believe is most capable on the basis of quality, responsiveness,
design, engineering and program management support as well as cost.
Reflecting L-3's strong competitive position, the Company (excluding the
1998 Acquisitions) has experienced a contract award win rate in 1997 in
excess of 60% on new competitive contracts for which it competes and in
excess of 90% on contracts for which it is the incumbent. The Company
intends to continue to align its research and development, manufacturing
and new business efforts to complement its customers' requirements and
provide state-of-the-art products.
o ENHANCE OPERATING MARGINS. Since the L-3 Acquisition in April 1997,
management has reduced corporate administrative and facilities expenses,
increased sales and improved competitive contract award win rates.
Enhancement of operating margins was primarily due to efficient management
and elimination of significant corporate expense allocations which existed
prior to the L-3 Acquisition. Pro forma EBITDA (excluding the 1998
Acquisitions) as a percentage of sales improved from 12.5% in 1996 to
13.4% in 1997. Management intends to continue to enhance its operating
performance by reducing overhead expenses, continuing consolidation and
increasing productivity.
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. L-3 has developed
strong, proprietary technical capabilities that have enabled it to capture
a number one or two market position in most of its key business areas,
including secure, high data rate communications systems, solid state
aviation recorders, telemetry, instrumentation and space products,
advanced antenna systems and high performance microwave components. Over
the past three years, the Company has invested over $150.0 million in
Company-sponsored independent research and development, including bid and
proposal costs, in addition to making substantial investments in its
technical and manufacturing resources. Further, the Company has a highly
skilled workforce including approximately 2,000 engineers. Management is
applying the Company's technical expertise and capabilities into several
closely aligned commercial business areas and applications, such as
medical imaging archive management, wireless telephony and airport
security equipment and will continue to explore other similar commercial
opportunities.
o MAINTAIN DIVERSIFIED BUSINESS MIX. The Company enjoys a diverse
business mix with a limited program exposure, a favorable balance of cost
plus and fixed price contracts, a significant sole source follow-on
business and an attractive customer profile. The Company's largest
program, representing 10% of 1997 pro forma sales, is a long-term, sole
source, cost plus contract for the U-2 Program. No other program
represented more than 5% of pro forma 1997 sales. Further, the Company's
pro forma sales mix of contracts in 1997 was 36% cost plus and 64% fixed
price, providing the Company with a favorable mix of predictable
profitability (cost plus) and higher margin (fixed price) business. L-3
also enjoys an attractive customer mix of defense and commercial business,
with DoD related sales accounting for 62% and commercial and federal
(non-DoD) sales accounting for 38% of 1997 pro forma sales. The Company
intends to leverage this favorable business profile to expand its merchant
supplier business base.
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o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent industry
consolidation has essentially eliminated traditional middle-tier
aerospace/defense companies. This level of consolidation is now beginning
to draw the concern of the DoD and federal anti-trust regulators. In 1997,
a number of mezzanine companies were sold: Computing Devices International
division of Ceridian to General Dynamics, Kaman Sciences to ITT, BDM to
TRW and TASC Inc., a subsidiary of Primark Corporation, to Litton. As a
result, the Company anticipates that the consolidation of the smaller
participants in the defense industry will create attractive complementary
acquisition candidates for L-3 in the future as these companies continue
to evaluate their core competencies and competitive position. L-3 intends
to vertically enhance its product base through internal research and
development efforts as well as selective acquisitions and horizontally add
to its product base through acquisitions in areas synergistic with L-3's
present technology. The Company seeks to acquire potential targets with
the following criteria: (i) significant market position in its business
area, (ii) product offerings which complement and/or extend those of L-3
and (iii) positive future growth and earnings prospects.
RECENT DEVELOPMENTS
Since the formation of the Company in April 1997, the Company has actively
pursued its acquisition strategy. The Company recently purchased the assets
and liabilities of STS and announced the pending acquisitions of ILEX and
Ocean Systems. The total purchase price for these acquisitions is $146.4
million of cash, subject to certain post-closing adjustments, and in one case
certain additional consideration based on post-closing performance. The
Company intends to finance these acquisitions through the use of its existing
cash balances as well as through borrowings under the $375.0 million Senior
Credit Facilities. These three businesses complement and extend L-3's product
offerings.
ILEX Systems
On , 1998, L-3 Communications purchased the assets of ILEX for
$51.9 million in cash plus additional consideration based on post-closing
performance which could include up to 540,000 shares of Common Stock over the
next three years. In 1997, ILEX had sales of $63.5 million. ILEX is a leading
supplier of communication software support services to military and related
government intelligence markets. ILEX also provides environmental consulting,
software and systems engineering services and complementary products to
several commercial markets. ILEX complements L-3's Secure Communication
Systems business area by adding software expertise in critical C(3)I programs
and increasing the number of the Company's skilled workforce by adding
approximately 500 software system engineers and scientists.
Ocean Systems
On , 1998, L-3 Communications purchased the assets of Ocean Systems
for $67.5 million in cash. In 1997, Ocean Systems had sales of $73.0 million.
Ocean Systems is one of the world's leading products suppliers of acoustic
undersea warfare systems, having designed, manufactured and supported a broad
range of compact, lightweight, high performance acoustic systems for navies
around the world for over 40 years. Ocean Systems is the leading products
supplier of airborne dipping sonar systems in the world with substantial
market share of the sector and systems in service with the U.S. and 20
foreign navies. Ocean Systems also produces several sea systems products
including towed array sonar, integrated side-looking sonar, acoustic jammers,
mine detection and torpedo defense systems and supplies commercial navigation
and hydrographic survey systems worldwide. Ocean Systems is further supported
by ELAC located in Kiel, Germany. ELAC manufactures a broad range of naval
defense products including submarine, torpedo and navigation sonars as well
as survey and navigation systems for the commercial nautical products
industry. Ocean Systems expands L-3's leading products and capabilities into
the undersea and anti-submarine warfare market place.
Satellite Transmission Systems
On February 5, 1998, L-3 Communications purchased the assets of STS of
California Microwave, Inc. for $27.0 million. For the fiscal year ended June
30, 1997, STS had sales of $68.0 million. STS is a leading global satellite
communications systems and services provider. Its customers include foreign
post,
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telephone and telegraph administrations, domestic and international prime
communications infrastructure contractors, telecommunication and satellite
service providers, broadcasters and media-related companies, government
agencies and large corporations. STS expands L-3's ability to apply its
products and provides networking capability to L-3's wireless communications
products business. STS also opens new opportunities in broader, international
markets.
The Company considers and executes strategic acquisitions on an ongoing
basis and may be evaluating acquisitions or engaged in acquisition
negotiations at any given time. As of the date hereof, the Company has
completed, has reached agreement on or is in discussions regarding certain
acquisitions, in addition to the 1998 Acquisitions, that are either
individually or in the aggregate not material to the financial condition or
results of operations of the Company.
HISTORY
Holdings and L-3 Communications were formed in April 1997 by Mr. Frank C.
Lanza, the former President and Chief Operating Officer of Loral, Mr. Robert
V. LaPenta, the former Senior Vice President and Controller of Loral
(collectively, "Senior Management"), Lehman Brothers Capital Partners III,
L.P. and its affiliates (the "Lehman Partnership") and Lockheed Martin to
acquire (the "L-3 Acquisition") substantially all of the assets and certain
liabilities of (i) nine business units previously purchased by Lockheed
Martin as part of its acquisition of Loral in April 1996 (the "Loral Acquired
Businesses") and (ii) one business unit, Communication Systems -- East,
purchased by Lockheed Martin as part of its acquisition of GE Aerospace in
April 1993 (collectively, the "Businesses"). L-3 Communications is a
wholly-owned subsidiary of Holdings. Prior to the consummation of the Common
Stock Offering, Messrs. Lanza and LaPenta and certain other members of
management collectively own 15.9%; the Lehman Partnership owns 50.1%; and
Lockheed Martin owns 34.0% of the outstanding capital stock of Holdings.
The Company's executive offices are located at 600 Third Avenue, New York,
New York, 10016, and the telephone number at that address is 212-697-1111.
PRODUCTS AND SERVICES
SECURE COMMUNICATION SYSTEMS
L-3 is a leader in communication systems for high performance intelligence
collection, imagery processing and ground, air, sea and satellite
communications for the DoD and other government agencies. The Salt Lake City
operation provides secure, high data rate, real-time communication systems
for surveillance, reconnaissance and other intelligence collection systems.
The Camden operation designs, develops, produces and integrates communication
systems and support equipment for space, ground and naval applications. The
Shrewsbury operation provides communication software support services to
military and related government intelligence markets. Product lines of the
Secure Communication Systems business include high data rate communications
links, satellite communications ("SATCOM") terminals, Navy vessel
communication systems, space communications and satellite control systems,
signal intelligence information processing systems, information security
systems, tactical battlefield sensor systems and commercial communication
systems.
o HIGH DATA RATE COMMUNICATIONS
The Company is a technology leader in high data rate, covert,
jam-resistant microwave communications in support of military and other
national agency reconnaissance and surveillance applications. L-3's product
line covers a full range of tactical and strategic secure point-to-point and
relay data transmission systems, products and support services that conform
to military and intelligence specifications. The Company's systems and
products are capable of providing battlefield commanders with real time,
secure surveillance and targeting information and were used extensively by
U.S. armed forces in the Persian Gulf war.
During the 1980s, largely based on its prior experience with command and
control guidance systems for remotely-piloted vehicles, L-3 developed its
current family of strategic and tactical data links,
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including its Modular Interoperable Data Link ("MIDL") systems and Modular
Interoperable Surface Terminals ("MIST"). MIDL and MIST technologies are
considered virtual DoD standards in terms of data link hardware. The
Company's primary focus is spread spectrum communication (based on CDMA
technology), which involves transmitting a data signal with a high rate noise
signal to make it difficult to detect by others, and then re-capturing the
signal and removing the noise. The Company's data links are capable of
providing information at over 200 Mb/s.
L-3 provides these secure high band width products to the U.S. Air Force,
Navy, Army and various Government agencies, many through long-term sole
source programs. The scope of these programs include air-to-ground,
air-to-air, ground-to-air and satellite communications. Government programs
include: U-2 Support Program, Common High-Band Width Data Link Surface
Terminal ("CHBDLST"), Battle Group Passive Horizon Extension System
("BGPHES"), Light Airborne Multi-Purpose System ("LAMPS"), TriBand SATCOM
Subsystem ("TSS"), major unmanned aerial vehicle ("UAV") programs and Direct
Air-Satellite Relay ("DASR").
O SATELLITE COMMUNICATION TERMINALS
L-3 provides ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals
to communicate with commercial, military and international satellites. These
terminals provide remote personnel with anywhere, anytime effective
communication capability and provide communications links to distant forces.
The Company's TriBand SATCOM Subsystem ("TSS") employs a 6.25 meter tactical
dish with a single point feed that provides C, Ku and X band communication to
support the U.S. Army. The Company also offers an 11.3 meter dish which is
transportable on two C-130 aircraft. The SHF Portable Terminal System ("PTS")
is a lightweight (28 lbs.), manportable terminal, which communicates through
DSCS, NATO or SKYNET satellites and brings unprecedented connectivity to
small military tactical units and mobile command posts. L-3 delivered 14 of
these terminals for use by NATO forces in Bosnia.
O SPACE COMMUNICATIONS AND SATELLITE CONTROL
Continuing L-3's tradition of providing communications for every manned
U.S. space flight since Mercury, the Company is currently designing and
testing three communication subsystems for the International Space Station
("ISS"). These systems will control all ISS radio frequency ("RF")
communications and external video activities. The Company also provides
solid-state recorders and memory units for data capture, storage, transfer
and retrieval for space applications. The standard NASA tape recorder, which
was developed and produced by the Company, has completed over four million
hours of service without a mission failure. Current programs include
recorders for the National Oceanic & Atmospheric Administration ("NOAA")
weather satellites, the Earth Observing Satellite ("EOS"), AM spacecraft and
Landsat-7 Earth-monitoring spacecraft. The Company also provides space and
satellite system simulation, satellite operations and computer system
training, depot support, network engineering, resource scheduling, launch
system engineering, support, software integration and test through cost-plus
contracts with the U.S. Air Force.
O MILITARY COMMUNICATIONS
The Company provides integrated, computer controlled switching systems for
the interior and exterior voice and data needs of today's Navy military
vessels. The Company's products include Integrated Voice Communication
Systems ("IVCS") for Aegis cruisers and destroyers and the Integrated Radio
Room ("IRR") for Trident class submarines, the first computer controlled
communications center in a submarine. These products integrate the intercom,
tactical and administrative communications network into one system accessing
various types of communication terminals throughout the ship. The Company's
MarCom 2000 secure digital switching system is in development for the Los
Angeles class attack submarine and provides an integrated approach to the
specialized voice and data communications needs of a shipboard environment
for internal and external communications, command and control and air traffic
control. The Company also offers on-board, high data rate communications
systems which provide a data link for carrier battle groups which are
interoperable with the U.S. Air Force's surveillance/
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reconnaissance terminal platforms. The Company provides the US Army's Command
and Control Vehicle ("C2V") Mission Module Systems ("MMS"). MMS provides the
"communications on the move" capability needed for the digital battlefield by
packaging advanced communications into a modified Bradley Fighting Vehicle.
The Company is a proven supplier of superior technological expertise to the
DoD, including its contractors and related government intelligence agencies.
O INFORMATION SECURITY SYSTEMS
The Company has produced more than 100,000 secure telephone units ("STU
III") which are in use today by the U.S. Armed Forces to provide secure
telephone capabilities for classified confidential communication over public
commercial telephone networks. The Company has begun producing the
next-generation digital, ISDN-compatible STE. STE provides clearer voice and
thirteen-times faster data/fax transmission capability than the STU III. STE
also supports secure conference calls and secure video teleconferencing. STE
uses a CryptoCard security system which consists of a small, portable,
cryptographic module mounted on a PCMCIA card holding the algorithms, keys
and personalized credentials to identify its user for secure communications
access. The Company also provides LMD/KP which is the workstation component
of the Government's Electronic Key Management System ("EKMS"), the next
generation of information security systems. EKMS is the Government system to
replace current "paper" secret keys used to secure government communications
with "electronic" secret keys. LMD/KP is the component of the EKMS which
produces and distributes the electronic keys. L-3 also develops specialized
strategic and tactical SIGINT to detect, acquire, collect, and process
information derived from electronic sources. These systems are used by
classified customers for intelligence gathering and require high speed
digital signal processing and high density custom hardware designs.
O TACTICAL SECURITY SYSTEMS
The Company manufactures the IREMBASS, an unattended ground sensor system
which uses sensors placed along likely avenues of enemy approach or intrusion
in a battlefield environment. The sensors respond to seismic and acoustic
disturbances, infrared energy and magnetic field changes and thus detect
enemy activities. IREMBASS is currently in use by U.S. Special Operations
Forces, the U.S. Army's Light Divisions and several foreign governments. The
Company also provides the Intrusion Detection Early Warning System ("IDEWS"),
a sensor system designed for platoon-level physical security applications.
Weighing less than two pounds, this sensor system is ideal for covert
perimeter intrusion detection, border protection and airfield or military
installation security.
SPECIALIZED COMMUNICATION PRODUCTS
MICROWAVE COMPONENTS
L-3 is the pre-eminent worldwide supplier of commercial off-the-shelf,
high performance radio frequency ("RF") microwave components, assemblies and
instruments supplying the wireless communications, industrial and military
markets. The Company is also a leading provider of state-of-the-art
space-qualified commercial satellite and strategic military RF products. L-3
sells many of these components under the well-recognized Narda brand name and
through the world's most comprehensive catalogue of standard, stocked
hardware. L-3 also sells its products through a direct sales force and an
extensive network of premier market representatives. Specific catalog
offerings include wireless products, electro-mechanical switches, power
dividers and hybrids, couplers/detectors, attenuators, terminations and phase
shifters, isolators and circulators, adapters, control products, sources,
mixers, waveguide components, RF safety products, power meters/monitors and
custom passive products. The Company operates from two sites, Hauppauge, New
York ("Narda East"), and Sacramento, California ("Narda West").
Narda East represents approximately 65% of L-3's microwave sales volume,
offering high performance microwave components, networks and instruments to
the wireless, industrial and military communications markets. Narda East's
products can be divided into three major categories: passive components,
higher level wireless assemblies/monitoring systems and safety instruments.
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Passive components are generally purchased in narrow frequency
configurations by wireless OEM equipment manufacturers and service providers.
Similar components are purchased in wide frequency configurations by first
tier military equipment suppliers. Commercial applications for Narda
components are primarily in cellular or PCS base stations. Narda also
manufactures higher level assemblies for wireless base stations and the
paging industry. These products include communication antenna test sets,
devices that monitor reflected power to determine if a cellular base station
antenna is working and whether the base station radios are operating at peak
power levels. Military applications include general procurement for test
equipment or electronic surveillance and countermeasure systems. RF safety
products are instruments which are used to measure the level of non-ionizing
radiation in a given area, i.e., from an antenna, test set or other emitting
source, and determine whether human exposure limits are within federal
standards.
Narda West designs and manufactures state-of-the-art space-qualified and
wireless components. Space qualified components include channel amplifiers
for satellite transponder control and diplexers/ multiplexers, which are used
to separate various signals and direct them to the appropriate other sections
of the payload. Narda West's primary areas of focus are communications
satellite payload products. Channel amplifiers constitute Narda West's main
satellite product. These components amplify the weak signals received from
earth stations by a factor of 1 million, and then drive the power amplifier
tubes that broadcast the signal back to earth. These products are sold to
satellite manufacturers and offer lower cost, lower weight and improved
performance versus in-house alternatives. On a typical satellite, for which
there are 20 to 50 channel amps, Narda West's channel amps offer cost savings
of up to 60% (up to $1 million per satellite) and decrease launch weight by
up to 25 kilograms.
Narda West products include wireless microwave components for cellular and
PCS base station applications. These products include filters used to
transmit and receive channel separation as well as ferrite components, which
isolate certain microwave functions, thereby preventing undesired signal
interaction. Other products include a wide variety of high-reliability power
splitters, combiners and filters for spacecraft and launch vehicles, such as
LLV, Tiros, THAAD, Mars Surveyor, Peacekeeper, Galileo, Skynet, Cassini,
Milstar, Space Shuttle, LandSat, FltSatCom, GPS, GPS Block IIR, IUS, ACE,
SMEX and certain classified programs. The balance of the operation's business
is of an historical nature and involves wideband filters used for electronic
warfare applications.
AVIONICS AND OCEAN SYSTEMS
O AVIATION RECORDERS
L-3 manufactures commercial solid-state crash-protected aviation recorders
("black boxes") under the Fairchild brand name, and has delivered over 40,000
flight recorders to airplane manufacturers and airlines around the world.
Recorders are mandated and regulated by various worldwide agencies for
commercial airlines and a large portion of business aviation aircraft.
Management anticipates growth opportunities in Aviation Recorders as a result
of the current high level of orders for new commercial aircraft. Expansion
into the military market shows continued growth opportunities. L-3 Recorders
were recently selected for installation on the fleet of the Royal Australian
Air Force and Royal Australian Army transport aircraft and are currently
being installed on the U.S. Navy C-9 aircraft. There are two types of
recorders: (i) the Cockpit Voice Recorder ("CVR") which records the last 30
to 120 minutes of crew conversation and ambient sounds from the cockpit and
(ii) the Flight Data Recorder ("FDR") which records the last 25 hours of
aircraft flight parameters such as speed, altitude, acceleration, thrust from
each engine and direction of the flight in its final moments. Recorders are
highly ruggedized instruments, designed to absorb the shock equivalent to
that of an object traveling at 268 knots stopping in 18 inches, fire
resistant to 1,100 degrees centigrade and pressure resistant to 20,000 feet
undersea for 30 days. Management believes that the Company has the leading
worldwide market position for CVR's and FDR's.
O ANTENNA SYSTEMS
Under the Randtron brand name, L-3 produces high performance antennas
designed for surveillance, high-resolution, ultra-wide frequency bands,
detection of low radar cross section ("LRCS") targets, LRCS
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installations, severe environmental applications and polarization diversity.
L-3's main antenna product is a sophisticated 24-foot diameter antenna
operational on all E-2C aircraft. This airborne antenna consists of a 24-foot
rotating aerodynamic radome containing a UHF surveillance radar antenna, IFF
antenna and forward and aft auxiliary antennas. Production of this antenna
began in the early 1980s, and production is planned beyond 2000 for the E-2C,
P-3 and C-130 AEW aircraft. The replacement for this antenna is a very
adaptive radar currently under development for introduction early in the next
decade. L-3 also produces broad-band antennas for a variety of tactical
aircraft and rotary joints for the AWAC's and E-2C's antenna. Randtron has
delivered over 2,000 aircraft sets of antennas and has a current backlog
through 1999.
O DISPLAY SYSTEMS
L-3 specializes in the design, development and manufacture of ruggedized
display system solutions for military and high-end commercial applications.
L-3's current product lines include cathode ray tubes ("CRTs"), the Actiview
family of active matrix liquid crystal displays ("AMLCD"), and a family of
high performance Display Processing systems. L-3 manufactures flat-panel
displays that are used on platforms such as E-2C, F-117, and the LCAC
(Landing Craft Air Cushion) vehicle. Recent new contracts for flat-panel
displays include the SH-60J helicopter and the C-130 Senior Scout. L-3 also
manufactures CRT displays for the E-2C Hawkeye, V-22 Osprey, and F-14 Tomcat
and electronics used in aircraft anti-lock braking systems.
O OCEAN SYSTEMS
The Company is one of the world's leading suppliers of acoustic undersea
warfare systems, having designed, manufactured and supported a broad range of
compact, lightweight, high performance acoustic systems for navies around the
world for over forty years. This experience spans a wide range of platforms,
including helicopters, submarines and surface ships, that employ the
Company's sonar systems and countermeasures.
TELEMETRY, INSTRUMENTATION AND SPACE
The Company is a leader in component products and systems used in
telemetry and instrumentation for airborne applications such as satellites,
aircraft, UAVs, launch vehicles, guided missiles, projectiles and targets.
Telemetry involves the collection of data from these platforms, its
transmission to ground stations for analysis, and its further dissemination
or transportation to another platform. A principal use of this telemetry data
is to measure as many as 1,000 different parameters of the platform's
operation (in much the same way as a flight data recorder on an airplane
measures various flight parameters) and transmit this data to the ground.
Additionally, for satellite platforms, the equipment also acquires the
command uplink that controls the satellite and transmits the necessary data
for ground processing. In these applications, high reliability of components
is crucial because of the high cost of satellite repair and the length of
uninterrupted service required. Telemetry also provides the data to terminate
the flight of missiles and rockets under errant conditions and/or at the end
of a mission. Telemetry and command/control products are currently provided
on missile programs such as AMRAAM, ASRAAM, AIM-9X, JASSM, JDAM, FOTT, ATACMS
and PAC-3, as well as satellite programs such as GPS BLK IIF, GLOBALSTAR,
EARTHWATCH, SBIRS, LUNAR PROSPECTOR and MTSAT.
O AIRBORNE, GROUND AND SPACE TELEMETRY
The Company provides airborne equipment and data link systems to gather
critical information and to process, format and transmit it to the ground
through communication data links from a communications satellite, spacecraft,
aircraft and/or missile. These products are available in both COTS and custom
configurations. Major customers are the major defense contractors who
manufacture aircraft, missiles, warheads, launch vehicles, munitions and
bombs. Ground instrumentation activity occurs at the ground station where the
serial stream of combined data is received and decoded in real-time, as it is
received
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from the airborne platform. Data can be encrypted and decrypted during this
process, an additional expertise that the Company offers. The Company
recently introduced the NeTstar satellite ground station, which collapses
racks of satellite RF receivers, demodulators and related units into a PC.
O SPACE PRODUCTS
L-3 offers value-added solutions that require complex product integration,
rich software content and comprehensive support to its customers. The Company
focuses on the following niches within the satellite ground segment equipment
market: telephony, video broadcasting and multimedia. The Company's customers
include foreign PTT's, domestic and international prime communications
infrastructure contractors, telecommunications or satellite service
providers, broadcasters and media-related companies.
EMERGING COMMERCIAL PRODUCTS
O MEDICAL ARCHIVING AND SIMULATION SYSTEMS
The Company and GE Medical Systems have jointly developed
GEMnet(Trademark), a cardiac image management and archive system.
GEMnet(Trademark) eliminates the use of cinefilm in a cardiac catheterization
laboratory by providing a direct digital connection to the laboratory. The
system provides for acquisition, display, analysis and short-and long-term
archive of cardiac patient studies, providing significant cost savings and
process improvements to the hospital. EchoNet(Trademark) is a digital archive
management and review system designed specifically for the echocardiology
profession. Echonet(Trademark) is the result of an exclusive strategic
partnership with Heartlab, Inc. The system accepts digital echocardiology
studies from a variety of currently available ultrasound systems, manages the
studies, making them available on a network, and allows the physicians and
technicians to become more productive. DICOMView(Trademark) is a multimodal,
low-cost viewing station designed for use with standard IBM-compatible
personal computer platforms. It makes full motion, full fidelity diagnostic
images accessible for the cardiologist, surgeon and referring physician.
EchoNet(Trademark) and DICOMView(Trademark) are trademarks of Heartlab, Inc.
GEMnet(Trademark) is a trademark of GE.
The Company has approximately a one-third equity ownership interest in
Medical Education Technologies, Inc. ("METI"). METI is a medical technology
company engaged in the development, manufacture and sale of Human Patient
Simulators ("HPS"). The HPS is a computerized system with a life-like
mannequin that reacts to medical treatments and interventions similar to a
human being. Originally oriented to the anesthesiology training and education
domain, METI has successfully expanded into cardiology, critical care, trauma
care, allied health care, military medicine and continuing medical education.
METI's target customers for its HPS include medical schools throughout the
world, colleges with registered nursing programs, community colleges and
state, local and volunteer emergency medical service organizations.
O WIRELESS LOOP TELECOMMUNICATION EQUIPMENT
The Company is applying its wireless communication expertise to introduce
local wireless loop equipment using a synchronous Code Division Multiple
Access technology ("CDMA") supporting terrestrial and space based, fixed and
mobile communication services. The system's principal targeted customer base
is emerging market countries and rural areas where existing
telecommunications infrastructure is inadequate or non-existent. The
Company's system will have the potential to interface with low earth orbit
("LEO") PCS systems such as Globalstar, Iridium and/or any local public
telephone network. The Company expects to manufacture for sale certain of the
infrastructure equipment. The Company intends to pursue joint ventures with
third parties for service and distribution capabilities. The Company has
entered into product distribution agreements with Granger Telecom Ltd. for
distribution in parts of Africa, the Middle East and the United Kingdom, and
with Unisys for distribution in parts of Mexico and South America. This same
technology is also being introduced into the Ellipso "big LEO" program to
provide the key communications capability in the ground and user segments. In
this program, the Company will provide the CDMA processing equipment in the
Ground Control Segment and the Ellipso user terminals, both fixed and mobile.
50
<PAGE>
O AIRPORT SECURITY EQUIPMENT
The FAA has awarded the Company a development contract for next generation
airport security equipment for explosive detection. L-3 has teamed with
Analogic Corporation and GE to design and produce an explosive detection
system ("EDS") utilizing a dual energy computer tomography ("CT") X-ray
system. L-3's EDS system, the eXaminer 3DX(Trademark) 6000, will analyze the
contents of checked baggage at airports for a wide-range of explosive
material as specified by the FAA. The eXaminer 3DX(Trademark) 6000 will
inspect baggage at an average of 675 bags per hour, which will allow
screening of passenger-checked baggage for a large body aircraft, such as a
Boeing 747, in approximately 40 minutes. It can be installed as a stand-alone
unit in a conveyor system or in a mobile van. L-3 has shipped two prototype
test units and FAA certification testing is expected to commence in the first
half of 1998.
MAJOR CUSTOMERS
The Company's sales are predominantly derived from contracts with agencies
of, and prime contractors to, the Government. Various Government customers
exercise independent purchasing decisions. Sales to the Government generally
are not regarded as constituting sales to one customer. Instead, each
contracting entity is considered to be a separate customer. In 1997, the
Company performed under approximately 150 contracts with value exceeding $1
million for the Government. Pro forma 1997 sales to the Government, including
sales through prime contractors, were $651.1 million. Pro forma sales to
Lockheed Martin were $81.6 million in 1997. The Company's largest program,
representing 10% of 1997 pro forma sales, is a long-term, sole source cost
plus support contract for the U-2 Program. No other program represented more
than 5% of pro forma 1997 sales.
RESEARCH AND DEVELOPMENT
The Company employs scientific, engineering and other personnel to improve
its existing product lines and to develop new products and technologies in
the same or related fields. As of December 31, 1997, the Company employed
approximately 2,000 engineers (of whom over 20% hold advanced degrees). The
pro forma amounts of research and development performed under customer-funded
contracts and Company-sponsored research projects, including bid and proposal
costs, for 1997 were $150.2 million and $46.2 million, respectively.
COMPETITION
The Company's ability to compete for defense contracts depends to a large
extent on the effectiveness and innovativeness of its research and
development programs, its ability to offer better program performance than
its competitors at a lower cost to the Government customer, and its readiness
in facilities, equipment and personnel to undertake the programs for which it
competes. In some instances, programs are sole source or work directed by the
Government to a single supplier. In such cases, there may be other suppliers
who have the capability to compete for the programs involved, but they can
only enter or reenter the market if the Government should choose to reopen
the particular program to competition. Approximately 65% of the Company's
1997 pro forma sales related to sole source contracts.
The Company experiences competition from industrial firms and U.S.
government agencies, some of which have substantially greater resources.
These competitors include: AlliedSignal, AMP, Inc., Aydin Corporation, Cubic
Corporation, GTE Corporation, Harris Corporation, Hughes, Motorola, Raytheon
and Titan Corporation. A majority of the sales of the Company is derived from
contracts with the Government and its prime contractors, and such contracts
are awarded on the basis of negotiations or competitive bids. Management does
not believe any one competitor or a small number of competitors is dominant
in any of the business areas of the Company. Management believes the Company
will continue to be able to compete successfully based upon the quality and
cost competitiveness of its products and services.
PATENTS AND LICENSES
Although the Company owns some patents and has filed applications for
additional patents, it does not believe that its operations depend upon its
patents. In addition, the Company's Government contracts
51
<PAGE>
generally license it to use patents owned by others. Similar provisions in
the Government contracts awarded to other companies make it impossible for
the Company to prevent the use by other companies of its patents in most
domestic work.
BACKLOG
As of December 31, 1997, the Company's pro forma funded backlog was
approximately $638.1 million. This backlog provides management with a useful
tool to project sales and plan its business on an on-going basis; however, no
assurance can be given that the Company's backlog will become revenues in any
particular period or at all. Funded backlog does not include the total
contract value of multi-year, cost-plus reimbursable contracts, which are
funded as costs are incurred by the Company. Funded backlog also does not
include unexercised contract options which represent the amount of revenue
which would be recognized from the performance of contract options that may
be exercised by customers under existing contracts and from purchase orders
to be issued under indefinite quantity contracts or basic ordering
agreements. Backlog is a more relevant predictor of future sales in the
Secure Communication Systems business area. Current funded backlog in Secure
Communication Systems as of December 31, 1997 was $306.0 million, of which
approximately 93% is expected to be shipped in 1998. The Company believes
backlog is a less relevant factor in the Specialized Communication Products
business area given the nature of its catalog and commercial oriented
business. Overall, approximately 85% of the Company's December 31, 1997
funded backlog is expected to be shipped in 1998.
<TABLE>
<CAPTION>
PRO FORMA
FUNDED BACKLOG AS OF
DECEMBER 31, 1997
--------------------
($ IN MILLIONS)
<S> <C>
Secure Communication Systems ..... $306.0
Specialized Communication
Products.......................... 332.1
--------------------
$638.1
====================
</TABLE>
GOVERNMENT CONTRACTS
Approximately 73% of the Company's 1997 pro forma sales were made to
agencies of the Government or to prime contractors or subcontractors of the
Government.
Approximately 64% of the Company's pro forma 1997 sales mix of contracts
were firm fixed price contracts under which the Company agrees to perform for
a predetermined price. Although the Company's fixed price contracts generally
permit the Company to keep profits if costs are less than projected, the
Company does bear the risk that increased or unexpected costs may reduce
profit or cause the Company to sustain losses on the contract. Generally,
firm fixed price contracts offer higher margin than cost plus type contracts.
All domestic defense contracts and subcontracts to which the Company is a
party are subject to audit, various profit and cost controls and standard
provisions for termination at the convenience of the Government. Upon
termination, other than for a contractor's default, the contractor will
normally be entitled to reimbursement for allowable costs and to an allowance
for profit. Foreign defense contracts generally contain comparable provisions
relating to termination at the convenience of the government. To date, no
significant fixed price contract of the Company has been terminated.
Companies supplying defense-related equipment to the Government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the Government to unilaterally suspend the
Company from new contracts pending resolution of alleged violations of
procurement laws or regulations. Other risks include a dependence on
appropriations by the Government, changes in the Government's procurement
policies (such as greater emphasis on competitive procurements) and the need
to bid on programs in advance of design completion. A reduction in
expenditures by the Government for products of the type manufactured by the
Company, lower margins resulting from increasingly competitive procurement
policies, a reduction in the volume of contracts or subcontracts awarded to
the Company or substantial cost overruns would have an adverse effect on the
Company's cash flow.
52
<PAGE>
PROPERTIES
The table below sets forth certain information with respect to
manufacturing facilities and properties of the Company, excluding
non-operating properties held for sale.
<TABLE>
<CAPTION>
LOCATION OWNED LEASED
- ----------------------------------- ------- --------
(THOUSANDS OF
SQUARE FEET)
<S> <C> <C>
L-3 Headquarters, NY ............... -- 58.7
SECURE COMMUNICATION SYSTEMS:
Camden, NJ......................... -- 588.7
Salt Lake City, UT................. -- 457.6
Sierra Vista, AZ................... -- 18.8
Camarillo, CA...................... -- 2.4
El Segundo, CA .................... -- 1.4
Milpitas, CA....................... -- 21.4
Oakland, CA........................ -- 5.2
Santa Ana, CA...................... -- 5.0
Santa Clara, CA ................... -- 6.2
Santa Maria, CA ................... -- 9.8
Colorado Springs, CO .............. -- 5.8
Hartford, CT....................... -- 1.8
Chicago, IL........................ -- 7.3
Boston, MA......................... -- 25.6
Annapolis Junction, MD ............ -- 6.6
Wheaton, MD........................ -- 0.5
Moorestown, NJ..................... -- 2.8
Shrewsbury, NJ..................... -- 22.5
New York, NY....................... -- 5.9
Cleveland, OH...................... -- 1.4
Fairfax, VA........................ -- 1.6
Warrentown, VA .................... -- 0.8
SPECIALIZED COMMUNICATION PRODUCTS:
Folsom, CA ........................ -- 57.5
Lancaster, CA ..................... -- 5.4
Menlo Park, CA .................... -- 98.3
San Diego, CA ..................... 196.0 68.9
San Mateo, CA ..................... -- 14.8
Santa Clara, CA ................... -- 2.0
Sylmar, CA......................... -- 240.0
Sarasota, FL....................... -- 143.7
Merritt Island, FL ................ -- 1.2
Atlanta, GA ....................... -- 52.1
Alpharetta, GA .................... 40.0 --
Norcross, GA ...................... -- 4.8
Lowell, MA......................... -- 47.0
Hauppauge, NY ..................... 240.0 --
Warminster, PA .................... 44.7 --
Hampshire (U.K.)................... -- 1.2
Kiel, Germany...................... -- 143.0
------- --------
Total............................... 520.7 2,137.7
======= ========
</TABLE>
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of its business. Management believes it is adequately
reserved for these liabilities and that there is no litigation pending that
could have a material adverse effect on the Company or its operations.
53
<PAGE>
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
environmental laws and regulations relating to the discharge, storage,
treatment, handling, disposal and remediation of certain materials,
substances and wastes used in its operations. The Company continually
assesses its obligations and compliance with respect to these requirements.
Management believes that the Company's current operations are in substantial
compliance with all existing applicable environmental laws and regulations.
The Company does not believe that its environmental compliance expenditures
will have a material adverse effect on its financial condition or results of
its operations.
Pursuant to the L-3 Acquisition Agreement, the Company has agreed to
assume certain on-site and off-site environmental liabilities related to
events or activities occurring prior to the L-3 Acquisition. Lockheed Martin
has agreed to retain all environmental liabilities for all facilities no
longer used by the Businesses and to indemnify fully the Company for such
prior site environmental liabilities. Lockheed Martin has also agreed, for
the first eight years following April 1997, to pay 50% of all costs incurred
by the Company above those reserved for on the Company's balance sheet at
April 1997 relating to certain Company-assumed environmental liabilities and,
for the seven years thereafter, to pay 40% of certain reasonable operation
and maintenance costs relating to any environmental remediation projects
undertaken in the first eight years. The Company is aware of environmental
contamination at two of the facilities acquired from Lockheed Martin that
will require ongoing remediation. In November 1997, the Company sold one such
facility located in Sarasota, Florida, while retaining a leasehold interest
in a portion of that facility, to DMB in a transaction in which DMB
contractually agreed to assume responsibility for further remediation of the
Sarasota site. Management believes that the Company has established adequate
reserves for the potential costs associated with the assumed environmental
liabilities. However, there can be no assurance that any costs incurred will
be reimbursable from the Government or covered by Lockheed Martin under the
terms of the L-3 Acquisition Agreement or that the Company's environmental
reserves will be sufficient.
In connection with the acquisition of Ocean Systems, the Company has
acquired the stock of ELAC. AlliedSignal ELAC GmbH ("ELAC"), a subsidiary
located in Germany. The premises currently leased by ELAC have environmental
contamination consisting of chlorinated solvents in the groundwater beneath
and adjoining the site. However, Honeywell Inc. ("Honeywell"), the previous
owner of ELAC and the current owner of the property, has retained the
liability for remediating the ELAC site and has contractually agreed to
indemnify AlliedSignal and ELAC. Management believes that any necessary
remediation will be covered by the Honeywell indemnification.
PENSION PLANS
Pursuant to the L-3 Acquisition Agreement, Holdings and L-3 Communications
assumed certain liabilities relating to defined benefit pension plans for
present and former employees and retirees of certain businesses which were
transferred from Lockheed Martin to Holdings and L-3 Communications. Prior to
the consummation of the L-3 Acquisition, Lockheed Martin received a letter
from the PBGC which requested information regarding the transfer of such
pension plans and indicated that the PBGC believed certain of such pension
plans were underfunded using the PBGC's actuarial assumptions (which
assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under FASB 87). The PBGC
underfunding is related to the Subject Plans. As of December 31, 1997, the
Company calculated the net funding position of the Subject Plans and believes
them to be overfunded by approximately $5.9 million under ERISA assumptions,
underfunded by approximately $10.2 million under FASB 87 assumptions and, on
a termination basis, underfunded by as much as $57.5 million under PBGC
assumptions.
With respect to the Subject Plans, Lockheed Martin entered into an
agreement (the "Lockheed Martin Commitment Agreement") among Lockheed Martin,
L-3 and the PBGC dated as of April 30, 1997. The material terms and
conditions of the Lockheed Martin Commitment Agreement include a commitment
by Lockheed Martin to, under certain circumstances, assume sponsorship of the
Subject Plans or provide another form of financial support for the Subject
Plans. The Lockheed Martin Commitment Agreement will continue with respect to
any Subject Plan until such time as such Subject
54
<PAGE>
Plan is no longer underfunded on a PBGC basis for two consecutive years or,
at any time after May 31, 2002, the Company achieves investment grade credit
ratings. Pursuant to the Lockheed Martin Commitment Agreement, the PBGC
agreed that it would take no further action in connection with the L-3
Acquisition.
In return for the Lockheed Martin Commitment, the Company entered into an
agreement with Lockheed Martin, dated as of April 30, 1997, pursuant to which
the Company provided certain assurances to Lockheed Martin including, but not
necessarily limited to, (i) continuing to fund the Subject Plans consistent
with prior practices and to the extent deductible for tax purposes and, where
appropriate, recoverable under Government contracts, (ii) agreeing to not
increase benefits under the Subject Plans without the consent of Lockheed
Martin, (iii) restricting the Company from a sale of any businesses employing
individuals covered by the Subject Plans if such sale would not result in
reduction or elimination of the Lockheed Martin Commitment with regard to the
specific plan and (iv) if the Subject Plans were returned to Lockheed Martin,
granting Lockheed Martin the right to seek recovery from the Company of those
amounts actually paid, if any, by Lockheed Martin with regard to the Subject
Plans after their return. In addition, upon the occurrence of certain events,
Lockheed Martin, at its option, will have the right to decide whether to
assume sponsorship of any or all of the Subject Plans, even if the PBGC has
not sought to terminate the Subject Plans. The Company has performed its
obligations under the letter agreement with Lockheed Martin and the Lockheed
Martin Commitment and has not received any communications from the PBGC
concerning actions which the PBGC contemplates taking in respect of the
Subject Plans.
The Company believes, based in part upon discussions with its consulting
actuaries, that any increase in pension expenses and future funding
requirements from those currently anticipated for the Subject Plans would not
be material.
EMPLOYEES
As of December 31, 1997, the Company, employed approximately 6,100
full-time and part-time employees. The Company believes that its relations
with its employees are good.
Approximately 540 of the Company's employees at its Communication Systems
- -- East operation in Camden, New Jersey are represented by four unions, the
Association of Scientists and Professional Engineering Personnel, the
International Federation of Professional and Technical Engineers, the
International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers and an affiliate of the International Brotherhood of
Teamsters. Three of the four collective bargaining agreements expire in
mid-1998. While the Company has not yet initiated discussions with
representatives of these unions, management believes it will be able to
negotiate, without material disruption to its business, satisfactory new
collective bargaining agreements with these employees. However, there can be
no assurance that a satisfactory agreement will be reached with the covered
employees or that a material disruption to the Company's Camden operations
will not occur.
Approximately 200 employees of Ocean Systems are represented by the United
Auto Workers. The collective bargaining agreement expires in mid-1999.
Approximately 140 of the employees at Ocean Systems' ELAC subsidiary in Kiel,
Germany are represented by the Metal Trade Industrial Workers of the Hamburg
Region and ELAC is represented by the Association of Metal Industry Employers
for Schleswig-Holstein. The labor contract expires in mid-1998. While the
Company has not yet initiated discussions with representatives of these
unions, management believes it will be able to negotiate, without material
disruption to its business, a satisfactory new labor contract with these
employees. However, there can be no assurance that a satisfactory agreement
will be reached with the covered employees or that material disruption to
operations of ELAC or Ocean Systems will not occur.
55
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the L-3 Acquisition Agreement, Lockheed Martin has agreed to
indemnify L-3, subject to certain limitations, for Lockheed Martin's breach
of representations and warranties and L-3 has assumed certain obligations
relating to environmental matters and benefits plans. These obligations
include certain on-site and off-site environmental liabilities related to
events or activities of the Businesses occurring prior to the L-3
Acquisition. Lockheed Martin has agreed to indemnify Holdings, subject to
certain limitations, for its breach of (i) non-environmental representations
and warranties up to $50 million (subject to a $5 million threshold) and (ii)
for the first eight years following April 1997, to pay 50% of all costs
incurred by the Company above those reserved for on the Company's balance
sheet at April 1997 relating to certain Company-assumed environmental
liabilities and, for the seven years thereafter, 40% of certain reasonable
operation and maintenance costs relating to any environmental remediation
projects undertaken in the first eight years (subject to a $6 million
threshold).
Lockheed Martin provides to certain divisions of the Company certain
management information systems services at Lockheed Martin's fully-burdened
cost but without profit. Holdings, L-3 Communications and Lockheed Martin
have entered into certain subleases of real property and cross-licenses of
intellectual property.
In addition, Holdings and Lockheed Martin have entered into a Limited
Noncompetition Agreement (the "Noncompetition Agreement") which, for up to
three years from April 1997, in certain circumstances, precludes Lockheed
Martin from engaging in the sale of any products that compete with the
products of the Company that are set forth in the Noncompetition Agreement
for specifically identified application of the products. Under the
Noncompetition Agreement, Lockheed Martin is prohibited, with certain
exceptions, from acquiring any business engaged in the sale of the specified
products referred to in the preceding sentence, although Lockheed Martin may
acquire such a business under circumstances where the exceptions do not apply
provided that it offers to sell such business to L-3 within 90 days of its
acquisition. The Noncompetition Agreement does not, among other exceptions,
(i) apply to businesses operated and managed by Lockheed Martin on behalf of
the Government, (ii) prohibit Lockheed Martin from engaging in any existing
businesses and planned businesses as of the closing of the L-3 Acquisition or
businesses that are reasonably related to existing or planned businesses or
(iii) apply to selling competing products where such products are part of a
larger system sold by Lockheed Martin.
In the ordinary course of business L-3 sells products to Lockheed Martin
and its affiliates. Pro forma and aggregated sales to Lockheed Martin were
$81.6 million, $70.7 million and $25.9 million for the years ended December
31, 1997, 1996 and 1995, respectively. See Note 19 to the Consolidated
(Combined) Financial Statements.
Sales of products to Lockheed Martin, excluding those under existing
intercompany work transfer agreements, are made on terms no less favorable
than those which would be available from non-affiliated third party
customers. A significant portion of L-3's sales to Lockheed Martin are either
based on competitive bidding or catalog prices.
STOCKHOLDERS AGREEMENT
Holdings, Lockheed Martin, the Lehman Partnership and Messrs. Lanza and
LaPenta entered into a stockholders agreement (the "Stockholders Agreement")
which, except the terms relating to (i) the registration rights, (ii)
provision of services by Lehman Brothers Inc. and (iii) the standstill
agreement by Lockheed Martin, terminates upon the consummation of the Common
Stock Offering. Prior to the consummation of the Common Stock Offering, the
Lehman Partnership is entitled to designate a majority of the members of the
Board of Directors provided that it holds at least 35% of the capital stock
of Holdings and remains the single largest shareholder.
Pursuant to the Stockholders Agreement, certain of the existing
stockholders have the right, from time to time on or after the 180-day period
following the completion of the initial public offering and subject to
certain conditions, to require the Company to register under the Securities
Act shares of Common Stock held by them. Lockheed Martin, the Lehman
Partnership and each of the Senior Management has three, four and one demand
registration rights, respectively. In addition, the Stockholders
56
<PAGE>
Agreement also provides certain existing stockholders with certain piggyback
registration rights. The Stockholders Agreement provides, among other things,
that the Company will pay expenses in connection with (i) up to two demand
registrations requested by Lockheed Martin, up to three demand registrations
requested by the Lehman Partnership and the two demand registrations
requested by the Senior Management and (ii) any registration in which the
existing stockholders participate through piggyback registration rights
granted under such agreement.
The Stockholders Agreement also provides that Lehman Brothers Inc. has the
exclusive right to provide investment banking services to Holdings for the
five-year period after the closing of the L-3 Acquisition (except that the
exclusivity period is three years as to cash acquisitions undertaken by L-3).
In the event that Lehman Brothers Inc. agrees to provide any investment
banking services to L-3, it will be paid fees that are mutually agreed upon
based on similar transactions and practices in the investment banking
industry.
Under the Stockholders Agreement Lockheed Martin is subject to a
standstill arrangement which generally prohibits any increase in its share
ownership percentage over 34.9%.
57
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning the directors and
executive officers of Holdings. All directors hold office until the next
annual meeting of the stockholders. All officers serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- -----------------------------------------------
<S> <C> <C>
Frank C. Lanza ......... 66 Chairman, Chief Executive Officer and Director
Robert V. LaPenta ...... 52 President, Chief Financial Officer and Director
Michael T. Strianese .. 41 Vice President--Finance and Controller
Christopher C. Cambria 39 Vice President--General Counsel and Secretary
Robert F. Mehmel ....... 35 Vice President--Planning and Assistant Secretary
Lawrence H. Schwartz .. 60 Vice President--Business Development
Jimmie V. Adams ........ 61 Vice President--Washington D.C. Operations
Robert RisCassi ........ 62 Vice President--Washington D.C. Operations
David J. Brand ......... 36 Director
Alberto M. Finali ...... 43 Director
Eliot M. Fried ......... 65 Director
Robert B. Millard ...... 47 Director
Alan H. Washkowitz .... 57 Director
Thomas A. Corcoran .... 53 Director
Frank H. Menaker, Jr. . 57 Director
John E. Montague ....... 44 Director
</TABLE>
Frank C. Lanza, Chairman and CEO. Mr. Lanza was Executive Vice President
of Lockheed Martin and a member of Lockheed Martin's Executive Council and
Board of Directors. Mr. Lanza was formerly President and COO of Lockheed
Martin's C(3)I and Systems Integration Sector, which comprised many of the
businesses acquired by Lockheed Martin from Loral in 1996. At the time of the
Loral acquisition, Mr. Lanza was President and COO of Loral, a position he
held since 1981. He joined Loral in 1972 as President of its largest
division, Electronic Systems. His earlier experience was with Dalmo Victor
and Philco Western Development Laboratory.
Robert V. LaPenta, President and Chief Financial Officer. Mr. LaPenta was
a Vice President of Lockheed Martin and was Vice President and Chief
Financial Officer of Lockheed's C(3)I and Systems Integration Sector. Prior
to Lockheed Martin's acquisition of Loral, he was Loral's Senior Vice
President and Controller since 1981. He joined Loral in 1972 and was named
Vice President and Controller of its largest division in 1974. He became
Corporate Controller in 1978 and was named Vice President in 1979.
Michael T. Strianese, Vice President--Finance and Controller. Mr.
Strianese was Vice President and Controller of Lockheed Martin's C(3)I and
Systems Integration Sector. From 1991 to the 1996 acquisition of Loral, he
was Director of Special Projects at Loral. Prior to joining Loral, he spent
11 years with Ernst & Young. Mr. Strianese is a Certified Public Accountant.
Christopher C. Cambria, Vice President--General Counsel and Secretary. Mr.
Cambria joined Holdings in June 1997. From 1994 until joining Holdings, Mr.
Cambria was an associate with Fried, Frank, Harris, Shriver & Jacobson. From
1986 until 1993, he was an associate with Cravath, Swaine & Moore.
Robert F. Mehmel, Vice President--Planning and Assistant Secretary. Mr.
Mehmel was the Director of Financial Planning and Capital Review for Lockheed
Martin's C(3)I and Systems Integration Sector. From 1984 to 1996, Mr. Mehmel
held several accounting and financial analysis positions at Loral Electronic
Systems and Loral. At the time of Lockheed Martin's acquisition of Loral, he
was Corporate Manager of Business Analysis.
Lawrence H. Schwartz, Vice President--Business Development. Between 1976
and 1987, Mr. Schwartz was Vice President of Engineering, Senior Vice
President of Business Development, Senior Vice
58
<PAGE>
President of the Rapport Program and Senior Vice President of Development
Programs at Loral Electronic Systems. In 1987, Mr. Schwartz assumed the
position of Corporate Vice President of Technology for Loral Corporation. He
then held that position for the C(3)I and System Integration Sector of
Lockheed Martin.
Jimmie V. Adams, Vice President--Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) was Vice President of Lockheed Martin's
Washington Operations for the C(3)I and Systems Integration Sector. He held
the same position at Loral and was an officer of Loral, prior to its
acquisition by Lockheed Martin. Before joining Loral in 1993, he was
Commander in Chief, Pacific Air Forces, Hickam Air Force Base, Hawaii,
capping a 35-year career with the U.S. Air Force. He was also Deputy Chief of
Staff for plans and operation for U.S. Air Force headquarters and Vice
Commander of Headquarters Tactical Air Command and Vice Commander in Chief of
the U.S. Air Forces Atlantic at Langley Air Force Base. He is a command pilot
with more than 141 combat missions.
Robert RisCassi, Vice President--Washington, D.C. Operations. General
Robert W. RisCassi (U.S. Army-ret.) was Vice President of Land Systems for
Lockheed Martin's C(3)I and Systems Integration Sector. He held the same
position for Loral, prior to its acquisition by Lockheed Martin. He joined
Loral in 1993 after retiring as U.S. Army Commander in Chief, United Nations
Command/Korea. His 35-year military career included posts as Army Vice Chief
of Staff; Director, Joint Staff, Joint Chiefs of Staff; Deputy Chief of Staff
for Operations and Plans; and Commander of the Combined Arms Center.
David J. Brand, Director. Mr. Brand is a Managing Director of Lehman
Brothers and a principal in the Global Mergers & Acquisitions Group, leading
Lehman Brothers' Technology Mergers and Acquisitions business. Mr. Brand
joined Lehman Brothers in 1987 and has been responsible for merger and
corporate finance advisory services for many of Lehman Brothers' technology
and defense industry clients. Mr. Brand is currently a director of K&F
Industries, Inc. Mr. Brand holds an M.B.A. from Stanford University's
Graduate School of Business and a B.S. in Mechanical Engineering from Boston
University.
Alberto M. Finali, Director. Mr. Finali is a Managing Director of Lehman
Brothers and principal of the Merchant Banking Group, based in New York.
Prior to joining the Merchant Banking Group, Mr. Finali spent four years in
Lehman Brothers' London office as a senior member of the M&A Group. Mr.
Finali joined Lehman Brothers in 1987 as a member of the M&A Group in New
York and became a Managing Director in 1997. Prior to joining Lehman
Brothers, Mr. Finali worked in the Pipelines and Production Technology Group
of Bechtel, Inc. in San Francisco. Mr. Finali holds an M.E. and an M.B.A.
from the University of California at Berkeley, and a Laurea Degree in Civil
Engineering from the Polytechnic School in Milan, Italy.
Eliot M. Fried, Director. Mr. Fried is a Managing Director of Lehman
Brothers. Mr. Fried joined Shearson, Hayden Stone, a predecessor firm, in
1976 and became a Managing Director in 1982. Mr. Fried has extensive
experience in portfolio management and equity research. Mr. Fried is
currently a director of Bridgeport Machines, Inc., Energy Ventures, Inc.,
SunSource L.P., Vernitron Corporation and Walter Industries, Inc. Mr. Fried
holds an M.B.A. from Columbia University and a B.A. from Hobart College.
Robert B. Millard, Director. Mr. Millard is a Managing Director of Lehman
Brothers, Head of Lehman Brothers' Principal Trading & Investments Group and
principal of the Merchant Banking Group. Mr. Millard joined Kuhn Loeb & Co.
in 1976 and became a Managing Director of Lehman Brothers in 1983. Mr.
Millard is currently a director of GulfMark International, Inc. and Energy
Ventures, Inc. Mr. Millard holds an M.B.A. from Harvard University and a B.S.
from the Massachusetts Institute of Technology.
Alan H. Washkowitz, Director. Mr. Washkowitz is a Managing Director of
Lehman Brothers and head of the Merchant Banking Group, and is responsible
for the oversight of Lehman Brothers Merchant Banking Portfolio Partnership
L.P. Mr. Washkowitz joined Lehman Brothers in 1978 when Kuhn Loeb & Co. was
acquired by Lehman Brothers. Mr. Washkowitz is currently a director of
Illinois Central Corporation, K&F Industries, Inc. and McBride plc. Mr.
Washkowitz holds an M.B.A. from Harvard University, a J.D. from Columbia
University and an A.B. from Brooklyn College.
59
<PAGE>
Thomas A. Corcoran, Director. Mr. Corcoran has been the President and
Chief Operating Officer of the Electronic Systems Sector of Lockheed Martin
Corporation since March 1995. From 1993 to 1995, Mr. Corcoran was President
of the Electronics Group of Martin Marietta Corporation. Prior to that he
worked for General Electric for 26 years and from 1983 to 1993 he held
various management positions with GE Aerospace; he was a company officer from
1990 to 1993. Mr. Corcoran is a member of the Board of Trustees of Worcester
Polytechnic Institute, the Board of Trustees of Stevens Institute of
Technology, the Board of Governors of the Electronic Industries Association,
a Director of the U.S. Navy Submarine League and a Director of REMEC
Corporation.
Frank H. Menaker, Jr., Director. Mr. Menaker has served as Senior Vice
President and General Counsel of Lockheed Martin since July 1996. He served
as Vice President and General Counsel of Lockheed Martin from March 1995 to
July 1996, as Vice President of Martin Marietta Corporation from 1982 until
1995 and as General Counsel of Martin Marietta Corporation from 1981 until
1995. He is a director of Martin Marietta Materials, Inc., a member of the
American Bar Association and has been admitted to practice before the United
States Supreme Court. Mr. Menaker is a graduate of Wilkes University and the
Washington College of Law at American University.
John E. Montague, Director. Mr. Montague has been Vice President,
Financial Strategies at Lockheed Martin responsible for mergers, acquisitions
and divestiture activities and shareholder value strategies since March 1995.
Previously, he was Vice President, Corporate Development and Investor
Relations at Martin Marietta Corporation from 1991 to 1995. From 1988 to
1991, he was Director of Corporate Development at Martin Marietta
Corporation, which he joined in 1977 as a member of the engineering staff.
Mr. Montague is a director of Rational Software Corporation. Mr. Montague
received his B.S. from the Georgia Institute of Technology and an M.S. in
engineering from the University of Colorado.
The Board of Directors intends to appoint two additional directors who are
not affiliated with the Company promptly following the Common Stock Offering.
The additional directors have not yet been identified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: an Audit Committee and
a Compensation Committee. Currently, the Audit Committee consists of Messrs.
Brand, Fried and Menaker. The Company intends to appoint to the Audit
Committee only persons who qualify as an "independent" director for purposes
of the rules and regulations of the NYSE. The Audit Committee will select and
engage, on behalf of the Company, the independent public accountants to audit
the Company's annual financial statements, and will review and approve the
planned scope of the annual audit. Currently, Messrs. Millard and Montague
serve as members of the Compensation Committee. The Compensation Committee
establishes remuneration levels for certain officers of the Company, performs
such functions as provided under the Company's employee benefit programs and
executive compensation programs and administers the 1997 Stock Option Plan.
COMPENSATION OF DIRECTORS
The current directors of the Company do not receive compensation for their
services as directors. Any non-affiliated directors will receive directors'
fees and reimbursements for their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the board of
directors or committees thereof.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL"), a
director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Under the DGCL, liability of a director may not be limited (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional
60
<PAGE>
misconduct or a knowing violation of law, (iii) in respect of certain
unlawful dividend payments or stock redemptions or repurchases and (iv) for
any transaction from which the director derives an improper personal benefit.
The effect of the provisions of the Company's Certificate of Incorporation is
to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior), except in the situations described in clauses (i) through (iv)
above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In
addition, the Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the four other
most highly compensated executive officers of the Company (the "Named
Executive Officers") during the nine months ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
-------------------------------
ANNUAL
COMPENSATION SECURITIES
---------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) STOCK AWARDS STOCK OPTIONS COMPENSATION(2)
- -------------------------------------- ---------- ---------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Frank C. Lanza (Chairman and Chief
Executive Officer).................... $542,654 $-- 1,142,857 $ --
Robert V. LaPenta (President and Chief
Financial Officer).................... 356,538 -- 1,142,857 --
Lawrence H. Schwartz (Vice President) . 145,327 17,000 --
Jimmie V. Adams (Vice President) ...... 157,854 15,000 61
Robert RisCassi (Vice President) ...... 125,704 15,000 611
</TABLE>
- ------------
(1) Bonus payments in respect of 1997 have not yet been determined.
(2) Represents Company match under savings plan.
61
<PAGE>
Stock Options Granted in 1997. The following table sets forth information
concerning individual grants of stock options made by the Company in 1997 to
each of the Named Executive Officers.
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT-DATE
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE VALUE(1)
- -------------------------------------- -------------- --------------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Frank C. Lanza (Chairman and Chief
Executive Officer).................... 1,142,857(2) 38.2% $6.47 April 30, 2007 $2,326,731
Robert V. LaPenta (President and Chief
Financial Officer) ................... 1,142,857(2) 38.2% $6.47 April 30, 2007 $2,326,731
Lawrence H. Schwartz (Vice President) 17,000 0.6% $6.47 July 1, 2007 $ 17,571
Jimmie V. Adams (Vice President) ...... 15,000 0.5% $6.47 July 1, 2007 $ 15,504
Robert RisCassi (Vice President) ...... 15,000 0.5% $6.47 July 1, 2007 $ 15,504
</TABLE>
- ------------
(1) The grant-date valuation of the options was calculated using the
minimum value method described in SFAS No. 123. The minimum value is
computed as the current price of stock at the grant date reduced to
exclude the present value of any expected dividends during the option's
expected life minus the present value of the exercise price, and does
not consider the expected volatility of the price of the stock
underlying the option. The material assumptions underlying the
computations are: an average discount rate 6.3%; a dividend yield of 0%
and a weighted average expected option life of 5.49 years, with the
option lives ranging from 2 years to 10 years.
(2) Half of the options granted consists of Time Options and half consists
of Performance Options. See "--Employment Agreements" for descriptions
of the terms of these options.
Aggregate Option Exercises. None of the Named Executive Officers exercised
options in 1997.
PENSION PLAN
The following table shows the estimated annual pension benefits payable
under the L-3 Communications Corporation Pension Plan to a covered
participant upon retirement at normal retirement age, based on the career
average compensation (salary and bonus) and years of credited service with
the Company and its subsidiaries under the plan.
<TABLE>
<CAPTION>
CAREER AVERAGE COMPENSATION YEARS OF CREDITED SERVICE
- --------------------------- ----------------------------------------------------
15 20 25 30 35
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$125,000.................... $ 18,981 $ 24,937 $ 29,833 $ 33,856 $ 37,164
150,000.................... 23,172 30,408 36,355 41,243 45,260
175,000.................... 27,364 35,879 42,877 48,629 53,357
200,000.................... 31,556 41,349 49,399 56,015 61,454
225,000.................... 35,747 46,820 55,921 63,402 69,550
250,000.................... 39,939 52,291 62,444 70,788 77,647
300,000.................... 48,322 63,233 75,488 85,561 93,840
400,000.................... 65,089 85,116 101,577 115,106 126,226
450,000.................... 73,472 96,057 114,621 129,879 142,420
500,000.................... 81,855 106,999 127,665 144,651 158,613
750,000.................... 123,772 161,707 192,887 218,515 239,579
</TABLE>
As of December 31, 1997, the current annual compensation and current years
of credited service (including for Messrs. LaPenta, Adams and RisCassi, years
of credited service as an employee of Loral and Lockheed Martin) for each of
the following persons were: Mr. Lanza, $750,000 and one year; Mr. LaPenta,
$500,000 and 26 years; Mr. Adams, $216,011 and 5 years; Mr. RisCassi,
$172,016 and 4 years; and Mr. Schwartz, $229,000 and one year. Compensation
covered under the pension plans includes amounts reported as salary and bonus
in the Summary Compensation Table.
62
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert Millard, Steven Berger and John Montague served on the Compensation
Committee of Holdings' Board of Directors during 1997. Mr. Berger resigned
from Holdings' Board of Directors and the Compensation Committee in January
1998. No member of the Compensation Committee served as an officer of
Holdings or L-3 Communications.
1997 STOCK OPTION PLAN
In April 1997, Holdings adopted the 1997 Option Plan for Key Employees of
Holdings (the "1997 Stock Option Plan") which authorizes the Compensation
Committee to grant options to key employees of Holdings and its subsidiaries
to acquire up to 3,255,815 shares of Common Stock. The Compensation Committee
of the Board of Directors of Holdings, in its sole discretion, determines the
terms of option agreements, including without limitation the treatment of
option grants in the event of a change of control.
On April 30, 1997, Holdings granted each of Messrs. Lanza and LaPenta
options to purchase 1,142,857 shares of Common Stock. See "--Employment
Agreements" for a description of the terms of these grants. On July 1, 1997
and November 11, 1997, the Compensation Committee authorized grants of
options to employees of Holdings and its subsidiaries, other than Messrs.
Lanza and LaPenta, to acquire an aggregate of 689,500 shares of Common Stock
at an exercise price of $6.47 per share (the "Employee Options"). Each
Employee Option was granted pursuant to an individual agreement that provides
(i) 20% of shares underlying the option will become exercisable on the first
anniversary of the grant date, 50% will become exercisable on the second
anniversary of the grant date and 30% will become exercisable on the third
anniversary of the grant date; provided, that, in the event of an initial
public offering of Common Stock, 15% of the shares underlying the option
(which would otherwise become exercisable on the second anniversary of the
grant date) will become exercisable on the earlier to occur of (A) the
completion of the initial public offering of the Common Stock and (B) the
first anniversary of the grant date; (ii) all shares underlying the option
will become exercisable upon certain events constituting a change of control;
and (iii) the option will expire upon the earliest to occur of (A) the tenth
anniversary of the grant date (B) one year after termination of employment
due to the optionee's death or permanent disability (C) immediately upon
termination of the optionee's employment for cause and (D) three months after
termination of optionee's employment for any other reason.
EMPLOYMENT AGREEMENTS
Holdings entered into an employment agreement (the "Employment
Agreements") with each of Mr. Lanza, Chairman and Chief Executive Officer of
Holdings and L-3 Communications, who will receive a base salary of $750,000
per annum and appropriate executive level benefits, and Mr. LaPenta,
President and Chief Financial Officer of Holdings and and L-3 Communications,
who will receive a base salary of $500,000 per annum and appropriate
executive level benefits. The Employment Agreements provide for an initial
term of five years, which will automatically renew for one-year periods
thereafter, unless a party thereto gives notice of its intent to terminate at
least 90 days prior to the expiration of the term.
Upon a termination without cause (as defined) or resignation for good
reason (as defined), Holdings will be obligated, through the end of the term,
to (i) continue to pay the base salary and (ii) continue to provide life
insurance and medical and hospitalization benefits comparable to those
provided to other senior executives; provided, however, that any such
coverage shall terminate to the extent that Mr. Lanza or Mr. LaPenta, as the
case may be, is offered or obtains comparable benefits coverage from any
other employer. The Employment Agreements provide for confidentiality during
employment and at all times thereafter. There is also a noncompetition and
non-solicitation covenant which is effective during the employment term and
for one year thereafter; provided, however, that if the employment terminates
following the expiration of the initial term, the noncompetition covenant
will only be effective during the period, if any, that Holdings pays the
severance described above.
Holdings has granted each of Messrs. Lanza and LaPenta (collectively, the
"Equity Executives") nonqualified options to purchase, at $6.47 per share of
Common Stock, 1,142,857 shares of Holdings'
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<PAGE>
initial fully-diluted common stock. In each case, half of the options will be
"Time Options" and half will be "Performance Options" (collectively, the
"Options"). The Time Options will become exercisable with respect to 20% of
the shares subject to the Time Options on each of the first five
anniversaries of the closing of the L-3 Acquisition (the "Closing") if
employment continues through and including such date. The Performance Options
will become exercisable nine years after the Closing, but will become
exercisable earlier with respect to up to 20% of the shares subject to the
Performance Options on each of the first five anniversaries of the Closing,
to the extent certain EBITDA targets are achieved. The Options will become
fully exercisable under certain circumstances, including a change in control.
The Option term is ten years from the Closing; except that (i) if the Equity
Executive is fired for cause or resigns without good reason, the Options
expire upon termination of employment; (ii) if the Equity Executive is fired
without cause, resigns for good reason, dies, becomes disabled or retires,
the Options expire one year after termination of employment. Unexercisable
Options will terminate upon termination of employment, unless acceleration is
expressly provided for. Upon a change of control, Holdings may terminate the
Options, so long as the Equity Executives are cashed out or permitted to
exercise their Options prior to such change of control.
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<PAGE>
OWNERSHIP OF CAPITAL STOCK
All outstanding capital stock of L-3 Communications is owned by Holdings.
Following the consummation of the Common Stock Offering, the existing
2,944,000 shares of Class B Common Stock of Holdings will convert to Common
Stock. Assuming such conversion, as of December 31, 1997, there were
20,000,000 shares of Common Stock outstanding. The following table sets forth
certain information regarding the beneficial ownership of the shares of the
Common Stock of Holdings, as of December 31, 1997, by each person who
beneficially owns more than five percent of the outstanding shares of Common
Stock of Holdings and by the directors and certain executive officers of
Holdings, individually and as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
------------------------------
BEFORE AFTER
COMMON STOCK COMMON STOCK
NAME OF BENEFICIAL OWNER COMMON STOCK OFFERING OFFERING
- ----------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Lehman Brothers Capital Partners III, L.P. and
affiliates(1)
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285 .................................. 10,020,000 50.1% %
Lockheed Martin Corporation
6801 Rockledge Drive
Bethesda, Maryland 20817-1877.............................. 6,800,000 34.0
Frank C. Lanza ............................................. 1,472,000 7.4
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016
Robert V. LaPenta .......................................... 1,472,000 7.4
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016
All directors and executive officers as group (16 persons) . 3,180,000 15.9
</TABLE>
- ------------
(1) David J. Brand, Alberto M. Finali, Eliot M. Fried, Robert B. Millard
and Alan H. Washkowitz, each of whom is director of the Company, are
each Managing Directors of Lehman Brothers Inc. As limited partners of
Lehman Brothers Capital Partners III, L.P. or other affiliated
partnerships sponsored by Lehman Brothers, all such individuals may be
deemed to have shared beneficial ownership of shares of Common Stock
held by Lehman Brothers Capital Partners III, L.P. and such affiliated
partnerships. Such individuals disclaim any such beneficial ownership.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITIES
The Senior Credit Facilities have been provided by a syndicate of banks
and other financial institutions led by Lehman Commercial Paper Inc., as
Arranger and Syndication Agent. The Senior Credit Facilities provide for
$175.0 million in term loans (the "Term Loan Facilities") and for $200.0
million in revolving credit loans (the "Revolving Credit Facility" and,
together with the Term Loan Facilities, the "Senior Credit Facilities"). The
Revolving Credit Facility includes borrowing capacity available for letters
of credit and for borrowings on same-day notice (the "Swingline Loans"). The
Term Loans, originally funded on April 30, 1997, comprised of a Tranche A
Term Loan ($100.0 million), which had an initial maturity of six years, a
Tranche B Term Loan ($45.0 million), which had an initial maturity of eight
years, and a Tranche C Term Loan ($30.0 million), which had an initial
maturity of nine years. The Revolving Loan Termination Date (as defined
therein) is March 31, 2003.
All borrowings under the Senior Credit Facilities bear interest, at L-3
Communications' option, at either: (A) a "base rate" equal to, for any day,
the higher of: (a) 0.50% per annum above the latest Federal
65
<PAGE>
Funds Rate; and (b) the rate of interest in effect for such day as publicly
announced from time to time by Bank of America NT&SA, as Administrative
Agent, in San Francisco, California, as its "reference rate" plus (i) in the
case of the Tranche A Term Loan, the Revolving Credit Facility and the
Swingline Loans, a debt to EBITDA-dependent rate ranging from 0.50% to 1.25%
per annum, (ii) in the case of the Tranche B Term Loan, a rate of 1.50% per
annum or (iii) in the case of the Tranche C Term Loan, a rate of 1.75% per
annum or (B) a "LIBOR rate" equal to, for any Interest Period (as defined in
the Senior Credit Facilities), with respect to LIBOR Loans comprising part of
the same borrowing, the London interbank offered rate of interest per annum
for such Interest Period as determined by the Administrative Agent, plus (i)
in the case of the Tranche A Term Loan and the Revolving Credit Facility, a
debt to EBITDA-dependent rate ranging from 1.50% to 2.25% per annum, (ii) in
the case of the Tranche B Term Loan, a rate of 2.50% per annum or (iii) in
the case of the Tranche C Term Loan, a rate of 2.75% per annum.
L-3 Communications will pay a commitment fee calculated at a debt to
EBITDA-dependent rate ranging from 0.375% to 0.50% per annum of the available
unused commitment under the Revolving Credit Facility, in each case in effect
on each day. Such fee will be payable quarterly in arrears and upon
termination of the Revolving Credit Facility.
L-3 Communications will pay a letter of credit fee calculated at a debt to
EBITDA-dependent rate ranging from 1.50% to 2.25% per annum of the face
amount of each letter of credit and a fronting fee calculated at a rate equal
to 0.125% per annum of the face amount of each letter of credit. Such fees
will be payable quarterly in arrears and upon the termination of the
Revolving Credit Facility. In addition, L-3 Communications will pay customary
transaction charges in connection with any letters of credit.
The foregoing debt to EBITDA-dependent rates range from the low rate
specified if the ratio of debt to EBITDA is less than 3.75 to 1.0 to the high
rate specified if such ratio is at least equal to 4.75 to 1.0.
The Term Loans are subject to the following amortization schedule:
<TABLE>
<CAPTION>
TRANCHE A TERM LOAN TRANCHE B TERM LOAN TRANCHE C TERM LOAN
------------------- ------------------- -------------------
<S> <C> <C> <C>
Year 1 ... $ 4,000,000 $ 500,000 $ 500,000
Year 2 ... 5,000,000 500,000 500,000
Year 3 ... 15,000,000 500,000 500,000
Year 4 ... 21,000,000 500,000 500,000
Year 5 ... 27,000,000 500,000 500,000
Year 6 ... 28,000,000 500,000 500,000
Year 7 ... -- 20,000,000 500,000
Year 8 ... -- 22,000,000 500,000
Year 9 ... -- -- 26,000,000
</TABLE>
Borrowings under the Senior Credit Facilities are subject to mandatory
prepayment (i) with the net proceeds of any incurrence of indebtedness with
certain exceptions to be agreed, (ii) with the proceeds of certain asset
sales and (iii) on an annual basis with (A) 75% of the Company's excess cash
flow (as defined in the Senior Credit Facilities) if the ratio of the
Company's debt to EBITDA is greater than 3.5 to 1.0 or (B) 50% of such excess
cash flow if the ratio is less than 3.5 to 1.0.
L-3 Communications' obligations under the Senior Credit Facilities are
secured by a lien on substantially all of the tangible and intangible assets
of the Company, including: (i) a pledge by Holdings of the stock of L-3
Communications and (ii) a pledge by L-3 Communications and its direct and
indirect subsidiaries of all of the stock of their respective domestic
subsidiaries and 65% of the stock of L-3 Communications' first-tier foreign
subsidiaries. In addition, indebtedness under the Senior Credit Facilities is
guaranteed by Holdings and by all of L-3 Communications' direct and indirect
domestic subsidiaries.
The Senior Credit Facilities contain customary covenants and restrictions
on L-3 Communications' ability to engage in certain activities. In addition,
the Senior Credit Facilities provide that L-3 Communications must meet or
exceed certain interest coverage ratios and must not exceed a leverage ratio.
The Senior Credit Facilities also include customary events of default.
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<PAGE>
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007
L-3 Communications has outstanding $225.0 million in aggregate principal
amount of its 10 3/8% Senior Subordinated Notes due 2007 (the "1997 Notes").
The 1997 Notes are subject to the terms and conditions of an Indenture (the
"1997 Indenture") dated as of April 30, 1997 between L-3 Communications and
The Bank of New York, as trustee, a copy of which was filed as an exhibit to
L-3 Communications' Registration Statement on Form S-4 relating to the 1997
Notes. The 1997 Notes are subject to all of the terms and conditions of the
1997 Indenture. The following summary of the material provisions of the 1997
Indenture does not purport to be complete, and is subject to, and qualified
in its entirety by reference to, all of the provisions of the 1997 Indenture
and those terms made a part of the 1997 Indenture by the Trust Indenture Act
of 1939, as amended. All terms defined in the 1997 Indenture and not
otherwise defined herein are used below with the meanings set forth in the
1997 Indenture.
General. The 1997 Notes will mature on May 1, 2007 and bear interest at 10
3/8% per annum, payable semi-annually on May 1 and November 1 of each year.
The 1997 Notes are general unsecured obligations of L-3 Communications and
are subordinated in right of payment to all existing and future Senior Debt
of L-3 Communications and rank pari passu with the Notes. The 1997 Notes will
be unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally, by all of L-3 Communications' future Restricted
Subsidiaries other than Foreign Subsidiaries.
Optional Redemption. The 1997 Notes are subject to redemption at any time,
at the option of L-3 Communications, in whole or in part, on or after May 1,
2002 at redemption prices (plus accrued and unpaid interest) starting at
105.188% of principal (plus accrued and unpaid interest) during the 12-month
period beginning May 1, 2002 and declining annually to 100% of principal
(plus accrued and unpaid interest) on May 1, 2005 and thereafter.
In addition, prior to May 1, 2000, L-3 Communications may redeem up to 35%
of the aggregate principal amount of the 1997 Notes with the net proceeds of
one or more Equity Offerings (as defined in the Indentures), to the extent
such proceeds are contributed (within 120 days of any such offering) to L-3
Communications as common equity, at a price equal to 109.375% of the
principal (plus accrued and unpaid interest) provided that at least 65% of
the original aggregate principal amount of the 1997 Notes remains outstanding
thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the 1997 Notes may require L-3 Communications to repurchase all or a
portion of such holder's 1997 Notes at a purchase price equal to 101% of the
principal amount thereof (plus accrued and unpaid interest). Generally, a
Change of Control means the occurrence of any of the following: (i) the
disposition of all or substantially all of L-3 Communications' assets to any
person, (ii) the adoption of a plan relating to the liquidation or
dissolution of L-3 Communications, (iii) the consummation of any transaction
in which a person other than the Principals and their Related Parties becomes
the beneficial owner of more than 50% of the voting stock of L-3
Communications, or (iv) the first day on which a majority of the members of
the Board of Directors of L-3 Communications are not Continuing Directors.
Subordination. The 1997 Notes are general unsecured obligations of L-3
Communications and are subordinate to all existing and future Senior Debt of
L-3 Communications. The 1997 Notes will rank senior in right of payment to
all subordinated Indebtedness of L-3 Communications. Any Subsidiary
Guarantees would be general unsecured obligations of the Guarantors and are
subordinated to the Senior Debt and to the guarantees of Senior Debt of such
Guarantors. The Subsidiary Guarantees rank senior in right of payment to all
subordinated Indebtedness of the Guarantors.
Certain Covenants. The 1997 Indenture contains a number of covenants
restricting the operations of L-3 Communications, which, among other things,
limit the ability of L-3 Communications to incur additional Indebtedness, pay
dividends or make distributions, sell assets, issue subsidiary stock,
restrict distributions from Subsidiaries, create certain liens, enter into
certain consolidations or mergers and enter into certain transactions with
affiliates.
Events of Default. Events of Default under the 1997 Indenture include the
following: (i) a default for 30 days in the payment when due of interest on
the 1997 Notes; (ii) default in payment when due of
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the principal of or premium, if any, on the Notes; (iii) failure by L-3
Communications to comply with certain provisions of the 1997 Indenture
(subject, in some but not all cases, to notice and cure periods); (iv)
default under Indebtedness for money borrowed by L-3 Communications or any of
its Restricted Subsidiaries in excess of $10.0 million; (v) failure by L-3
Communications or any Restricted Subsidiary that would be a Significant
Subsidiary to pay final judgments aggregating in excess of $10.0 million,
which judgments are not paid, discharged or stayed for a period of 60 days;
(vi) except as permitted by the Indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Subsidiary Guarantee; or (vii) certain events of bankruptcy or
insolvency with respect to L-3 Communications or any of its Restricted
Subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding Notes may accelerate the maturity of all the 1997 Notes as
provided in the 1997 Indenture.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued under an indenture dated as of , 1998 (the
"Indenture") between the Company, as issuer, and , as
trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and holders of the Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture describes the material
terms of the Indenture but does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture
Act. For definitions of certain capitalized terms used in the following
summary, see "--Certain Definitions".
For purposes of this summary, the term "Company" refers only to L-3
Communications Corporation and not to any of its Subsidiaries.
The Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with the 1997 Notes and will be
subordinated in right of payment to all current and future Senior Debt. At
December 31, 1997, on a pro forma basis giving effect to the 1998
Acquisitions and the Offerings, the Company would have had Senior Debt of
approximately $58.6 million outstanding (excluding letters of credit). The
Indenture will permit the incurrence of additional Senior Debt in the future.
See "--Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock".
The Indenture will provide that the Company's payment obligations under
the Notes will be jointly and severally guaranteed (the "Subsidiary
Guarantees") by all of the Company's present and future Restricted
Subsidiaries, other than Foreign Subsidiaries (collectively, the
"Guarantors"). The Subsidiary Guarantee of each Guarantor will be
subordinated to the prior payment in full of all Senior Debt of such
Guarantor, which would include the guarantees of amounts borrowed under the
Senior Credit Facilities.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $250.0 million,
of which $150.0 million will be issued in the Notes Offering. The Notes will
mature on , 2008. Interest on the Notes will accrue at the rate of %
per annum and will be payable semi-annually in arrears on and ,
commencing on , 1998, to Holders of record on the immediately preceding
and . Interest on the Notes will accrue from the most recent date
to which interest has been paid or, if no interest has been paid, from the
date of original issuance. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or,
at the option of the Company, payment of interest may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal,
premium and interest with respect to Notes the Holders of which have given
wire transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof if such Holders shall be registered Holders of at least
$250,000 in principal amount of Notes. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in
denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to ,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages
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of principal amount) set forth below plus accrued and unpaid interest to the
applicable redemption date, if redeemed during the twelve-month period
beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------ --------------
<S> <C>
2003 .................... %
2004 .................... %
2005 .................... %
2006 and thereafter .... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Issue
Date, the Company may on any one or more occasions redeem up to an aggregate
of 35% of the Notes originally issued at a redemption price of % of the
principal amount thereof, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds of one or more Equity Offerings by the
Company or the net cash proceeds of one or more Equity Offerings by Holdings
that are contributed to the Company as common equity capital; provided that
at least 65% of the Notes originally issued remain outstanding immediately
after the occurrence of each such redemption; and provided, further, that any
such redemption must occur within 120 days of the date of the closing of such
Equity Offering.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to
the prior payment in full of all Senior Debt, whether outstanding on the
Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property,
an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, the holders of Senior Debt will be entitled
to receive payment in full in cash of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Debt, whether or not an
allowable claim in any such proceeding) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes, and until all
Obligations with respect to Senior Debt are paid in full, any distribution to
which the Holders of Notes would be entitled shall be made to the holders of
Senior Debt (except, in each case, that Holders of Notes may receive
Permitted Junior Securities and payments made from the trust described under
"--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except from the trust described under "--Legal Defeasance and Covenant
Defeasance") if (i) a default in the payment of the principal of, premium, if
any, or interest on Designated Senior Debt occurs and is continuing or (ii)
any other default occurs and is continuing with respect to Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity (or that would permit such holders
to accelerate with the giving of notice or the passage of time or both) and
the Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Company or the holders of any Designated Senior Debt. Payments on
the Notes may and shall be resumed (A) in the case of a payment default, upon
the date on which such default is cured or waived and (B) in case of a
nonpayment default, the earlier of the date on which such nonpayment default
is cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Debt has been accelerated. No new period of payment blockage may be commenced
unless and until (i) 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice and (ii) all scheduled payments of
principal, premium, if any, and interest on the Notes that have come due have
been paid in full in cash. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice unless such default shall have been waived for a period of not less
than 90 days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
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As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. On a pro forma
basis, after giving effect to the Offerings and the 1998 Acquisitions, the
principal amount of Senior Debt outstanding (excluding letters of credit) at
December 31, 1997 would have been approximately $58.6 million.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no Notes of $1,000 or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes
to be redeemed at its registered address. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. Notes called for redemption become
due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders",
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price
in cash equal to 101% of the aggregate principal amount thereof plus accrued
and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within ten days following any Change of Control, the Company will
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the Notes as a result of a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of
all Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail
to each Holder of Notes so tendered the Change of Control Payment for such
Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided
that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof.
The Indenture will provide that, prior to mailing a Change of Control
Offer, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or offer to repay all
Senior Debt and terminate all commitments thereunder of each lender who has
accepted such
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offer or obtain the requisite consents, if any, under all agreements
governing outstanding Senior Debt to permit the repurchase of Notes required
by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except
as described above with respect to a Change of Control, the Indenture does
not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facilities will prohibit the Company from purchasing any
Notes, and also provides that certain change of control events with respect
to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event
a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture and 1997 Indenture which would, in turn,
constitute a default under the Senior Credit Facilities. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of Notes. See "Risk Factors -- Change of
Control". Finally, the Company's ability to pay cash to the holders of Notes
upon a purchase may be limited by the Company's then-existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required purchases. Even if sufficient funds were
otherwise available, the terms of the Senior Credit Facilities will prohibit,
subject to certain exceptions, the Company's prepayment of Notes prior to
their scheduled maturity. Consequently, if the Company is not able to prepay
indebtedness outstanding under the Senior Credit Facilities and any other
Senior Indebtedness containing similar restrictions or obtain requisite
consents, the Company will be unable to fulfill its repurchase obligations if
holders of Notes exercise their purchase rights following a Change of
Control, thereby resulting in a default under the Indenture and 1997
Indenture. Furthermore, the Change of Control provisions of the Indenture and
1997 Indenture may in certain circumstances make more difficult or discourage
a takeover of the Company.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) other than the Principals or their
Related Parties (as defined below), (ii) the adoption of a plan relating to
the liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly, of more than 50% of the Voting Stock of the Company
(measured by voting power rather than number of shares) or (iv) the first day
on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board
of Directors on the Issue Date or (ii) was nominated for election or elected
to such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
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"Principals" means any Lehman Investor, Lockheed Martin Corporation, Frank
C. Lanza and Robert V. LaPenta.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 50% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding a more than 50% controlling
interest of which consist of such Principal and/or such other Persons
referred to in the immediately preceding clause (i).
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
With respect to the disposition of assets, the phrase "all or
substantially all" as used in the Indenture varies according to the facts and
circumstances of the subject transaction and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree
of uncertainty in ascertaining whether a particular transaction would involve
a disposition of "all or substantially all" of the assets of the Company.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i)
the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by an Officers' Certificate delivered to the Trustee
which will include a resolution of the Board of Directors with respect to
such fair market value in the event such Asset Sale involves aggregate
consideration in excess of $5.0 million) of the assets or Equity Interests
issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary,
as the case may be, consists of cash, Cash Equivalents and/or Marketable
Securities; provided, however, that (A) the amount of any Senior Debt of the
Company or such Restricted Subsidiary that is assumed by the transferee in
any such transaction and (B) any consideration received by the Company or
such Restricted Subsidiary, as the case may be, that consists of (1) all or
substantially all of the assets of one or more Similar Businesses, (2) other
long-term assets that are used or useful in one or more Similar Businesses
and (3) Permitted Securities shall be deemed to be cash for purposes of this
provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (i) to repay
Indebtedness under a Credit Facility, or (ii) to the acquisition of Permitted
Securities, all or substantially all of the assets of one or more Similar
Businesses, or the making of a capital expenditure or the acquisition of
other long-term assets in a Similar Business. Pending the final application
of any such Net Proceeds, the Company may temporarily reduce Indebtedness
under a Credit Facility or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales
that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds". When the aggregate
amount of Excess Proceeds exceeds $10.0 million, the 1997 Indenture provides
that the Company will be required to make an offer to all holders of 1997
Notes (an "Asset Sale Offer") to purchase the maximum principal amount of
1997 Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase, in accordance with the
procedures set forth in the 1997 Indenture. To the extent that the aggregate
amount of 1997 Notes tendered pursuant to an Asset Sale Offer is less than
the remaining Excess Proceeds ("Remaining Excess Proceeds") and the sum of
(A) such amount of Remaining Excess Proceeds and (B) the Remaining Excess
Proceeds from any subsequent Asset Sale Offers exceeds $3.0 million, the
Company will be required to make an offer to all Holders of Notes and any
other Indebtedness that ranks pari passu with the Notes that, by its terms,
requires the Company to offer to repurchase such Indebtedness with such
Remaining Excess Proceeds (a "Secondary Asset Sale Offer") to purchase the
maximum principal amount of Notes and pari passu Indebtedness that may be
purchased out of such Remaining Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date of purchase, in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes or pari
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passu Indebtedness tendered pursuant to a Secondary Asset Sale Offer is less
than the Remaining Excess Proceeds, the Company may use any Remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes or pari passu Indebtedness surrendered by Holders thereof exceeds the
amount of Remaining Excess Proceeds in a Secondary Asset Sale Offer, the
Company shall repurchase such Indebtedness on a pro rata basis and the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Senior Credit Facilities will substantially limit the Company's
ability to purchase subordinated Indebtedness, including the Notes. Any
future credit agreements relating to Senior Debt may contain similar
restrictions. See "Description of Certain Indebtedness -- Senior Credit
Facilities".
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of
the Company's or any of its Restricted Subsidiaries' Equity Interests in
their capacity as such (other than (A) dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary so long as, in the case
of any dividend or distribution payable on or in respect of any class or
series of securities issued by a Restricted Subsidiary other than a Wholly
Owned Restricted Subsidiary, the Company or a Restricted Subsidiary receives
at least its pro rata share of such dividend or distribution in accordance
with its Equity Interests in such class or series of securities); (ii)
purchase, redeem or otherwise acquire or retire for value (including without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company; (iii) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness
that is subordinated to the Notes except a payment of interest or principal
at Stated Maturity; or (iv) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries since April 30, 1997 (excluding Restricted Payments permitted
by clauses (ii) through (vii) of the next succeeding paragraph or of the
kind contemplated by such clauses that were made prior to the date of the
Indenture), is less than the sum of (i) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from July
1, 1997 to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is
a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by the Company since April 30, 1997 from a
contribution to its common equity capital or the issue or sale of Equity
Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock
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or convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was
made after April 30, 1997 is sold for cash or otherwise liquidated or
repaid for cash, the amount of cash received in connection therewith (or
from the sale of Marketable Securities received in connection therewith),
plus (iv) to the extent not already included in such Consolidated Net
Income of the Company for such period and without duplication, (A) 100% of
the aggregate amount of cash received as a dividend from an Unrestricted
Subsidiary, (B) 100% of the cash received upon the sale of Marketable
Securities received as a dividend from an Unrestricted Subsidiary, and (C)
100% of the net assets of any Unrestricted Subsidiary on the date that it
becomes a Restricted Subsidiary. As of December 31, 1997 (without giving
effect to the Common Stock Offering), the amount that would have been
available to the Company for Restricted Payments pursuant to this
paragraph (c) would have been $6.8 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness (other than intercompany Indebtedness) in
exchange for, or with the net cash proceeds from an incurrence of,
Permitted Refinancing Indebtedness;
(iv) the repurchase, retirement or other acquisition or retirement for
value of common Equity Interests of the Company or Holdings held by any
future, present or former employee, director or consultant of the Company
or any Subsidiary or Holdings issued pursuant to any management equity
plan or stock option plan or any other management or employee benefit plan
or agreement; provided, however, that the aggregate amount of Restricted
Payments made under this clause (iv) does not exceed $1.5 million in any
calendar year and provided further that cancellation of Indebtedness owing
to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Equity
Interests of the Company will not be deemed to constitute a Restricted
Payment for purposes of this covenant or any other provision of the
Indenture;
(v) repurchases of Equity Interests deemed to occur upon exercise of
stock options upon surrender of Equity Interests to pay the exercise price
of such options;
(vi) payments to Holdings (A) in amounts equal to the amounts required
for Holdings to pay franchise taxes and other fees required to maintain
its legal existence and provide for other operating costs of up to
$500,000 per fiscal year and (B) in amounts equal to amounts required for
Holdings to pay federal, state and local income taxes to the extent such
income taxes are actually due and owing; provided that the aggregate
amount paid under this clause (B) does not exceed the amount that the
Company would be required to pay in respect of the income of the Company
and its Subsidiaries if the Company were a stand alone entity that was not
owned by Holdings; and
(vii) other Restricted Payments in an aggregate amount since the Issue
Date not to exceed $20.0 million.
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not
cause a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments
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in an amount equal to the fair market value of such Investments at the time
of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered
to the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which
the calculations required by the covenant "Restricted Payments" were
computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue
any Disqualified Stock and will not permit any of its Subsidiaries to issue
any shares of preferred stock; provided, however, that the Company and any
Restricted Subsidiary may incur Indebtedness (including Acquired Debt) or
issue shares of preferred stock if the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such preferred stock is issued
would have been at least 2.0 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the preferred stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The forgoing limitation will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company of Indebtedness under Credit Facilities
(and the guarantee thereof by the Guarantors); provided that the aggregate
principal amount of all Indebtedness outstanding under all Credit
Facilities (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its Restricted
Subsidiaries thereunder) after giving effect to such incurrence, including
all Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any other Indebtedness incurred pursuant to this clause (i), does
not exceed an amount equal to $375.0 million less the aggregate amount of
all Net Proceeds of Asset Sales applied to repay any such Indebtedness
(including any such Permitted Refinancing Indebtedness) pursuant to the
covenant described above under the caption "--Asset Sales";
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company and the Guarantors of $150.0 million
in aggregate principal amount of the Notes and the Subsidiary Guarantees
thereof;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (iv), not to exceed $30.0 million at any time
outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of assets or a new
Restricted Subsidiary; provided that such Indebtedness was incurred by the
prior owner of such assets or such Restricted Subsidiary prior to such
acquisition by the Company or one of its Restricted Subsidiaries and was
not incurred in
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connection with, or in contemplation of, such acquisition by the Company
or one of its Restricted Subsidiaries; and provided further that the
principal amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness incurred pursuant to this
clause (v), does not exceed $10.0 million;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace, Indebtedness that was
permitted by the Indenture to be incurred;
(vii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business in respect of
workers' compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement type obligations regarding workers' compensation
claims; provided, however, that upon the drawing of such letters of credit
or the incurrence of such Indebtedness, such obligations are reimbursed
within 30 days following such drawing or incurrence;
(viii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed
in connection with the disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition; provided, however, that (A)
such Indebtedness is not reflected on the balance sheet of the Company or
any Restricted Subsidiary (contingent obligations referred to in a
footnote to financial statements and not otherwise reflected on the
balance sheet will not be deemed to be reflected on such balance sheet for
purposes of this clause (A)) and (B) the maximum assumable liability in
respect of all such Indebtedness shall at no time exceed the gross
proceeds including noncash proceeds (the fair market value of such noncash
proceeds being measured at the time received and without giving effect to
any subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (A) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated
to the prior payment in full in cash of all Obligations with respect to
the Notes and (B)(1) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Company or one of its Restricted Subsidiaries and (2) any
sale or other transfer of any such Indebtedness to a Person that is not
either the Company or one of its Restricted Subsidiaries shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be;
(x) the incurrence by the Company or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of (A) fixing, hedging or
capping interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding or (B)
protecting the Company and its Restricted Subsidiaries against changes in
currency exchange rates;
(xi) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(xii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xii), and
the issuance of preferred stock by Unrestricted Subsidiaries;
(xiii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted
Subsidiaries in the ordinary course of business; and
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(xiv) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
other Indebtedness incurred pursuant to this clause (xiv), not to exceed
$50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiv) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company shall, in its sole discretion, classify, or later reclassify,
such item of Indebtedness in any manner that complies with this covenant.
Accrual of interest, the accretion of accreted value and the payment of
interest in the form of additional Indebtedness will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien securing Indebtedness on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens.
ANTILAYERING PROVISION
The Indenture will provide that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that
is subordinate or junior in right of payment to any Senior Debt and senior in
any respect in right of payment to the Notes, and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt of a Guarantor and senior in any respect in right of payment to any of
the Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(A) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (B) pay
any indebtedness owed to the Company or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or (iii) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (A) the provisions of security
agreements that restrict the transfer of assets that are subject to a Lien
created by such security agreements, (B) the provisions of agreements
governing Indebtedness incurred pursuant to clause (v) of the second
paragraph of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock", (C) the Indenture, the Notes,
and the 1997 Indenture and the 1997 Notes, (D) applicable law, (E) any
instrument governing Indebtedness or Capital Stock of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (F)
by reason of customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (G)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii)
above on the property so acquired, (H) Permitted Refinancing Indebtedness,
provided that the restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced, (I)
contracts for the sale of assets, including, without
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limitation, customary restrictions with respect to a Subsidiary pursuant to
an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary, (J)
agreements relating to secured Indebtedness otherwise permitted to be
incurred pursuant to the covenants described under "Limitations on Incurrence
of Indebtedness and Issuance of Preferred Stock" and "Liens" that limit the
right of the debtor to dispose of the assets securing such Indebtedness, (K)
restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business, or (L)
customary provisions in joint venture agreements and other similar agreements
entered into in the ordinary course of business.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger
of the Company with or into a Wholly Owned Restricted Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made, after giving pro forma effect to such transaction as if such
transaction had occurred at the beginning of the most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding such transaction either (A) would be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock" or (B) would have a pro forma Fixed Charge Coverage Ratio
that is greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such transaction.
Notwithstanding the foregoing clause (iv), (i) any Restricted Subsidiary
may consolidate with, merge into or transfer all or part of its properties
and assets to the Company and (ii) the Company may merge with an Affiliate
that has no significant assets or liabilities and was incorporated solely for
the purpose of reincorporating the Company in another State of the United
States so long as the amount of Indebtedness of the Company and its
Restricted Subsidiaries is not increased thereby.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (A) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (B) with respect to any Affiliate
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Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $15.0 million, an opinion as to the fairness to
the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing.
The foregoing provisions will not prohibit: (i) any employment agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business; (ii) any transaction with a Lehman Investor;
(iii) any transaction between or among the Company and/or its Restricted
Subsidiaries; (iv) transactions between the Company or any of its Restricted
Subsidiaries, on the one hand, and Lockheed Martin or any of its Subsidiaries
or a Permitted Joint Venture, on the other hand, on terms that are not
materially less favorable to the Company or the applicable Restricted
Subsidiary of the Company than those that could have been obtained from an
unaffiliated third party; provided that (A) in the case of any such
transaction or series of related transactions pursuant to this clause (iv)
involving aggregate consideration in excess of $5.0 million but less than
$25.0 million, such transaction or series of transactions (or the agreement
pursuant to which the transactions were executed) was approved by the
Company's Chief Executive Officer or Chief Financial Officer and (B) in the
case of any such transaction or series of related transactions pursuant to
this clause (iv) involving aggregate consideration equal to or in excess of
$25.0 million, such transaction or series of related transactions (or the
agreement pursuant to which the transactions were executed) was approved by a
majority of the disinterested members of the Board of Directors; (v) any
transaction pursuant to and in accordance with the provisions of the
Transaction Documents as the same are in effect on the Issue Date; and (vi)
any Restricted Payment that is permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments".
PAYMENTS FOR CONSENT
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report
on an annual and quarterly basis on forms provided for such annual and
quarterly reporting pursuant to rules and regulations promulgated by the
Commission, the Indenture will require the Company to file with the
Commission (and provide the Trustee and Holders with copies thereof, without
cost to each Holder, within 15 days after it files them with the Commission),
(a) within 90 days after the end of each fiscal year, annual reports on Form
10-K (or any successor or comparable form) containing the information
required to be contained therein (or required in such successor or comparable
form); (b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 10-Q (or any successor or
comparable form); (c) promptly from time to time after the occurrence of an
event required to be therein reported, such other reports on Form 8-K (or any
successor or comparable form); and (d) any other information, documents and
other reports which the Company would be required to file with the Commission
if it were subject to Section 13 or 15(d) of the Exchange Act; provided,
however, the Company shall not be so obligated to file such reports with the
Commission if the Commission does not permit such filing, in which event the
Company will make available such information to prospective purchasers of
Notes, in addition to providing such information to the Trustee and the
Holders, in each case within 15 days after the time the Company would be
required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
FUTURE SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed by all of the Company's existing and future Restricted
Subsidiaries, other than Foreign Subsidiaries. The
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Indenture will provide that if the Company or any of its Subsidiaries shall
acquire or create a Subsidiary (other than a Foreign Subsidiary or an
Unrestricted Subsidiary) after the Issue Date, then such Subsidiary shall
execute a Subsidiary Guarantee and deliver an opinion of counsel, in
accordance with the terms of the Indenture. The Subsidiary Guarantee of each
Guarantor will rank pari passu with the guarantees of the Original Notes
subordinated to the prior payment in full of all Senior Debt of such
Guarantor, which would include the guarantees of amounts borrowed under the
Senior Credit Facilities. The obligations of each Guarantor under its
Subsidiary Guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable law.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person) another
Person (except the Company or another Guarantor) unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes and the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; and (iii)
the Company (A) would be permitted by virtue of the Company's pro forma Fixed
Charge Coverage Ratio, immediately after giving effect to such transaction,
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the covenant described above under
the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" or
(B) would have a pro forma Fixed Charge Coverage Ratio that is greater than
the actual Fixed Charge Coverage Ratio for the same four-quarter period
without giving pro forma effect to such transaction.
Notwithstanding the foregoing paragraph, (i) any Guarantor may consolidate
with, merge into or transfer all or part of its properties and assets to the
Company and (ii) any Guarantor may merge with an Affiliate that has no
significant assets or liabilities and was incorporated solely for the purpose
of reincorporating such Guarantor in another State of the United States so
long as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
The Indenture will provide that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale
or other disposition, by way of such a merger, consolidation or otherwise, of
all of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "--Repurchase at Option of Holders -- Asset Sales".
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on
the Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium,
if any, on the Notes (whether or not prohibited by the subordination
provisions of the Indenture); (iii) failure by the Company to comply with the
provisions described under the captions "--Change of Control", "--Asset
Sales" or "--Merger, Consolidation or Sale of Assets"; (iv) failure by the
Company for 60 days after notice to comply with any of its other agreements
in the Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the Issue Date, which default results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness the maturity of which has
been so accelerated, aggregates $10.0 million or more; (vi) failure by the
Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $10.0 million, which
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judgments are not paid, discharged or stayed for a period of 60 days; (vii)
certain events of bankruptcy or insolvency with respect to the Company or any
of its Restricted Subsidiaries; and (viii) except as permitted by the
Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding
to be unenforceable or invalid.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, however,
that so long as any Designated Senior Debt is outstanding, such declaration
shall not become effective until the earlier of (i) the day which is five
Business Days after receipt by the Representatives of Designated Senior Debt
of such notice of acceleration or (ii) the date of acceleration of any
Designated Senior Debt. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency,
with respect to the Company or any Restricted Subsidiary, all outstanding
Notes will become due and payable without further action or notice. Holders
of the Notes may not enforce the Indenture or the Notes except as provided in
the Indenture. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default
or Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted
by law upon the acceleration of the Notes. If an Event of Default occurs
prior to , 2003 by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to , 2003, then the premium
specified in the Indenture shall also become immediately due and payable to
the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee
a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes and the Indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the
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Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the Issue
Date, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will
not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Notes over the other creditors
of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by
the Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of
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the Notes then outstanding (including, without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for,
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including
consents obtained in connection with a tender offer or exchange offer for
Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption
of the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest on any Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if
any, or interest on the Notes (except a rescission of acceleration of the
Notes by the Holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in
the Notes, (vi) make any change in the provisions of the Indenture relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium, if any, or interest on the Notes, (vii)
waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relates to subordination)
will require the consent of the Holders of at least 75% in aggregate
principal amount of the Notes then outstanding if such amendment would
adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of Notes
in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
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"1997 Indenture" means the indenture, dated as of April 30, 1997, among
The Bank of New York, as trustee, and the Company, with respect to the 1997
Notes.
"1997 Notes" means the $225,000,000 in aggregate principal amount of the
Company's 10 3/8% Senior Subordinated Notes due 2007, issued pursuant to the
1997 Indenture on April 30, 1997.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Change of Control" and/or the
provisions described above under the caption "--Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant), and (ii)
the issue or sale by the Company or any of its Subsidiaries of Equity
Interests of any of the Company's Restricted Subsidiaries, in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions (A) that have a fair market value in excess of $1.0
million or (B) for net proceeds in excess of $1.0 million. Notwithstanding
the foregoing: (i) a transfer of assets by the Company to a Restricted
Subsidiary or by a Restricted Subsidiary to the Company or to another
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted
Subsidiary to the Company or to another Restricted Subsidiary, (iii) a
Restricted Payment that is permitted by the covenant described above under
the caption "--Restricted Payments" and (iv) a disposition of Cash
Equivalents in the ordinary course of business will not be deemed to be an
Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining
term of the lease included in such sale and leaseback transaction (including
any period for which such lease has been extended or may, at the option of
the lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government
or any agency or instrumentality thereof having maturities of not more than
one year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any
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domestic financial institution to the Senior Credit Facilities or with any
domestic commercial bank having capital and surplus in excess of $500.0
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
or S&P and in each case maturing within six months after the date of
acquisition, (vi) investment funds investing 95% of their assets in
securities of the types described in clauses (i)-(v) above, and (vii) readily
marketable direct obligations issued by any State of the United States of
America or any political subdivision thereof having maturities of not more
than one year from the date of acquisition and having one of the two highest
rating categories obtainable from either Moody's or S&P.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to
the extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus
(iv) depreciation, amortization (including amortization of goodwill, debt
issuance costs and other intangibles but excluding amortization of other
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Restricted Subsidiaries for such period to the extent
that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
(excluding any items that were accrued in the ordinary course of business)
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof that is a Guarantor, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends
or similar distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded, (iv) the cumulative effect of a
change in accounting principles shall be excluded, (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries, and (vi) the Net Income of any
Restricted Subsidiary shall be calculated after deducting preferred stock
dividends payable by such Restricted Subsidiary to Persons other than the
Company and its other Restricted Subsidiaries.
"Consolidated Tangible Assets" means, with respect to the Company, the
total consolidated assets of the Company and its Restricted Subsidiaries,
less the total intangible assets of the Company and its Restricted
Subsidiaries, as shown on the most recent internal consolidated balance sheet
of the Company and such Restricted Subsidiaries calculated on a consolidated
basis in accordance with GAAP.
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"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Senior Credit Facilities and (ii) any other Senior Debt permitted under the
Indenture the principal amount of which is $25.0 million or more and that has
been designated by the Company as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the date that is 91 days after the date
on which the Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have
the right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the
Company may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants -- Restricted
Payments"; and provided further, that if such Capital Stock is issued to any
plan for the benefit of employees of the Company or its Subsidiaries or by
any such plan to such employees, such Capital Stock shall not constitute
Disqualified Stock solely because it may be required to be repurchased by the
Company in order to satisfy applicable statutory or regulatory obligations.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company or Holdings, other than any
private sales to an Affiliate of the Company or Holdings.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means any Indebtedness of the Company (other than
Indebtedness under the Senior Credit Facilities and the Notes) in existence
on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts
and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations, but excluding amortization of debt issuance costs) and (ii) the
consolidated interest of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on
Indebtedness of another Person that is guaranteed by such Person or one of
its Restricted Subsidiaries or secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (A) all dividend payments, whether or
not in cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company, times (B) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in
accordance with GAAP.
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"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person and its Restricted Subsidiaries
for such period. In the event that the Company or any of its Restricted
Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other
than revolving credit borrowings) or issues preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, Guarantee or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to
above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the
proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to
the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving rise to
such Fixed Charges will not be obligations of the referent Person or any of
its Restricted Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary of the Company that was
not organized or existing under the laws of the United States, any state
thereof, the District of Columbia or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which were in effect April 30, 1997.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and currency exchange or interest rate collar
agreements and (ii) other agreements or arrangements designed to protect such
Person against fluctuations in currency exchange rates or interest rates.
"Holdings" means L-3 Communications Holdings, Inc.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any
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Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current
payments of interest, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, moving and
similar loans or advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells
or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided
in the last paragraph of the covenant described above under the caption
"--Restricted Payments".
"Issue Date" means the closing date for the sale and original issuance of
the Notes under the Indenture.
"Lehman Investor" means Lehman Brothers Holdings Inc. and any of its
Affiliates.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are (i) traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; and (ii)
issued by a corporation having a total equity market capitalization of not
less than $250.0 million; provided that the excess of (A) the aggregate
amount of securities of any one such corporation held by the Company and any
Restricted Subsidiary over (B) ten times the average daily trading volume of
such securities during the 20 immediately preceding trading days shall be
deemed not to be Marketable Securities; as determined on the date of the
contract relating to such Asset Sale.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes thereon, realized in
connection with (A) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (B) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary gain or loss,
together with any related provision for taxes on such extraordinary gain or
loss and (iii) the cumulative effect of a change in accounting principles.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions
and any tax sharing arrangements), amounts required to be applied to the
repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
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"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (A) provides credit support of any
kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (B) is directly or indirectly liable (as a
guarantor or otherwise), or (C) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than Indebtedness incurred under Credit Facilities) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity; and (iii) as to which the lenders have been notified
in writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization, whether or not a claim for post-filing interest is allowed in
such proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages, guarantees and other liabilities or
amounts payable under the documentation governing any Indebtedness or in
respect thereto.
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary of the Company that is a Guarantor; (ii) any Investment
in cash or Cash Equivalents; (iii) any Investment by the Company or any
Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (A) such Person becomes a Restricted Subsidiary of the Company and
a Guarantor or (B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company that
is a Guarantor; (iv) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders -- Asset Sales" or any disposition of
assets not constituting an Asset sale; (v) any acquisition of assets solely
in exchange for the issuance of Equity Interests (other than Disqualified
Stock) of the Company; (vi) advances to employees not to exceed $2.5 million
at any one time outstanding; (vii) any Investment acquired in connection with
or as a result of a workout or bankruptcy of a customer or supplier; (viii)
Hedging Obligations permitted to be incurred under the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (ix) any Investment in a Similar Business that is not a
Restricted Subsidiary; provided that the aggregate fair market value of all
Investments outstanding pursuant to this clause (ix) (valued on the date each
such Investment was made and without giving effect to subsequent changes in
value) may not at any one time exceed 10% of the Consolidated Tangible Assets
of the Company; and (x) other Investments in any Person having an aggregate
fair market value (measured on the date each such Investment was made and
without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (x) that are at the
time outstanding, not to exceed $15.0 million.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of Directors (until designation by the Board
of Directors to the contrary); provided that (i) at least 25% of the Capital
Stock thereof with voting power under ordinary circumstances to elect
directors (or Persons having similar or corresponding powers and
responsibilities) is at the time owned (beneficially or directly) by the
Company and/or by one or more Restricted Subsidiaries of the Company and (ii)
such joint venture, partnership or other Person is engaged in a Similar
Business. Any such designation or designation to the contrary shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same
extent as, or to a greater extent than, the Notes and the Subsidiary
Guarantees are subordinated to Senior Debt pursuant to Article 10 of the
Indenture.
"Permitted Liens" means (i) Liens securing Senior Debt of the Company or
any Guarantor that was permitted by the terms of the Indenture to be
incurred; (ii) Liens in favor of the Company or any
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Guarantor; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof
by the Company or any Subsidiary of the Company, provided that such Liens
were in existence prior to the contemplation of such acquisition and do not
extend to any other assets of the Company or any of its Restricted
Subsidiaries; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business; (vi) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (iv)
of the second paragraph of the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness -- ; (vii) Liens existing on the Issue Date; (viii) Liens for
taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor; (ix) Liens incurred in the ordinary
course of business of the Company or any Restricted Subsidiary of the Company
with respect to obligations that do not exceed $5.0 million at any one time
outstanding; (x) Liens on assets of Guarantors to secure Senior Debt of such
Guarantors that was permitted by the Indenture to be incurred; (xi) Liens
securing Permitted Refinancing Indebtedness, provided that any such Lien does
not extend to or cover any property, shares or debt other than the property,
shares or debt securing the Indebtedness so refunded, refinanced or extended;
(xii) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance and return of money bonds and other obligations of a
like nature, in each case incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (xiii) Liens
upon specific items of inventory or other goods and proceeds of any Person
securing such Person's obligations in respect of bankers' acceptances issued
or created for the account of such Person to facilitate the purchase,
shipment or storage of such inventory or other goods in the ordinary course
of business; (xiv) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that
are within the general parameters customary in the industry, in each case
securing Indebtedness under Hedging Obligations; and (xv) Liens encumbering
deposits made in the ordinary course of business to secure nondelinquent
obligations arising from statutory or regulatory, contractual or warranty
requirements of the Company or its Subsidiaries for which a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
made.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that: (i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses and prepayment premiums incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date no earlier than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated
in right of payment to the Notes, such Permitted Refinancing Indebtedness is
subordinated in right of payment to the Notes on terms at least as favorable
to the Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by
the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Securities" means, with respect to any Asset Sale, Voting Stock
of a Person primarily engaged in one or more Similar Businesses; provided
that after giving effect to the Asset Sale such Person shall become a
Restricted Subsidiary and a Guarantor.
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"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, each Subsidiary
of such Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means the credit agreement, as in effect on the
Issue Date among the Company and a syndicate of banks and other financial
institutions led by Lehman Commercial Paper Inc., as syndication agent, and
any related notes, collateral documents, letters of credit and guarantees,
including any appendices, exhibits or schedules to any of the foregoing (as
the same may be in effect from time to time), in each case, as such
agreements may be amended, modified, supplemented or restated from time to
time, or refunded, refinanced, restructured, replaced, renewed, repaid or
extended from time to time (whether with the original agents and lenders or
other agents and lenders or otherwise, and whether provided under the
original credit agreement or other credit agreements or otherwise).
"Senior Debt" means (i) all Indebtedness of the Company or any of its
Restricted Subsidiaries outstanding under Credit Facilities and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness permitted to be
incurred by the Company or any of its Restricted Subsidiaries under the terms
of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in
right of payment to the Notes and (iii) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (i) any liability for federal, state, local or other
taxes owed or owing by the Company, (ii) any Indebtedness of the Company to
any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv)
any Indebtedness that is incurred in violation of the Indenture. The 1997
Notes will be pari passu with the Notes and will not constitute Senior Debt.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Similar Business" means a business, a majority of whose revenues in the
most recently ended calendar year were derived from (i) the sale of defense
products, electronics, communications systems, aerospace products, avionics
products and/or communications products, (ii) any services related thereto,
(iii) any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary thereto,
and (iv) any combination of any of the foregoing.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (A) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (B) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"S&P" means Standard and Poor's Corporation.
"Transaction Documents" means the Indenture, the Notes and the
Underwriting Agreement.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
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(i) has no Indebtedness other than Non-Recourse Debt; (ii) is not party to
any agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company
or such Restricted Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of the Company; (iii) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (A) to subscribe for additional Equity
Interests or (B) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results;
(iv) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (v) has at least one director on its board of directors
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Restricted Payments". If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock", the Company shall be in default of such covenant). The Board of
Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation
shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
"Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock", calculated on a pro forma basis as if such designation had occurred
at the beginning of the four-quarter reference period, and (ii) no Default or
Event of Default would be in existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (A) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (B) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (ii)
the then outstanding principal amount of such Indebtedness.
"Wholly Owned" means, when used with respect to any Subsidiary or
Restricted Subsidiary of a Person, a Subsidiary (or Restricted Subsidiary, as
appropriate) of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries (or Wholly Owned Restricted Subsidiaries, as appropriate) of
such Person and one or more Wholly Owned Subsidiaries (or Wholly Owned
Restricted Subsidiaries, as appropriate) of such Person.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary describes certain U.S. federal income tax
consequences of the ownership of the Notes as of the date hereof by U.S.
Holders as described below. Except where noted, it deals only with Notes held
as capital assets by initial purchasers that purchase the Notes at their
issue price and does not deal with special situations, such as those of
dealers in securities or currencies, financial institutions, tax-exempt
entities, life insurance companies, persons holding Notes as a part of a
hedging constructive sale or conversion transaction or a straddle or holders
of Notes whose "functional currency" is not the U.S. dollar. Furthermore, the
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. In addition, except as
otherwise indicated, the following does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or gift tax
considerations. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS, AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
STATED INTEREST ON NOTES
It is expected that the Notes will not be issued with original issue
discount, therefore, interest on a Note will generally be taxable to a U.S.
Holder as ordinary income from domestic sources at the time it is paid or
accrued in accordance with the U.S. Holder's method of accounting for tax
purposes. As used herein, a "U.S. Holder" means a holder of a Note that is
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) a
trust which is subject to the supervision of a court within the United States
and the control of one or more U.S. persons as described in Section
7701(a)(30) of the Code. A "Non-U.S. Holder" is a holder of a Note that is
not a U.S. Holder.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A U.S. Holder's tax basis in a Note will, in general, be the U.S. Holder's
cost therefor. Upon the sale, exchange, retirement or other disposition of a
Note, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized upon the sale, exchange, retirement or other
disposition and the tax basis of the Note. Such gain or loss will be capital
gain or loss and will be long-term capital gain or loss if at the time of
sale, exchange, retirement or other disposition the Note has been held for
more than one year. Under recently enacted legislation, capital gains of
individuals derived in respect of capital assets held for more than one year
are eligible for reduced rates of taxation which may vary depending upon the
holding period of such capital assets. Prospective investors should consult
their own tax advisors with respect to the tax consequences of the new
legislation. The deductibility of capital losses is subject to limitations.
NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) no withholding of U.S. federal income tax will be required with
respect to the payment by the Company or any paying agent of principal,
premium, if any, or interest on, if any, in respect of a Note owned by a
Non-U.S. Holder (the "Portfolio Interest Exception"), provided (i) that
the beneficial owner does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote within the meaning of section 871(h)(3) of the Code and
the regulations thereunder, (ii) the beneficial owner is not a controlled
foreign corporation that is related to the Company through stock
ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on a Note is described in section 881(c)(3)(A) of the Code and
(iv) the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the
Code and the regulations thereunder.
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(b) no withholding of U.S. federal income tax will be required with
respect to any gain or income realized by a Non-U.S. Holder upon the sale,
exchange, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder will not be subject to U.S. federal estate tax as a
result of such individual's death, provided that such individual does not
actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote within the
meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such Note would not have been, if received at the
time of such individual's death, effectively connected with the conduct of
a U.S. trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner
is not a U.S. person. Currently, these requirements will be met if (i) the
beneficial owner provides his name and address, and certifies, under
penalties of perjury, that he is not a U.S. person (which certification may
be made on an IRS Form W-8 (or successor form)) or (ii) a financial
institution holding the Note on behalf of the beneficial owner certifies,
under penalties of perjury, that such statement has been received by it and
furnishes a paying agent with a copy thereof. Under recently finalized
Treasury regulations (the "Final Regulations"), the statement requirement
referred to in (a)(iv) above may also be satisfied with other documentary
evidence for interest paid after December 31, 1998 with respect to an
offshore account or through certain foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the Portfolio
Interest Exception described in (a) above, payments on a Note made to such
Non-U.S. Holder will be subject to a 30% withholding tax unless the
beneficial owner of the Note provides the Company or its paying agent, as the
case may be, with a properly executed (i) IRS Form 1001 (or successor form)
claiming an exemption from withholding under the benefit of a tax treaty or
(ii) IRS Form 4224 (or successor form) stating that interest paid on the Note
is not subject to withholding tax because it is effectively connected with
the beneficial owner's conduct of a trade or business in the United States.
Under the Final Regulations, Non-U.S. Holders will generally be required to
provide IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224, although
alternative documentation may be applicable in certain situations.
If a Non-U.S. Holder is engaged in a trade or business in the United
States and payment on a Note is effectively connected with the conduct of
such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed above, will be subject to U.S. federal income tax
on such payment on a net income basis in the same manner as if it were a U.S.
Holder. In addition, if such holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, subject to adjustments. For this
purpose, such payment on a Note will be included in such foreign
corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to U.S. federal income
tax unless (i) such gain or income is effectively connected with a trade or
business in the United States of the Non-U.S. Holder, or (ii) in the case of
a Non-U.S. Holder who is an individual, such individual is present in the
United States for 183 days or more in the taxable year of such sale,
exchange, retirement or other disposition, and certain other conditions are
met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments on a
Note and to the proceeds of sale of a Note made to U.S. Holders other than
certain exempt recipients (such as corporations). A 31% backup withholding
tax will apply to such payments if the U.S. Holder fails to provide a
taxpayer identification number or certification of foreign or other exempt
status or fails to report in full dividend and interest income.
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No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in (a)(iv) under "--Non-U.S. Holders" has
been received and the payor does not have actual knowledge that the
beneficial owner is a U.S. person.
In addition, backup withholding and information reporting will not apply
if payments on a Note are paid or collected by a foreign office of a
custodian, nominee or other foreign agent on behalf of the beneficial owner
of such Note, or if a foreign office of a broker (as defined in applicable
Treasury regulations) pays the proceeds of the sale of a Note to the owner
thereof. If, however, such nominee, custodian, agent or broker is, for U.S.
federal income tax purposes, a U.S. person, a controlled foreign corporation
or a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, or, for
taxable years beginning after December 31, 1998, a foreign partnership, in
which one or more U.S. persons, in the aggregate, own more than 50% of the
income or capital interests in the partnership or which is engaged in a trade
or business in the United States, such payments will be subject to
information reporting (but not backup withholding), unless (i) such
custodian, nominee, agent or broker has documentary evidence in its records
that the beneficial owner is not a U.S. person and certain other conditions
are met or (ii) the beneficial owner otherwise establishes an exemption.
Under the Final Regulations, backup withholding will not apply to such
payments absent actual knowledge that the payee is a U.S. person.
Payments on a Note paid to the beneficial owner of a Note by a U.S. office
of a custodian, nominee or agent, or the payment by the U.S. office of a
broker of the proceeds of sale of a Note, will be subject to both backup
withholding and information reporting unless the beneficial owner provides
the statement referred to in (a)(iv) above and the payor does not have actual
knowledge that the beneficial owner is a U.S. person or otherwise establishes
an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
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UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the underwriting agreement (the form
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part) (the "Underwriting Agreement"), to purchase from
L-3 Communications, and L-3 Communications has agreed to sell to the
Underwriters, the aggregate principal amount of Notes set forth opposite
their respective names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ----------------------------------- --------------------
<S> <C>
Lehman Brothers Inc. ...............
BancAmerica Robertson Stephens ....
--------------------
Total............................. $150,000,000
====================
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Notes are subject to the approval of certain
legal matters by their counsel and to certain conditions, and that if any
Notes are purchased by the Underwriters pursuant to the Underwriting
Agreement, all of the Notes agreed to be purchased by the Underwriters
pursuant to the Underwriting Agreement must be so purchased.
In the Underwriting Agreement, L-3 Communications has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
In order to facilitate the Notes Offering, the Underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot in connection with the
Notes Offering, creating a short position in the Notes for their own account.
In addition, to cover overallotments or to stabilize the price of the Notes,
the Underwriters may bid for and purchase Notes in the open market. Any of
these activities may stabilize or maintain the market price of the Notes
above independent market levels.
Lehman Brothers Inc. has provided investment banking, financial advisor
and other services to the Company, for which services Lehman Brothers Inc.
has received fees. In addition, Lehman Brothers Inc. is acting as lead
underwriter for the concurrent Common Stock Offering, and Lehman Brothers
Commercial Paper Inc., an affiliate of Lehman Brothers Inc., is the Arranger
and Syndication Agent under the Senior Credit Facilities. After the
completion of the Common Stock Offering and assuming that the Underwriters'
over-allotment option is exercised, the Lehman Partnership will beneficially
own % of the outstanding capital stock of Holdings. By virtue of such
ownership, the Lehman Partnership will be able to significantly influence the
business and affairs of the Company with respect to matters requiring
stockholder approval. See "Management -- Directors and Executive Officers"
and "Ownership of Capital Stock".
Because Lehman Brothers Inc. is an "affiliate" of the Company under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD") and Lehman Brothers Commercial Paper Inc. and BancAmerica Robertson
Stephens are lenders under the Senior Credit Facilities and may receive
significant portions of the proceeds from the Offerings, will act
as "qualified independent underwriter". In accordance with the Conduct Rules
of the NASD, the yield at which the Notes will be distributed to the public
will be established at a yield no lower than that recommended by
in its capacity as a qualified independent underwriter.
Bank of America NT&SA, an affiliate of BancAmerica Robertson Stephens,
acts as the Administrative Agent and a lender under the Senior Credit
Facilities. See "Description of Certain Indebtedness -- Senior Credit
Facilities".
97
<PAGE>
AVAILABLE INFORMATION
L-3 Communications has filed with the Commission a Registration Statement
on Form S-1 (together with all amendments, exhibits, schedules and
supplements thereto, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Notes being
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company
and the Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified by the provisions in such exhibit, to which reference is hereby
made. L-3 Communications is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). The Registration Statement, such
reports and other information can be inspected and copied at the Public
Reference Section of the Commission located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549 and at regional public
reference facilities maintained by the Commission located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material,
including copies of all or any portion of the Registration Statement, can be
obtained from the Public Reference Section of the Commission at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov).
So long as L-3 Communications is subject to the periodic reporting
requirements of the Exchange Act, it is required to furnish the information
required to be filed with the Commission to the Trustee and the holders of
the Notes. L-3 Communications has agreed that, even if it is not required
under the Exchange Act to furnish such information to the Commission, it will
nonetheless continue to furnish information that would be required to be
furnished by L-3 Communications by Section 13 of the Exchange Act to the
Trustee and the holders of the Notes as if it were subject to such periodic
reporting requirements.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York and for the Underwriters by
Latham & Watkins, New York, New York.
EXPERTS
The (i) consolidated balance sheet of the Company as of December 31, 1997
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the nine months then ended, (ii)
combined statements of operations, changes in invested equity and cash flows
of the Predecessor Company for the three months ended March 31, 1997, (iii)
combined balance sheet of the Predecessor Company as of December 31, 1996 and
the related combined statements of operations, changes in invested equity and
cash flows for the year then ended, (iv) combined statement of operations and
cash flows of the Loral Acquired Businesses for the three months ended March
31, 1996 and for the year ended December 31, 1995 and (v) the combined
balance sheet of AlliedSignal Ocean Systems (a wholly-owned operation of
AlliedSignal, Inc.) and the related combined statements of operations, cash
flows and equity for the year then ended, included in this Prospectus, have
been included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent auditors, given on the authority of that firm as experts in
accounting and auditing. The report on the combined financial statements of
the Predecessor Company for the year ended December 31, 1996 indicates that
Coopers & Lybrand L.L.P.'s opinion, insofar as it relates to the financial
statements of the Lockheed Martin Communications Systems Division included in
such combined financial statements, is based solely on the report of other
auditors.
The combined financial statements of Lockheed Martin Communications
Systems Division as of and for the years ended December 31, 1996 (not
presented separately herein) and 1995, and the financial
98
<PAGE>
statements of the Satellite Transmission Systems Division of California
Microwave, Inc. as of June 30, 1997 and 1996 and for each of the three years
in the period ended June 30, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Ilex Systems, Inc. as of December
31, 1997, and for the year then ended have been included in this Prospectus
and the Registration Statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
L-3 COMMUNICATIONS CORPORATION
(AND THE PREDECESSOR COMPANY)
Consolidated (Combined) Financial Statements as of December 31, 1997 and
1996 and for the nine months ended December 31, 1997, the three months ended
March 31, 1997, and the years ended December 31, 1996 and 1995 ........................... F-3
Report of Coopers & Lybrand L.L.P. ...................................................... F-4
Report of Ernst & Young LLP on the financial statements of Lockheed Martin
Communications Systems Division as of December 31, 1996 and for the two years ended
December 31, 1996....................................................................... F-5
Consolidated (Combined) Balance Sheets as of December 31, 1997 and December 31, 1996 ... F-6
Consolidated (Combined) Statements of Operations for the nine months ended December 31,
1997, for the three months ended March 31, 1997 and for the years ended December 31,
1996 and 1995 .......................................................................... F-7
Consolidated (Combined) Statements of Changes in Shareholders' Equity and Invested
Equity for the nine months ended December 31, 1997, for three months ended March 31,
1997 and for the years ended December 31, 1996 and 1995 ................................ F-8
Consolidated (Combined) Statements of Cash Flows for the nine months ended December 31,
1997, for the three months ended March 31, 1997 and for the years ended December 31,
1996 and 1995 .......................................................................... F-9
Notes to Consolidated (Combined) Financial Statements.................................... F-10
LORAL ACQUIRED BUSINESSES
Combined Financial Statements for the three months ended March 31, 1996 and the year
ended December 31, 1995 .................................................................. F-28
Report of Coopers & Lybrand L.L.P. ...................................................... F-29
Combined Statements of Operations for three months ended March 31, 1996 and the
year ended December 31, 1995 ........................................................... F-30
Combined Statements of Cash Flows for three months ended March 31, 1996 and the year
ended December 31, 1995 ................................................................ F-31
Notes to Combined Financial Statements .................................................. F-32
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
Unaudited Condensed Financial Statements as of December 31, 1997 and for the six months
ended December 31, 1997 and 1996 ......................................................... F-38
Condensed Balance Sheet (Unaudited) as of December 31, 1997 ............................. F-39
Condensed Statements of Operations (Unaudited) for the six months ended December 31,
1997 and 1996 .......................................................................... F-40
Condensed Statements of Cash Flows (Unaudited) for the six months ended December 31,
1997 and 1996 .......................................................................... F-41
Notes to the Condensed Financial Statements ............................................. F-42
F-1
<PAGE>
Financial Statements as of June 30, 1997 and 1996 and for the years ended
June 30, 1997, 1996 and 1995 ............................................................. F-45
Report of Ernst & Young LLP.............................................................. F-46
Balance Sheets as of June 30, 1997 and 1996 ............................................. F-47
Statement of Operations for the years ended June 30, 1997, 1996 and 1995 ............... F-48
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 .............. F-49
Notes to the Financial Statements ....................................................... F-50
ILEX SYSTEMS, INC. AND SUBSIDIARY
Consolidated Financial Statements as of December 31, 1997 and for the year ended December
31, 1997 .................................................................................. F-56
Report of KPMG Peat Marwick LLP ......................................................... F-57
Consolidated Balance Sheet as of December 31, 1997 ...................................... F-58
Consolidated Statement of Income for the year ended December 31, 1997 .................. F-59
Consolidated Statement of Shareholders' Equity for the year ended December 31, 1997 .... F-60
Consolidated Statement of Cash Flows for the year ended December 31, 1997 .............. F-61
Notes to the Consolidated Financial Statements .......................................... F-62
ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.)
Combined Financial Statements as of December 31, 1997 and for the year ended December 31,
1997 ...................................................................................... F-66
Report of Coopers & Lybrand L.L.P. ...................................................... F-67
Combined Balance Sheet as of December 31, 1997 .......................................... F-68
Combined Statement of Operations for the year ended December 31, 1997 .................. F-69
Combined Statement of Invested Equity for the year ended December 31, 1997 ............. F-70
Combined Statement of Cash Flows for the year ended December 31, 1997 .................. F-71
Notes to the Combined Financial Statements .............................................. F-72
</TABLE>
F-2
<PAGE>
L-3 COMMUNICATIONS CORPORATION
(and the Predecessor Company)
Consolidated (Combined) Financial Statements as of December 31, 1997 and
1996 and for the nine months ended December 31, 1997, the three months ended
March 31, 1997 and the years ended December 31, 1997 and 1996.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
L-3 Communications Corporation:
We have audited the accompanying (i) consolidated balance sheet of L-3
Communications Corporation and subsidiaries (the "Company") as of December
31, 1997, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the nine months then ended, (ii) the
combined statements of operations and cash flows of the Predecessor Company,
as defined in Note 1 to the financial statements, for the three months ended
March 31, 1997 and (iii) combined balance sheet of the Predecessor Company,
as of December 31, 1996 and the related combined statements of operations,
changes in invested equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1996 financial statements of the Lockheed
Martin Communications Systems Division, which statements reflect total assets
and sales constituting 35 percent and 30 percent of the related combined
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for the Communications Systems Division for 1996, is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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 and the report
of the other auditors provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (i) present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries as of December 31, 1997 and their consolidated
results of operations and cash flows for the nine months then ended, and (ii)
based on our audit and the report of other auditors for 1996, present fairly
in all material respects, the combined financial position of the Predecessor
Company as of December 31, 1996 and their combined results of operations, and
cash flows for the year then ended and the three months ended March 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
February 2, 1998
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
L-3 Communications Corporation
We have audited the combined balance sheet of Lockheed Martin
Communications Systems Division, as defined in Note 1 to the financial
statements, as of December 31, 1996, and the related combined statements of
operations, and changes in invested equity and shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Division's and Lockheed
Martin Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Lockheed Martin Communications Systems Division at December 31, 1996 (not
presented separately herein), and the combined results of its operations and
its cash flows for the year ended December 31, 1996 (not presented separately
herein), and the results of its operations and its cash flows for the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Washington, D.C.
March 7, 1997
F-5
<PAGE>
L-3 COMMUNICATIONS CORPORATIONS
CONSOLIDATED (COMBINED) BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY
----------------- -------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 77,474 --
Contracts in process ........................................... 167,202 $198,073
Net assets held for sale ....................................... 6,653 --
Deferred income taxes .......................................... 13,298 --
Other current assets ........................................... 2,750 3,661
----------------- -------------------
Total current assets ......................................... 267,377 201,734
----------------- -------------------
Property, plant and equipment ................................... 95,034 116,566
Less, accumulated depreciation and amortization ................ 12,025 24,983
----------------- -------------------
83,009 91,583
----------------- -------------------
Intangibles, primarily cost in excess of net assets acquired,
net of amortization ............................................ 297,503 282,674
Deferred income taxes ........................................... 24,217 --
Other assets .................................................... 31,298 17,307
----------------- -------------------
Total assets ................................................. $703,404 $593,298
================= ===================
LIABILITIES AND SHAREHOLDERS' (INVESTED) EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ 5,000 --
Accounts payable, trade ........................................ 33,052 $ 35,069
Accrued employment costs ....................................... 31,162 27,313
Customer advances and amounts in excess of costs incurred ..... 34,458 14,299
Accrued interest ............................................... 4,419 --
Other current liabilities ...................................... 27,476 26,207
----------------- -------------------
Total current liabilities .................................... 135,567 102,888
----------------- -------------------
Pension and postretirement benefits ............................. 38,113 --
Other liabilities ............................................... 5,009 16,801
Long-term debt .................................................. 392,000 --
Commitments and contingencies ...................................
Shareholders' Equity
Common Stock, $.01 par value; 100 shares authorized and
outstanding.................................................... -- --
Additional paid-in capital ..................................... 125,000 --
Retained earnings .............................................. 16,715 --
Deemed distribution ............................................ (9,000) --
----------------- -------------------
Total Shareholders' and Invested Equity ......................... 132,715 473,609
----------------- -------------------
Total Liabilities and Shareholders' Equity ................... $703,404 $593,298
================= ===================
</TABLE>
See notes to consolidated (combined) financial statements.
F-6
<PAGE>
L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------- ---------------------------------------
THREE
NINE MONTHS MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 31, -----------------------
1997 1997 1996 1995
- ---------------------------------- ----------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
SALES ............................. $546,525 $158,873 $543,081 $166,781
COSTS AND EXPENSES ................ 490,669 150,937 499,390 162,132
----------------- -------------- ---------- ----------
OPERATING INCOME .................. 55,856 7,936 43,691 4,649
INTEREST INCOME ................... 1,430 -- -- --
INTEREST EXPENSE .................. 29,884 8,441 24,197 4,475
----------------- -------------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 27,402 (505) 19,494 174
INCOME TAX EXPENSE (BENEFIT) ..... 10,687 (247) 7,798 1,186
----------------- -------------- ---------- ----------
NET INCOME (LOSS) ................. $ 16,715 $ (258) $ 11,696 $ (1,012)
================= ============== ========== ==========
</TABLE>
See notes to consolidated (combined) financial statements.
F-7
<PAGE>
L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
INVESTED EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997, THREE MONTHS ENDED
MARCH 31, 1997 AND YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
COMBINED CONSOLIDATED
------------- -----------------------------------------------------------------------
COMMON STOCK
------------- ADDITIONAL
INVESTED SHARES PAID-IN RETAINED EQUITY
EQUITY ISSUED PAR VALUE CAPITAL EARNINGS ADJUSTMENT TOTAL
------------- --------- ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 .. $199,506
Repayments to Lockheed
Martin.................. (3,831)
Net loss................. (1,012)
-------------
Balance December 31,
1995..................... 194,663
Advances from Lockheed
Martin.................. 267,250
Net income............... 11,696
-------------
Balance December 31,
1996..................... 473,609
Advances from Lockheed
Martin.................. 20,579
Net loss................. (258)
-------------
Balance March 31, 1997 ... $493,930 -- -- -- -- -- --
============= ======== =========== ============ ========== ============ ==========
Shares Issued............ 100 $-- $125,000 $125,000
Deemed distribution ..... $(9,000) (9,000)
Net Income............... $16,715 16,715
-------- ----------- ------------ ---------- ------------ ----------
Balance December 31,
1997..................... 100 $-- $125,000 $16,715 $(9,000) $132,715
======== =========== ============ ========== ============ ==========
</TABLE>
F-8
<PAGE>
L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
--------------------------------------------------------
THREE
NINE MONTHS MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 31, ----------------------
1997 1997 1996 1995
----------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................... $ 16,715 $ (258) $ 11,696 $(1,012)
Depreciation and amortization ............... 22,190 7,786 28,139 11,578
Amortization of deferred debt issue costs .. 1,517
Deferred income taxes ....................... 9,991 -- -- --
Changes in operating assets and liabilities .
Contracts in process ....................... 18,161 (17,475) 23,543 (3,267)
Other current assets ....................... (275) (481) 3,049 788
Other assets ............................... 2,141 (761) (8,346) 1,245
Accounts payable ........................... (6,146) (207) 4,104 (648)
Accrued employment costs ................... 6,363 (625) 2,282 (611)
Customer advances and amounts in excess of
costs incurred ............................ 545 (1,891) (11,586) (2,041)
Accrued interest ........................... 4,419 -- -- --
Other current liabilities .................. (7,132) (1,867) 3,180 4,004
Pension and postretirement benefits ....... 4,284 -- -- --
Other liabilities .......................... 1,087 (500) (25,327) (699)
----------------- -------------- ----------- ----------
Net cash from (used in) operating activities 73,860 (16,279) 30,734 9,337
----------------- -------------- ----------- ----------
INVESTING ACTIVITIES:
Acquisition of business ..................... (466,317) -- (287,803) --
Proceeds from assumption of contract
obligation ................................. 12,176 -- -- --
Net cash from assets held for sale .......... 3,179 -- -- --
Proceeds from sale of property .............. 9,458 -- -- --
Purchases of investments .................... (5,113) -- -- --
Capital expenditures ........................ (11,934) (4,300) (13,528) (5,532)
Disposition of property, plant and equipment 771 -- 3,347 26
----------------- -------------- ----------- ----------
Net cash used in investing activities ...... (457,780) (4,300) (297,984) (5,506)
----------------- -------------- ----------- ----------
FINANCING ACTIVITIES:
Borrowings under senior credit facility .... 175,000 -- -- --
Proceeds from sale of 10 3/8% subordinated
notes ...................................... 225,000 -- -- --
Proceeds from issuance of common stock ..... 80,000 -- -- --
Debt issuance costs ......................... (15,606) -- -- --
Payment of debt ............................. (3,000) -- -- --
Advances from (repayments to) lockheed
martin ..................................... -- 20,579 267,250 (3,831)
----------------- -------------- ----------- ----------
Net cash from (used in) financing
activities.................................. 461,394 20,579 267,250 (3,831)
----------------- -------------- ----------- ----------
Net change in cash .......................... 77,474 -- -- --
Cash and cash equivalents, beginning of the
period...................................... -- -- -- --
----------------- -------------- ----------- ----------
Cash and cash equivalents, end of the period $ 77,474 -- -- --
================= ============== =========== ==========
</TABLE>
See notes to consolidated (combined) financial statements.
F-9
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS
(Dollars in thousands)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the assets,
liabilities and results of operations of L-3 Communications Corporation,
Inc., ("L-3" or the "Company"), a wholly owned subsidiary of L-3
Communications Holdings, Inc. ("Holdings") following the change in ownership
(see Note 2) effective as of April 1, 1997 and for the period from April 1,
1997 to December 31, 1997. Prior to April 1, 1997, the statements comprise
substantially all of the assets and liabilities and results of operations of
(i) nine business units previously purchased by Lockheed Martin Corporation
("Lockheed Martin") as part of its acquisition of Loral Corporation ("Loral")
in April 1996, and (ii) one business unit, Communications Systems -- Camden
purchased by Lockheed Martin as part of its acquisition of the aerospace
business of GE in April 1993 (collectively, the "Businesses" or the
"Predecessor Company"). The combined financial statements of the Predecessor
Company reflect the Businesses' assets, liabilities and results of operations
included in Lockheed Martin's historical financial statements. Intercompany
accounts between Lockheed Martin and the Businesses have been included in
Invested Equity. The assets and operations of the semiconductor product line
and certain other facilities which are not material have been excluded from
the combined financial statements. Significant intercompany and
inter-business transactions and balances have been eliminated.
The Company is a supplier of sophisticated secure communication systems
and specialized communication products including secure, high data rate
communication systems, microwave components, avionics, recorders, telemetry
and space products. The Company's customers include the Department of Defense
(the "DoD"), selected U.S. government intelligence agencies, major
aerospace/defense prime contractors and commercial customers. The Company
operates primarily in one industry segment, electronic components and
systems.
Substantially all the Company's products are sold to agencies of the U.S.
Government, primarily the Department of Defense, to foreign government
agencies or to prime contractors or subcontractors thereof. All domestic
government contracts and subcontracts or subcontractors thereof. All domestic
government contracts and subcontracts of the Businesses are subject to audit
and various cost controls, and include standard provisions for termination
for the convenience of the U.S. Government. Multi-year U.S. Government
contracts and related orders are subject to cancellation if funds for
contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the government.
2. CHANGE IN OWNERSHIP TRANSACTION
Holdings and L-3 were formed by Mr. Frank C. Lanza, the former President
and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the former
Senior Vice President and Controller of Loral (collectively, the "Equity
Executives"), Lehman Brothers Capital Partners III, L.P. and its affiliates
(the "Lehman Partnership") and Lockheed Martin to acquire the Businesses. The
Company was capitalized with an equity contribution from Holdings of
$125,000.
On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, L-3, and
Lockheed Martin entered into a Transaction Agreement (the "L-3 Acquisition
Agreement") whereby Holdings would acquire the Businesses from Lockheed
Martin (the "L-3 Acquisition"). Also included in the acquisition is a
semiconductor product line of another business and certain leasehold
improvements in New York City which were not material. Pursuant to the L-3
Acquisition Agreement, L-3 acquired the Businesses from Lockheed Martin for
$525,000, comprising $458,779 of cash, after a $21,221 reduction related to a
purchase price adjustment, and $45,000 of common equity, representing a 34.9%
interest in Holdings retained by Lockheed Martin, plus acquisition costs of
$8,000.
The Company and Lockheed Martin finalized the purchase price adjustment
pursuant to an amendment to the L-3 Acquisition Agreement dated November 5,
1997, which also included the
F-10
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
assumption by the Company of Lockheed Martin's rights and obligations under a
contract for the production of mission communication systems for track
vehicles, for which the Company received cash of $12,176.
In connection with the L-3 Acquisition Agreement, Holdings and the Company
anticipated entering into a transition services agreement with Lockheed
Martin pursuant to which Lockheed Martin would provide to L-3 and its
subsidiaries (and L-3 would provide to Lockheed Martin) certain corporate
services of a type previously provided at costs consistent with past
practices until December 31, 1997 (or, in the case of Communication Systems
- -- East (formerly known as Communication Systems -- Camden), for a period of
up to 18 months after the Closing). Lockheed Martin is providing L-3 the
services contemplated by the proposed transaction services agreement in the
absence of any executed agreement. The parties also entered into supply
agreements which reflect previously existing inter-company work transfer
agreements or similar support arrangements upon prices and other terms
consistent with previously existing arrangements. Holdings, the Company and
Lockheed Martin have entered into certain subleases of real property and
cross-licenses of intellectual property.
Pursuant to the L-3 Acquisition Agreement the Company also assumed certain
obligations relating to environmental liabilities and benefit plans.
In accordance with Accounting Principles Board Opinion No. 16, the
acquisition of the Businesses by Holdings and L-3 has been accounted for as a
purchase business combination effective as of April 1, 1997. The purchase
cost (including the fees and expenses related thereto) was allocated to the
tangible and intangible assets and liabilities of the Company based upon
their respective fair values. The assets and liabilities recorded in
connection with the purchase price allocation were $664,800 and $164,400,
respectively. The excess of the purchase price over the fair value of net
assets acquired of $303,200 was recorded as goodwill, and is being amortized
on a straight-line basis over a period of 40 years. As a result of the 34.9%
ownership interest retained by Lockheed Martin, the provisions of Emerging
Issues Task Force Issue Number 88-16 were applied in connection with the
purchase price allocation, which resulted in the recognition of a deemed
distribution of $9,000.
In connection with the determination of the fair value of assets acquired
and pursuant to the provisions of Accounting Principles Board Opinion No. 16,
the Company has valued acquired contracts in process at contract price, less
the estimated cost to complete and an allowance for the Company's normal
profit on its effort to complete such contracts.
Had the L-3 Acquisition occurred on January 1, 1996, the unaudited pro
forma sales and net income for the years ended December 31, 1997 and 1996
would have been $703,600 and $16,300, and $663,200 and $9,700, respectively.
The pro forma results, which are based on various assumptions, are not
necessarily indicative of what would have occurred had the acquisition been
consummated on January 1, 1996. The 1997 and 1996 pro forma sales and net
income have been adjusted to (a) include the operations of the Loral Acquired
Businesses from January 1, 1996 (Note 3) and (b) exclude the operations of
the Hycor business net assets held for sale from January 1, 1996 (Note 6).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: Cash equivalents consist of highly liquid
investments with a maturity of three months or less at time of purchase.
STATEMENTS OF CASH FLOWS: Changes in operating assets and liabilities are
net of the impact of acquisitions and final purchase price allocations. The
Predecessor Company participated in Lockheed Martin's cash management system,
under which all cash was received and payments were made by Lockheed Martin.
All transactions between the Predecessor Company and Lockheed Martin have
been accounted for as settled in cash at the time the transactions were
recorded by the Predecessor Company.
F-11
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
REVENUE RECOGNITION: Sales on production-type contracts are recorded as
units are shipped; profits applicable to such shipments are recorded pro
rata, based upon estimated total profit at completion of the contract. Sales
and profits on cost reimbursable contracts are recognized as costs are
incurred. Sales and estimated profits under other long-term contracts are
recognized under the percentage of completion method of accounting using the
cost-to-cost method. Amounts representing contract change orders or claims
are included in sales only when they can be reliably estimated and their
realization is probable.
Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period, on a cumulative catch-up basis, in
which the facts, requiring the revision, become known.
CONTRACTS IN PROCESS: Costs accumulated on contracts in process include
direct costs, as well as manufacturing overhead, and for government
contracts, general and administrative costs, independent research and
development costs and bid and proposal costs. In accordance with industry
practice, contracts in process contain amounts relating to contracts and
programs with long performance cycles, a portion of which may not be realized
within one year.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated
at cost. Depreciation is provided primarily on the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements.
COST IN EXCESS OF NET ASSETS ACQUIRED: The excess of the cost of the L-3
Acquisition over the fair value of the net assets acquired is being amortized
using a straight-line method over a 40 year period. Accumulated amortization
of the Company amounted to $5,741 at December 31, 1997.
The carrying amount of cost in excess of net assets acquired is evaluated
on a recurring basis. Current and future profitability as well as current and
future undiscounted cash flows, excluding financing costs, of the acquired
businesses are primary indicators of recoverability. For the nine months
ended December 31, 1997, there was no reduction to the carrying amount of the
cost in excess of net assets acquired resulting from these evaluations.
PREDECESSOR COMPANY INTANGIBLES: Intangibles, primarily the excess of the
cost of Businesses over the fair value of the net assets acquired, was
amortized using a straight-line method primarily over a 40-year period. Other
intangibles were amortized over their estimated useful lives which range from
11 to 15 years. Amortization expense of the Businesses was $2,655 for the
three months ended March 31, 1997; $10,115 and $6,086 for the years ended
December 31, 1996 and 1995, respectively. Accumulated amortization was
$26,524 at December 31, 1996.
Intangibles of the Predecessor Company include costs allocated to the
Businesses relating to the Request for Funding Authorization ("RFA"),
consisting of over 20 restructuring projects to reduce operating costs,
initiated by General Electric ("GE") Aerospace in 1990 and to the REC Advance
Agreement ("RAA"), a restructuring plan initiated after Lockheed Martin's
acquisition of GE Aerospace. The RAA was initiated to close two regional
electronic manufacturing centers. Restructure costs are reimbursable from the
U.S. Government if savings can be demonstrated to exceed costs. The total
cost of restructuring under the RFA and the RAA represented approximately 15%
of the estimated savings to the U.S. Government and, therefore, a deferred
asset has been recorded by Lockheed Martin. The deferred asset is being
allocated to all the former GE Aerospace sites, including the Communications
Systems Division, on a basis that includes manufacturing labor, overhead, and
direct material less non-hardware subcontracts. At December 31, 1997 and
1996, approximately $2,313 and $4,400, respectively, of unamortized RFA and
RAA costs are deferred on the Company's and the Predecessor Company's
consolidated (combined) balance sheets in other current assets and other
assets.
The carrying values of the Predecessor Company intangibles were reviewed
if the facts and circumstances indicated potential impairment of their
carrying value. If this review indicated that
F-12
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
intangible assets were not recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining
amortization period, the Businesses carrying values related to the intangible
asset were reduced by the estimated shortfall of cash flows.
INCOME TAXES: The Company provides for income taxes using the liability
method prescribed by the Financial Accounting Standards Board ("FASB")
Statement No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income tax assets and liabilities reflect tax carryforwards and the
net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and income tax purposes, as
determined under enacted tax laws and rates. The financial effect of changes
in tax laws or rates is accounted for in the period of enactment.
PREDECESSOR COMPANY INCOME TAXES: The Predecessor Company was included in
the consolidated Federal income tax return and certain combined and separate
state and local income tax returns of Lockheed Martin. However, for purposes
of these financial statements, the provision for income taxes has been
allocated to the Predecessor Company based upon reported combined income
before income taxes. Income taxes, current and deferred, are considered to
have been paid or charged to Lockheed Martin and are recorded through the
invested equity account with Lockheed Martin. The principal components of the
deferred taxes are contract accounting methods, property, plant and
equipment, goodwill amortization and timing of accruals.
RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the
Company and the Predecessor Company include research and development, bid and
proposal costs related to government products and services. These costs
generally are allocated among all contracts and programs in progress under
U.S. Government contractual arrangements. Customer-sponsored research and
development costs incurred pursuant to contracts are accounted for as direct
contract costs.
STOCK OPTIONS: In accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, compensation expense for stock options is recognized in
income based on the excess, if any, of the Company's fair value of the stock
at the grant date of the award or other measurement date over the amount an
employee must pay to acquire the stock. The exercise price for stock options
granted to employees equals or exceeds the fair value of Holdings common
stock at the date of grant, thereby resulting in no recognition of
compensation expense by the Company. The Company has adopted the disclosure
- -only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123").
DERIVATIVE FINANCIAL INSTRUMENTS: In the normal course of financing
operations, the Company enters into interest rate cap and floor transactions
for interest rate protection purposes, and not for speculative or trading
purposes. Cash payments to and from the Company to and from the
counterparties are recorded as a component of interest expense. The initial
cost of these arrangements are deferred and amortized as interest expense.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. The most significant of these estimates and
assumptions relate to contract estimates of sales and costs, allocations from
Lockheed Martin, recoverability of recorded amounts of fixed assets and cost
in excess of net assets acquired, litigation and environmental obligations.
Actual results could differ from these estimates.
EARNINGS PER SHARE: Earnings per share data is not presented since the
Company and the Predecessor Company are wholly owned subsidiaries.
F-13
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
ACCOUNTING PRONOUNCEMENTS: In June 1997, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in full set general purpose financial statements. SFAS No. 131
establishes accounting standards for the way that public business enterprises
report selected information about operating segments and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. In February 1998, the FASB issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 revises employers' disclosures about pension and
other post-retirement benefits plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other post-retirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful as they were when
SFAS No. 87 "Employers' Accounting for Pensions", SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits" and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" were issued. SFAS No. 132
suggests combined formats for presentation of pension and other
post-retirement benefits disclosures. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 and SFAS No. 131 and
SFAS No. 132 are required to be adopted by 1998. The Company is currently
evaluating the impact, if any, of SFAS No. 130, SFAS No. 131 and SFAS 132.
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets To Be Disposed Of" ("SFAS 121"). SFAS 121
establishes the accounting standards for the impairment of long-lived assets,
certain intangible assets and cost in excess of net assets acquired to be
held and used for long-lived assets and certain intangible assets to be
disposed of. The impact of adopting SFAS 121 was not material.
Effective in December 1997 the Company adopted the provisions of SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS 129").
RECLASSIFICATIONS: Certain reclassifications have been made to conform
prior-year amounts to the current-year presentation.
4. PREDECESSOR COMPANY ACQUISITION
Effective April 1, 1996, Lockheed Martin acquired substantially all the
assets and liabilities of the defense businesses of Loral, including the
Wideband Systems Division and the Products Group which are included in the
Businesses. The acquisition of the Wideband Systems Division and Products
Group businesses (the "Loral Acquired Businesses") has been accounted for as
a purchase by Lockheed Martin Communications Systems -- Camden Division
("Division"). The acquisition has been reflected in the financial statements
based on the purchase price allocated to those acquired businesses by
Lockheed Martin. The assets and liabilities recorded in connection with the
purchase price allocation were $401,000 and $113,200, respectively. As such,
the accompanying condensed combined financial statements for periods prior to
April 1, 1997 reflect the results of operations of the Division and the Loral
Acquired Businesses from the effective date of acquisition including the
effects of an allocated portion of cost in excess of net assets acquired
resulting from the acquisition.
F-14
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
5. CONTRACTS IN PROCESS
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, comprise the following:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
---------- -------------
DECEMBER 31,
-------------------------
1997 1996
---------- -------------
<S> <C> <C>
Billed contract receivables..................................... $ 39,029 $ 45,212
Unbilled contract receivables .................................. 33,136 84,814
Other billed receivables, principally commercial and affiliates 31,253 41,154
Inventoried costs .............................................. 82,954 72,880
---------- -------------
186,372 244,060
Less, unliquidated progress payments (19,170) (45,987)
---------- -------------
Net contracts in process........................................ $167,202 $198,073
========== =============
</TABLE>
The U.S. Government has title to or a secured interest in, inventory to
which progress payments are applied. Unbilled contract receivables represent
accumulated costs and profits earned but not yet billed to customers. The
Company believes that substantially all such amounts will be billed and
collected within one year.
The following data has been used in the determination of costs and
expenses:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------- --------------------------------
NINE THREE
MONTHS MONTHS FOR THE YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, MARCH 31, ------------------
1997 1997 1996 1995
-------------- ------------ -------- -------
<S> <C> <C> <C> <C>
Selling, general and administrative ("SG&A") costs
included in inventoried costs...................... $15,379 $14,536 $14,700 $1,156
Selling, general and administrative costs incurred . 88,527 28,449 82,226 6,525
Independent research and development, including bid
and proposal costs, included in SG&A incurred ..... $28,893 $12,024 $36,500 $9,800
</TABLE>
6. NET ASSETS HELD FOR SALE
The Company has accounted for the allocation of purchase price and the net
assets of its Hycor business in accordance with the FASB's Emerging Issues
Task Force Issue 87-11 "Allocation of Purchase Price to Assets to be Sold"
("EITF 87-11"). Accordingly, the net assets related to the Hycor business as
of April 1, 1997 are included in the accompanying consolidated balance sheet
as "Net assets held for sale". The fair value assigned to such net assets is
based upon management's estimate of the proceeds from the sale of the Hycor
business less the estimated income from operations for such business during
the holding period of April 1, 1997 through January 29, 1998 (the "holding
period"), plus interest expense on debt allocated to such net assets during
the holding period. On January 29, 1998, the Company sold the Hycor business,
excluding land and buildings for $3.5 million in cash subject to adjustment
based on final closing net assets. In accordance with EITF 87-11, loss from
the operations of the Hycor business of $108 and interest expense of $552 on
the debt allocated to the Hycor net assets have been excluded from the
Company's consolidated statements of operations for the nine months ended
December 31, 1997.
Also included in net assets held for sale at December 31, 1997 is a
Company property located in Atlanta, Georgia.
F-15
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
---------- -------------
DECEMBER 31,
-------------------------
1997 1996
---------- -------------
<S> <C> <C>
Land.......................................... $ 6,670 $ 9,200
Buildings and improvements ................... 19,487 27,000
Machinery, equipment, furniture and fixtures 58,978 73,137
Leasehold improvements ....................... 9,899 7,229
---------- -------------
$95,034 $116,566
========== =============
</TABLE>
Depreciation and amortization expense attributable to property, plant and
equipment was $13,320 for the nine months ended December 31, 1997; $4,529 for
the three months ended March 31, 1997, and $14,924 and $5,492 for the years
ended December 31, 1996 and 1995, respectively.
8. DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Term loans............................. $172,000
10 3/8 Senior Subordinated Notes due
2007 ................................. 225,000
-----------------
$397,000
Less current portion of term loans ... 5,000
-----------------
Total long-term debt.................. $392,000
=================
</TABLE>
In connection with the Acquisition, the Company entered into $275,000 of
Senior Credit Facilities consisting of $175,000 of term loans, and a $100,000
revolving credit facility which has been provided by a syndicate of banks and
financial institutions and bear interest, at the option of the Company, at a
rate related to (i) the higher of federal funds rate plus 0.50% per annum or
the reference rate published by Bank of America NT&SA or (ii) LIBOR, at
December 31, 1997, such interest rates, based on various maturities, ranged
from 7.625% to 8.625%. Interest payments vary in accordance with the type of
borrowing and are made at a minimum every three months. The revolving credit
facility expires in 2003 and is available for ongoing working capital and
letter of credit needs. The Term Loans mature in installments until the final
maturity date in 2006. Approximately $93,428 of the revolving credit facility
is available at December 31, 1997 reflecting letters of credit of $6,572
drawn against the revolving credit facility of $100,000. In February 1998,
the Senior Credit Facilities were amended to, among other things, increase
the revolving credit facility to $200,000, waive certain excess cash flow
prepayments, as defined, otherwise required and permit the incurrence of up
to an additional $150,000 of subordinated debt. The Company pays a commitment
fee of 0.375% per annum on the unused portion of the revolving credit
facility.
In April 1997, the Company issued $225,000 of 10 3/8% senior subordinated
notes (the "1997 Notes") due May 1, 2007 with interest payable semi-annually
on May 1 and November 1 of each year, commencing November 1, 1997. On
November 5, 1997, the Company completed its exchange offer relating to the
1997 Notes and the holders of the 1997 Notes received registered securities.
The 1997 Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after May 1, 2002, at various redemption prices plus
accrued and unpaid interest to the applicable redemption date. In addition,
prior to May 1, 2000, the Company may redeem up to 35% of the aggregate
principal amount of 1997 Notes at a redemption price of 109.375% of the
principal amount thereof, plus accrued and unpaid interest to the
F-16
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
redemption date with the net cash proceeds of one or more equity offerings by
Holdings that are contributed to the Company as common equity capital.
The Senior Credit Facilities and the 1997 Notes agreement contain
financial and restrictive covenants that limit, among other things, the
ability of the Company to borrow additional funds, dispose of assets, or pay
cash dividends. At December 31, 1997, none of the Company's retained earnings
were available to pay dividends. The Senior Credit Facilities contain
financial covenants, which remain in effect so long as any amount is owed by
the Company thereunder. These financial covenants require that (i) the
Company's debt ratio, as defined, be less than or equal to 5.50 for the
quarter ended December 31, 1997, and that the maximum allowable debt ratio,
as defined, thereafter be further reduced to less than or equal to 3.1 for
the quarters ending after June 30, 2002, and (ii) the Company's interest
coverage ratio, as defined, be at least 1.85 for the quarter ended December
31, 1997, and thereafter increasing the interest coverage ratio, as defined,
to at least 3.10 for any fiscal quarters ended after June 30, 2002. At
December 31, 1997, the Company was in compliance with these covenants.
In connection with the Senior Credit Facilities, the Company has granted
the lenders a first priority lien on substantially all of the Company's
assets including the stock of L-3 Communications Corporation.
The aggregate principal payments for debt, excluding the revolving credit
borrowings for the five years ending December 31, 1998 through 2002 are:
$5,000, $11,000, $19,000, $25,000 and $33,200, respectively.
The costs related to the issuance of debt have been deferred and are being
amortized as interest expense over the term of the related debt using a
method that approximates the effective interest method.
9. PREDECESSOR COMPANY'S INTEREST EXPENSE
Interest expense has been allocated to the Predecessor Company by applying
Lockheed Martin's weighted average consolidated interest rate to the portion
of the beginning of the period invested equity account deemed to be financed
by consolidated debt, which has been determined based on Lockheed Martin's
debt to equity ratio on such date, except that the acquisition of the Loral
Acquired Businesses has been assumed to be fully financed by debt. Management
of the Businesses believes that this allocation methodology is reasonable.
Interest expense of the Predecessor Company was calculated using the
following balances and interest rates:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED -----------------------
MARCH 31, 1997 1996 1995
-------------- ---------- ---------
<S> <C> <C> <C>
Invested Equity $473,609 $482,466 $199,506
Interest Rate .. 7.10% 7.20% 7.40%
</TABLE>
10. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, billed contract receivables, other billed receivables
(principally commercial and affiliates), trade accounts payable, customer
advances, debt instruments, and interest rate cap and interest rate floor
contracts. The book values of cash and cash equivalents, billed contract
receivables, other billed receivables (principally commercial and
affiliates), trade accounts payable and customer advances are considered to
be representative of their respective fair values at December 31, 1997 due to
the short-term maturities or expected settlement dates of these instruments.
The Company's debt instruments consist of term loans and 1997 Notes (Note
8). The carrying values of the term loans approximate fair value because they
are variable-rate loans which bear interest at current market rates.
F-17
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
The 1997 Notes are registered, unlisted public debt which is traded in
the over-the-counter market. The fair value of such debt at December 31, 1997
was estimated to be approximately $243,000, based on trading activity on
December 31, 1997.
To mitigate risks associated with changing interest rates on certain of
its debt, the Company entered into the interest rate agreements. The fair
values of the interest rate caps and interest rate floors (collectively, the
"interest rate agreements") were estimated by discounting expected cash flows
using quoted market interest rates. The Company manages exposure to
counterparty credit risk by entering into the interest rate agreements only
with major financial institutions that are expected to fully perform under
the terms of such agreements. The notional amounts are used to measure the
volume of these agreements and do not represent exposure to credit loss. The
impact of the interest rate agreements was not material to interest expense
for the nine months ended December 31, 1997. Information with respect to the
interest rate agreements is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
NOTIONAL UNREALIZED
AMOUNT GAINS (LOSSES)
---------- --------------
<S> <C> <C>
Interest rate caps . $100,000 $(1,008)
---------- --------------
Interest rate
floors.............. $ 50,000 $ (263)
---------- --------------
</TABLE>
At December 31, 1996, the Predecessor Company's financial instruments
consisted primarily of billed contract receivables, other billed receivables
(principally commercial and affiliates), trade accounts payable and customer
advances. The book value of billed contract receivables, other billed
receivables (principally commercial and affiliates), trade accounts payable
and customer advances approximated their respective fair values at December
31, 1996, due to the short-term maturities or expected settlement dates of
those instruments.
11. INCOME TAXES
THE COMPANY
Pretax income of the Company for the nine months ended December 31, 1997
was $27,402 and was primarily domestic. The components of the Company's
provision for income taxes for the nine months ended December 31, 1997 are:
<TABLE>
<CAPTION>
<S> <C>
Income taxes currently payable, primarily federal $ 696
Deferred income taxes:
Federal .......................................... 8,635
State and local .................................. 1,356
--------
Subtotal ......................................... $ 9,991
--------
Total provision for income taxes .................. $10,687
========
</TABLE>
The effective income tax rate of the Company for the nine months ended
December 31, 1997 differs from the statutory federal income tax rate for the
following reasons:
<TABLE>
<CAPTION>
<S> <C>
Statutory federal income tax rate .............................. 35.0%
State and local income taxes, net of federal income tax benefit 3.2
Non-deductible goodwill amortization and other expenses ....... 3.7
Research and development and other tax credits ................. (2.9)
-------
Effective income tax rate ...................................... 39.0 %
=======
</TABLE>
F-18
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
The significant components of the Company's net deferred tax assets at
December 31, 1997 are:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Other postretirement benefits ....................... $ 8,649
Inventoried costs ................................... 8,711
Compensation and benefits ........................... 528
Pension costs ....................................... 4,177
Property, plant and equipment ....................... 8,098
Income recognition on long-term contracts .......... 3,691
Other ............................................... 1,861
Net operating loss and other credit carryforwards .. 2,969
---------
Total deferred tax assets........................... 38,684
Deferred tax liabilities:
Cost in excess of net assets acquired ............... (1,099)
Other, net .......................................... (70)
---------
Total deferred tax liabilities...................... (1,169)
---------
Net deferred tax assets............................... $37,515
=========
The net deferred tax assets are classified as
follows:
Current deferred tax assets ......................... $13,298
Long-term deferred tax assets........................ 24,217
---------
$37,515
=========
</TABLE>
At December 31, 1997, the Company had $2,969 of tax credit carryforwards
primarily related to U.S. federal net operating losses and research and
experimentation tax credits, which expire, if unused, in 2012. The Company
believes that these carryforwards will be available to reduce future income
tax liabilities and has recorded these carryforwards as non-current deferred
tax assets.
PREDECESSOR COMPANY
The (benefit) provision for income taxes for the Predecessor Company was
calculated by applying statutory tax rates to the reported income (loss)
before income taxes after considering items that do not enter into the
determination of taxable income and tax credits reflected in the consolidated
provision of Lockheed Martin, which are related to the Businesses.
Substantially all the income of the Businesses are from domestic operations.
For the three months ended March 31, 1997, it is estimated that the benefit
for deferred taxes represents $1,315. For the years ended December 31, 1996
and 1995, it is estimated that the (benefit) provision for deferred taxes
represents ($2,143) and $3,994, respectively.
F-19
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
The effective income tax rate of the Predecessor Company differs from the
statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1997 1996 1995
-------------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate ..................... (35.0)% 35.0% 34.0%
Amortization of cost in excess of net assets acquired (8.1) 2 529
Research and development and other tax credits ....... (11.3) (2) --
State and local income taxes, net of federal income
tax benefit and state and local income tax credits .. 4.8 6 101
Foreign sales corporation tax benefits ................ (8.4) (1) --
Other, net ............................................ 9.1 -- 17.0
-------------- ------- -------
Effective income tax rate ............................. (48.9)% 40.0% 681%
============== ======= =======
</TABLE>
12. STOCK OPTIONS
THE COMPANY
Holdings sponsors an option plan for key employees, pursuant to which
options to purchase up to 3,255,815 shares of common stock have been
authorized for grant.
On April 30, 1997, Holdings adopted the 1997 Option Plan for key employees
and granted to the Equity Executives nonqualified options to purchase, at
$6.47 per share, 2,285,714 shares of Class A common stock of Holdings. In
each case, half of the options are "Time Options" and half are "Performance
Options" (collectively, the "Options"). The Time Options become exercisable
with respect to 20% of the shares subject to the Time Options on each of the
first five anniversaries if employment continues through and including such
date. The Performance Options become exercisable nine years after the grant
date, but may become exercisable earlier with respect to up to 20% of the
shares subject to the Performance Options on each of the first five
anniversaries, to the extent certain defined targets are achieved. The
Options, which have a ten year term, become fully exercisable under certain
circumstances, including a change in control.
On July 1, 1997 and November 11, 1997, Holdings granted nonqualified
options to certain officers and other employees of the Company to purchase at
$6.47 per share 679,500 shares of Class A common stock of Holdings
(collectively, the "1997 Options"). Generally, the 1997 Options vest over a
three-year vesting period and expire ten years from the date of grant.
The exercise price for Holdings' stock options granted to employees in
1997 equaled the fair value of Holdings' common stock at the date of grant.
Accordingly, in accordance with APB 25, no compensation expense was
recognized by the Company.
Pro forma information regarding net earnings as required by SFAS 123 has
been determined as if the Company had accounted for its employee stock
options under the fair value method. Because Holdings is a nonpublic entity
the fair value for the options was estimated at the date of grant using the
minimum value method prescribed in SFAS 123, which does not consider the
expected volatility of Holdings's stock price, with the following
weighted-average assumptions for 1997: risk-free interest rate of 6.3%;
dividend yield of 0%; and weighted-average expected option life of 5.49
years.
F-20
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
For purposes of pro forma disclosures, the compensation cost of the
options based on their estimated fair values is amortized to expense over
vesting periods of the options. The Company's net income for the nine months
ended December 31, 1997 would have decreased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net income:
As reported . $16,715
=========
Pro forma..... $16,161
=========
</TABLE>
A summary of the stock option activity for the nine months ended December
31, 1997 is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000'S) EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Options granted ........................ 2,975 $6.47
Options exercised ...................... -- --
Options cancelled ...................... 4 $6.47
Options outstanding, December 31, 1997 2,971 $6.47
Options exercisable, December 31, 1997 -- --
</TABLE>
The weighted-average grant-date fair value of options granted during the
nine months ended December 31, 1997 was $1.82 per option. The weighted
average remaining contract life of the Company's outstanding stock options
was 9.37 years at December 31, 1997.
PREDECESSOR COMPANY
During the three months ended March 31, 1997 and the years ended December
31, 1996 and 1995, certain employees of the Predecessor Company participated
in Lockheed Martin's stock option plans. All stock options granted had 10
year terms and vested over a two year service period. Exercise prices of
options awarded in both years were equal to the market price of the stock on
the date of grant. Pro forma information regarding net earnings (loss) as
required by SFAS No. 123 has been determined as if the Predecessor Company
had accounted for its employee stock options under the fair value method. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the three months ended March 31, 1997 and the years ended
December 31, 1996 and 1995, respectively: risk-free interest rates of 5.58%,
5.58% and 6.64%; dividend yield of 1.70%; volatility factors related to the
expected market price of the Lockheed Martin's common stock of .186, .186 and
.216; weighted-average expected option life of five years. The
weighted-average fair values of options granted during 1997, 1996 and 1995
were $17.24, $17.24 and $16.09, respectively.
For the purposes of pro forma disclosures, the options' estimated fair
values are amortized to expense over the options' vesting periods. The
Predecessor Company's pro forma net loss for the three months ended March 31,
1997 and the years ended December 31, 1996 and 1995 were ($386), $11,531, and
$(1,040), respectively.
F-21
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
13. COMMITMENTS AND CONTINGENCIES
THE COMPANY
The Company and Predecessor Company leases certain facilities and
equipment under agreements expiring at various dates through 2011. At
December 31, 1997, the Company's future minimum payments for noncancellable
operating leases with initial or remaining terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------------------------
REAL ESTATE EQUIPMENT TOTAL
------------- ----------- --------
<S> <C> <C> <C>
1998.......... $ 8,599 $295 $ 8,894
1999 ......... 7,734 244 7,978
2000 ......... 10,030 232 10,262
2001 ......... 8,926 29 8,955
2002 ......... 2,795 22 2,817
Thereafter .. 14,393 -- 14,393
------------- ----------- --------
$52,477 $822 $53,299
============= =========== ========
</TABLE>
Real estate lease commitments have been reduced by minimum sublease
rentals of $22,106 due in the future under noncancellable subleases.
Leases covering major items of real estate and equipment contain renewal
and or purchase options which may be exercised by the Company and Predecessor
Company. Rent expense, net of sublease income from other Lockheed Martin
entities, was $7,330 for the Company for the nine months ended December 31,
1997; $2,553 for the Predecessor Company for the three months ended March 31,
1997 and $8,495 and $4,772 for the Predecessor Company for the years ended
December 31, 1996 and 1995, respectively.
The Company is and the Predecessor Company has been engaged in providing
products and services under contracts with the U.S. Government and to a
lesser degree, under foreign government contracts, some of which are funded
by the U.S. Government. All such contracts are subject to extensive legal and
regulatory requirements, and, from time to time, agencies of the U.S.
Government investigate whether such contracts were and are being conducted in
accordance with these requirements. Under government procurement regulations,
an indictment of the Company and the Predecessor Company by a federal grand
jury could result in the Company and the Predecessor Company being suspended
for a period of time from eligibility for awards of new government contracts.
A conviction could result in debarment from contracting with the federal
government for a specified term.
The decline in the U.S. defense budget since the mid-1980s has resulted in
program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Company's
programs; however, in the event that U.S. Government expenditures for
products of the type manufactured by the Company are reduced, and not offset
by greater commercial sales or other new programs or products, or
acquisitions, there may be a reduction in the volume of contracts or
subcontracts awarded to the Company.
Pursuant to the L-3 Acquisition Agreement, Holdings and the Company have
agreed to assume certain on-site and off-site environmental liabilities
related to events or activities occurring prior to the consummation of the
L-3 Acquisition. Lockheed Martin has agreed to retain all environmental
liabilities for all facilities not used by the Businesses as of April, 1997
and to indemnify fully Holdings for such prior site environmental
liabilities. Lockheed Martin has also agreed, for the first eight years
following April 1997 to pay 50% of all costs incurred by Holdings above those
reserved for on the Company's balance sheet at March 31, 1997 relating to
certain Company-assumed environmental liabilities and, for the seven
F-22
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
years thereafter, to pay 40% of certain reasonable operation and maintenance
costs relating to any environmental remediation projects undertaken in the
first eight years.
Management continually assesses the Company's obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management is
aware, the Company believes that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's results
of operations. The Company accrues for these contingencies when it is
probable that a liability has been incurred and the amount of the loss can be
reasonably estimated.
The Company and the Predecessor Company have been periodically subject to
litigation, claims or assessments and various contingent liabilities
(including environmental matters) incidental to its business. With respect to
those investigative actions, items of litigation, claims or assessments of
which they are aware, management of the Company is of the opinion that the
probability is remote that, after taking into account certain provisions that
have been made with respect to these matters, the ultimate resolution of any
such investigative actions, items of litigation, claims or assessments will
have a material adverse effect on the financial position or results of
operations of the Company and the Predecessor Company.
14. PENSIONS AND OTHER EMPLOYEE BENEFITS
THE COMPANY
PENSIONS: Holdings and the Company maintain a number of pension plans,
both contributory and noncontributory, covering certain employees.
Eligibility for participation in these plans varies and benefits are
generally based on members' compensation and years of service. The Company's
funding policy is generally to contribute in accordance with cost accounting
standards that affect government contractors, subject to the Internal Revenue
Code and regulations thereon. Plan assets are invested primarily in U.S.
government and agency obligations and listed stocks and bonds.
Pension expense for the nine months ended December 31, 1997 includes the
following components:
<TABLE>
<CAPTION>
<S> <C>
Service cost ................. $ 5,109
Interest cost ................ 8,883
Actual return on plan assets (11,285)
Net deferral ................. 1,581
----------
Total pension cost ........... $ 4,288
==========
</TABLE>
F-23
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
The following presents the funded status and amounts recognized in the
balance sheet for the Company's pension plans:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits ................................................ $13,742 $152,133
--------------- ---------------
Accumulated benefits ........................................... $13,825 $155,474
Effect of projected future salary increases .................... 3,337 25,795
--------------- ---------------
Projected benefits.............................................. $17,162 $181,269
=============== ===============
Plan assets at fair value........................................ $18,172 $155,278
--------------- ---------------
Plan assets in excess of (less than) projected benefit
obligation...................................................... 1,010 (25,991)
Unrecognized net (gain) loss .................................... (559) 5,683
--------------- ---------------
Prepaid (accrued) pension cost................................... $ 451 $(20,308)
=============== ===============
</TABLE>
The following assumptions were used in accounting for pension plans for
the Company:
<TABLE>
<CAPTION>
APRIL 1, 1997 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
Discount rate .................... 7.50% 7.25%
Rate of increase in compensation 5.00% 5.00%
Rate of return on plan assets ... 9.00% 9.00%
</TABLE>
POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE: In addition to providing
pension benefits, the Company provides certain health care and life insurance
benefits for retired employees and dependents at certain locations.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension
plans. These benefits are funded primarily on a pay-as-you-go basis with the
retiree generally paying a portion of the cost through contributions,
deductibles and coinsurance provisions.
Post-retirement health care and life insurance costs for the nine months
ended December 31, 1997 include the following components:
<TABLE>
<CAPTION>
<S> <C>
Service cost .............................................. $ 466
Interest cost ............................................. 840
-------
Total post-retirement health care and life insurance costs $1,306
=======
</TABLE>
F-24
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
The following table presents the amounts recognized in the balance sheet
for the Company at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Accumulated post-retirement benefit obligation:
Retirees.................................................... $ 4,702
Fully eligible plan participants ........................... 3,188
Other active plan participants ............................. 10,990
---------
Total accumulated post-retirement benefit obligation ........ $18,880
Unrecognized net loss ....................................... 624
---------
Accrued post-retirement health care and life insurance costs $18,256
=========
</TABLE>
Actuarial assumptions used in determining the December 31, 1997 used in
determining the accumulated post-retirement benefit obligation include a
discount rate of 7.25%, an average rate of compensation increase of 5.0% and
an assumed health care cost trend rate of 6.5% in 1997 decreasing gradually
to rate of 4.5% by the year 2001. The discount rate used at April 1, 1997 was
7.50%. The other assumptions did not change from April 1, 1997. Increasing
the assumed health care cost trend rate by 1% would change the accumulated
post-retirement benefits obligation at December 31, 1997 by approximately
$2,218 and the aggregate service and interest cost components for the nine
months ended December 31, 1997 by approximately $81 and $113, respectively.
EMPLOYEE SAVINGS PLAN: Under its various employee savings plans, the
Company matches the contributions of participating employees up to a
designated level. The extent of the match, vesting terms and the form of the
matching contribution vary among the plans. Under these plans, the Company's
matching contributions, in cash, for the nine months ended December 31, 1997
was $3,742.
THE PREDECESSOR COMPANY
Certain of the Businesses for the Predecessor Company participated in
various Lockheed Martin-sponsored pension plans covering certain employees.
Eligibility for participation in these plans varies, and benefits are
generally based on members' compensation and years of service. Lockheed
Martin's funding policy was generally to contribute in accordance with cost
accounting standards that affect government contractors, subject to the
Internal Revenue Code and regulations. Since the aforementioned pension
arrangements are part of certain Lockheed Martin defined benefit plans, no
separate actuarial data is available for the portion allocable to the
Businesses. Therefore, no liabilities or assets are reflected in the
accompanying combined financial statements of the Predecessor Company as of
December 31, 1996. The Businesses have been allocated pension costs based
upon participant employee headcount. Net pension expense included in the
accompanying combined financial statements of the Predecessor Company was
$1,848 for the three months ended March 31, 1997, and $7,027 and $4,134, for
the years ended December 31, 1996 and 1995, respectively.
In addition to participating in Lockheed Martin-sponsored pension plans,
certain of the Businesses of the Predecessor Company provided varying levels
of health care and life insurance benefits for retired employees and
dependents. Participants were eligible for these benefits when they retired
from active service and met the pension plan eligibility requirements. These
benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions. Since the aforementioned postretirement benefits are
part of certain Lockheed Martin postretirement arrangements, no separate
actuarial data is available for the portion allocable to the Businesses.
Accordingly, no liability is reflected in the accompanying combined financial
statements as of combined December 31, 1996 and 1995. The Businesses have
been allocated
F-25
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
postretirement benefits cost based on participant employee headcount.
Postretirement benefit costs included in the accompanying combined financial
statements was $616 for the three months ended March 31, 1997 and $2,787 and
$2,124 for the years ended December 31, 1996 and 1995, respectively. Under
various employee savings plans sponsored by Lockheed Martin, the Predecessor
Company matched contributions of participating employees up to a designated
level. Under these plans the matching contributions for the three months
ended March 31, 1997 and for the years ended December 31, 1996 and 1995 were
$1,241, $3,940 and $1,478, respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statement of cash flows are
as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
----------------- -----------------------------
<S> <C> <C> <C>
THREE
MONTHS
NINE MONTHS ENDED YEAR ENDED
ENDED MARCH DECEMBER 31,
DECEMBER 31, 31,
1997 1997 1996 1995
- ------------------ ----------------- -------------- ------ ------
INTEREST PAID ..... $21,245 -- -- --
================= ============== ====== ======
INCOME TAXES PAID $ 109 -- -- --
================= ============== ====== ======
</TABLE>
The Company issued $45,000 of Holdings Class A Common Stock to Lockheed
Martin in a non-cash transaction as partial consideration paid to Lockheed
Martin for the L-3 Acquisition.
16. SALES TO PRINCIPAL CUSTOMERS
The Company and the Predecessor Company operate primarily in one industry
segment, government electronic systems. Sales to principal customers are as
follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------- -------------------------------------------
THREE
NINE MONTHS YEAR YEAR
MONTHS ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
-------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Government Agencies ... $434,020 $128,505 $425,033 $161,617
Foreign (principally foreign
governments) ............... 12,090 13,612 33,475 4,945
Other (principally U.S.
commercial) ................ 100,415 16,756 84,573 219
-------------- ----------- -------------- --------------
$546,525 $158,873 $543,081 $166,781
============== =========== ============== ==============
</TABLE>
17. OTHER TRANSACTIONS WITH LOCKHEED MARTIN
The Company and the Predecessor Company sell products to Lockheed Martin
and its affiliates, net sales for which were $60,402 for the nine months
ended December 31, 1997; $21,171 for the three months ended March 31, 1997
and $70,658 and $25,874 for the years ended December 31, 1996 and 1995,
respectively. Included in Contracts in Process are receivables from Lockheed
Martin and its affiliates of $8,846 and $10,924 at December 31, 1997 and
1996, respectively.
The Predecessor Company relied on Lockheed Martin for certain services,
including treasury, cash management, employee benefits, taxes, risk
management, internal audit, financial reporting, contract administration and
general corporate services. Although certain assets, liabilities and expenses
related to
F-26
<PAGE>
L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(continued)
(Dollars in thousands)
these services have been allocated to the Businesses, the combined financial
position, results of operations and cash flows presented in the accompanying
combined financial statements would not be the same had the Businesses been
independent entities.
The amount of allocated corporate expenses to the Predecessor Company and
reflected in these combined financial statements was estimated based
primarily on an allocation methodology prescribed by government regulations
pertaining to government contractors. Allocated costs to the Businesses were
$5,208 for the three months ended March 31, 1997, and $10,057 and $2,964 for
the years ended December 31, 1996 and 1995, respectively.
18. SUBSEQUENT EVENTS
On February 5, 1998, the Company purchased substantially all the assets
and liabilities of the Satellite Transmission Systems division of California
Microwave, Inc. The purchase price of $27,000 is subject to adjustment based
on closing net assets. The Company used cash on hand to fund the purchase
price.
On December 22, 1997, the Company signed a definitive agreement to
purchase substantially all the assets and liabilities of the Ocean Systems
division of AlliedSignal Inc. The purchase price of $67,500, subject to
adjustment based on closing net working capital, will be financed through
cash on hand and/or borrowings available under the Senior Credit Facilities.
On February 11, 1998, the Company entered into a definitive agreement to
purchase the assets of ILEX Systems ("ILEX") for $51,900 million in cash and
additional consideration based on post-acquisition performance of ILEX.
The acquisition of ILEX and Ocean are expected to close during the first
quarter of 1998. The company plans to finance the purchase prices using its
cash on hand and available borrowings under its revolving credit facility.
F-27
<PAGE>
LORAL ACQUIRED BUSINESSES
COMBINED FINANCIAL STATEMENTS
For the three months ended March 31, 1996 and the year ended December 31, 1995
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors of
L-3 Communications Corporation:
We have audited the accompanying combined statements of operations and
cash flows for the Loral Acquired Businesses as defined in Note 1 (the
"Businesses") for the three months ended March 31, 1996 and the year ended
December 31, 1995. These financial statements are the responsibility of the
Businesses' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of the operations and cash
flows of the Businesses for the three months ended March 31, 1996 and the
year ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
March 20, 1997
F-29
<PAGE>
LORAL ACQUIRED BUSINESSES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
Sales ...................... $132,200 $448,165
Cost and expenses .......... 124,426 424,899
-------------- -----------------
Operating income ........... 7,774 23,266
Allocated interest expense 4,365 20,799
-------------- -----------------
Income before income taxes 3,409 2,467
Income taxes ............... 1,292 854
-------------- -----------------
Net income.................. $ 2,117 $ 1,613
============== =================
</TABLE>
See notes to combined financial statements.
F-30
<PAGE>
LORAL ACQUIRED BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income ................................... $ 2,117 $ 1,613
Depreciation and amortization ................ 5,011 20,625
Changes in operating assets and liabilities
Contracts in process ........................ (11,382) 7,327
Other current assets ........................ (3,436) 890
Other assets ................................ 2,437 6,736
Accounts payable and accrued liabilities ... 4,525 (4,533)
Other current liabilities ................... 3,348 4,428
Other liabilities ........................... (452) 117
-------------- -----------------
Net cash from operating activities ........... 2,168 37,203
-------------- -----------------
INVESTING ACTIVITIES:
Acquisition of business ...................... -- (214,927)
Capital expenditures ......................... (3,962) (12,683)
Disposition of property, plant and equipment 187 4,342
-------------- -----------------
(3,775) (223,268)
-------------- -----------------
FINANCING ACTIVITIES:
Advances from (repayments to) Loral ......... $ 1,607 $ 186,065
-------------- -----------------
Net change in cash............................ -- --
============== =================
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BACKGROUND AND DESCRIPTION OF BUSINESS
On January 31, 1997, Lockheed Martin Corporation ("Lockheed Martin"),
Lehman Brothers Holdings Inc. ("Lehman"), Frank C. Lanza ("Lanza") and Robert
V. LaPenta ("LaPenta") entered into a Memorandum of Understanding ("MOU")
regarding the transfer of certain businesses of Lockheed Martin to a newly
formed corporation ("Newco") to be owned by Lockheed Martin, Lehman, Lanza
and LaPenta. The businesses proposed to be transferred (the "Loral Acquired
Businesses" or "Businesses") include Lockheed Martin's Wideband Systems
Division and the Products Group, comprised of ten autonomous operations, all
of which were acquired by Lockheed Martin effective April 1, 1996 as part of
the acquisition by Lockheed Martin of the defense electronics business of
Loral Corporation ("Loral"). Also included in the transaction is the
acquisition of a semiconductor product line of another business and certain
leasehold improvements in New York City.
The Businesses are leading suppliers of sophisticated secure communication
systems, microwave communication components, avionic and instrumentation
products and other products and services to major aerospace and defense
contractors as well as the U.S. Government. The Businesses operate primarily
in one industry segment, communication systems and products.
Substantially all the Businesses' products are sold to agencies of the
United States Government, primarily the Department of Defense, to foreign
government agencies or to prime contractors or subcontractors thereof. All
domestic government contracts and subcontracts of the Businesses are subject
to audit, various cost controls and include standard provisions for
termination for the convenience of the government. Multi-year government
contracts and related orders are subject to cancellation if funds for
contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the government.
The decline in the U.S. defense budget since the mid 1980s has resulted in
program delays, cancellations and scope reductions for defense contractors in
general. These events may or may not have an effect on the Businesses'
programs; however, in the event that expenditures for products of the type
manufactured by the Businesses are reduced, and not offset by greater foreign
sales or other new programs or products, or acquisitions, there may be a
reduction in the volume of contracts or subcontracts awarded to the
Businesses.
The Businesses' operations, as presented herein, include allocations and
estimates of certain expenses of Loral based upon estimates of services
performed by Loral that management of the Businesses believe are reasonable.
Such services include treasury, cash management, employee benefits, taxes,
risk management, internal audit and general corporate services. Accordingly,
the results of operations and cash flows as presented herein may not be the
same as would have occurred had the Businesses been independent entities.
2. BASIS OF PRESENTATION
BASIS OF COMBINATION
The accompanying combined financial statements reflect the Businesses'
assets, liabilities and operations included in Loral Corporation's historical
financial statements that will be transferred to Newco. All significant
intercompany transactions and amounts have been eliminated. The combined
financial statements do not include the operations of telecommunications
switch product line which will not be transferred and was exited in 1995.
Also, the assets and operations of the semiconductor product line and certain
other facilities which are not material to the Businesses have been excluded
from the financial statements.
F-32
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
ALLOCATION OF CORPORATE EXPENSES
The amount of corporate office expenses reflected in these financial
statements has been estimated based primarily on the allocation methodology
prescribed by government regulations pertaining to government contractors,
which management of the Businesses believes to be a reasonable allocation
method.
INCOME TAXES
The Businesses were included in the consolidated Federal income tax return
and certain combined and separate state and local income tax returns of
Loral. However, for the purposes of these financial statements, the provision
for income taxes was allocated based upon reported income before income
taxes. Such provision was recorded through the advances from (repayments to)
Loral account.
INTEREST EXPENSE
Interest expense has been allocated to the Businesses by applying Loral's
weighted average consolidated interest rate to the portion of the beginning
of the period invested equity account deemed to be financed by consolidated
debt, which amount has been determined based on Loral's debt to equity ratio
on such date, except that the acquisition of Wideband Systems has been
assumed to be fully financed by debt.
STATEMENTS OF CASH FLOWS
The Businesses participated in Loral's cash management system, under which
all cash was received and payments made by Loral. All transactions between
the Businesses and Loral have been accounted for as settled in cash on the
date such transactions were recorded by the Businesses.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTRACTS IN PROCESS
Sales on long-term production-type contracts are recorded as units are
shipped; profits applicable to such shipments are recorded pro rata, based
upon estimated total profit at completion of the contract. Sales and profits
on cost reimbursable contracts are recognized as costs are incurred. Sales
and estimated profits under other long-term contracts are recognized under
the percentage of completion method of accounting using the cost-to-cost
method. Amounts representing contract change orders or claims are included in
sales only when they can be reliably estimated and realization is probable.
Incentive fees and award fees enter into the determination of contract
profits when they can be reliably estimated.
Costs accumulated under long-term contracts include direct costs as well
as manufacturing, overhead, and for government contracts, general and
administrative, independent research and development and bid and proposal
costs. Losses on contracts are recognized when determined. Revisions in
profit estimates are reflected in the period in which the facts which require
the revision become known.
DEPRECIATION AND AMORTIZATION
Depreciation is provided primarily on the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements. The excess of the cost of purchased businesses over the
fair value of the net assets acquired is being amortized using a
straight-line method generally over a 40-year period.
F-33
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The carrying amount of cost in excess of net assets acquired is evaluated
on a recurring basis. Current and future profitability as well as current and
future undiscounted cash flows, excluding financing costs, of the underlying
businesses are primary indicators of recoverability. There were no
adjustments to the carrying amount of cost in excess of net assets acquired
resulting from these evaluations during the periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Businesses' 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 revenue and expenses
during the reporting period. The most significant of these estimates and
assumptions relate to contract estimates of sales and costs, cost allocations
from Loral, including interest and income taxes, recoverability of recorded
amounts of fixed assets and cost in excess of net assets acquired, litigation
and environmental obligations. Actual results could differ from these
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes the accounting
standards for the impairment of long-lived assets, certain intangible assets
and cost in excess of net assets and certain intangible assets to be disposed
of. The impact of adopting SFAS 121 was not material.
Effective January 1, 1994, the Businesses adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"). SFAS 112 requires that the costs of benefits provided
to employees after employment but before retirement be recognized on an
accrual basis. The adoption of SFAS 112 did not have a material impact on the
results of operations of the Businesses.
4. ACQUISITIONS
Effective May 1, 1995, Loral acquired substantially all the assets and
liabilities of the Defense Systems operations of Unisys Corporation, which
included the Wideband Systems Division. The acquisition has been accounted
for as a purchase. As such, the accompanying combined financial statements
reflect the results of operations of the Wideband Systems Division from the
effective date of acquisition, including the amortization of an allocated
portion of cost in excess of net assets acquired resulting from the
acquisition. Such allocation was based on the sales and profitability of the
Wideband Systems Divisions relative to the aggregate sales and profitability
of the defense systems operations acquired by Loral. The assets and
liabilities recorded in connection with the purchase price allocation were
$240,525 and $25,598, respectively.
Had the acquisition of the Wideband Systems Division occurred on January
1, 1995, the unaudited pro forma sales and net income for the year ended
December 31, 1995 would have been $524,355 and $504,780, respectively. The
results, which are based on various assumptions, are not necessarily
indicative of what would have occurred had the acquisition been consummated
as of January 1, 1995.
F-34
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
5. OPERATING EXPENSES
The following expenses have been included in the statements of operations:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
General and administrative expenses ...................... $23,558 $90,757
Independent research and development, and bid and
proposal costs .......................................... $ 5,587 $21,370
</TABLE>
6. INCOME TAXES
The provision for income taxes was calculated by applying Loral's
statutory tax rates to the reported pre-tax book income after considering
items that do not enter into the determination of taxable income and tax
credits reflected in the consolidated provision which are related to the
Businesses. It is estimated that deferred income taxes represent
approximately $714,000 and $2,857,000 of the provisions for income taxes
reflected in these financial statements for the three months ended March 31,
1996 and the year ended December 31, 1995. The principal components of
deferred income taxes are contract accounting methods, property plant and
equipment, goodwill amortization, and timing of accruals. Substantially all
of the Businesses' income is from domestic operations.
The following is a reconciliation of the statutory rate to the effective
tax rates reflected in the financial statements:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1996 1995
------- --------
<S> <C> <C>
Statutory Federal income tax rate ............................. 35.0% 35.0%
Research and development and other tax credits................. -- (18.6)
State and local income taxes, net of Federal income tax
benefit and state and local income tax credits ............... 3.9 (.3)
Foreign sales corporation tax benefit ......................... (2.2) (3.0)
Amortization of goodwill ...................................... 6.3 35.1
Other, net .................................................... (5.1) (13.6)
------- --------
Effective income tax rate ..................................... 37.9% 34.6%
======= ========
</TABLE>
7. INTEREST EXPENSE
Interest expense was calculated using the following balances and interest
rates:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
Invested Equity ........................... $453,062 $265,384
Interest Rate ............................. 7.40% 7.87%
Wideband Systems Allocated Purchase Price -- $214,927
Interest Rate.............................. -- 7.40%
</TABLE>
F-35
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
8. COMMITMENTS AND CONTINGENCIES
The Businesses lease certain facilities and equipment under agreements
expiring at various dates through 2011. Leases covering major items of real
estate and equipment contain renewal and/or purchase options which may be
exercised by the Businesses. Rent expense for the three months ended March
31, 1996 was $1,063. Rent expense for the year ended December 31, 1995 was
$4,276.
Management is continually assessing its obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Businesses in order to
comply with these laws, based upon available internal and external
assessments, the Businesses believe that even without considering potential
insurance recoveries, if any, there are no environmental loss contingencies
that, individually or in the aggregate, would be material to the Businesses'
operations. The Businesses accrue for these contingencies when it is probable
that a liability has been incurred and the amount of the loss can be
reasonably estimated. The Businesses believe that it has adequately accrued
for future expenditures in connection with environmental matters and that
such expenditures will not have a material adverse effect on its financial
position or results of operations.
There are a number of lawsuits or claims pending against the Businesses
and incidental to its business. However, in the opinion of management, the
ultimate liability on these matters, if any, will not have a material adverse
effect on the financial position or results of operations of the Businesses.
9. PENSIONS AND OTHER EMPLOYEE BENEFITS
PENSIONS
The Businesses participate in various Loral-sponsored pension plans both
contributory and non-contributory covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
members' compensation and years of service. Loral's funding policy was
generally to contribute in accordance with cost accounting standards that
affect government contractors, subject to the Internal Revenue code and
regulations thereon. Since the aforementioned pension arrangements were part
of certain Loral defined benefit or defined contribution plans, no separate
actuarial data was available for the Businesses. The Businesses have been
allocated their share of pension costs based upon participation employee
headcount. Net pension expense, which approximates the amount funded,
included in the accompanying financial statements was $1,234 and $4,391 for
the three months ended March 31, 1996 and the year ended December 31, 1995,
respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to participating in Loral-sponsored pension plans, the
Businesses provide certain health care and life insurance benefits for
retired employees and dependents at certain locations. Participants are
eligible for these benefits when they retire from active service and meet the
pension plan eligibility requirements. These benefits are funded primarily on
a pay-as-you-go basis with the retiree generally paying a portion of the cost
through contributions, deductibles and coinsurance provisions. Since the
aforementioned postretirement benefits were part of certain Loral
postretirement arrangements, no separate actuarial data is available for the
Businesses. The Businesses have been allocated postretirement benefit costs
based upon participant employee headcount. Post-retirement benefits costs
included in the accompanying financial statements were $402 and $1,646 for
the three months ended March 31, 1996 and the year ended December 31, 1995,
respectively.
EMPLOYEE SAVINGS PLANS
Under various employee savings plans sponsored by Loral, the Businesses
matched the contributions of participating employees up to a designated
level. The extent of the match, vesting terms and the form
F-36
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
of the matching contribution vary among the plans. Under these plans, the
matching contributions, in cash, common stock or both, for the three months
ended March 31, 1996 and the year ended December 31, 1995 were $634 and
$1,879, respectively.
10. SALES TO PRINCIPAL CUSTOMERS
The Businesses operate primarily in one industry segment, electronic
components and systems. Sales to principal customers are as follows:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
U.S. Government Agencies .................. $ 94,993 $328,476
Foreign (principally foreign governments) 16,838 62,549
Other (principally commercial) ............ 20,369 57,140
-------------- -----------------
$132,200 $448,165
============== =================
</TABLE>
Foreign sales comprise the following:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
Export sales
Asia .............. $ 4,056 $19,248
Middle East ....... 3,648 4,147
Europe ............ 6,275 26,283
Other ............. 2,859 12,871
-------------- -----------------
Total foreign
sales............. $16,838 $62,549
============== =================
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Businesses had a number of transactions with Loral and its affiliates.
Management believes that the arrangements are as favorable to the Businesses
as could be obtained from unaffiliated parties. The following describe the
related party transactions.
Loral allocated certain operational, administrative, legal and other
services to the Businesses. Costs allocated to the Businesses were $1,827 and
$6,535 for the three months ended March 31, 1996 and the year ended December
31, 1995, respectively. The Businesses sold products to Loral and its
affiliates. Net sales to Loral were $14,840 for the three months ended March
31, 1996 and were $54,600 in 1995. Net sales to Space Systems/Loral were
$2,471 for the three months ended March 31, 1996 and were $4,596 in 1995. Net
sales to K&F Industries were $1,173 for the three months ended March 31, 1996
and were $2,415 in 1995.
F-37
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Six months ended December 31, 1996 and 1997
F-38
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Accounts receivable, less $554 allowance for doubtful
accounts .................................................... $ 22,204
Inventories .................................................. 10,382
----------
Total current assets .......................................... 32,586
Property, plant and equipment, at cost ........................ 21,663
Less accumulated depreciation and amortization ................ (14,467)
----------
Net property and equipment .................................... 7,196
Other assets .................................................. 15
----------
Total assets .................................................. $ 39,797
==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ............................................. $ 6,508
Accrued liabilities .......................................... 3,703
Current portion of long-term debt ............................ 200
----------
Total current liabilities ..................................... 10,411
Long-term debt ................................................ 1,330
----------
Total liabilities ............................................. 11,741
Commitments
Division equity ............................................... 28,056
----------
Total liabilities and Division equity ......................... $ 39,797
==========
</TABLE>
See accompanying notes.
F-39
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales ........................... $24,551 $ 38,770
Cost of products sold ............... 23,226 42,530
---------- ----------
Gross margin ........................ 1,325 (3,760)
---------- ----------
Expenses:
Research and development ........... 712 721
Marketing and administration ...... 5,123 8,064
Amortization of intangible assets . -- 72
---------- ----------
Total expenses ...................... 5,835 8,857
---------- ----------
Operating loss ...................... (4,510) (12,617)
Interest expense .................... (43) (70)
Interest income ..................... -- 5
---------- ----------
Loss before income tax benefit ..... (4,553) (12,682)
Allocated benefit from income taxes 1,639 4,185
---------- ----------
Net loss ............................ $(2,914) $ (8,497)
========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................ $(2,914) $ (8,497)
Adjustments for noncash items:
Amortization of intangible assets .............................. -- 72
Depreciation and amortization of property, plant and equipment 780 1,200
Loss on sale of assets ........................................ -- 151
Provision for doubtful accounts ............................... 66 750
Changes in asset and liability accounts:
Accounts receivable ............................................ 6,053 16,124
Inventories .................................................... (2,644) 6,789
Prepaid expenses and other assets .............................. 85 213
Accounts payable ............................................... (1,256) (10,238)
Accrued liabilities ............................................ 132 (208)
---------- ----------
Net cash provided by operations ................................. 302 6,356
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................ (160) (1,072)
Proceeds from sale of building .................................. -- 1,617
---------- ----------
Net cash provided by (used in) investing activities ............ (160) 545
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt ...................................... (100) (200)
Net cash provided to CMI ........................................ (42) (6,701)
---------- ----------
Net cash used in financing activities ........................... (142) (6,901)
---------- ----------
Cash and cash equivalents ....................................... $ -- $ --
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the six month period for interest .............. $ 36 $ 32
========== ==========
</TABLE>
See accompanying notes.
F-41
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements include the operations of
the Satellite Transmission Systems Division ("STS" or the "Division") of
California Microwave, Inc. ("CMI" or the "Company"). The Division is a global
satellite communication systems integrator providing hardware, software and
services for turnkey projects to large commercial customers, principally
domestic and foreign telephone companies and major common carriers and to the
U.S. and foreign governments.
These financial statements are presented as if the Division had existed as
an entity separate from CMI during the periods presented and include the
historical assets, liabilities, sales and expenses that are directly related
to the Division's operations. However, these financial statements are not
necessarily indicative of the financial position and results of operations
which would have occurred had the Division been an independent entity.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month periods ended December 31, 1996 and 1997
are not necessarily indicative of the results that may be expected for the
years ended June 30, 1997 and 1998. For further information, refer to the
financial statements and footnotes thereto included in the Division's
financial statements for the year ended June 30, 1997.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates are used in determining the
collectibility of accounts receivable, warranty costs, inventory realization,
profitability on long-term contracts, restructuring reserves, recoverability
of property, plant and equipment, and contingencies. Actual results could
differ from estimates.
INVENTORIES AND COST OF PRODUCTS SOLD
Inventories are recorded at the lower of cost or market. Project
inventories are transferred to cost of products sold at the time revenue is
recognized based on the estimated total manufacturing costs and total
contract prices under each contract. Losses on contracts are recognized in
full when the losses become determinable. The cost of other inventories is
generally based on standard costs which approximate actual costs determined
by the first-in, first-out method.
F-42
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Projects in process..................................... $ 9,351
Less: progress billings................................. 1,547
--------------
7,804
Product inventories, principally materials and
supplies............................................... 2,578
--------------
Total................................................... $10,382
==============
</TABLE>
3. CORPORATE ALLOCATIONS
CMI allocates corporate expenses on a value-added basis to each division,
which CMI believes results in a reasonable allocation of such costs. The
accompanying financial statements reflect charges for general corporate
administrative expenses incurred by CMI which amounted to approximately
$832,000 and $793,000 for the six months ended December 31, 1996 and 1997,
respectively.
No interest is allocated by CMI to the Division.
The Division is charged for its proportional share of CMI's self-insured
medical plan. Such charges amounted to $1,015,000 and $732,000 for the six
months ended December 31, 1996 and 1997, respectively.
In addition, there were direct charges from CMI as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
--------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Marketing.................. $304 $389
General and
administrative............ -- 142
------ ------
Total...................... $304 $531
====== ======
</TABLE>
The Division believes that the direct charges from CMI were reasonable
during the periods presented.
4. RESTRUCTURING
During fiscal 1997, a comprehensive review of the Division's operations
was performed, including a review of inventory levels, product development
and migration plans and facility and personnel needs. It was determined to
focus the Division on potentially higher margin products. This resulted in
the write-down of certain inventories and the restructuring of the Division's
operations. During the six month period ended December 31, 1996 inventory and
other charges of $10,300,000, arising from this review, were included in cost
of products sold. During February 1997, additional charges of $800,000
relating to excess facilities and severance were recorded. There are no
remaining cash outlays associated with the restructuring at December 31,
1997.
F-43
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. OTHER
In November 1997, the Division recorded a $1 million charge to cost of
sales relating to a contract with a customer in Sudan. The President of the
United States imposed economic sanctions on Sudan which banned U.S. companies
from doing business in Sudan and as a result, the Division could not continue
to perform under the existing contract. Based upon this, the contract was
terminated and the Division has been released from further performance
requirements.
On December 19, 1997, L-3 Communications Corporation, an unrelated party,
reached an agreement to purchase from CMI substantially all of the assets of
the Division, and to assume certain of the liabilities of the Division, for
approximately $27 million in cash. The final purchase price is subject to
adjustment based on the net assets of the Division at the closing date of the
transaction.
F-44
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
FINANCIAL STATEMENTS
As of June 30, 1997 and 1996 and for the
years ended June 30, 1997, 1996 and 1995
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
California Microwave, Inc.
We have audited the accompanying balance sheets of the Satellite
Transmission Systems Division of California Microwave, Inc. (the "Company")
as of June 30, 1997 and 1996, and the related statements of operations and
cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Satellite
Transmission Systems Division of California Microwave, Inc., as of June 30,
1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1997 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Melville, New York
January 27, 1998
F-46
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less $140 and $508 allowance for doubtful
accounts in 1996 and 1997......................................... $ 28,323 $ 46,750
Inventories........................................................ 7,738 10,412
Prepaid expenses and other assets.................................. 77 121
---------- ----------
Total current assets................................................ 36,138 57,283
Property, plant and equipment, at cost.............................. 21,503 21,378
Less accumulated depreciation and amortization...................... (13,687) (12,984)
---------- ----------
Net property and equipment ......................................... 7,816 8,394
Intangible assets, net of accumulated amortization of $2,268 in
1996............................................................... -- 2,032
Other assets........................................................ 23 2,045
---------- ----------
Total assets ....................................................... $ 43,977 $ 69,754
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable................................................... $ 7,764 $ 19,548
Accrued liabilities................................................ 3,571 3,584
Current portion of long-term debt.................................. 100 200
---------- ----------
Total current liabilities........................................... 11,435 23,332
Long-term debt...................................................... 1,530 1,630
---------- ----------
Total liabilities................................................... 12,965 24,962
Commitments
Division equity..................................................... 31,012 44,792
---------- ----------
Total liabilities and Division equity............................... $ 43,977 $ 69,754
========== ==========
</TABLE>
See accompanying notes.
F-47
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Net sales......................................... $ 68,037 $124,393 $94,271
Cost of products sold............................. 65,724 102,399 86,335
----------- ---------- ---------
Gross margin...................................... 2,313 21,994 7,936
----------- ---------- ---------
Expenses:
Research and development......................... 1,360 2,540 2,288
Marketing and administration..................... 14,154 13,295 12,655
Amortization and write-down of intangible
assets........................................... 2,032 171 171
Restructuring.................................... 800 -- 2,446
----------- ---------- ---------
Total expenses.................................... 18,346 16,006 17,560
----------- ---------- ---------
Operating (loss) income........................... (16,033) 5,988 (9,624)
Interest expense.................................. (65) (69) (98)
Interest income................................... 40 11 3
----------- ---------- ---------
(Loss) income before income tax benefit
(expense)........................................ (16,058) 5,930 (9,719)
Allocated benefit (expense) from income taxes .... 4,676 (2,135) 3,207
----------- ---------- ---------
Net (loss) income................................. $(11,382) $ 3,795 $(6,512)
=========== ========== =========
</TABLE>
See accompanying notes.
F-48
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income................................... $(11,382) $ 3,795 $(6,512)
Adjustments for noncash items:
Amortization and write-down of intangible assets .. 2,032 171 171
Depreciation and amortization of property, plant
and equipment..................................... 1,639 1,746 1,848
Loss on sale of assets............................. 77 140 64
Provision for doubtful accounts.................... 750 100 150
Changes in asset and liability accounts:
Accounts receivable................................ 17,677 (17,019) 14,937
Inventories........................................ 2,674 12,243 (8,211)
Prepaid expenses and other assets.................. 449 1,449 5,627
Accounts payable................................... (11,783) 5,736 (3,747)
Accrued and other liabilities...................... (14) (1,697) 1,895
----------- ---------- ----------
Net cash provided by operations..................... 2,119 6,664 6,222
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................ (1,138) (1,099) (1,881)
Proceeds from sale of building...................... 1,617 -- --
----------- ---------- ----------
Net cash (used in) provided by investing
activities......................................... 479 (1,099) (1,881)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt.......................... (200) (100) (200)
Net cash provided to CMI............................ (2,398) (5,465) (4,141)
----------- ---------- ----------
Net cash used in financing activities............... (2,598) (5,565) (4,341)
----------- ---------- ----------
Cash and cash equivalents........................... $ -- $ -- $ --
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest.............. $ 38 $ 66 $ 70
=========== ========== ==========
</TABLE>
See accompanying notes.
F-49
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the operations of the
Satellite Transmission Systems Division ("STS" or the "Division") of
California Microwave, Inc. ("CMI" or the "Company"). The Division is a global
satellite communication systems integrator providing hardware, software and
services for turnkey projects to large commercial customers, principally
domestic and foreign telephone companies and major common carriers and to the
U.S. and foreign governments.
These financial statements are presented as if the Division had existed as
an entity separate from CMI during the periods presented and include the
historical assets, liabilities, sales and expenses that are directly related
to the Division's operations. However, these financial statements are not
necessarily indicative of the financial position and results of operations
which would have occurred had the Division been an independent entity.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates are used in determining the
collectibility of accounts receivable, warranty costs, inventory realization,
profitability on long-term contracts, restructuring reserves, recoverability
of property, plant and equipment, and contingencies. Actual results could
differ from estimates.
CASH AND CASH EQUIVALENTS
The Division participates in CMI's centralized cash management function;
accordingly, the Division does not maintain separate cash accounts, other
than payroll and foreign subsidiary accounts, which are deemed insignificant,
and its cash disbursements and collections are settled through Division
equity.
INVENTORIES AND COST OF PRODUCTS SOLD
Inventories are recorded at the lower of cost or market. Project
inventories are transferred to cost of products sold at the time revenue is
recognized based on the estimated total manufacturing costs and total
contract prices under each contract. Losses on contracts are recognized in
full when the losses become determinable. During the year ended June 30,
1995, the Division recognized losses of approximately $2,800,000 on such
contracts. The cost of other inventories is generally based on standard costs
which approximate actual costs determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method based on the estimated useful lives
of the related assets.
INTANGIBLE ASSETS OF BUSINESS ACQUIRED
During 1997, CMI wrote off $1,888,000 of purchased intangible assets,
principally goodwill, relating to the original acquisition of STS by CMI,
which was pushed down to the Division's books. The intangible
F-50
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
assets consisted of the excess of the purchase price paid for STS over the
net tangible assets acquired and was amortized using the straight-line method
over 30 years. During 1997, CMI determined that the excess purchase price was
not recoverable due to a significant reduction in sales by the Division in
1997 as compared to prior periods and appropriately reduced the carrying
value.
OTHER LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of," the Division records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of such assets.
Other than as described above related to purchased intangibles, no such
losses have been incurred.
REVENUE RECOGNITION, RECEIVABLES AND CREDIT RISK
Revenue from product sales is recognized at the time of shipment. Sales on
certain long-term, small quantity, high unit value contracts are recognized
at the completion of significant project milestones, which are generally
contract line items. Scheduled billings and retainages under certain
contracts (principally export contracts) have deferred billing provisions
resulting in unbilled accounts receivable (included in accounts receivable)
of $7,426,000 and $4,425,000 at June 30, 1996 and 1997, respectively. The
unbilled receivable at June 30, 1997, is expected to be collected within one
year.
The Division manufactures and sells satellite communications products,
systems and turnkey telecommunications networks to large commercial
customers, principally domestic and foreign telephone companies and major
common carriers, and to the U.S. government. The Division generally requires
no collateral, but generally requires letters of credit, denominated in U.S.
dollars, from its foreign customers.
During 1996 and 1997, the Division periodically transferred certain
international accounts receivable to CMI. CMI insures these receivables under
a credit insurance program and then sells the receivables, without recourse,
at prevailing discount rates. The Division retains the responsibility to
collect and service these amounts. Outstanding customer receivables
transferred to CMI through Division equity amounted to approximately $421,000
and $2,100,000 during 1996 and 1997, respectively.
The Division charged to operations $150,000, $100,000 and $750,000 for its
provision for doubtful accounts in 1995, 1996 and 1997, respectively.
WARRANTY
The Company generally warrants its products for a period of 12 to 24
months from completion of contract or shipment. Warranty expense was
approximately $679,000, $753,000 and $688,000 for 1995, 1996 and 1997,
respectively.
INCOME TAXES
Income taxes reflect an allocation of CMI's income tax expense (benefit)
calculated based on CMI's effective tax rate.
All deferred tax assets and liabilities relating to the Division are
included in intercompany balances with CMI and are accounted for within
Division equity (see Note 7).
F-51
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FISCAL YEAR
The Division's fiscal year ends on the Saturday closest to June 30, and
includes 52 weeks in fiscal 1995, 1996 and 1997. For 1995, 1996 and 1997, the
fiscal years ended on July 1, 1995, June 29, 1996 and June 28, 1997,
respectively. For clarity of presentation, the financial statements are
reported as ending on a calendar month end.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
LIFE 1997 1996
---------- --------- --------
(IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C>
Land........................... $ 950 $ 950
Buildings ..................... 30 3,559 3,559
Machinery and equipment ...... 3-5 8,780 9,256
Office and computer equipment 3-10 6,440 5,653
Building improvements.......... -- 1,721 1,813
Vehicles ...................... 5 53 147
--------- --------
$21,503 $21,378
========= ========
</TABLE>
Building improvements are depreciated over the shorter of the life of the
improvement or the remaining life of the building.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Projects in process..................................... $6,484 $ 6,287
Less: progress billings................................. 2,544 1,991
-------- --------
3,940 4,296
Product inventories, principally materials and
supplies............................................... 3,798 6,116
-------- --------
Total................................................... $7,738 $10,412
======== ========
</TABLE>
F-52
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Salaries and bonuses . $ 497 $1,381
Vacation.............. 610 873
Other payroll
related.............. 123 115
Warranties............ 899 758
Commissions........... 813 --
Other................. 629 457
-------- --------
$3,571 $3,584
======== ========
</TABLE>
5. LONG-TERM DEBT
The Division has industrial development bonds that are payable in annual
installments through November 9, 2007, may be prepaid at any time without
penalty and bear interest at 65% of the bank's floating rate (5.5% at June
30, 1997), based upon prevailing market conditions, which is redetermined
daily. The obligor of the industrial development bonds is a related entity,
and the bonds are secured by mortgages on the equipment and properties
involved.
At June 30, 1997, the annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998................. $ 100,000
1999................. 200,000
2000................. 100,000
2001................. 200,000
2002................. 100,000
Thereafter........... 930,000
-----------
1,630,000
Less current
portion............. 100,000
-----------
$1,530,000
===========
</TABLE>
6. COMMITMENTS
On November 15, 1996, the Division leased a facility under an 18-month
noncancelable operating lease. Rent expense was approximately $209,000,
$229,000 and $69,000 for 1995, 1996, and 1997, respectively.
Future minimum lease payments under the operating lease is $48,000 for
1998.
F-53
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DIVISION EQUITY
A summary of the Division equity activity is as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Beginning balance........ $ 44,792 $46,462
Net income (loss)........ (11,382) 3,795
Net cash provided to
CMI..................... (2,398) (5,465)
---------- ---------
Ending balance........... $ 31,012 $44,792
========== =========
</TABLE>
8. EMPLOYEE BENEFITS
The Division participates in the CMI defined contribution retirement plan
which covers substantially all of the employees of the Division. The
Division's contribution was $379,000, $700,000 and $180,000 for 1995, 1996
and 1997, respectively.
9. SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION
The Division operates in a single industry segment and is engaged in the
manufacture and sale of electronics equipment for satellite communications.
International sales were as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia Pacific....... $22,333 $27,106 $17,164
Africa/Middle
East.............. 13,052 41,827 9,572
Latin America...... 5,149 11,137 14,768
Europe............. 7,828 15,984 9,784
Other.............. 1,391 2,973 4,312
--------- --------- ---------
$49,753 $99,027 $55,600
========= ========= =========
</TABLE>
The Division had revenues from one customer representing 17.3%, 31.5% and
11% of total revenues in 1995, 1996 and 1997, respectively.
10. CORPORATE ALLOCATIONS
CMI allocates corporate expenses on a value-added basis to each division,
which CMI believes results in a reasonable allocation of such costs. The
accompanying financial statements reflect charges for general corporate
administrative expenses incurred by CMI which amounted to approximately
$1,477,000, $1,555,000 and $1,663,000 in 1995, 1996 and 1997, respectively.
No interest is allocated by CMI to the Division.
The Division is charged for its proportional share of CMI's self-insured
medical plan. Such charges amounted to $944,000, $1,437,000 and $1,856,000 in
1995, 1996, and 1997, respectively.
F-54
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CORPORATE ALLOCATIONS (Continued)
In addition, there were direct charges from CMI as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996 1995
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Marketing.................. $ 889 -- $--
General and
administrative............ 285 $508 --
-------- ------ ------
Total...................... $1,174 $508 $--
======== ====== ======
</TABLE>
The Division believes that the direct charges from CMI were reasonable
during the periods presented.
11. RELATED PARTY TRANSACTIONS
Included in net sales are product sales to other divisions of CMI. These
sales totaled $3,584,000, $640,000 and $1,800,000 for 1995, 1996 and 1997,
respectively. In addition, there is approximately $2,363,000, $2,937,000 and
$776,000 of purchases from another division of CMI which is included in
ending inventory and $2,139,000, $3,576,000 and $1,129,000 due to this
division which is included in accounts payable at June 30, 1995, 1996 and
1997, respectively.
12. RESTRUCTURING
In June 1995, a decision was made to close the Division's Melbourne,
Florida facility as well as to perform a review of personnel needs at the
Division's operations. Pursuant to these decisions, approximately $2.4
million of restructuring charges were recorded, including approximately
$600,000 to reflect the facility at its net realizable value. There are no
remaining cash outlays associated with the restructuring at June 30, 1997.
In December 1996 and January 1997, a comprehensive review of the
Division's operations was performed, including a review of inventory levels,
product development and migration plans and facility and personnel needs. It
was determined to focus the Division on potentially higher margin products.
This resulted in the write-down of certain inventories and the restructuring
of the Division's operations. Inventory and other charges of $10,300,000,
arising from this review, were included in cost of products sold and excess
facilities and severance charges of $800,000 were included in restructuring.
There are no remaining cash outlays associated with the restructuring at June
30, 1997.
13. SUBSEQUENT EVENTS
In November 1997, the Division recorded a $1 million charge to cost of
sales relating to a contract with a customer in Sudan. The President of the
United States imposed economic sanctions on Sudan which banned U.S. companies
from doing business in Sudan, and as a result the Division could not continue
to perform under the existing contract. Based upon this, the contract was
terminated and the Division has been released from further performance
requirements.
On December 19, 1997, L-3 Communications Corporation, an unrelated party,
reached an agreement to purchase from CMI substantially all of the assets of
the Division, and to assume certain of the liabilities of the Division, for
approximately $27 million in cash. The final purchase price is subject to
adjustment based on the net assets of the Division at the closing date of the
transaction.
F-55
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ilex Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Ilex
Systems, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ilex
Systems, Inc. and subsidiary as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 9, 1998
F-57
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 4,919,548
Accounts receivable, net of allowance for doubtful accounts of $327,422 ...... 7,354,640
Unbilled accounts receivable .................................................. 4,868,453
Inventories ................................................................... 923,466
Deferred income taxes ......................................................... 13,000
Other current assets .......................................................... 278,771
-------------
Total current assets ......................................................... 18,357,878
Property, plant, and equipment:
Equipment ..................................................................... 2,343,643
Furniture, fixtures, and leasehold improvements ............................... 634,425
-------------
2,978,068
Accumulated depreciation and amortization ..................................... (2,031,763)
-------------
946,305
Goodwill, net of accumulated amortization of $117,940 .......................... 343,564
Deposits and other assets ...................................................... 138,730
-------------
$19,786,477
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................. $ 62,833
Accounts payable .............................................................. 2,226,340
Accrued payroll and related expenses .......................................... 3,176,151
Deferred income ............................................................... 37,843
Distribution payable to shareholders .......................................... 2,216,877
Income taxes payable .......................................................... 80,552
Other current liabilities ..................................................... 175,011
-------------
Total current liabilities .................................................... 7,975,607
Other liabilities .............................................................. 18,678
-------------
Total liabilities ............................................................ 7,994,285
Shareholders' equity:
Common stock, no par value; 5,000,000 shares authorized; 1,317,605 shares
issued and outstanding ....................................................... 1,386,417
Retained earnings ............................................................. 10,405,775
-------------
Total shareholders' equity ................................................... 11,792,192
Commitments ....................................................................
-------------
$19,786,477
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Consulting fees ...................... $57,309,190
Equipment sales ...................... 6,213,038
-------------
63,522,228
-------------
Costs and expenses:
Cost of revenue, consulting .......... 41,852,031
Cost of sales, equipment ............. 3,314,614
Selling, general, and administrative 9,507,879
Research and development ............. 1,211,497
-------------
55,886,021
-------------
Operating income .................... 7,636,207
Other income (expense):
Interest income ...................... 135,114
Interest expense ..................... (8,579)
Loss on write-down of investment .... (250,000)
Other expense ........................ (108,000)
-------------
Income before income taxes .......... 7,404,742
Income taxes .......................... 550,000
-------------
Net income .......................... $ 6,854,742
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1996 ........ 1,315,720 $1,352,249 $10,606,517 $11,958,766
Issuance of common stock in exchange for
services ............................... 3,400 42,500 -- 42,500
Stock repurchase ........................ (1,515) (8,332) (6,060) (14,392)
Distributions to shareholders ........... -- -- (7,049,424) (7,049,424)
Net income .............................. -- -- 6,854,742 6,854,742
----------- ------------ ------------- ---------------
Balances as of December 31, 1997 ........ 1,317,605 $1,386,417 $10,405,775 $11,792,192
=========== ============ ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 6,854,742
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 419,593
Allowance for doubtful accounts .................................................... (203,255)
Loss on write-down of investment ................................................... 250,000
Deferred income taxes .............................................................. 485,000
Issuance of common stock for services .............................................. 42,500
Changes in operating assets and liabilities:
Receivables ....................................................................... (1,267,205)
Inventories ....................................................................... 387,485
Other current assets .............................................................. (112,176)
Deposits and other assets ......................................................... 140,884
Accounts payable and accrued liabilities .......................................... 324,963
Deferred income ................................................................... (159,012)
Income taxes payable .............................................................. 80,552
Other liabilities ................................................................. (459,166)
-------------
Net cash provided by operating activities ........................................ 6,784,905
-------------
Cash flows used in investing activities--purchases of property, plant, and equipment (416,630)
-------------
Cash flows from financing activities:
Payments on debt .................................................................... (67,265)
Distributions paid to shareholders .................................................. (4,832,547)
Repurchase of common stock .......................................................... (14,392)
-------------
Net cash used in financing activities ............................................ (4,914,204)
-------------
Increase in cash and cash equivalents ................................................ 1,454,071
Cash and cash equivalents, beginning of year ......................................... 3,465,477
-------------
Cash and cash equivalents, end of year ............................................... $ 4,919,548
=============
Supplemental disclosures of cash flow information:
Cash paid during year:
Income taxes ....................................................................... $ 716,190
=============
Interest ........................................................................... $ 8,579
=============
Noncash investing and financing activities--distributions payable to shareholders .. $ 2,216,877
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Ilex Systems, Inc. (the "Company") provides services and products
primarily in four areas: environmental consulting services to private and
public sector customers; software consulting services to the federal
government and its contractors; supervisory control and data acquisition
products and services to the electrical utility industry; and secured
communications products, principally to the federal government and its
agencies. The majority of the Company's revenues are derived from its
software consulting services.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company's consulting services are generally performed on time-and
materials-based contracts for the federal government and its contractors.
Accordingly, revenues are recognized as services are performed. Equipment
sales revenues are recognized upon shipment. Unbilled accounts receivable
comprise charges for services and materials provided to customers that have
not been invoiced.
The Company does not require collateral for its receivables. Reserves are
maintained for potential credit losses.
CASH EQUIVALENTS
Cash equivalents of $1,879,285 as of December 31, 1997, consist
principally of money market investments. For purposes of the accompanying
consolidated statement of cash flows, the Company considers all highly liquid
debt instruments with remaining maturities of three months or less when
acquired to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments in the Company's consolidated
financial statements approximates fair value due to the short-term maturities
of these instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the assets (generally five years). Leasehold improvements are amortized
straight-line over the shorter of the lease term or the estimated useful life
of the asset.
GOODWILL
Goodwill, which represents the excess of purchase price over the fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited of 10 to 15 years. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation.
F-62
<PAGE>
INCOME TAXES
The Company elected S corporation status on March 17, 1997, effective
January 1, 1997. Federal and the majority of state income taxes on the income
of S corporations are generally payable by the individual shareholders rather
than the Company.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
USE OF ESTIMATES
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) INVENTORIES
Inventories consisted of the following as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and
subassemblies.................. $833,945
Work in process................. 89,521
----------
$923,466
==========
</TABLE>
(3) LINE OF CREDIT AND LONG-TERM DEBT
The Company has a $5,000,000 line of credit with a bank that is due on
demand. Interest is payable at the bank's prime rate (8.5% as of December 31,
1997) and is secured by trade accounts receivable, inventories, and other
assets. Borrowings outstanding under the line of credit were $-0-as of
December 31, 1997. The line of credit contains certain restrictive financial
covenants, including a minimum level of net worth and cash flow to debt
ratio. As of December 31, 1997, the Company was in compliance with all such
covenants.
The Company has an unsecured promissory note payable to a former
shareholder that was issued in conjunction with the repurchase of shares of
common stock in 1992. The note bears interest at 10% with payments of $6,000
per month, including interest, through December 1998. As of December 31,
1997, the principal balance of this note was $62,833.
(4) INCOME TAXES
The provision for income taxes for the year ended December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Federal:
Current .. --
Deferred . $388,000
----------
388,000
----------
State:
Current .. 65,000
Deferred . 97,000
----------
162,000
----------
$550,000
==========
</TABLE>
F-63
<PAGE>
The provision for income taxes for the year ended December 31, 1997,
differs from the federal statutory rate, primarily due to the flow through
nature of income tax liability to the shareholders and reduction of the
federal and partial state deferred income tax assets and liabilities as of
December 31, 1996, resulting from the S corporation election as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal income tax statutory rate ........ 34.0%
State income tax rate..................... 2.2
Benefit of federal S corporation
election................................. (28.8)
--------
7.4%
========
</TABLE>
The gross deferred tax assets were $13,000 as of December 31, 1997,
consisting of the state deferred income tax assets and liabilities for those
states who do not recognize S corporation status. Management considers
realization of the net deferred tax assets more likely than not due to
continued profitability of the Company and significant carryback
opportunities.
(5) EMPLOYEE BENEFIT PLANS
The Company has two Section 401(k) retirement savings plans (the Plans).
Under the terms of the Plans, employees may make contributions based on a
percentage of eligible earnings. Company contributions to the Plans are
discretionary and totaled $359,718 in 1997.
(6) STOCK OPTION PLAN
The Company has 100,000 shares of common stock reserved for issuance under
its 1992 Incentive Stock Option Plan (the "Plan"). Under the Plan, the
Company may grant options to employees, officers, and directors. Options are
granted at prices not less than the fair market value of the Company's common
stock as determined by the Board of Directors on the grant date. Options vest
ratably over 48 months and expire 49 months from the date of grant.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock options. Accordingly, no compensation cost has been
recorded for these stock options. Had compensation cost been determined,
consistent with Statement of Financial Accounting Standards No. 123, the
Company's 1997 net income would not have been significantly impacted.
On January 1, 1997, the Company had no options outstanding. In July 1997,
the Company granted 25,000 options at an exercise price of $17.50, all of
which were outstanding but not exercisable as of December 31, 1997.
(7) COMMITMENTS
The Company leases certain facilities under operating leases that expire
at various dates through 2001. The Company in turn subleases some of these
facilities. As of December 31, 1997, future minimum lease payments under
noncancelable operating leases, exclusive of the sublease rentals, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- --------------
<S> <C>
1998......... $1,474,448
1999......... 510,551
2000......... 292,096
2001......... 124,212
------------
$2,401,307
============
</TABLE>
Rent expense, exclusive of sublease rentals, was approximately $1,081,636
in 1997. Sublease rental income was approximately $186,733 in 1997.
F-64
<PAGE>
(8) SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, sales to a single customer
represented 26% of revenues. The outstanding accounts receivable and unbilled
receivable balances for this customer as of December 31, 1997, were
$1,257,875 and $2,228,650, respectively.
(9) SUBSEQUENT EVENT
In January 1998, shareholders of the Company agreed to sell all of their
common stock for approximately $50,000,000, subject to certain adjustments,
plus additional consideration based on post-acquisition performance. The
expected closing date is scheduled for February 25, 1998, subject to
satisfaction of closing conditions.
F-65
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND FOR THE YEAR ENDED
F-66
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Management and Board of Directors
L-3 Communications Holdings, Inc.
We have audited the accompanying combined balance sheet of AlliedSignal
Ocean Systems, a wholly owned operation of AlliedSignal, Inc. ("Ocean
Systems"), as of December 31, 1997 and the related combined statements of
operations, equity and cash flows for the year then ended. These financial
statements are the responsibility of Ocean System's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Ocean Systems as
of December 31, 1997, and the combined results of their operations and cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
February 23, 1998
F-67
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Accounts receivable, net of allowances for doubtful accounts of $81 $13,313
Inventories ........................................................ 25,274
Contracts in progress .............................................. 793
Prepaid expenses and other current assets .......................... 1,743
---------
Total current assets .............................................. 41,123
Property, plant and equipment, net .................................. 16,845
Capitalized software, net ........................................... 2,248
Goodwill, net ....................................................... 1,820
Other assets ........................................................ 31
---------
Total assets ........................................................ $62,067
=========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ................................................... $ 2,626
Accrued liabilities ................................................ 16,112
Advance payments ................................................... 16,162
---------
Total current liabilities ......................................... 34,900
Accrued pension and postretirement benefits ......................... 10,959
---------
Total liabilities ................................................... 45,859
---------
Commitment and contingencies
Equity:
Invested equity..................................................... 9,312
ELAC common stock .................................................. 3,424
ELAC retained earnings ............................................. 4,570
Cumulative translation adjustment .................................. (1,098)
---------
Total equity......................................................... 16,208
---------
Total liabilities and equity ........................................ $62,067
=========
</TABLE>
See accompanying notes to the combined financial statements
F-68
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Sales ................................. $73,033
Cost of sales ......................... 56,049
---------
Gross profit ......................... 16,984
Operating expenses:
General and administrative ........... 11,981
Selling .............................. 5,933
Bid and proposal ..................... 2,053
Independent research and development 2,765
---------
Total operating expenses ............ 22,732
---------
Loss from operations .................. (5,748)
Interest expense, net ................. 490
Other income .......................... (185)
---------
Loss before income taxes .............. (6,053)
Benefit for income taxes .............. (2,378)
---------
Net loss ............................ $(3,675)
=========
</TABLE>
See accompanying notes to the combined financial statements
F-69
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTED ELAC ELAC CUMULATIVE
EQUITY IN OS COMMON RETAINED TRANSLATION TOTAL
(DEFICIT) STOCK EARNINGS ADJUSTMENT EQUITY
-------------- -------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ..... $ 8,298 $3,424 $6,403 $ 87 $18,212
Net loss .......................... (2,680) -- (995) -- (3,675)
Cumulative translation adjustment -- -- -- (1,185) (1,185)
Advances from (repayments to)
AlliedSignal ..................... 3,694 -- (838) -- 2,856
-------------- -------- ---------- ------------- ---------
Balance at December 31, 1997 ..... $ 9,312 $3,424 $4,570 $(1,098) $16,208
============== ======== ========== ============= =========
</TABLE>
See accompanying notes to the combined financial statements
F-70
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss ..................................................................... ($ 3,675)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation of property, plant and equipment ............................... 2,976
Amortization of capitalized software ........................................ 1,078
Amortization of intangible assets ........................................... 70
Loss on the disposal of property, plant and equipment ....................... 8
Changes in operating assets and liabilities:
Accounts receivable ........................................................ 13,561
Inventories ................................................................ (359)
Contracts in progress ...................................................... 1,666
Prepaid and other current assets ........................................... (220)
Accounts payable ........................................................... (1,976)
Accrued liabilities ........................................................ (10,472)
Advance payments ........................................................... (1,092)
Accrued pension and postretirement benefits ................................ (20)
----------
Net cash provided by operating activities ................................. 1,545
----------
Cash flows from investing activities:
Property, plant and equipment purchased ...................................... (3,090)
Software purchased ........................................................... (265)
----------
Net cash used in investing activities ..................................... (3,355)
----------
Cash flows from financing activities:
Advances from AlliedSignal, net .............................................. 3,198
----------
Net cash provided by financing activities ................................. 3,198
----------
Effect of foreign currency exchange rate changes on cash ..................... (1,388)
----------
Net change in cash ............................................................ --
Cash and cash equivalents at the beginning of the year ........................ --
----------
Cash and cash equivalents at the end of the year .............................. $ --
==========
Supplement disclosures of cash flow information:
Cash paid during the year for:
Interest--AlliedSignal ...................................................... $ 552
----------
</TABLE>
See accompanying notes to the combined financial statements
F-71
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND DESCRIPTION OF BUSINESS
The Ocean Systems business ("Ocean Systems" or the "Company") is a wholly
owned operation of AlliedSignal Inc. ("AlliedSignal") comprised of the Ocean
Systems Division ("OS"), and AlliedSignal ELAC Nautik GmbH ("ELAC"). The OS
Division headquarters and principal operations, including one manufacturing
site, are located in Sylmar, California, a suburb of Los Angeles. OS also
operates marketing offices located in Canada ("ASCI") and England ("BOSL").
OS was acquired through AlliedSignal's merger with the Bendix Corporation in
1982. ELAC is a wholly owned subsidiary of AlliedSignal Deutschland ("AS
Deutschland") and is a separate legal entity located in Kiel, Germany. ELAC
was acquired from Honeywell Inc. in 1994.
On December 22, 1997, L-3 Communications Corporation, a wholly owned
subsidiary of L-3 Communications Holdings, Inc. ("L-3") entered into a
definitive Purchase Agreement with AlliedSignal to acquire substantially all
the net assets excluding land and buildings, and assumed certain of the
liabilities of OS and purchased the outstanding capital stock of ELAC from AS
Deutschland.
Ocean Systems develops, manufactures and sells sophisticated sonar
detection and tracking devices for underwater use. The Company's customers
include the U.S. Government, foreign governments, defense industry prime
contractors and commercial customers. The Company operates primarily in one
industry segment, electronic sonar components and systems.
All domestic government contracts and subcontracts of Ocean Systems are
subject to audit and various cost controls, and Government contracts and
related orders are subject to cancellation if funds for contract performance
for any subsequent year become unavailable. Foreign government contracts
generally include comparable provisions relating to termination for the
convenience of the foreign government.
The decline in the U.S. defense budget since the late 1980s has resulted
in program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Company's
programs; however, in the event that U.S. Government expenditures for
products of the type manufactured by the Company are reduced, and not offset
by greater foreign sales or other new programs or products, or acquisitions,
there may be a reduction in the volume of contracts or subcontracts awarded
to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
BASIS OF PRESENTATION AND USE OF ESTIMATES
The accompanying combined financial statements reflect the assets,
liabilities and operations of Ocean Systems including OS and ELAC which are
combined herein as they are entities under common control and management. All
significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principals requires the Company's 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 combined financial statements and the reported amounts of revenue and
expenses during the reporting period. The most significant of these estimates
and assumptions relate to contract estimates of sales and costs, excess and
obsolete inventory reserves, warranty reserves, pension estimates and
recoverability of recorded amounts of fixed assets. Actual results could
differ from these estimates.
REVENUE RECOGNITION
Under fixed-price contracts, sales and related costs are recorded upon
delivery and customer acceptance. Sales and related costs under
cost-reimbursable contracts are recorded on the percentage of
F-72
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
completion method. Anticipated future losses on contracts are charged to
income when identified. Revisions in profit estimates are reflected in the
period in which the facts, which require the revision, become known.
ACCOUNTS RECEIVABLE
Management assesses the credit risk and records an allowance for
uncollectable accounts as considered necessary based on several factors
including, but not limited to, an analysis of specific customers, historical
trends, current economic conditions and other information. The U.S. Navy
comprises a significant portion of Ocean System's revenues. The Company's
other customers include the navies of many foreign countries. The Company's
credit risk is affected by conditions or occurrences within the U.S.
Government and economic conditions of the countries in which the Company
operates or has customers. Sales are made on unsecured, customer-specific
credit terms, which may include extended terms.
INVENTORIES
Inventories are valued at the lower of cost or market using the average
cost method. Inventories consist of raw materials and supplies, work in
process and finished goods. An excess and obsolete inventory reserve has been
established primarily for raw materials and parts that have not been
allocated to firm contracts. The excess and obsolete inventory reserve is
based on estimates of future usage of inventory on hand.
CONTRACTS IN PROCESS
Costs accumulated under cost-reimbursable contracts include direct costs,
as well as manufacturing overhead. In accordance with industry practice,
these amounts are included in current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost net of
accumulated depreciation. For financial purposes, property, plant and
equipment is generally depreciated on the straight line method using
estimated useful lives ranging from 3 to 20 years. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements. Interest costs incurred during the construction of plant
and equipment are capitalized using an imputed interest rate approximating
8%. Interest costs capitalized during 1997 amounted to $57.
CAPITALIZED SOFTWARE
Capitalized software primarily represents costs incurred related to the
purchase and implementation of the Company's MRP II business system.
Capitalized software is reported at historical cost less accumulated
amortization. Amortization is based on the estimated useful service life not
to exceed five years. Amortization of capitalized software was $1,078 for the
year ended December 31, 1997. Accumulated amortization was $2,368 at December
31, 1997.
GOODWILL
Goodwill represents the excess of the cost of the purchased business over
the net assets acquired and is being amortized on a straight-line basis over
40 years. This excess relates primarily to the allocated portion of goodwill
arising out of the AlliedSignal merger with Bendix in 1982 and was allocated
to OS
F-73
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
based on the proportionate percentage of OS pretax earnings to the total
Bendix Aerospace Group pretax earnings at the time of the AlliedSignal
acquisition from Bendix. Amortization expense was $70 for the year ended
December 31, 1997. Accumulated amortization was $980 at December 31, 1997.
The carrying amounts of intangible assets are reviewed if the facts and
circumstances indicate potential impairment of their carrying value. If this
review indicates that intangible assets are not recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying values related to the
intangible assets are reduced to the fair value of the asset.
RESEARCH AND DEVELOPMENT AND SIMILAR COSTS
Research and development costs sponsored by the Company include research
and development and bid and proposal efforts related to government products
and services. Customer-sponsored research and development costs incurred are
included in contract costs.
FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSLATION
The Company's major foreign operation is ELAC located in Germany with the
Deutsche mark as its functional currency. Assets and liabilities are
translated at current exchange rates at the end of the period. Income and
expenses are translated using the monthly average exchange rates. The effect
of the unrealized rate fluctuations on translating foreign currency assets
and liabilities into U.S. dollars are accumulated as a separate component of
equity in the accompanying combined balance sheet.
There are no material foreign currency gains or losses for the year ended
December 31, 1997 as the Company's U.S. sales to foreign customers are
denominated in U.S. dollars. ASCI Canadian sales are denominated in Canadian
dollars and the ELAC foreign sales are denominated in Deutsche Marks.
FINANCIAL INSTRUMENTS
At December 31, 1997, the carrying value of the Company's financial
instruments, such as receivables, accounts payable and accrued liabilities,
approximate fair value, based on the short-term maturities of these
instruments.
INCOME TAXES
The benefit for income taxes for OS was computed by applying statutory tax
rates to the reported loss before income taxes after considering items that
do not enter into the determination of taxable income and tax credits
reflected in the consolidated provision of AlliedSignal which are related to
OS. Income taxes for OS are assumed to have been settled with AlliedSignal at
December 31, 1997 and there are no separate tax attributes related to OS. For
ELAC, separate tax attributes that relate specifically to ELAC have been
considered in computing taxes.
3. TRANSACTIONS WITH ALLIEDSIGNAL
Ocean Systems relies on AlliedSignal for certain services, including
treasury, cash management, employee benefits, taxes, risk management,
internal audit, financial reporting, legal, contract administration and
general corporate services. Although certain assets, liabilities and expenses
related to these services have been allocated to the Company, the combined
financial position, results of operations and cash flows presented in the
accompanying combined financial statements would not be the same as would
have occurred had the Company been an independent entity. The following
describes the related party transactions.
F-74
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ALLOCATION OF CORPORATE EXPENSES
The amount of allocated corporate expenses reflected in these combined
financial statements has been estimated based primarily on an allocation
methodology prescribed by government regulations pertaining to government
contractors. Corporate expenses allocated to Ocean Systems were $2,258 for
the year ended December 31, 1997, and are included in general and
administrative expense in the accompanying combined statement of operations.
PENSIONS
Certain of the Company's employees participate in various AlliedSignal
sponsored pension plans covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
employees' compensation and years of service.
AlliedSignal funding policy is generally to contribute in accordance with
cost accounting standards that affect government contractors subject to the
Internal Revenue code and regulations. Although the aforementioned pension
arrangements are part of certain AlliedSignal defined benefit plans, separate
actuarial estimates were made for the portion allocable to the Company.
Pension expense included in the accompanying combined statement of operations
was $1,452 for the year ended December 31, 1997. The pension plan liability
at December 31, 1997 was fully funded. The Company also has a supplemental
pension plan for highly compensated employees as defined by IRS rules. The
liability reflected in the accompanying combined balance sheet was $650 at
December 31, 1997. Pension expense included in the combined statement of
operations for the supplemental pension plan was $24 for the year ended
December 31, 1997.
The Company's German employees of ELAC are covered by a separate pension
plan. Pension costs included the following components for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Service costs earned during the year ......... $163
Interest cost on projected benefit obligation 119
Actual return on plan assets .................. (92)
Amortization of unrecognized net obligation .. 24
------
Net periodic pension cost ..................... $214
======
</TABLE>
F-75
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
The following table sets forth the ELAC pension plan funded status and
amounts recognized in the Company's combined balance sheet at December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligation
Vested ................................................ $1,067
Nonvested ............................................. 296
--------
Accumulated benefit obligation ....................... 1,363
========
Projected benefit obligation .......................... 1,919
Plan assets at fair value ............................. 1,422
--------
Projected benefit obligation in excess of plan assets 497
Unrecognized net loss ................................ 37
Unrecognized prior service costs .....................
Unrecognized net obligation .......................... (361)
--------
Accrued pension costs ............................... $ 173
========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Major assumptions were:
Discount Rate ................................... 6.8%
Expected long-term rate of return on assets .... 6.8%
Rate of increase in compensation levels ........ 4.0%
</TABLE>
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to participating in AlliedSignal pension plans, employees of
OS are provided varying levels of health care and life insurance benefits for
retired employees and dependents. Participants are eligible for these
benefits when they retire from active service and meet the pension plan
eligibility requirements. These benefits are funded primarily on a
pay-as-you-go basis with the retiree generally paying of the cost through
contributions, deductibles and coinsurance provisions.
Although the aforementioned postretirement benefits are part of certain
AlliedSignal postretirement arrangements, separate actuarial estimates were
made for the portion allocable to the Company. The weighted average discount
rate utilized in determining the accumulated postretirement benefit
obligation was 7.25% for 1997. The liability reflected in the accompanying
combined balance sheet was $9,747 at December 31, 1997. Postretirement
benefit costs included in the combined statements of operations was $1,072
for the year ended December 31, 1997.
EMPLOYEE SAVINGS PLANS
Ocean Systems North American operation also has a supplemental savings
plan in which the Company matches the contributions of participating
employees up to a designated level. Under this plan, the matching
contributions, in cash, were $54 for the year ended December 31, 1997 and the
liability recorded at December 31, 1997 was $562.
INTEREST EXPENSE
Interest expense has been allocated to the Company by applying
AlliedSignal's weighted average consolidated interest rate to the portion of
the beginning of the period equity account deemed to be
F-76
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
financed by consolidated debt, which has been determined based on
AlliedSignal's debt to equity ratio on such date. Management of the Company
believes that this allocation methodology is reasonable.
The allocated interest expense was calculated using the following equity
balance and interest rate, for the year ended December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Equity ........ $5,751
Interest Rate 9.6%
</TABLE>
Allocated interest expense for the year ended December 31, 1997 amounted
to $552 and is included in interest expense, net in the accompanying combined
statement of operations.
INCOME TAXES
The Company will be included in the consolidated Federal income tax
return, foreign tax returns and certain combined and separate state and local
income tax returns of AlliedSignal for 1997. Income taxes for OS are
considered to have been settled with AlliedSignal at December 31, 1997 and
are recorded through the invested equity account with AlliedSignal as there
are no separate stand alone tax attributes related to OS.
ELAC participates in the AlliedSignal Deutschland GmbH profit pooling
agreement for corporate income tax and municipal trade tax. Since entering
into this agreement ELAC has not paid German taxes, as any profits or losses
of ELAC are transferred to AlliedSignal Deutschland. For purposes of these
combined financial statements, the tax attributes that relate to ELAC prior
to entering into the pooling agreement have been considered in computing the
separate ELAC tax computations as these attributes will remain with ELAC
after the termination of the pooling agreement after the acquisition by L-3.
STATEMENT OF CASH FLOWS
The company participates in the AlliedSignal cash management system, under
which all cash is received and payments are made by AlliedSignal. All
transactions between the Company and AlliedSignal have been accounted for as
settled in cash at the time such transactions were recorded by the Company.
4. INVENTORIES AND CONTRACTS IN PROCESS
Net inventories are comprised of the following components at December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and supplies ............ $14,494
Work in process ....................... 6,675
Finished goods ........................ 12,080
Excess and obsolete inventory reserve (7,772)
Net inventories ...................... 25,477
Less, unliquidated progress payments (603)
---------
$24,874
=========
</TABLE>
For the year ended December 31, 1997, there were no general and
administrative, independent research and development, or bid and proposal
costs charged to inventory.
Contracts in process include accumulated inventoried costs and profits on
cost or cost-reimbursement contracts, principally with the U.S. Government.
The U.S. Government has title to, or a security interest in, inventories to
which progress payments are applied. The Company believes that substantially
all such amounts will be billed and collected within one year.
F-77
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 are comprised of the
following components:
<TABLE>
<CAPTION>
<S> <C>
Buildings, building improvements and land
improvements ................................ $ 9,108
Machinery, equipment, furniture and fixtures 48,060
Leasehold improvements ....................... 300
----------
57,468
Less, accumulated depreciation and
amortization ................................ (43,324)
----------
14,144
Land ......................................... 388
Construction in progress ..................... 2,313
----------
$ 16,845
==========
</TABLE>
Depreciation and amortization expense was $2,976 for the year ended
December 31, 1997.
6. INCOME TAXES
The effective tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
<S> <C>
Statutory federal income tax rate .... (35.0)%
State taxes net of federal benefit ... (6.0)%
Foreign losses with no tax benefit ... 6.7 %
Foreign sales corporation tax
benefit.............................. (4.5)%
Other, net............................ (0.5)%
---------
(39.3)%
=========
</TABLE>
At December 31, 1997, the German trade tax and corporate income tax net
operating loss ("NOL") carryovers amounted to $953 and $1,180, respectively,
and may be carried forward indefinitely.
At December 31, 1997, deferred tax assets related to ELAC's German trade
tax and corporate income tax NOL carryovers amounted to $468. A full
valuation is recorded against the deferred tax asset.
The valuation allowance for deferred taxes was based on ELAC's historical
losses from operations and its current year loss. In addition, certain
aspects of the acquisition could limit the utilization of a portion or all of
these NOL carryovers. Accordingly, management believes currently there is not
enough historical information to support that it is more likely than not that
ELAC will realize the future tax benefit of these NOL carryovers.
7. EQUITY
Invested equity represents the equity contributed to OS by AlliedSignal
and related accumulated results of operations of OS. ELAC common stock
represents the one share of common stock held by AS Deutschland. ELAC's
retained earnings includes the impact of ELAC's accumulated operating losses,
and repayments to AlliedSignal offset by the effects of the amortization of
negative goodwill associated with the ELAC acquisition from Honeywell.
F-78
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
8. SALES TO PRINCIPAL CUSTOMERS
The Company operates primarily in one industry segment, electronic sonar
components and systems. Sales to principal customers are as follows for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
U.S. Government agencies and prime contractors $36,133
German government............................... 5,895
Other foreign governments....................... 24,883
Commercial customers............................ 6,122
---------
$73,033
=========
</TABLE>
Summarized data of the Company's operations by geographic area for the
year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NORTH REST OF
AMERICA GERMANY EUROPE ASIA OTHER ELIM TOTAL
--------- --------- --------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customer ............. $39,002 $ 8,146 $6,220 $18,611 $1,054 -- $73,033
Inter-area sales ...... 19,536 4,334 -- -- -- $(23,870) --
Loss from operations . (4,658) (1,090) -- -- -- -- (5,748)
Identifiable assets at
December 31, 1997 ... 51,613 10,454 -- -- -- -- 62,067
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2011. At December 31, 1997, future minimum
payments for noncancellable operating leases with initial or remaining terms
in excess of one year are $933 for 1998, $340 for 1999, $161 for 2000, $35
for 2001 and $7 for 2002.
Leases covering major items of real estate and equipment contain renewal
and or purchase options which may be exercised by the company. Rent expense,
net of sublease income from other AlliedSignal entities, was $1,342 for the
year ended December 31, 1997.
Management is continually assessing the Company's obligations with respect
to applicable environmental protection laws. While it is difficult to
determine the timing and ultimate cost to be incurred by the Company in order
to comply with these laws, based upon available internal and external
assessments, with respect to those environmental loss contingencies of which
management of the Company is aware, the Company believes that even without
considering potential insurance recoveries, if any, there are no
environmental loss contingencies that individually or in the aggregate, would
be material to the Company's combined financial position, cash flows and
results of operations. The Company accrues for these contingencies when it is
probable that a liability has been incurred and the amount of the loss can be
reasonably estimated.
The Company is engaged in providing products and services under contracts
with the U.S. Government and foreign government agencies. All such contracts
are subject to extensive legal and regulatory requirements, and, from time to
time, agencies of the U.S. Government investigate whether such contracts were
and are being conducted in accordance with these requirements. Under
government procurement regulations, an indictment of the Company by a federal
grand jury could result in the Company being suspended for a period of time
from eligibility for awards of new government contracts. A conviction could
result in debarment from contracting with federal government for a specified
term.
F-79
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
The Company is also periodically subject to periodic review or audit by
agencies of the U.S. Government. At December 31, 1997, there are several
pending issues with these agencies that are incidental to the Company's
business. One of these reviews was critical of the Company's procedures for
maintaining control of Government owned property in the Company's custody.
The Company is responsible and liable for $93 million of Government-owned
property in its possession. With respect to this and other U.S. Government
matters, the Company's management believes the ultimate resolution of any
such matters will not have a material adverse effect on the combined
financial position, cash flows or results of operations of the Company.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities (including environmental matters)
incidental to their business. With respect to those investigative actions,
items of litigation, claims or assessments of which they are aware,
management of the Company is of the opinion that the probability is remote
that, after taking into account certain provisions that have been made with
respect to these matters, the ultimate resolution of any such investigative
actions, items of litigation, claims or assessments will have a material
adverse effect on the combined financial position, cash flows or results of
operations of the Company.
F-80
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES OFFERED HEREBY NOR DOES IT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 12
Use of Proceeds ................................... 20
Capitalization..................................... 20
Unaudited Pro Forma Condensed Consolidated
Financial Information............................. 21
Selected Financial Information..................... 28
Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 29
Business........................................... 38
Certain Relationships and Related Transactions .... 56
Management......................................... 58
Ownership of Capital Stock......................... 65
Description of Certain Indebtedness................ 65
Description of the Notes........................... 69
Certain United States Federal Tax Considerations .. 94
Underwriting....................................... 97
Available Information ............................. 98
Legal Matters...................................... 98
Experts............................................ 98
Index to Financial Statements...................... F-1
</TABLE>
$
[L-3 LOGO]
L-3 COMMUNICATIONS
CORPORATION
% SENIOR SUBORDINATED NOTES
DUE 2008
PROSPECTUS
, 1998
LEHMAN BROTHERS
BANCAMERICA
ROBERTSON STEPHENS
<PAGE>
[ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS]
PROSPECTUS
[L-3 LOGO]
L-3 COMMUNICATIONS CORPORATION
% SENIOR SUBORDINATED NOTES DUE 2008
The % Senior Subordinated Notes due 2008 (the "Notes") of L-3
Communications Corporation (the "Company" or "L-3") have been issued by the
Company.
Interest on the Notes will be payable semi-annually on and of
each year, commencing , 1998. The Notes will be redeemable at the option
of the Company, in whole or in part, at any time on or after , 2003, at the
redemption prices set forth herein, plus accrued and unpaid interest to the
date of redemption. In addition, prior to , 2001, the Company may redeem
up to 35% of the aggregate principal amount of Notes at the redemption price
set forth herein plus accrued and unpaid interest through the redemption date
with the net cash proceeds of one or more Equity Offerings (as defined). The
Notes will not be subject to any mandatory sinking fund. In the event of a
Change of Control (as defined), each holder of Notes will have the right, at
the holder's option, to require the Company to purchase such holder's Notes
at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase. See "Description of the
Notes". The Company's ability to pay cash to the holders of Notes upon a
purchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required purchases.
The Notes will be general unsecured obligations of the Company,
subordinate in right of payment to all existing and future Senior Debt (as
defined) of the Company. As of December 31, 1997, after giving pro forma
effect to the Offerings, application of the net proceeds therefrom and
borrowings under the Senior Credit Facilities (as defined), the Company would
have had approximately $433.6 million of indebtedness outstanding, of which
$58.6 million would have been Senior Debt (excluding letters of credit). See
"Capitalization".
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Prospectus has been prepared for and is to be used by Lehman Brothers
Inc. in connection with offers and sales in market-making transactions of the
Notes. The Company will not receive any of the proceeds of such sales. Lehman
Brothers Inc. may act as a principal or agent in such transactions. The Notes
may be offered in negotiated transactions or otherwise.
LEHMAN BROTHERS
The date of this Prospectus is , 1998
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
THE NOTES OFFERING
Securities Offered ............ $150,000,000 aggregate principal amount of
% Senior Subordinated Notes due 2008 (the
"Notes").
Maturity ...................... , 2008.
Interest Payment Dates ........ and , commencing , 1998.
Optional Redemption ........... The Notes may be redeemed at the option of
L-3 Communications, in whole or in part, on
or after , 2003, at the redemption
prices set forth herein, plus accrued and
unpaid interest, if any, to the date of
redemption.
In addition, prior to , 2001, L-3
Communications may redeem up to an aggregate
of 35% of the Notes originally issued at a
redemption price of % of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption,
with the net cash proceeds of one or more
Equity Offerings; provided, however, that at
least 65% in aggregate principal amount of
the Notes originally issued remain
outstanding following such redemption.
Change of Control ............. In the event of a Change of Control (as
defined), the holders of the Notes will have
the right to require L-3 Communications to
purchase their Notes at a price equal to
101% of the aggregate principal amount
thereof, plus accrued and unpaid interest,
if any, to the date of purchase.
Ranking ....................... The Notes will be general unsecured
obligations of L-3 Communications,
subordinate in right of payment to all
current and future Senior Debt including all
obligations of L-3 Communications and its
subsidiaries under the Senior Credit
Facilities (as defined). At December 31,
1997, on a pro forma basis after giving
effect to the 1998 Acquisitions and the
Offerings, L-3 Communications would have had
$433.6 million of indebtedness outstanding,
of which $58.6 million would have been
Senior Debt (excluding letters of credit).
Borrowings under the Senior Credit
Facilities will be secured by substantially
all of the assets of L-3 Communications as
well as the capital stock of L-3
Communications and its subsidiaries. See
"Risk Factors -- Substantial Leverage" and
"--Subordination".
Covenants ..................... The Indenture pursuant to which the Notes
will be issued (the "Indenture") will
contain certain covenants that, among other
things, limit the ability of L-3
Communications and its Restricted
Subsidiaries to incur additional
Indebtedness and issue preferred stock, pay
dividends or make other distributions,
repurchase Equity Interests (as defined) or
subordinated Indebtedness, create certain
liens, enter into certain transactions with
affiliates, sell assets of L-3
Communications or its Restricted
Subsidiaries, issue or sell Equity Interests
of L-3 Communications' Restricted
ALT-2
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
Subsidiaries or enter into certain mergers
and consolidations. In addition, under
certain circumstances, L-3 Communications
will be required to offer to purchase Notes
at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase,
with the proceeds of certain Asset Sales (as
defined). See "Description of the Notes".
Use of Proceeds ............... This Prospectus is delivered in connection
with the sale of the Notes by Lehman
Brothers Inc. in market-making transactions.
The Company will receive no proceeds from
such transactions. See "Use of Proceeds."
RISK FACTORS
For a discussion of certain risk factors that should be considered in
connection with an investment in the Notes, see "Risk Factors".
ALT-3
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the Notes by
Lehman Brothers Inc. in market-making transactions. The Company will not
receive any of the proceeds from such transactions.
ALT-4
<PAGE>
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
AVAILABLE INFORMATION
L-3 Communications has filed with the Commission a Registration Statement
on Form S-1 (together with all amendments, exhibits, schedules and
supplements thereto, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act") with respect to the Notes being
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company
and the Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified by the provisions in such exhibit, to which reference is hereby
made. L-3 Communications is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). The Registration Statement, such
reports and other information can be inspected and copied at the Public
Reference Section of the Commission located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549 and at regional public
reference facilities maintained by the Commission located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material,
including copies of all or any portion of the Registration Statement, can be
obtained from the Public Reference Section of the Commission at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov).
So long as L-3 Communications is subject to the periodic reporting
requirements of the Exchange Act, it is required to furnish the information
required to be filed with the Commission to the Trustee and the holders of
the Notes. L-3 Communications has agreed that, even if it is not required
under the Exchange Act to furnish such information to the Commission, it will
nonetheless continue to furnish information that would be required to be
furnished by L-3 Communications by Section 13 of the Exchange Act to the
Trustee and the holders of the Notes as if it were subject to such periodic
reporting requirements.
ALT-5
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
UNDERWRITING
This Prospectus is to be used by Lehman Brothers Inc. in connection with
offers and sales of the Notes in market-making transactions effected from
time to time. Lehman Brothers Inc. may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as
principal or as agent for both counterparties, and may receive compensation
in the form of discounts and commissions, including from both counterparties
when it acts as agent for both. Such sales will be made at prevailing market
prices at the time of sale, at prices related thereto or at negotiated
prices.
Affiliates of Lehman Brothers Inc. currently own % of the Common Stock.
See "Ownership of Capital Stock". Lehman Brothers Inc. has informed the
Company that it does not intend to confirm sales of the Notes to any accounts
over which it exercises discretionary authority without the prior specific
written approval of such transactions by the customer.
The Company has been advised by Lehman Brothers Inc. that, subject to
applicable laws and regulations, Lehman Brothers Inc. currently intends to
make a market in the Notes following completion of the Notes Offering.
However, Lehman Brothers Inc. is not obligated to do so and any such
market-making may be interrupted or discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act. There can be no assurance
that an active trading market will develop or be sustained. See "Risk Factors
- -- Trading Market for the Notes".
Lehman Brothers Inc. has provided investment banking, financial advisor
and other services to the Company, for which services Lehman Brothers Inc.
has received fees. In addition, Lehman Brothers Inc. acted as the lead
underwriter in connection with the initial sale of the Notes and received an
underwriting discount of approximately $ million in connection therewith.
Lehman Brothers Commercial Paper Inc., an affiliate of Lehman Brothers Inc.,
is the Arranger and Syndication Agent under the Senior Credit Facilities. See
"Certain Relationship and Related Transactions".
ALT-6
<PAGE>
[ALTERNATE BACK COVER FOR MARKET-MAKING PROSPECTUS]
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 12
Use of Proceeds.................................... 20
Capitalization..................................... 20
Unaudited Pro Forma Condensed Consolidated
Financial Information............................. 21
Selected Financial Information..................... 28
Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 29
Business........................................... 38
Certain Relationships and Related Transactions .... 56
Management......................................... 58
Ownership of Capital Stock......................... 65
Description of Certain Indebtedness................ 65
Description of The Notes........................... 69
Certain United States Federal Tax Considerations .. 94
Underwriting....................................... 97
Available Information ............................. 98
Legal Matters...................................... 98
Experts............................................ 98
Index to Financial Statements...................... F-1
</TABLE>
[L-3 LOGO]
L-3 COMMUNICATIONS
CORPORATION
PROSPECTUS
% SENIOR SUBORDINATED
NOTES DUE 2008
LEHMAN BROTHERS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- --------------------------------------------------------------- -----------
<S> <C>
Securities and Exchange Commission registration fee ........... $44,250
National Association of Securities Dealers, Inc. filing fee ... 15,500
Legal fees and expenses ........................................ *
Accounting fees and expenses ................................... *
Printing and engraving fees and expenses ....................... *
Blue Sky fees and expenses ..................................... *
Trustee fees and expenses....................................... *
Miscellaneous expenses.......................................... *
-----------
Total......................................................... $*
===========
</TABLE>
- ------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
for, among other things:
(i) permissive indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are parties to litigation other
than stockholder derivative actions if certain conditions are met;
(ii) permissive indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including
directors and officers of a corporation, in the event such persons are
parties to stockholder derivative actions if certain conditions are met;
(iii) mandatory indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including
directors and officers of a corporation, in the event such persons are
successful on the merits or otherwise in defense of litigation covered by
(i) and (ii) above; and
(iv) that the indemnification provided for by Section 145 is not deemed
exclusive of any other rights which may be provided under any by-law,
agreement, stockholder or disinterested director vote, or otherwise.
In addition to the indemnification provisions of the DGCL described above,
the Registrant's Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Registrant shall, to the fullest extent
permitted by the DGCL, (i) indemnify its officers and directors and (ii)
advance expenses incurred by such officers or directors in relation to any
action, suit or proceeding.
The Registrant's Bylaws (the "Bylaws") require the advancement of expenses
to an officer or director (without a determination as to his conduct) in
advance of the final disposition of a proceeding if such person furnishes a
written affirmation of his good faith belief that he has met the applicable
standard of conduct and furnishes a written undertaking to repay any advances
if it is ultimately determined that he is not entitled to indemnification. In
connection with proceedings by or in the right of the Registrant, the Bylaws
provide that indemnification shall include not only reasonable expenses, but
also judgments, fines, penalties and amounts paid in settlement. The Bylaws
provide that the Registrant may, subject to authorization on a case by case
basis, indemnify and advance expenses to employees or agents to the same
extent as a director or to a lesser extent (or greater, as permitted by law)
as determined by the Board of Directors.
II-1
<PAGE>
The Bylaws purport to confer upon officers and directors contractual
rights to indemnification and advancement of expenses as provided therein.
The Certificate of Incorporation limits the personal liability of
directors to the Registrant or its stockholders for monetary damages for
breach of the fiduciary duty as a director, other than liability as a
director (i) for breach of duty of loyalty to the Registrant or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (certain illegal distributions) or (iv) for any transaction for
which the director derived an improper personal benefit.
The Registrant maintains officers' and directors' insurance covering
certain liabilities that may be incurred by officers and directors in the
performance of their duties.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 30, 1997, L-3 Communications issued 100 shares of its common
stock to Holdings for aggregate consideration of $125 million. The securities
were sold directly by L-3 Communications and did not involve any underwriter.
L-3 Communications considers these securities to have been offered and sold
in a transaction not involving any public offering and, therefore, to be
exempted from registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- --------------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement among L-3 Communications Corporation and the Underwriters
named therein
*3.1 Certificate of Incorporation.
*3.2 By-Laws of L-3 Communications Corporation.
*4.1 Form of Indenture between L-3 Communications Corporation and the Trustee, including the form
of Note.
*5 Opinion of Simpson Thacher & Bartlett.
*10.1 Credit Agreement, dated as of April 30, 1997 among L-3 Communications Corporation and
lenders named therein, as amended.
*10.2 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The Bank of
New York, as Trustee.
*10.3 Stockholders' Agreement between L-3 Communications Corporation and the stockholders parties
thereto.
*10.4 Transaction Agreement dated as of March 28, 1997, as amended, among Lockheed Martin
Corporation, Lehman Brothers Capital Partners III, L.P., Frank C. Lanza, Robert V. LaPenta
and L-3 Communications Holdings, Inc.
*10.5 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3 Communications
Holdings, Inc.
*10.51 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3 Communications
Holdings, Inc.
*10.6 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and KSL, Division of Bonneville International.
*10.61 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, L-3 Communications
Corporation and Unisys Corporation.
*10.62 Sublease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and Unisys Corporation.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- --------------------------------------------------------------------------------------------
*10.7 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin Corporation
and L-3 Communications Corporation.
*10.8 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications
Corporation and California Microwave, Inc.
*10.9 Form of Stock Option Agreement for Employee Options.
*10.10 L-3 Communications Corporation Pension Plan.
*23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5
hereto).
23.2 Consent of Coopers & Lybrand L.L.P., independent certified public accountants.
23.3 Consent of Ernst & Young LLP, independent certified public accountants.
23.31 Consent of Ernst & Young LLP, independent certified public accountants.
23.4 Consent of KPMG Peat Marwick LLP, independent certified public accountants.
24 Powers of Attorney.
*25 Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- ------------
* To be provided by amendment.
(b) Financial Statement Schedules
Not applicable
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by 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 Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 27,
1998.
L-3 COMMUNICATIONS CORPORATION
By: *
-------------------------------
Chief Executive Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 27th day of February, 1998 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------- ----------------------------------------------------------
<S> <C>
*
-------------------------- Chairman, Chief Executive Officer and Director (Principal
Frank C. Lanza Executive Officer)
*
-------------------------- President, Chief Financial Officer (Principal Financial
Robert V. LaPenta Officer) and Director
*
-------------------------- Vice President--Finance and Controller (Principal
Michael T. Strianese Accounting Officer)
*
--------------------------
David J. Brand Director
*
--------------------------
Thomas A. Corcoran Director
*
--------------------------
Alberto M. Finali Director
*
--------------------------
Eliot M. Fried Director
*
--------------------------
Frank H. Menaker, Jr. Director
*
--------------------------
Robert B. Millard Director
*
--------------------------
John E. Montague Director
*
--------------------------
Alan H. Washkowitz Director
By:/s/ Christopher C. Cambria
--------------------------
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of L-3 Communications
Corporation, do hereby constitute and appoint Michael T. Strianese,
Christopher C. Cambria and David J. Brand, or any of them, our true and
lawful attorneys and agents, to do any and all acts and things in our name
and on our behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, may deem necessary
or advisable to enable said Corporation to comply with the Securities Act of
1933 and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign
for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto and we do hereby
ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 27th day of February, 1998 by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------- -----------------------------------------------------------
<S> <C>
/s/ Frank C. Lanza
----------------------------- Chairman, Chief Executive Officer and Director (Principal
Frank C. Lanza Executive Officer)
/s/ Robert V. LaPenta
----------------------------- President, Chief Financial Officer (Principal Financial
Robert V. LaPenta Officer) and Director
/s/ Michael T. Strianese
----------------------------- Vice President--Finance and Controller (Principal
Michael T. Strianese Accounting Officer)
/s/ David J. Brand
-----------------------------
David J. Brand Director
/s/ Thomas A. Corcoran
-----------------------------
Thomas A. Corcoran Director
/s/ Albert M. Finali
-----------------------------
Albert M. Finali Director
/s/ Eliot M. Fried
-----------------------------
Eliot M. Fried Director
/s/ Frank H. Menaker, Jr.
-----------------------------
Frank H. Menaker, Jr. Director
/s/ Robert B. Millard
-----------------------------
Robert B. Millard Director
/s/ John E. Montague
-----------------------------
John E. Montague Director
/s/ Alan H. Washkowitz
-----------------------------
Alan H. Washkowitz Director
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- --------------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement among L-3 Communications Corporation and the Underwriters
named therein
*3.1 Certificate of Incorporation.
*3.2 By-Laws of L-3 Communications Corporation.
*4.1 Form of Indenture between L-3 Communications Corporation and the Trustee, including the form
of Note.
*5 Opinion of Simpson Thacher & Bartlett.
*10.1 Credit Agreement, dated as of April 30, 1997 among L-3 Communications Corporation and
lenders named therein, as amended.
*10.2 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The Bank of
New York, as Trustee.
*10.3 Stockholders' Agreement between L-3 Communications Corporation and the stockholders parties
thereto.
*10.4 Transaction Agreement dated as of March 28, 1997, as amended, among Lockheed Martin
Corporation, Lehman Brothers Capital Partners III, L.P., Frank C. Lanza, Robert V. LaPenta
and L-3 Communications Holdings, Inc.
*10.5 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3 Communications
Holdings, Inc.
*10.51 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3 Communications
Holdings, Inc.
*10.6 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and KSL, Division of Bonneville International.
*10.61 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, L-3 Communications
Corporation and Unisys Corporation.
*10.62 Sublease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and Unisys Corporation.
*10.7 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin Corporation
and L-3 Communications Corporation.
*10.8 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications
Corporation and California Microwave, Inc.
*10.9 Form of Stock Option Agreement for Employee Options.
*10.10 L-3 Communications Corporation Pension Plan.
*23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5
hereto).
23.2 Consent of Coopers & Lybrand L.L.P., independent certified public accountants.
23.3 Consent of Ernst & Young LLP, independent certified public accountants.
23.31 Consent of Ernst & Young LLP, independent certified public accountants.
23.4 Consent of KPMG Peat Marwick LLP, independent certified public accountants.
24 Powers of Attorney (included in signature page).
*25 Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- ------------
* To be provided by amendment.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-1 of (i)
our report dated February 2, 1998 on our audits of the consolidated financial
statements of L-3 Communications Corporation and subsidiaries as of December
31, 1997 and for the nine months then ended, the combined financial
statements of the Predecessor Company for the three months ended March 31,
1997, and as of December 31, 1996 and for the year then ended, and (ii) our
report, dated March 20, 1997, on our audits of the combined financial
statements of the Loral Acquired Businesses for the three months ended March
31, 1996 and for the year ended December 31, 1995, and (iii) our report,
dated February 23, 1998, on our audit of the combined financial statements of
AlliedSignal Ocean Systems (a wholly owned operation of AlliedSignal, Inc.)
as of and for the year ended December 31, 1997. Our report on the combined
financial statements of the Predecessor Company as of and for the year ended
December 31, 1996 indicates that our opinion, insofar as it relates to the
financial statements of the Lockheed Martin Communications Systems Division
as of December 31, 1996 included in such combined financial statements, is
based solely on the report of other auditors. We also consent to the
reference to our Firm under the caption "Experts".
Coopers & Lybrand L.L.P.
New York, New York
February 26, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 7, 1997, with respect to the combined
financial statements of Lockheed Martin Communications Systems Division as of
and for the years ended December 31, 1996 (not presented separately herein)
and 1995, included in the Registration Statement on Form S-1 and related
Prospectus of L-3 Communications Corporation for the registration of
$150,000,000 of Senior Subordinated Notes due 2008.
Ernst & Young LLP
Washington, D.C.
February 26, 1998
<PAGE>
EXHIBIT 23.31
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 27, 1998, with respect to the financial
statements of Satellite Transmission Systems Division of California Microwave,
Inc., included in the Registration Statement on Form S-1 and related Prospectus
of L-3 Communications Corporation for the registration of $150,000,000 of
Senior Subordinated Notes due 2008.
Ernst & Young LLP
Washington, D.C.
February 23, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
ILEX Systems, Inc:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG Peat Marwick LLP
San Jose, California
February 23, 1998
