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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
L-3 COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3937436
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 THIRD AVENUE 10016
NEW YORK, NEW YORK (Zip Code)
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(Address of principal executive offices)
(212) 697-1111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 31, 1997, L-3 Communications Corporation (the "Company" or
"L-3 Communications") had 100 shares of common stock oustanding, which were
held by its parent, L-3 Communications Holdings, Inc. ("Holdings").
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
As used herein, unless the context requires otherwise: (i) "Holdings"
means L-3 Communications Holdings, Inc., (ii) "L-3" 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" or the "Company" 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), ILEX (as defined) and Ocean Systems (as defined)
described under "--Recent Developments", (vi) "Notes Offering" means $150
million aggregate principal amount of Senior Subordinated Notes due 2008 to
be offered by L-3 Communications, (vii) "Common Stock Offering" means an
initial public offering of common stock by Holdings which is made
concurrently with the Notes Offering, (viii) "Offerings" means the Notes
Offering and the contribution by Holdings of the proceeds of the Common Stock
Offering and (ix) 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.
ITEM 1. 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 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
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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, Inc.,
Lucent Technologies Inc., AT&T Corp. 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 business
area to the medical image archiving market through a partnership with the
General Electric Company's ("GE") medical systems business. Based on secure,
high data rate communications technology also developed in its Secure
Communication Systems business 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 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 commenced 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.
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The Company's systems and products are summarized in the following tables:
SECURE COMMUNICATION SYSTEMS (1997 PRO FORMA SALES: $456.0 MILLION)
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SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
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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
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SPECIALIZED COMMUNICATION PRODUCTS (1997 PRO FORMA SALES: $438.0 MILLION)
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PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
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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, PanAmSat, Telstar, Sirius,
(channel amplifiers, transceivers, channel and frequency separation Tempo, Tiros, Milstar, GPS and LandSat
converters, filters and multiplexers)
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
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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 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,
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.
RECENT DEVELOPMENTS
The Company recently purchased the assets and liabilities of three
businesses described below which collectively comprise the "1998
Acquisitions". The combined purchase prices for these acquisitions was $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 has financed 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.
Ocean Systems
On March 30, 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.
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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 Nautik GmbH ("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.
ILEX Systems
On March 4, 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 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.
Satellite Transmission Systems
On February 5, 1998, L-3 Communications purchased the assets of 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, telecommunication and satellite service
providers, broadcasters and media-related companies, government agencies and
large corporations.
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, purchased by Lockheed Martin as part of its
acquisition of the aerospace business of GE in April 1993 (collectively, the
"Businesses"). L-3 Communications is a wholly-owned subsidiary of Holdings.
At December 31, 1997, 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.
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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, 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 so as 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 ("CHBDL"),
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
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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/ 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 systems 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.
8
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS
MICROWAVE COMPONENTS
L-3 is the preeminent 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 catalog 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.
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
9
<PAGE>
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 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.
10
<PAGE>
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 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 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.
11
<PAGE>
O WIRELESS LOOP TELECOMMUNICATIONS EQUIPMENT
The Company is applying its wireless communication expertise to introduce
local wireless loop telecommunications 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.
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 commenced in the first quarter 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,
12
<PAGE>
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 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
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<PAGE>
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.
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 permits. 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 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.
In connection with the acquisition of Ocean Systems, the Company has
acquired the stock of ELAC. 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
14
<PAGE>
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 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.
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
15
<PAGE>
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.
ITEM 2. 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>
ITEM 3. 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.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no established public trading market for the Company's common
stock. All of the issued and outstanding shares of common stock of the
Company are held by its parent, Holdings.
ITEM 6. SELECTED FINANCIAL DATA.
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 such transactions had occurred on January 1, 1997, for the
statement of operations and other data. The balance sheet data reflect the
1998 Acquisitions, and the Offerings as if such transactions 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
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,
which comprised the Predecessor Company for all periods prior to April 1,
1996.
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, 1993
---------------------- -------------------------- --------------------
NINE THREE NINE THREE
YEAR ENDED MONTHS MONTHS MONTHS MONTHS
DECEMBER 31, 1997 ENDED ENDED ENDED ENDED
PRO FORMA DEC. 31(1) MARCH 31 1996(2) 1995(3) 1994(3) DEC. 31(3) MARCH 31(4)
----------------- ---------- ---------- -------- -------- ------- --------- ----------
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ................................... $894.0 $546.5 $ 158.9 $543.1 $166.8 $218.9 $200.0 $67.8
Operating income ........................ 58.3 55.9 7.9 43.7 4.7 8.4 12.4 5.1
Interest expense, net(5) ................ 43.9 28.5 8.4 24.2 4.5 5.5 4.1 --
Provision (benefit) for income taxes(5) 4.2 10.7 (0.2) 7.8 1.2 2.3 3.8 2.0
Net income (loss)........................ 10.2 16.7 (0.3) 11.7 (1.0) 0.6 4.5 3.1
BALANCE SHEET DATA:
Working capital ......................... $138.9 $131.8 $ 98.8 $ 21.1 $ 19.3 $ 24.7 $22.8
Total assets ............................ 896.0 703.4 593.3 228.5 233.3 241.7 93.5
Invested equity ......................... 473.6 194.7 199.5 202.0 59.9
Shareholders' equity..................... 224.7 132.7
OTHER DATA:
EBITDA(6) ............................... $ 95.1 $ 78.1 $ 15.7 $ 71.8 $ 16.3 $ 19.9 $ 23.4 $7.0
Depreciation expense .................... 22.0 13.3 4.5 14.9 5.5 5.4 6.1 1.8
Amortization expense .................... 14.8 8.9 3.3 13.2 6.1 6.1 4.9 0.1
Capital expenditures .................... 19.9 11.9 4.3 13.5 5.5 3.7 2.6 0.8
Ratios of:
Earnings to fixed charges(7)............ 1.3x 1.8x n.a.(10) 1.7x 1.0x 1.4x 2.5x n.a.(11)
EBITDA to cash interest expense(8) ..... 2.3x
Net debt to EBITDA(9)................... 4.0x
</TABLE>
17
<PAGE>
- ------------
(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 the ownership of Communications Systems -- East by GE
Aerospace. The amounts shown herein include only those amounts as
reflected in the financial records of Communications 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.
(10) For the three months ended March 31, 1997, earnings were insufficient
to cover fixed charges by $0.5 million.
(11) For the three months ended March 31, 1993, no interest expense was
incurred.
ITEM 7. 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
and ocean systems, 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%.
18
<PAGE>
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".
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 tax 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
19
<PAGE>
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.
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
-------------- -------------------------------------------------------------------------------
YEAR
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS ENDED
ENDED ENDED ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, ------------------
1997 1996 1997 1996 1996 1995
--------------- -------------- -------------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
($ in millions)
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, CHBDL, 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 outstanding borrowings
(see Note 8 to Consolidated (Combined) Financial Statements), 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.
20
<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
-------------- -------------- -------------- ---------------
NINE MONTHS THREE MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, 1997 DECEMBER 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%.
21
<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.
22
<PAGE>
FINANCING
The L-3 Acquisition was funded by a combination of debt and equity. The
equity of $125.0 million was provided by Holdings. In connection with the L-3
Acquisition, the Company entered into a $275.0 million credit facility
consisting of $175.0 million of term loans (the "Term Loan Facilities") and a
$100.0 million revolving credit facility (the "Revolving Credit Facility"),
(collectively the "Senior Credit Facilities"). The initial debt balance of
$400.0 million consisted of $175.0 million of borrowings under the Term Loan
Facilities and $225 million of 10 3/8% Senior Subordinated Notes ("the 1997
Notes") due May 1, 2007. 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. 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 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.
On February 27, 1998, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the sale of $150.0 million
aggregate principal amount of Senior Subordinated
23
<PAGE>
Notes due 2008 (the "Notes Offering"), and concurrently with the Notes
Offering, Holdings filed a registration statement with the SEC for the sale
of common stock for a proposed maximum aggregate offering price of $100.0
million (the "Common Stock Offering").
To mitigate risks associated with changing interest rates on certain of
its debt, the Company entered into the interest rate cap and floor contracts
(the "interest rate agreements"). The Company manages exposure to
counterparty credit risk by entering into the interest rate agreements only
with major financial institutions that are expected to perform fully under
the terms of such agreements. Cash payments to (from) the Company and the
counterparties are made at the end of the quarter to the extent due under the
terms of the interest rate agreements. Such payments are recorded as
adjustments to interest expense. The initial costs of the interest rate
agreements are capitalized as debt issue costs and amortized into interest
expense. See Note 8 to the Consolidated (Combined) Financial Statements.
CASH FLOWS
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
-------------- -------------- ------------------
NINE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
------------------
1997 1997 1996 1995
-------------- -------------- --------- -------
($ 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.
24
<PAGE>
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.
All transactions between the Businesses and Lockheed Martin have been
accounted for 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 March 30, 1998, the Company purchased the assets of Ocean Systems for
$67.5 million of cash.
On March 4, 1998, the Company purchased the assets of ILEX for $51.9
million of cash, subject to adjustment based on closing net assets, and
additional consideration based on post-acquisition performance of ILEX.
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 financed the 1998 Acquisitions 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.
25
<PAGE>
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 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.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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.
27
<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
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lockheed Martin 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, changes in shareholders' equity and invested equity, and cash
flows for 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
29
<PAGE>
L-3 COMMUNICATIONS CORPORATION
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-30
<PAGE>
L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------------ -------------------------------------
NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ENDED ----------------------
DECEMBER 31, MARCH 31, 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-31
<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
------------- -----------------------------------------------------------------------
ADDITIONAL
INVESTED COMMON STOCK PAID-IN RETAINED EQUITY
EQUITY ---------------------- CAPITAL EARNINGS ADJUSTMENT TOTAL
SHARES
ISSUED PAR VALUE
------------- -------- ----------- ---------- --------- ----------- -------
<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-32
<PAGE>
L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------------ -------------------------------------
NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ENDED ----------------------
DECEMBER 31, MARCH 31, 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,
NET OF AMOUNTS ACQUIRED.....................
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-33
<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 (the "Loral Acquired Businesses"), and (ii) one business unit,
Communications Systems -- East 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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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 L-3 Acquisition, the Company entered into $275,000 of
Senior Credit Facilities consisting of $175,000 of term loans (the "Term Loan
Facilities"), and a $100,000 revolving credit facility (the "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-40
<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 borrowings under the
Revolving Credit Facilities, 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-41
<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-42
<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-43
<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 689,500 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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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
----------------- ------------------------------
YEAR ENDED
NINE MONTHS THREE MONTHS DECEMBER 31,
ENDED ENDED ------------
DECEMBER 31, 1997 MARCH 31, 1997 1996 1995
------------------ -------------- ------ ------
<S> <C> <C> <C> <C>
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-50
<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
In February 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.
In February 1998, the Company entered into a definitive agreement to
purchase the assets of ILEX Systems ("ILEX") for $51,900 in cash and
additional consideration based on post-acquisition performance of ILEX.
The acquisitions of ILEX and Ocean Systems 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.
In February 1998, the Company expects to file a registration statement
with the Securities and Exchange Commission ("SEC") for the sale of $150,000
aggregate principal amount of Senior Subordinated Notes due 2008 (the "Notes
Offering"), and concurrently with the Notes Offering, Holdings expects to
file a registration statement with the SEC for the sale of common stock for a
proposed maximum aggregate offering of $100,000.
F-51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
52
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning the directors and
executive officers. 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 .. 42 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.
53
<PAGE>
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 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 &
54
<PAGE>
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.
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,
hereinafter defined.
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
55
<PAGE>
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 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.
ITEM 11. EXECUTIVE COMPENSATION.
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 SECURITIES
COMPENSATION RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION ----------------------- STOCK AWARDS STOCK OPTIONS COMPENSATION(2)
SALARY BONUS(1)
- -------------------------------------- ---------- ------------ -------------- ------------- ---------------
<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 $80,000 17,000 --
Jimmie V. Adams (Vice President) ...... 157,854 70,000 15,000 $ 61
Robert RisCassi (Vice President) ...... 125,704 60,000 15,000 611
</TABLE>
- ------------
(1) Represents Company match under savings plan.
56
<PAGE>
Stock Options Granted in 1997. The following table sets forth information
concerning individual grants of stock options to purchase Holdings' Common
Stock made 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 and Supplemental
Employee Retirement 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.
<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.
57
<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 Holdings' 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 Holdings' 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
Holdings' 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 Holdings' 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
Holdings' 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'
58
<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 March 2, 1998 and each of the
second through fifth 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 March 2, 1998 and each of the second
through fifth 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All outstanding capital stock of L-3 Communications is owned by Holdings.
ITEM 13. 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.
59
<PAGE>
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 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%.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS
The financial statements and notes to the Consolidated (Combined)
Financial Statements are referred to in Item 8.
(B) ADDITIONAL FINANCIAL INFORMATION
None
(C) REPORTS FILED ON FORM 8-K
None
(D) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- -----------------------------------------------------------------------------------------
<S> <C>
*3.1 Certificate of Incorporation.
*3.2 By-Laws of L-3 Communications Corporation. the form of Note.
*10.1 Credit Agreement, dated as of April 30, 1997 among L-3 Communications Corporation and
lenders named therein.
*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.
10.81 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3
Communications Corporation.
10.82 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc., AlliedSignal
Technologies, Inc., AlliedSignal Deutschland GMBH and L-3 Communications Corporation.
10.9 Form of Stock Option Agreement for Employee Options.
10.10 L-3 Communications Corporation Pension Plan.
12. Computation of Ratio of Earnings to Fixed Charges.
61
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- -----------------------------------------------------------------------------------------
24 Powers of Attorney.
99.1 Unaudited Pro Forma Condensed Consolidated Financial Information.
99.2 Satellite Transmission Systems Division of California Microwave, Inc. Unaudited Condensed
Financial Statements, Six months ended December 31, 1996 and 1997.
99.3 Satellite Transmission Systems Division of California Microwave, Inc. Financial
Statements of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and
1995.
99.4 ILEX Systems, Inc. and Subsidiary Consolidated Financial Statements, December 31, 1997.
99.5 AlliedSignal Ocean Systems Combined Financial Statements as of December 31, 1997 and for
the year ended December 31, 1997.
</TABLE>
- ------------
* Incorporated by reference from the Company's Registration Statement
on Form S-4 (File no. 333-31649).
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 31,
1998.
L-3 COMMUNICATIONS CORPORATION
By: /s/ Robert V. LaPenta
-------------------------------
Name: Robert V. LaPenta
Title: President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant on March 31, 1998 and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------- ----------------------------------------------------------
<S> <C>
/s/ Frank C. Lanza Chairman, Chief Executive Officer and Director
---------------------------- (Principal Executive Officer)
Frank C. Lanza
/s/ Robert V. LaPenta President, Chief Financial Officer (Principal Financial
---------------------------- Officer) and Director
Robert V. LaPenta
/s/ Michael T. Strianese Vice President--Finance and Controller (Principal
---------------------------- Accounting Officer
Michael T. Strianese
* Director
----------------------------
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
By:/s/ Michael T. Strianese
----------------------------
Attorney-in-Fact
</TABLE>
63
<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
Exchange Act of 1934 and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report,
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 Exchange Act of 1934, this
Annual Report has been signed on the 30th day of March, 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 Executive Officer)
Frank C. Lanza
/s/ Robert V. LaPenta President, Chief Financial Officer (Principal Financial
---------------------------- Officer) and Director
Robert V. LaPenta
/s/ Michael T. Strianese Vice President--Finance and Controller (Principal
---------------------------- Accounting Officer
Michael T. Strianese
/s/ David J. Brand Director
----------------------------
David J. Brand
/s/ Thomas A. Corcoran Director
----------------------------
Thomas A. Corcoran
/s/ Albert M. Finali Director
----------------------------
Alberto M. Finali
/s/ Eliot M. Fried Director
----------------------------
Eliot M. Fried
/s/ Frank H. Menaker, Jr. Director
----------------------------
Frank H. Menaker, Jr.
/s/ Robert B. Millard Director
----------------------------
Robert B. Millard
/s/ John E. Montague Director
----------------------------
John E. Montague
/s/ Alan H. Washkowitz Director
----------------------------
Alan H. Washkowitz
</TABLE>
64
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- --------------- ---------------------------------------------------------------------------------- --------
<S> <C> <C>
*3.1 Certificate of Incorporation.
*3.2 By-Laws of L-3 Communications Corporation.
*10.1 Credit Agreement, dated as of April 30, 1997 among L-3 Communications Corporation
and lenders named therein.
*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.
10.81 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3
Communications Corporation.
10.82 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc.,
AlliedSignal Technologies, Inc., AlliedSignal Deutschland GMBH and
L-3 Communications Corporation.
10.9 Form of Stock Option Agreement for Employee Options.
10.10 L-3 Communications Corporation Pension Plan.
12. Computation of Ratio of Earnings to Fixed Charges.
24 Powers of Attorney (included in signature page).
99.1 Unaudited Pro Forma Condensed Consolidated Financial Information.
99.2 Satellite Transmission Systems Division of California Microwave, Inc. Unaudited
Condensed Financial Statements, Six months ended December 31, 1996 and 1997.
99.3 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.
99.4 ILEX Systems, Inc. and Subsidiary Consolidated Financial Statements, December 31,
1997.
99.5 AlliedSignal Ocean Systems Combined Financial Statements as of December 31, 1997
and for the year ended December 31, 1997.
</TABLE>
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* Incorporated by reference from the Company's Registration Statement
on Form S-4 (File no. 333-31649).
<PAGE>
Exhibit 10.8
ASSET PURCHASE AGREEMENT
________________________________________________________________________________
Between
L-3 COMMUNICATIONS CORPORATION
and
CALIFORNIA MICROWAVE, INC.
________________________________________________________________________________
Dated as of December 19, 1997
<PAGE>
TABLE OF CONTENTS
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ARTICLE I SALE AND PURCHASE OF THE ASSETS . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Books and Records; Intellectual Property . . . . . . . . . . . . . . 4
ARTICLE II THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Place and Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Allocation of Purchase Price . . . . . . . . . . . . . . . . . . . . 5
2.4 Assumption of Liabilities . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Excluded Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Consent of Third Parties . . . . . . . . . . . . . . . . . . . . . . 8
2.7 Adjustment of Purchase Price . . . . . . . . . . . . . . . . . . . . 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . 11
3.1 Authorization, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Corporate Status . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3 No Conflicts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . 12
3.6 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.7 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.9 Compliance with Laws; Governmental
Approvals and Consents; Governmental
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.10 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.11 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.12 Territorial Restrictions . . . . . . . . . . . . . . . . . . . . . . 18
3.13 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.14 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.15 Product Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . 18
3.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.18 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 20
3.20 Employees, Labor Matters, etc. . . . . . . . . . . . . . . . . . . . 20
3.21 Employee Benefit Plans and Related Matter . . . . . . . . . . . . . . 21
</TABLE>
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3.22 Brokers, Finders, etc. . . . . . . . . . . . . . . . . . . . . . . . 21
3.23 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . 22
3.24 Order Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.25 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.26 Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . 23
4.1 Corporate Status; Authorization, etc. . . . . . . . . . . . . . . . . 23
4.2 No Conflicts, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.3 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.4 Brokers, Finders, etc. . . . . . . . . . . . . . . . . . . . . . . . 24
4.5 Adequate Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE V COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.1 Covenants of Seller . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.2 Covenants of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VI CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.1 Conditions to Obligations of Each Party . . . . . . . . . . . . . . . 31
6.2 Conditions to Obligations of Buyer . . . . . . . . . . . . . . . . . 32
6.3 Conditions to Obligations of Seller . . . . . . . . . . . . . . . . . 35
ARTICLE VII EMPLOYEES AND EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . 35
7.1 Employment of Seller's Employees . . . . . . . . . . . . . . . . . . 35
7.2 Welfare and Fringe Benefit Plans . . . . . . . . . . . . . . . . . . 36
ARTICLE VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE IX INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.1 By Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.2 By Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.3 Adjustments to Indemnification Payments. . . . . . . . . . . . . . . 39
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9.4 Indemnification Procedures. . . . . . . . . . . . . . . . . . . . . . 39
9.5 Expiration of Representations and Warranties, etc. . . . . . . . . 40
9.6 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE X DEFINITIONS, MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.1 Definition of Certain Terms . . . . . . . . . . . . . . . . . . . . . 41
10.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.5 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.6 Arbitration Procedure. . . . . . . . . . . . . . . . . . . . . . . . 51
10.7 Attorneys Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.8 Liability for Transfer Taxes . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
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<PAGE>
EXHIBITS
EXHIBIT A Form of Cross-License Agreement
EXHIBIT B Form of Technology License Agreement
EXHIBIT C Form of Trademark License Agreement
EXHIBIT D Form of Supply Agreement
SCHEDULES
SCHEDULE 1.2 Excluded Assets
SCHEDULE 2.4(a) Retention Incentive Agreements
SCHEDULE 3.2(b) Qualification to Do Business; Good Standing
SCHEDULE 3.3 Conflicts
SCHEDULE 3.4 September Balance Sheet
SCHEDULE 3.5 Undisclosed Liabilities
SCHEDULE 3.6(a) Contested Taxes
SCHEDULE 3.7 Absence of Changes
SCHEDULE 3.8 Litigation
SCHEDULE 3.9(a) Compliance with Laws
SCHEDULE 3.9(b) Governmental Approvals and other Consents
SCHEDULE 3.9(c) Government Contracts
SCHEDULE 3.10 Asset Exceptions
SCHEDULE 3.11(a) Contracts
SCHEDULE 3.11(c) Defaults and Consents under Contracts
SCHEDULE 3.13 Inventory Exceptions
SCHEDULE 3.15 Product Warranties
SCHEDULE 3.16(a) Owned Intellectual Property
SCHEDULE 3.16(b) Intellectual Property Licensing Arrangements
SCHEDULE 3.16(c) Infringement by Third Parties
SCHEDULE 3.16(d) Claims by Third Parties
SCHEDULE 3.17 Insurance
SCHEDULE 3.18(a) Owned Real Property
SCHEDULE 3.18(b) Leases
SCHEDULE 3.19(a) Environmental Matters
SCHEDULE 3.21(a) Employee Benefit Plans
SCHEDULE 3.23 Suppliers and Customers
SCHEDULE 3.24 Backlog
SCHEDULE 4.2 Governmental Approvals and other Consents
SCHEDULE 5.2(e) Letters of Credit; Performance and Surety Bonds
SCHEDULE 5.2(f) Severance Agreements
SCHEDULE 6.2(c) Consents
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<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of December 19, 1997,
between L-3 Communications Corporation, a Delaware corporation (the "Buyer"),
and California Microwave, Inc., a Delaware corporation (the "Seller").
R E C I T A L S:
A. Seller is in the business of designing, integrating
and installing satellite communications systems (with a principal focus on the
telephony, video broadcasting, multimedia, trunk and VSAT hub niches) in the
United States and certain other countries through an unincorporated division
(the "STS Division").
B. Buyer wishes to purchase or acquire from Seller, and
Seller wishes to sell, assign and transfer to Buyer, substantially all of the
assets of the STS Division, and Buyer has agreed to assume certain of the
liabilities of such Division, all for the purchase price and upon the terms and
subject to the conditions hereinafter set forth.
C. Capitalized terms used herein without separate
definition have the meanings given to such terms in Section 10.1.
NOW THEREFORE, in consideration of the mutual covenants,
representations and warranties made herein, and of the mutual benefits to be
derived hereby, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF THE ASSETS
1.1 Assets. Subject to and upon the terms and conditions
set forth in this Agreement, at the Closing, Seller shall sell, transfer,
convey, assign and deliver to Buyer, and Buyer shall purchase and acquire from
Seller, all right, title and interest of Seller in and to the properties,
assets and rights of every nature, kind and description, tangible and
intangible (including goodwill), whether real, personal or mixed, whether
accrued, contingent or otherwise and whether now existing or hereinafter
acquired (other than the Excluded Assets) that primarily relate to and are used
in the Business as the same may exist on the Closing Date (collectively, the
"Assets"), including, without limitation,
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(a) the Owned Real Property described on Schedule
3.18(a) and the property leased at 125 Kennedy Drive, Hauppauge, New York,
described on Schedule 3.18(b) (the "Kennedy Facility");
(b) all machinery, equipment, furniture,
furnishings, vehicles, tools, dies, molds and other tangible personal property;
(c) all inventories of raw materials, work in
process, finished products, goods, spare parts, replacement and component
parts, and office and other supplies (whether on hand, in-transit or on order)
(collectively, the "Inventories");
(d) all rights in Intellectual Property owned by
Seller and used primarily in the Business;
(e) the GMACS and Universal System Controller;
(f) all rights under all Contracts;
(g) all credits, prepaid expenses, deferred
charges, advance payments, security deposits and prepaid items;
(h) all notes and accounts receivable held by
Seller (including intercompany and interdivisional accounts receivable) and all
notes, bonds and other evidences of indebtedness of and rights to receive
payments from any Person (in all cases, whether or not billed) and the benefit
of security therefor;
(i) all Books and Records;
(j) to the extent their transfer is permitted by
law, all Governmental Approvals, including all applications therefor;
(k) all rights to causes of action, lawsuits,
claims and demands of any nature available to or being pursued by Seller with
respect to the Assets or the Assumed Liabilities (subject to Section 1.2(e));
(l) all guarantees, warranties, indemnities and
similar rights in favor of Seller with respect to the Assets;
(m) all computer hardware and software used
exclusively in the Business, including all rights under licenses and other
instruments or agreements relating thereto;
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(n) all assets reflected on the Final Closing
Statement of Net Assets;
(o) the Names and Logos "Satellite Transmission
Systems" alone or in any combination of words, or any combination, variation or
derivation of any such name or mark; and
(p) the cash and the cash equivalents in the
non-U.S. bank accounts as provided in Section 2.7(b).
Subject to the terms and conditions hereof, at the Closing,
the Assets shall be transferred or otherwise conveyed to Buyer free and clear
of all Liens excepting only those Liens listed in the first and fourth
paragraphs of Schedule 3.10 and Permitted Liens.
1.2 Excluded Assets. Seller shall retain and not
transfer, and Buyer shall not purchase or acquire, the following assets
(collectively, the "Excluded Assets"):
(a) the assets listed on Schedule 1.2;
(b) the name and mark "California Microwave" and
any name or mark derived from or including the foregoing;
(c) all cash and cash equivalents and similar
type investments, such as certificates of deposit, treasury bills and other
marketable securities other than non-U.S. bank accounts as provided in Section
2.7(b);
(d) all Books and Records relating to or used in
the business of Seller and not primarily relating to or used in the Business;
(e) all insurance policies and all rights to
causes of action, lawsuits, claims and demands, rights of recovery and set-off,
and proceeds, under or with respect to insurance policies except to the extent
provided for in Section 5.1(e);
(f) all rights to causes of action, lawsuits,
claims and demands of any nature available to or being pursued by Seller with
respect to the Excluded Assets or the Excluded Liabilities;
(g) all Intellectual Property not used primarily
in the Business;
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(h) all right, title and interest of the Seller
in and to prepaid Taxes of the Business (except to the extent reflected on the
Final Closing Statement of Net Assets), and any claims for any refund, rebate
or abatement with respect to Taxes of the Business (except to the extent
reflected on the Final Closing Statement of Net Assets) for any period or
portion thereof through the Closing Date and any interest payable with respect
thereto; and
(i) the lease of the warehouse located at 65
Commerce Drive, Hauppauge, New York.
1.3 Books and Records; Intellectual Property.
(a) From and after the Closing and until the
sixth anniversary thereof, (i) Seller agrees to grant to Buyer, upon reasonable
notice and during normal business hours, reasonable access to any Books and
Records that pertain to the operations of the Business but that are not Books
and Records that primarily relate to the Business, and (ii) Buyer agrees to
grant to Seller, upon reasonable notice and during normal business hours,
reasonable access to any Books and Records included in the Assets that pertain
to the operation of the Business on or prior to the Closing Date, for any
reasonable business purpose of Seller.
(b) At the Closing, Seller shall grant to Buyer a
fully-paid, nonexclusive license to use intellectual property of Seller used in
the operation of the Business but not constituting Intellectual Property that
primarily relates to the Business. Such license shall be substantially in the
form of the Cross-License Agreement between Buyer and Seller attached as
Exhibit A hereto (the "Cross- License Agreement").
(c) At the Closing, Buyer shall grant to Seller a
fully-paid, non-exclusive license to use the GMACS, Universal System Controller
and the patent pending referenced in Schedule 3.16(a). Such license shall be
substantially in the form of the Technology License Agreement between Buyer and
Seller attached as Exhibit B hereto (the "Technology License Agreement").
(d) At the Closing, Buyer shall grant to Seller a
fully-paid, non-exclusive license to use the trademarks, service marks,
tradenames and service names associated with the GMACS and the Universal System
Controller. Such agreement shall be substantially in the form of the Trademark
License Agreement between Buyer and Seller attached as Exhibit C hereto (the
"Trademark License Agreement").
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ARTICLE II
THE CLOSING
2.1 Place and Date. The closing of the sale and purchase
of the Assets (the "Closing") and the assumption of the Assumed Liabilities
shall take place at 10:00 A.M. local time on the 26th day of January, 1998 at
the offices of Whitman Breed Abbott & Morgan LLP, 200 Park Avenue, New York, NY
10166, or such other time and place upon which the parties may agree. The day
on which the Closing actually occurs is herein sometimes referred to as the
"Closing Date."
2.2 Purchase Price. On the terms and subject to the
conditions set forth in this Agreement, Buyer agrees to pay to Seller at the
Closing an aggregate of U.S. $27 million, subject to adjustment as provided for
in Section 2.7 (the "Purchase Price"), and to assume the Assumed Liabilities as
provided in Section 2.4. The Purchase Price shall be paid by the wire transfer
of immediately available funds to such bank account or accounts as are
specified by Seller in written instructions given to Buyer at least three days
prior to the Closing.
2.3 Allocation of Purchase Price. The parties agree to
allocate the aggregate of the Purchase Price and the Assumed Liabilities
(collectively, the "Aggregate Purchase Price") among the Assets, including
solely for this purpose the agreements contained in Section 5.1(f), in
accordance with Section 1060 of the Code as mutually agreed to by the parties
within 180 days following the Closing. All such mutually agreed to allocations
shall be (a) at the election and expense of Buyer, based upon appraisal(s)
prepared by independent firm(s) selected by Buyer and approved by Seller (such
approval not to be unreasonably withheld or delayed), and (b) used by each
party in preparing any filings required pursuant to Section 1060 of the Code or
any similar provisions of state or local law and all relevant income and
franchise tax returns, subject to adjustment to reflect the adjustment to the
Purchase Price provided for in Section 2.7. Neither Buyer nor Seller will take
any position before any taxing authority or in any judicial proceeding that is
inconsistent with such mutually agreed to allocations without the prior consent
of the other party. The parties shall in good faith exercise reasonable
efforts to support such reported allocations in any audit proceedings initiated
by any taxing authority.
2.4 Assumption of Liabilities. Subject to the terms and
conditions set forth herein, at the Closing, Buyer shall assume and agree to
pay, honor and discharge when due only the following liabilities and
obligations relating to the Assets or the Business: (a) all payment
obligations of Seller under all retention incentive agreements as set forth in
Schedule
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<PAGE>
2.4(a), but only to the extent that such payment obligations relate to the
failure of Buyer to hire employees of the STS Division or the involuntary
termination by Buyer without cause of the employment of any Transferred
Employee after the Closing; (b) all product warranty obligations of the
Business; (c) all liabilities and obligations of Seller to be performed from
and after the Closing Date under or relating to Contracts and Governmental
Approvals included in the Assets; (d) all liabilities and obligations of Seller
relating to or arising out of the operation of the Business and reflected on
the June Balance Sheet and/or the September Balance Sheet or disclosed in the
notes thereto other than those relating to income taxes; and (e) to the extent
reflected on the Final Closing Statement of Net Assets, all trade and other
accounts payable and other liabilities (other than those relating to income
taxes) arising out of or in respect of the ordinary course of business of the
Business (including intercompany and interdivisional trade accounts payable)
consistent with past practice since September 30, 1997 (collectively, the
"Assumed Liabilities").
2.5 Excluded Liabilities. Other than for the Assumed
Liabilities, Buyer shall not be responsible for any other debts, claims,
commitments, liabilities or obligations of Seller or the Business
(collectively, the "Excluded Liabilities"), including without limitation any
and all liabilities, obligations or commitments of Seller (except those that
constitute Assumed Liabilities) relating to and arising out of any of the
following:
(a) any liability, obligation or commitment that,
in accordance with GAAP, was required to have been shown as a liability in the
Financial Statements or in the notes thereto and was not so shown, unless
reflected on the Final Closing Statement of Net Assets;
(b) except as expressly assumed by Buyer pursuant
to Article VII hereof or as accrued or otherwise reflected on the Final Closing
Statement of Net Assets, (i) the sponsorship, administration, contribution
obligation of any entity under any Employee Benefit Plan or termination of any
Employee Benefit Plan on or prior to the Closing Date, or (ii) the termination
of employment of any employee of the Business by Seller;
(c) any cause of action or judicial or
administrative action, suit, proceeding or investigation, pending or threatened
on the Closing Date, relating to periods prior to the Closing Date, that is not
disclosed on Schedule 3.8 hereto;
(d) any failure or alleged failure to comply
with, or any violation or alleged violation of, (i) any law, rule, regulation,
statute, ordinance, permit, judgment, injunction, order, decree, license or
other Governmental Approval applicable to the Business or the Assets or (ii)
any
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Contract, in each case which failure or violation occurred or was alleged to
have occurred prior to the Closing Date;
(e) any infringement or alleged infringement of
the rights of any other person or entity arising out of the use of any
Intellectual Property in connection with the Business prior to the Closing
Date;
(f) any rights of any other Person relating to
the Intellectual Property pursuant to any license, sublicense or agreement
required to be disclosed and not so disclosed;
(g) any obligations against Seller with respect
to any notes, bonds, accounts receivable or other evidences of indebtedness of
or rights to receive payment from any Person that have been transferred to a
third person by Seller;
(h) any liability for any Taxes imposed on Seller
arising from the operation of the Business on or before the Closing Date;
(i) the Excluded Assets;
(j) all Environmental Liabilities and Costs
arising from, relating to, in respect of, or incurred in connection with (i)
any real property, business entities or assets, whether domestic or foreign,
formerly owned, occupied or operated by or in connection with the Business and
not owned, occupied or operated by or in connection with the Business as of the
Closing Date, (ii) the transportation or disposal of any Hazardous Substances
to or at any offsite facility or location by or in connection with the Business
occurring prior to the Closing Date and (iii) conditions existing or events
occurring on or prior to the Closing Date on any real property owned, occupied
or operated by or in connection with the Business as of the Closing Date;
(k) all obligations of Seller under all retention
agreements, severance agreements (subject to the provisions of Section 5.2(f)),
change of control agreements and similar arrangements not listed on Schedule
2.4(a);
(l) all obligations of Seller under all retention
incentive agreements listed on Schedule 2.4(a) (including any payments due
thereunder upon and by reason of the sale of the STS Division), other than
those payment obligations of Seller referred to in Section 2.4(a);
(m) any claim, litigation, action or proceeding,
whether or not now pending or threatened, relating to the Business or the
Assets to the
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extent based on or arising out of or based upon product liability with respect
to products shipped or sold prior to the Closing; or
(n) all intercompany obligations and liabilities
owed by the Business to Seller other than intercompany or interdivisional trade
accounts payable reflected on the Final Closing Statement of Net Assets.
2.6 Consent of Third Parties. Notwithstanding anything
to the contrary in this Agreement, this Agreement shall not constitute an
agreement to assign or transfer any Governmental Approval, instrument,
contract, lease, permit or other agreement or arrangement or any claim, right
or benefit arising thereunder or resulting therefrom if an assignment or
transfer or an attempt to make such an assignment or transfer without the
consent of a third party would constitute a breach or violation thereof or
affect adversely the rights of Buyer or Seller thereunder; and any transfer or
assignment to Buyer by Seller of any interest under any such Governmental
Approval, instrument, contract, lease, permit or other agreement or arrangement
that requires the consent of a third party shall be made subject to such
consent or approval being obtained. In the event any such consent or approval
is not obtained on or prior to the Closing Date, Seller shall (i) continue to
use all reasonable efforts to obtain any such approval or consent after the
Closing Date until such time as such consent or approval has been obtained
without any third party cost to Buyer, (ii) hold such Governmental Approval,
instrument, contract, lease, permit or other agreement or arrangement on behalf
of Buyer, (iii) cooperate with Buyer in any lawful arrangement to provide that
Buyer shall receive the benefits under any such Governmental Approval,
instrument, contract, lease or permit or other agreement or arrangement,
including performance by Seller, as agent, and (iv) enforce and perform for the
account of Buyer any rights of Seller arising from such Government Approval,
instrument, contract, lease, permit or other agreement or arrangement, provided
that Buyer shall undertake to pay or satisfy the corresponding liabilities for
the enjoyment of such benefit to the extent Buyer would have been responsible
therefor if such consent or approval had been obtained. Nothing in this
Section 2.6 shall be deemed a waiver by Buyer of its right to receive an
effective assignment of all of the Assets.
2.7 Adjustment of Purchase Price.
(a) Calculation of Adjustment. The Purchase
Price shall be (i) increased by the amount that the Closing Date Net Assets (as
hereinafter defined), are greater than $25,099,080 (which amount is the book
value of the net assets as shown on the adjusted September Balance Sheet (the
"Target Net Assets"); or (ii) decreased by the amount that the Closing Date Net
Assets are less than the Target Net Assets. The term "Closing Date Net Assets"
as used herein shall mean the book value of the Assets set forth on the Final
Closing
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Statement of Net Assets (as hereinafter defined) in excess of the amount of the
Assumed Liabilities set forth on the Final Closing Statement of Net Assets,
determined in accordance with the procedures set forth below. The amount of
any decrease or increase to the Purchase Price pursuant to this Section 2.7(a)
plus interest from and including the Closing Date to but excluding the date of
payment at the Prime Rate (as hereinafter defined) shall be paid by Seller or
Buyer, as the case may be, by wire transfer in immediately available funds
within five (5) business days after the Final Closing Statement of Net Assets
is agreed to by Seller and Buyer or is determined by the Neutral Auditor (as
hereinafter defined). For purposes of this Agreement, "Prime Rate" means the
prime rate of interest in effect on the Closing Date as stated in the "Money
Rates" section of the Wall Street Journal.
(b) Preparation of Closing Statement of Net
Assets. As soon as practicable, and in any event within sixty (60) days after
the Closing Date, Seller shall cause Ernst & Young LLP ("E&Y") to prepare an
audited statement of net assets for the Business consisting of the Assets and
the Assumed Liabilities, as of the close of business on the Closing Date
determined on a pro forma basis as if the parties hereto had not consummated
the transactions contemplated by this Agreement (the "Closing Statement of Net
Assets"), to be prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a basis consistent with the September
30, 1997 Financial Statements (including the September Balance Sheet) through
full application of the policies and procedures used in preparing the September
30, 1997 Financial Statements (including the September Balance Sheet) and
taking into account the type of adjustments included in the September Balance
Sheet set forth in Schedule 3.4, and with changes in contract estimates at
completion ("EAC's") and estimates to complete ("ETC's") determined on a basis
consistent with the method used for the determination of the September 30, 1997
Financial Statements (including the September Balance Sheet); provided that,
for purposes of the Closing Statement of Net Assets, the cash and cash
equivalents held in non-US bank accounts for the benefit of the STS Division
shall be transferred to Buyer and shall be reflected as assets of the STS
Division and shall be included in the calculation of any Purchase Price
adjustment required by this Section. The Closing Statement of Net Assets shall
be accompanied by the report of E&Y thereon and by a certificate of Seller's
Chief Financial Officer, each of which shall state that the Closing Statement
of Net Assets presents fairly, in all material respects, the Assets and Assumed
Liabilities presented on such statement as provided for in this Agreement at
the Closing Date in conformity with GAAP consistently applied with the
September 30, 1997 Financial Statements, except that it does not contain all
the notes required by GAAP. Buyer shall provide Seller, E&Y and the Neutral
Auditor such access to the Books and Records as may reasonably be required for
the preparation and/or review of the Closing
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Statement of Net Assets. All fees and expenses of E&Y relating to the
preparation of the Closing Statement of Net Assets shall be borne equally by
Seller and Buyer.
(c) Review of Closing Statement of Net Assets.
After receipt of the Closing Statement of Net Assets, Buyer shall have thirty
(30) days to review it. Buyer and its authorized representatives shall have
full access to all Books and Records and appropriate employees of the Seller
and its accountants to the extent required to complete their review of the
Closing Statement of Net Assets including work papers used in preparation
thereof. Unless the Buyer delivers written notice to Seller on or prior to the
30th day after receipt of the Closing Statement of Net Assets specifying in
reasonable detail all disputed items and the basis therefor, the parties shall
be deemed to have accepted and agreed to the Closing Statement of Net Assets.
If Buyer so notifies the Seller of an objection to the Closing Statement of Net
Assets, the parties shall, within thirty (30) days following the date of such
notice (the "Resolution Period") attempt to resolve their differences and any
resolution by them as to any disputed amount shall be final, binding,
conclusive and nonappealable for all purposes under this Agreement.
(d) Resolution. If at the conclusion of the
Resolution Period the parties have not reached an agreement on the objections,
then all amounts remaining in dispute may, at the election of either party, be
submitted to Price Waterhouse or another large international accounting firm
not otherwise engaged by either party (the "Neutral Auditor"). Each party
agrees to execute, if requested by the Neutral Auditor, a reasonable engagement
letter. All fees and expenses relating to the work, if any, to be performed by
the Neutral Auditor shall be borne equally by Seller and Buyer, unless the
Neutral Auditor finds one party acted in bad faith in which case that party
pays all. Except as provided in the preceding sentence, all other costs and
expenses incurred by the parties in connection with resolving any dispute
hereunder before the Neutral Auditor shall be borne by the party incurring such
cost and expense. The Neutral Auditor shall act as an arbitrator to determine,
based solely on the presentations by Seller and Buyer, and not by independent
review, only those issues still in dispute. The Neutral Auditor's
determination shall be made within thirty (30) days of its engagement (which
engagement shall be made no later than five (5) business days after the
election by either party to submit the objections to the Neutral Auditor) or as
soon thereafter as possible, shall be set forth in a written statement
delivered to Seller and Buyer and shall be final, binding, conclusive and
nonappealable for all purposes hereunder. The term "Final Closing Statement of
Net Assets," as hereinafter used, shall mean the definitive Closing Statement
of Net Assets agreed to by Seller and Buyer in accordance with Section 2.7(c)
or the definitive Closing Statement of Net Assets resulting
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from the determination made by the Neutral Auditor in accordance with this
Section 2.7(d) (in addition to those items theretofore agreed to by Seller and
Buyer).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
3.1 Authorization, etc. Seller has the corporate power
and authority to execute and deliver this Agreement, to perform fully its
obligations thereunder, and to consummate the transactions contemplated hereby.
The execution and delivery by Seller of this Agreement, and the consummation of
the transactions contemplated hereby, have been duly authorized by all
requisite corporate action of Seller. Seller has duly executed and delivered
this Agreement. This Agreement is a legal, valid and binding obligation of
Seller, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws affecting creditor's rights generally and by
general equitable principles.
3.2 Corporate Status.
(a) Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full corporate power and authority to carry on the Business and to own or
lease and to operate the properties of the Business as and in the places where
the Business is conducted and such properties are owned, leased or operated.
(b) Seller is duly qualified or licensed to do
business and is in good standing in each of the jurisdictions in which the
operation of the Business or the character of the properties owned, leased or
operated by it in connection with the Business makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not have a Material Adverse Effect. Such jurisdictions are listed on
Schedule 3.2(b).
(c) Seller has delivered to Buyer complete and
correct copies of its certificate of incorporation and by-laws in each case, as
amended and in effect on the date hereof and on the Closing Date. Seller is
not in violation of any of the provisions of its certificate of incorporation
or by-laws or other organizational documents.
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3.3 No Conflicts, etc. The execution, delivery and
performance by Seller of this Agreement and the consummation of the
transactions contemplated hereby, do not and will not conflict with or result
in a violation of or a default under (with or without the giving of notice or
the lapse of time or both), or result in the acceleration of or give rise to
any party the right to terminate, modify or cancel under, or result in the loss
of any rights, privileges, options or alternatives under, or result in the
creation of any Lien on any assets of Seller (including the Assets) under (i)
any Applicable Law applicable to Seller or any of the Assets, (ii) the
certificate of incorporation or by-laws of Seller or (iii) except as set forth
in Schedule 3.3, any Contract or other agreement or instrument to which Seller
is a party or by which Seller or the Assets is bound. Except as specified in
Schedule 3.3 and as may be required under the HSR Act, no Governmental Approval
or other Consent is required to be obtained or made by Seller in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
3.4 Financial Statements. Seller has delivered to Buyer
(a) the audited balance sheet (the "June Balance Sheet") and the related
statements of operations and cash flows of the Business as at and for the
fiscal year ended June 30, 1997 and (b) the unaudited balance sheet and the
unaudited adjusted balance sheet, a copy of which is attached hereto as
Schedule 3.4 (the "September Balance Sheet") and the related statement of
income of the Business as at and for the three-month period ended September 30,
1997 (collectively, the "Financial Statements"). The September 30, 1997
Financial Statements have been prepared on a basis consistent with the June 30,
1997 Financial Statements. The Financial Statements are in accordance with the
books and records of the STS Division, have been prepared in accordance with
GAAP and fairly present the financial condition and results of operations of
the Business as at and for the periods specified, except that the September 30,
1997 Financial Statements do not contain notes required by GAAP.
3.5 Absence of Undisclosed Liabilities. Seller has no
debts, claims, liabilities or obligations of any nature, whether known or
unknown, absolute, accrued, contingent or otherwise and whether due or to
become due, asserted or unasserted, arising out of or relating to the Business,
except (a) as set forth in Schedule 3.5, (b) as and to the extent disclosed or
reserved against in the September Balance Sheet, and (c) liabilities and
obligations that were incurred after September 30, 1997 in the ordinary course
of business consistent with prior practice.
3.6 Taxes. Seller has (or by the Closing will have) duly
and timely filed all Tax Returns relating to the Business with respect to Taxes
required to be filed on or before the Closing Date. Except for Taxes set forth
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on Schedule 3.6(a), which are being contested in good faith and by appropriate
proceedings, the following Taxes have (or by the Closing Date will have) been
duly and timely paid: (i) all Taxes shown to be due on the Tax Returns, (ii)
all deficiencies and assessments of Taxes of which notice has (or by the
Closing Date will have) been received by Seller that are or may become payable
by Buyer or chargeable as a lien upon the Business, and (iii) all other Taxes
in respect of periods prior to the Closing.
3.7 Absence of Changes. Except as set forth in Schedule
3.7 (which Schedule includes, as Schedule 3.7(a), certain STS Division summary
financial data showing the actual results of the STS Division for the quarter
ended September 30, 1997 and the STS Division's forecasted results, by quarter,
for the fiscal year ending June 30, 1998) and for the results shown and changes
forecast in Schedule 3.7(a), since September 30, 1997, Seller has not in
connection with or relating to the Business or the Assets:
(a) suffered any material adverse change in the
financial condition, results of operation or Assets of the Business, other than
changes in the STS Division's intercompany account with CMI corporate, which
changes represent (i) the results of operations of the STS Division, (ii) the
cash advanced to the STS Division by CMI corporate or repaid by the STS
Division to CMI corporate, and (iii) certain allocations between CMI corporate
and the STS Division, which allocations were made in the ordinary course of
business consistent in type and amount with past practice;
(b) incurred, assumed, guaranteed or discharged
any obligation or liability, absolute, accrued, contingent or otherwise,
whether due or to become due, or any indebtedness for borrowed money, except
current liabilities for trade or business obligations incurred in connection
with the purchase of goods or services in the ordinary course of business
consistent with prior practice;
(c) mortgaged, pledged or subjected to Lien, any
property, business or assets, tangible or intangible;
(d) sold, transferred, leased to others or
otherwise disposed of any of the Assets, except for inventory sold in the
ordinary course of business, or cancelled or compromised any debt or claim, or
waived or released any right of substantial value;
(e) received any notice of termination of any
material contract, lease or other agreement;
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(f) suffered any damage, destruction or loss
(whether or not covered by insurance), in any case or in the aggregate, in
excess of $150,000;
(g) transferred or granted any rights under, or
entered into any settlement regarding the breach or infringement of, any
Intellectual Property, or modified any existing rights with respect thereto;
(h) made any change in the rate of compensation,
commission, bonus or other direct or indirect remuneration payable, or paid or
agreed or orally promised to pay, conditionally or otherwise, any bonus,
incentive, retention or other compensation, retirement, welfare, fringe or
severance benefit or vacation pay, to or in respect of any employee,
distributor or agent of the Business, other than increases in the ordinary
course of business consistent with past practice in the compensation payable to
those employees of the Business earning less than $50,000 per annum each;
(i) encountered any labor union organizing
activity, had any actual or threatened employee strikes, work stoppages,
slowdowns or lockouts, or had any material change in its relations with its
employees, distributors, agents, customers or suppliers;
(j) entered into any transaction, contract or
commitment other than in the ordinary course of business or paid or agreed to
pay any legal, accounting, brokerage, finder's fee, Taxes or other expenses in
connection with, or incurred any severance pay obligations by reason of, this
Agreement or the transactions contemplated hereby;
(k) made any grant of credit to any customer or
distributor on terms or in amounts materially more favorable than had been
extended to that customer or distributor in the past; or
(l) taken any action or omitted to take any
action that would result in the occurrence of any of the foregoing.
Seller makes no representation or warranty as to the
realization of any results forecast in Schedule 3.7(a).
3.8 Litigation. Except as set forth on Schedule 3.8,
there is no action, claim, demand, suit, proceeding, arbitration, grievance,
citation, summons, subpoena, inquiry or investigation, civil, criminal,
regulatory or otherwise, in law or in equity, pending or, to the knowledge of
Seller, threatened against or relating to Seller in connection with the Assets
or the Business seeking unspecified damages, damages in excess of $50,000 or
any
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injunctive or other equitable relief or against or relating to the transactions
contemplated by this Agreement.
3.9 Compliance with Laws; Governmental Approvals and
Consents; Governmental Contracts.
(a) Except as disclosed in Schedule 3.9(a),
Seller has complied in all respects with all Applicable Laws applicable to the
Business or the Assets, except for any non-compliance that has not had or would
not result in, individually or in the aggregate, a Material Adverse Effect.
(b) Schedule 3.9(b) sets forth all Governmental
Approvals and other Consents necessary for, or otherwise material to, the
conduct of the Business as conducted by Seller. Except as set forth in
Schedule 3.9(b), all such Governmental Approvals and Consents have been duly
obtained and are in full force and effect, and Seller is in compliance in all
material respects with each of such Governmental Approvals and Consents held by
it with respect to the Assets and the Business.
(c) Schedule 3.9(c) sets forth all Contracts with
any Governmental Authority.
3.10 Assets.
(a) Except for those Liens listed on Schedule
3.10, on the date hereof, Seller has good and valid title to all the Assets
free and clear of any and all Liens other than Permitted Liens. Except for
those Liens listed as Items 1 and 4 on Schedule 3.10, on the Closing Date,
Seller will have good and valid title to all the Assets free and clear of any
and all Liens other than Permitted Liens. The Assets include all material
assets required for the continued conduct of the Business by Buyer as now being
conducted or material to the financial condition or results of operations of
the Business, except for the Excluded Assets. The Assets do not include stock
or equity interests in any Person.
(b) All material property and assets owned or
utilized by the Business are in good operating condition and repair (except for
ordinary wear and tear), free from any defects (except such minor defects as do
not interfere with the use thereof in the conduct of the normal operations),
and are sufficient to carry on the Business as presently conducted. All
buildings, plants and other structures utilized by the Business are in good
condition and repair (except for ordinary wear and tear).
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3.11 Contracts.
(a) Schedule 3.11(a) contains a complete and
correct list of all agreements, contracts, commitments, orders, licenses,
leases, and other instruments and arrangements (whether written or oral) of the
types described below to which Seller is a party or by which it or any of its
assets is bound in connection with the Business, the Assets or the Assumed
Liabilities (the "Contracts"):
(i) leases, licenses, permits,
franchises, insurance policies, Governmental Approvals and other contracts
concerning or relating to the Real Property;
(ii) employment, consulting, agency,
collective bargaining or other similar contracts, agreements, and other
instruments and arrangements relating to or for the benefit of employees, sales
representatives, distributors, dealers, agents, or (if material) independent
contractors;
(iii) loan agreements, indentures, letters
of credit, mortgages, security agreements, pledge agreements, deeds of trust,
bonds, notes, guarantees, and other agreements and instruments relating to the
borrowing of money or obtaining of or extension of credit;
(iv) licenses, licensing arrangements and
other contracts providing in whole or in part for the use of, or limiting the
use of, any Intellectual Property;
(v) brokerage or finder's agreements;
(vi) joint venture, partnership and
similar contracts involving a sharing of profits or expenses (including but not
limited to joint research and development and joint marketing contracts);
(vii) asset purchase agreements and other
acquisition or divestiture agreements, including but not limited to any
agreements relating to the sale, lease or disposal of any Assets (other than
sales of inventory in the ordinary course of business) or involving continuing
indemnity or other obligations;
(viii) any contract with respect to which
the aggregate amount that could reasonably be expected to be paid or received
thereunder in the future exceeds $100,000 per annum;
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(ix) sales agency, manufacturer's
representative, marketing or distributorship agreements;
(x) contracts, agreements or
arrangements with respect to the representation of the Business in foreign
countries;
(xi) purchase commitments for inventory
items or supplies that, together with amounts on hand, constitute in excess of
six months normal usage;
(xii) any agreement, understanding,
contract or commitment (written or oral) with (x) any employee, agent,
consultant, distributor, dealer or franchisee other than those involving in the
aggregate consideration or other expenditure of less than $100,000, or (y) any
Affiliate;
(xiii) any collective bargaining agreements
with any unions, guilds, shop committees or other collective bargaining groups;
(xiv) any guarantee of the payment or
performance of any Person agreement to indemnify any Person, or act as a
surety, or other agreement to be contingently or secondarily liable for the
obligations of any Person other than (x) the endorsement of checks in the
ordinary course of business and (y) guarantees or agreements which in the
aggregate do not exceed $100,000;
(xv) any outstanding bid or proposal or
any outstanding customer option relating to Contracts in the Backlog in excess
of $100,000; and
(xvi) any other contracts, agreements or
commitments that are material to the Business.
(b) Seller has furnished Buyer with access to all
written Contracts, together with all amendments thereto, set forth in Schedule
3.11(a). Seller has furnished Buyer with a complete and accurate summary of
all oral contracts listed on Schedule 3.11(a).
(c) There does not exist under any Contract any
event of default or event or condition that, after notice or lapse of time or
both, would constitute a violation, breach or event of default thereunder on
the part of Seller or, to the knowledge of Seller, any other party thereto
except as set forth in Schedule 3.11(c) and except for such events or
conditions that, individually and in the aggregate, (i) have not had or
resulted in a Material Adverse Effect and (ii) have not materially impaired the
ability of Seller to
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perform its obligations under the Agreement. Except as set forth in Schedule
3.11(c), each Contract is a legal, valid, binding and enforceable obligation of
Seller and, to the knowledge of Seller, the other parties thereto. Except as
set forth in Schedule 3.11(c), no consent of any third party is required under
any Contract as a result of or in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby.
3.12 Territorial Restrictions. Seller is not restricted
by any agreement or understanding with any other Person from carrying on the
Business anywhere in the world.
3.13 Inventories. Except as set forth on Schedule 3.13
and net of reserves as reflected in the September Balance Sheet or to be
reflected in the Final Closing Statement of Net Assets, (a) Inventories are of
such quality as to meet the quality control standards of Seller and any
applicable governmental quality control standard and are usable in the ordinary
course of business in amounts consistent with past practice, and (b)
Inventories that are finished goods are saleable in the ordinary course of
business.
3.14 Receivables. Seller's receivables (including
accounts receivable, loans receivable and advances) which have arisen in
connection with the Business and which are reflected in the September Balance
Sheet or will be reflected in the Final Closing Statement of Net Assets, and
all such receivables which will have arisen since the date of the Financial
Statements, have arisen only from bona fide transactions in the ordinary course
of business. Seller has no knowledge of any facts or circumstances generally
(other than general economic conditions) which would result in any material
increase in the uncollectability of such receivables as a class in excess of
the reserves therefor set forth on the Financial Statements. To Seller's
knowledge, there has not been any material adverse change in the collectability
of such receivables since September 30, 1997.
3.15 Product Warranties. Except as set forth in Schedule
3.15 and for warranties under Applicable Law, (a) there are no warranties
express or implied, written or oral, with respect to the products of the
Business and (b) except as reflected in the Financial Statements or as incurred
in the ordinary course of business thereafter there are no pending or
threatened claims with respect to any such warranty. Seller is not aware of
any facts that indicate that the reserves for product warranties reflected in
the September Balance Sheet are materially understated. Schedule 3.15 sets
forth a list of all pending or, to the knowledge of Seller, threatened product
warranty claims in excess of $50,000.
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3.16 Intellectual Property. Schedule 3.16(a) sets forth a
complete and correct list of all material Intellectual Property that is owned
by Seller and used in connection with the Business (the "Owned Intellectual
Property"). Schedule 3.16(b) sets forth a complete and correct list of all
material written or oral licenses and arrangements, (i) pursuant to which the
use by any Person of Intellectual Property is permitted by Seller and (ii)
pursuant to which the use by Seller of Owned Intellectual Property is permitted
by any Person (collectively, the "Intellectual Property Licenses"). The Owned
Intellectual Property and the Intellectual Property Licenses (including the
GMACS and Universal System Controller) constitute all Intellectual Property
necessary to operate the Business consistent with past practice. On the date
hereof and at the Closing, all Intellectual Property Licenses are or will be in
full force and effect in accordance with their terms, and are free and clear of
any Liens (other than Permitted Liens). To the knowledge of Seller, the
conduct of the Business does not infringe the rights of any third party in
respect of any Intellectual Property, except as set forth on Schedule 3.16(c).
To the knowledge of Seller, none of the Intellectual Property is being
infringed by third parties. Except as set forth on Schedule 3.16(d), there is
no claim or demand of any Person pertaining to, or any proceeding which is
pending or, to the knowledge of Seller, threatened, that challenges the rights
of Seller in respect of any Intellectual Property, or claims that any default
exists under any Intellectual Property License.
3.17 Insurance. Schedule 3.17 contains a list of all
insurance policies maintained by Seller for the benefit of or in connection
with the Assets or the Business and no notice of cancellation, termination, or
reduction of coverage, and no notice of intention to cancel, terminate or
reduce coverage, has been received. Seller has given Buyer access to complete
and correct copies of all such policies together with all riders and amendments
thereto. Such policies are in full force and effect, and all premiums due
thereon have been paid.
3.18 Real Property.
(a) Owned Real Property. Schedule 3.18(a)
contains a complete and correct list of all Owned Real Property setting forth
the address and owner of each parcel of Owned Real Property and generally
describing all improvements thereon including, without limitation, the
properties reflected as being so owned on the Financial Statements and not
disposed of after the date of the Financial Statements in the ordinary course
of Business. Seller has, or on the Closing Date will have, good and marketable
fee simple title to the Owned Real Property indicated on Schedule 3.18(a) as
being owned by it, free and clear of all Liens other than Permitted Liens.
There are no outstanding options or rights of first refusal to purchase the
Owned Real Property, or any
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portion thereof or interest therein. Notwithstanding the foregoing provisions,
for the purposes of this Section 3.18, Section 3.10, and the last sentence of
Section 1.1, Permitted Liens shall not include, with the exception of the
mortgage liens and easements of record described on Schedule 3.18(c), any
mortgage lien encumbering the Owned Real Property or the Kennedy Facility or
any easement of record.
(b) Leases. Schedule 3.18(b) contains a complete
and correct list of all Leases setting forth the address, landlord and tenant
for each Lease. Seller has delivered to Buyer correct and complete copies of
the Leases. Each Lease is legal, valid, binding and enforceable, and in full
force and effect, except as may be limited by bankruptcy, insolvency,
reorganization and similar Applicable Laws affecting creditors generally and by
the availability of equitable remedies. Seller is not in default, violation or
breach in any respect under any Lease, and no event or condition has occurred
and is continuing that constitutes or, with notice or the passage of time or
both, would constitute a default, violation or breach in any respect under any
Lease. No renewal or extension options have been granted to tenants. Schedule
3.18(c) sets forth all easements, covenants, mortgages and restrictions of
record encumbering the Owned Real Property and the Leased Real Property subject
to the lease from the Suffolk County Industrial Development Agency.
3.19 Environmental Matters.
(a) Compliance with Environmental Law. To the
knowledge of Seller, Seller is and has been in compliance in all material
respects with all applicable Environmental Laws pertaining to any of the
properties and assets of the Business and the use by Seller thereof. Except as
disclosed on Schedule 3.19(a) hereto, Seller has obtained all material permits,
licenses and other authorizations that are required under Environmental Law
necessary to operate the Business and the same are listed on Schedule 3.19(a)
hereto. No violation by Seller is being alleged of any applicable
Environmental Law relating to any of the Assets.
(b) Other Environmental Matters. To the
knowledge of Seller, Seller has not caused or taken any action that resulted
in, and Seller is not subject to, any material liability or obligation on the
part of Seller, relating to (x) the environmental conditions on, under, or
about the Real Property or other properties or assets owned, leased, operated
or used by Seller in the Business including without limitation, the air, soil
and groundwater conditions at such properties or (y) the use, management,
handling, transport, treatment, generation, storage, disposal or Release of any
Hazardous Materials by Seller.
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3.20 Employees, Labor Matters, etc. Seller is not a party
to or bound by any collective bargaining agreement and there are no labor
unions or other organizations representing, purporting to represent or
attempting to represent any employees employed in the operation of the
Business. Since August 31, 1994, there has not occurred or, to the knowledge
of Seller, been threatened any material strike, slowdown, picketing, work
stoppage, concerted refusal to work overtime or other similar labor activity
with respect to any employees employed in the operation of the Business. There
are no labor disputes currently subject to any grievance procedure, arbitration
or litigation and there is no representation petition pending or, to the
knowledge of Seller, threatened with respect to any employee employed in the
operation of the Business.
3.21 Employee Benefit Plans and Related Matters.
(a) Schedule 3.21(a) lists each pension,
retirement, profit-sharing, deferred compensation, bonus or other incentive
plan, or other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, or any other employee benefit plan, including,
without limitation, any "employee benefit plan" as defined in Section 3(3) of
ERISA, to which Seller contributes or is a party or is bound and under which it
may have liability and under which employees or former employees of the
Business (or their beneficiaries) are eligible to participate or derive a
benefit ("Employee Benefit Plans"). Seller has delivered to Buyer true,
correct and complete copies of all Employee Benefit Plans. The Assets are not
subject to any Lien in favor of, or enforceable by, the Pension Benefit
Guaranty Corporation.
(b) Compliance; Liability.
(i) No liability has been or is expected
to be incurred by Seller under or pursuant to Title I or IV of ERISA or the
penalty, excise tax or joint and several liability provisions of the Code or
ERISA relating to employee benefit plans and, to the knowledge of the Seller,
no event, transaction or condition has occurred or exists that could result in
any such liability to the Business or, following the Closing, Buyer or any such
Employee Benefit Plan.
(ii) No Employee Benefit Plan is a
"multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, a
"multiple employer plan" within the meaning of Section 413(c) of the Code, or a
defined benefit plan within the meaning of Section B(35) of ERISA.
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3.22 Brokers, Finders, etc. With the exception of fees
and expenses payable to J.P. Morgan & Co. Incorporated and certain employees of
Seller and its Affiliates which shall be paid by Seller, all negotiations
relating to this Agreement, and the transactions contemplated hereby, have been
carried on without the participation of any Person acting on behalf of Seller
or its Affiliates in such manner as to give rise to any valid claim against
Buyer for any brokerage or finder's commission, fee or similar compensation, or
for any bonus payable to any officer, director, employee, agent or sales
representative of or consultant to Seller or its Affiliates upon consummation
of the transactions contemplated hereby or thereby.
3.23 Suppliers and Customers. Schedule 3.23 attached
hereto sets forth the twenty (20) largest suppliers and all sole source
suppliers and the twenty (20) largest customers of the Business for the period
July 1, 1996 through the date hereof. During the period July 1, 1996 through
the date hereof, (a) none of the 20 largest customers referred to in the next
preceding sentence has cancelled in whole or in part its agreement or
commitment with Seller or the Business to purchase products or services (or
threatened in writing to do any of the foregoing). During the period July 1,
1996 through the date hereof, none of the sole source suppliers referred to in
the first sentence of this Section has cancelled in whole or in part its
agreement or commitment to supply services or supplies to Seller or the
Business (or threatened in writing to do any of the foregoing). To Seller's
knowledge, the relationship of Seller with each of its suppliers and each of
its customers is a good commercial working relationship. Seller does not have
knowledge that any such supplier or customer intends to cancel or otherwise
substantially modify its relationship with Seller or the Business or limit its
services, supplies or materials to Seller or the Business, or its usage or
purchase of the services and products of the Business either as a result of the
transactions contemplated hereby or otherwise.
3.24 Order Backlog. A true and complete list of (a) all
firm product and service purchase orders and contracts for the sale of goods or
the delivery of services by Seller in connection with the Business to Persons
other than Governmental Authorities, and (b) all firm funded product and
service purchase orders and contracts for the sale of goods or the delivery of
services by Seller in connection with the Business to Governmental Authorities
(collectively, the "Backlog") pending as of the latest practical date prior to
the date of this Agreement is set forth in Schedule 3.24 attached hereto.
3.25 Disclosure. No representation or warranty of Seller
in this Agreement and the Schedules or certificates attached hereto or
delivered by Seller in accordance with the terms hereof contains any untrue
statement of a material fact or omits any statement of a material fact
necessary in order to
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make the statements contained herein or therein, in light of the circumstances
in which they were made, not misleading.
3.26 Mortgages. If any parcel of Owned Real Property is
encumbered by one or more existing mortgages (each, an "Existing Mortgage"), no
written notice has been received from the mortgagee(s) asserting that a default
or breach exists thereunder or under any note or other obligation secured
thereby which remains uncured. Seller knows of no default, or event which with
notice or the passage of time will constitute a default, under the Existing
Mortgage(s) or under any note or other obligation secured thereby which has
occurred and is continuing. Seller has delivered to Buyer complete copies of
the documents constituting the Existing Mortgage(s) and the note(s) secured
thereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
4.1 Corporate Status; Authorization, etc. Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation with full corporate power and
authority to execute and deliver the Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The
execution and delivery by Buyer of this Agreement, and the consummation of the
transactions contemplated hereby, have been duly authorized by all requisite
corporate action of Buyer. Buyer has duly executed and delivered this
Agreement. This Agreement is a valid and legally binding obligation of Buyer,
enforceable against Buyer in accordance with its terms.
4.2 No Conflicts, etc. The execution, delivery and
performance by Buyer of the Agreement, and the consummation of the transactions
contemplated hereby, do not and shall not conflict with or result in a
violation of or under (with or without the giving of notice or the lapse of
time, or both) (i) the certificate of incorporation or by-laws or other
organizational documents of Buyer, (ii) any Applicable Law applicable to Buyer
or any of its properties or assets or (iii) any contract, agreement or other
instrument applicable to Buyer or any of its properties or assets, except, in
the case of clause (iii), as set forth in Schedule 4.2 and for violations and
defaults that, individually and in the aggregate, have not and shall not
materially impair the ability of Buyer to perform its obligations under the
Agreement. Except as specified in Schedule 4.2 and except as required under
the HSR Act, no Governmental Approval or other Consent is required to be
obtained or made by Buyer in
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connection with the execution and delivery of the Agreement or the consummation
of the transactions contemplated hereby.
4.3 Litigation. There is no action, claim, suit or
proceeding pending, or to Buyer's knowledge threatened, by or against or
affecting Buyer in connection with or relating to the transactions contemplated
by this Agreement or of any action taken or to be taken in connection herewith
or the consummation of the transactions contemplated hereby.
4.4 Brokers, Finders, etc. All negotiations relating to
this Agreement and the transactions contemplated hereby have been carried on
without the participation of any Person acting on behalf of Buyer in such
manner as to give rise to any valid claim against Seller for any brokerage or
finder's commission, fee or similar compensation.
4.5 Adequate Funds. Buyer has all funds necessary to
enable it to perform this Agreement in accordance with its terms.
ARTICLE V
COVENANTS
5.1 Covenants of Seller.
(a) Public Announcements. Except as required by
Applicable Law (in which case the nature of the announcement shall be described
to Buyer prior to dissemination to the public), Seller shall not make any
public announcement in respect of this Agreement or the transactions
contemplated hereby without the prior written consent of Buyer.
(b) Conduct of Business. From the date hereof to
the Closing Date, except as permitted or required by this Agreement or as
otherwise consented to by Buyer in writing, Seller shall:
(i) carry on the Business in the
ordinary course, in substantially the same manner as heretofore conducted, and
use all reasonable best efforts to maintain the Business in good operating
condition and repair, and preserve its relationships with customers, suppliers
and others having business dealings with the Business;
(ii) not grant (or commit to grant) any
increase in the compensation (including incentive or bonus compensation) of any
employee employed in the operation of the Business other than increases in the
ordinary course of business consistent with past practice in the
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compensation payable to those employees of the Business earning less than
$50,000 per annum each; or institute, adopt or amend (or commit to institute,
adopt or amend) any compensation or benefit plan, policy, program or
arrangement or collective bargaining agreement applicable to any such employee.
(iii) not sell, assign, voluntarily
encumber, grant a Lien on or license with respect to, or dispose of, any of the
Assets having a fair market value of at least $50,000 individually or $100,000
in the aggregate, or incur any liabilities or obligations (including, without
limitation, liabilities with respect to capital leases or guarantees thereof)
in excess of $100,000 individually or in the aggregate, except for sales and
dispositions made or liabilities incurred, including the creation of purchase
money security interests, in the ordinary course of business consistent with
past practice;
(iv) take any action inconsistent with,
the representations and warranties of Seller hereunder or that would cause any
of the representations and warranties of Seller hereunder to become untrue in
any material respect; and
(v) not make, give or grant any bid or
proposal, or any customer option relating to contracts in the Backlog,
involving an amount in excess of $250,000 (or amend, supplement or terminate
any existing bid or proposal, or any existing customer option relating to
contracts in the Backlog, involving an amount in excess of $250,000), in each
case without the prior approval of Buyer (which approval shall not be
unreasonably withheld or delayed).
(c) Access and Information. (i) Prior to and
after the Closing, Seller shall (and shall cause its accountants, counsel,
consultants, employees and agents to) give Buyer and its respective
accountants, counsel, consultants, employees and agents, reasonable access
during normal business hours to, and furnish them with all documents, records,
work papers and information with respect to, all properties, assets, books,
contracts, commitments, reports and records relating to the Business, as Buyer
shall from time to time reasonably request. In addition, Seller shall permit
Buyer, and its accountants, counsel, consultants, employees and agents,
reasonable access to such personnel of Seller during normal business hours as
may be necessary to Buyer in its review of the properties, assets and business
affairs of the Business and the above-mentioned documents, records and
information. Buyer and Buyer's agents shall have the right, upon giving
reasonable advance notice to enter upon and inspect the Real Property,
including physical inspection of the surface and sub-surface land and all
improvements and the major components thereof, including heating, plumbing, air
conditioning,
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electrical equipment and wiring and roof. Buyer shall indemnify and hold
Seller harmless from and against any and all costs and liabilities resulting
from the negligence or willful misconduct of any third party engaged by Buyer
to perform such inspections, and Buyer shall return the Real Property to
substantially the same condition as before such inspections. Inspections shall
be conducted during times reasonably convenient to Seller and the Business.
(ii) Buyer shall remain bound by the
terms of its existing Confidentiality Agreement with Seller, dated August 6,
1997 (the "Confidentiality Agreement"), except that from and after the Closing:
(A) the terms "Evaluation Material" and "Notes" as defined and used in the
Confidentiality Agreement, shall no longer include information concerning the
Business and properties of the STS Division; (B) clause (d) of the second
paragraph of the Confidentiality Agreement shall cease to have any further
force and effect insofar as the provisions thereof relate to the STS Division
or the Business; and (C) the seventh and eighth paragraphs of the
Confidentiality Agreement shall cease to have any further force and effect
insofar as the provisions thereof relate to the STS Division or the Business.
(d) Further Actions.
(i) Seller agrees to use commercially
reasonable efforts to take all actions and to do all things necessary, proper
or advisable to consummate the transactions contemplated hereby by the Closing
Date.
(ii) Seller, as promptly as practicable,
shall file or supply, or cause to be filed or supplied, all applications,
notifications and information required to be filed or supplied by Seller
pursuant to Applicable Law in connection with the Agreement, the sale and
transfer of the Assets pursuant to the Agreement and the consummation of the
other transactions contemplated hereby, including but not limited to filings
pursuant to the HSR Act.
(iii) Seller, as promptly as practicable,
shall use all reasonable efforts to obtain, or cause to be obtained, all
Consents (including, without limitation, all Governmental Approvals and any
Consents required under any Contract) necessary to be obtained by it in order
to consummate the sale and transfer of the Assets pursuant to the Agreement and
the consummation of the other transactions contemplated hereby.
(iv) Seller shall coordinate and
cooperate with Buyer in exchanging such information and supplying such
assistance as may be reasonably requested by Buyer in connection with the
filings and other actions contemplated by Section 5.2.
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(e) Further Assurances. Following the Closing,
Seller shall from time to time, execute and deliver such additional
instruments, documents, conveyances or assurances and take such other actions
as shall be necessary, or otherwise reasonably requested by Buyer, to confirm
and assure the rights and obligations provided for in this Agreement and render
effective the consummation of the transactions contemplated hereby. Seller
until the Closing shall maintain in force in respect of the Business the
existing insurance covering the Business, subject to normal variations required
by ordinary operations of the Business. Seller shall cooperate with Buyer in
order to afford Buyer the benefit of all insurance policies covering the
Business for periods prior to the Closing to the extent that the claims
thereunder relate to any of the Assets or the Assumed Liabilities.
(f) Noncompete. Seller will not and will cause
its Subsidiaries and operating units and Affiliates not to (collectively, the
"Restricted Parties and individually, a "Restricted Party"), for a period of
three years following the Closing (the "Non- Competition Period"), manufacture,
sell or provide products or services which are competitive to the Primary
Activities, except that this provision shall not preclude (i) EFData Corp. from
manufacturing, selling or providing products which it currently manufactures,
sells or provides; (ii) EFData Corp. from providing services under those
contracts where the EFData Corp. manufactured product content (consisting of
products of the type currently manufactured by EFData Corp.) exceeds 50% of the
contract value; (iii) the GCS unit of CMI from providing products and services
to U.S. Government entities which it currently provides to such U.S. Government
customers; or (iv) the bona fide sale, whether by a merger or otherwise, of all
or substantially all of the properties and assets of Seller (in one transaction
or a series of related transactions) to a Person that is not an Affiliate of
Seller that manufactures or sells products or services competitive to the
Primary Activities or restrict the activities of any such acquiring Person
after such sale (other than any such sale in which the stockholders of Seller
immediately before the transaction or series of related transactions possess
immediately thereafter 50% or more of the voting power of Seller or the
acquiring Person or any parent entity of either). "Primary Activities" shall
mean the manufacture and global sale of portable L- Band satellite
communications terminals for use in the Inmarsat-B system, the manufacture and
global sale of single-channel digital video exciters and receivers, using
MPEG-2 or equivalent digital compression algorithms, for satellite-based
applications, the manufacture and global sale of X-Band frequency converters
for satellite applications, and the bidding and executing of satellite
communications projects and/or contracts with commercial customers or foreign
governmental authorities in which the primary added-value is system design,
integration, installation and/or program management.
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Seller will not use or permit the use of any of the
intellectual property licensed to it pursuant to the Technology License
Agreement or the Trademark License Agreement in a manner that would cause a
violation of this Section 5.1(f).
During the Non-Competition Period, Seller will not, and will
cause its Affiliates not to, (i) directly or indirectly, induce or solicit, or
aid or assist any Person to induce or solicit, any employees, salespersons,
agents, consultants, distributors, representatives, advisors, customers or
suppliers of the Business to terminate, curtail or otherwise limit their
employment by or business relationship with the Business, or (ii) license,
assign or otherwise grant any interest in the Name or Logo "California
Microwave" (alone or in any combination of words, or any combination, variation
or derivation of such Name or Logo), for use by any Person in connection with
the manufacturing, marketing, sale or provision of any products or services
which are competitive to the Primary Activities.
(g) No Solicitation. From the date hereof to the
Closing Date, Seller shall cause its employees, directors, agents and
Affiliates to immediately suspend any existing negotiations or discussions
relating to any sale, joint venture or other transfer of actual or beneficial
ownership of the STS Division, its operations or any of its assets associated
therewith (other than inventory in the ordinary course of business)
(collectively a "Transaction") and Seller shall not, and shall cause its
employees, directors, agents and Affiliates to not, (a) solicit any proposals
or offers relating to a Transaction, or (b) negotiate or discuss with any third
party concerning any proposal or offer for a Transaction.
(h) Post-Closing Confidentiality. From and after
the Closing, Seller will, and will cause its Affiliates to, hold in strict
confidence, and will not use to the detriment of Buyer or any of its
Affiliates, all information with respect to the Business. Notwithstanding the
foregoing, Seller may disclose such information (i) if compelled to disclose
the same by judicial or administrative process or by other requirements of law,
(ii) if the same hereafter is in the public domain through no fault of Seller,
or (iii) if the same is later acquired by Seller from another source and Seller
is not aware that such source is under an obligation to another Person to keep
such information confidential.
(i) Mail; Payments. Seller authorizes and
empowers Buyer from and after the Closing Date to receive and open all mail and
other communications received by Buyer and to act with respect to such
communications in such manner as Buyer may elect if such communications relate
to the Business other than the Excluded Assets or Excluded Liabilities,
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or, if such communications do not relate to the Business or relate to the
Excluded Assets or Excluded Liabilities, to forward the same promptly to
Seller. Seller and Buyer shall promptly deliver to the other any cash, checks
or other instruments of payment to which the other is entitled and shall hold
the same in trust for the other until such delivery.
(j) Performance of Contracts. With respect to
each Contract, Governmental Approval, Lease and Intellectual Property License,
Seller shall duly perform and comply with all agreements and conditions
required thereby to be performed or complied with by it prior to or on the
Closing Date.
5.2 Covenants of Buyer.
(a) Public Announcements. Except as required by
Applicable Law (in which case the nature of the announcement shall be described
to the Seller prior to dissemination to the public), Buyer shall not, and shall
not permit its Affiliates to, make any public announcement in respect of this
Agreement or the transactions contemplated hereby without the prior written
consent of Seller.
(b) Further Actions.
(i) Buyer agrees to use commercially
reasonable efforts to take all actions and to do all things necessary, proper
or advisable to consummate the transactions contemplated hereby by the Closing
Date.
(ii) Buyer shall, as promptly as
practicable, file or supply, or cause to be filed or supplied, all
applications, notifications and information required to be filed or supplied by
Buyer pursuant to Applicable Law in connection with this Agreement, Buyer's
acquisition of the Assets pursuant to this Agreement and the consummation of
the other transactions contemplated thereby, including but not limited to
filings pursuant to the HSR Act.
(iii) Buyer shall coordinate and cooperate
with Seller in exchanging such information and supplying such reasonable
assistance as may be reasonably requested by Seller in connection with the
filings and other actions contemplated by Section 5.1.
(c) Further Assurances. Following the Closing,
Buyer shall, from time to time, execute and deliver such additional
instruments, documents, conveyances or assurances and take such other actions
as shall be necessary, or otherwise reasonably requested by Seller, to confirm
and assure
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the rights and obligations provided for in this Agreement and render effective
the consummation of the transactions contemplated hereby.
(d) Use of Business Names by Buyer.
(i) Buyer acknowledges that Seller has
the absolute and exclusive proprietary right to all names, marks, trade names,
trademarks, service names and service marks (collectively, "Names")
incorporating "California Microwave" or any similar Name and to all corporate
symbols or logos (collectively, "Logos") incorporating California Microwave or
any similar Name. All rights of Seller and its respective affiliates to which
and the goodwill represented thereby and pertaining thereto are being retained
by Seller. Buyer agrees that it will not, and will cause the Business not to,
use the Name California Microwave or any similar Name or any Logo incorporating
such Name or any similar Name in any manner, including in connection with the
sale of any products or services or otherwise in the conduct of its business,
except as expressly permitted by clause (ii) of this Section 5.2(d).
(ii) For a period of six months from the
Closing Date (the "Window Period"), Seller shall and hereby irrevocably grants,
effective as of the Closing Date, on a fully-paid, royalty-free basis, the
Buyer the right to use the California Microwave Logo and the California
Microwave Name in connection with the operation of the Business as currently
conducted including, during the Window Period, to (A) use any molds or castings
included in the equipment or machinery included in the Assets despite the
appearance thereon and on the products manufactured therewith of the Name
California Microwave or the California Microwave Logo, (B) market and sell all
such products produced by the Business and (C) use any other assets on hand
included in the Assets, including, without limitation, any catalogs, invoices,
packaging material or stationery, bearing the California Microwave Name or
California Microwave Logo. Immediately upon the expiration of the Window
Period, Buyer shall cease to use in any manner the Name California Microwave or
the California Microwave Logo incorporating such Name and remove or obliterate
such Name or the California Microwave Logo from any molds, castings, products
or other assets and clearly and prominently mark the new name of the Business
thereon. At all times following the Closing, Buyer shall indicate that neither
Buyer nor the Business are affiliated with Seller or any of its affiliates.
(e) Substitute Letters of Credit and Bonds.
Buyer shall use commercially reasonable efforts to furnish as of the Closing or
as soon as practicable thereafter, its own letters of credit or performance or
surety bonds in substitution for the letters of credit and bonds referred to in
Schedule 5.2(e)
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attached hereto and agrees to reimburse Seller for any out-of-pocket bank fees
or charges incurred by Seller by reason of any of the same remaining
outstanding from and after 30 days after the Closing Date.
(f) Reimbursement of Certain Severance
Obligations. Schedule 5.2(f) lists three severance agreements heretofore
entered into between Seller and each of Messrs. Maloney, Strean and Pinto (each
an "Executive"), respectively (each a "Severance Agreement"). If (i) an
Executive becomes employed by Buyer as of the Closing Date as a Transferred
Employee, (ii) there shall occur thereafter a termination by such Executive of
his employment with Buyer for Good Reason (as defined below) within one year
after the Closing Date, and (iii) as a result of the termination of employment
of the type described in clause (ii) above, Seller shall be obligated to make
any cash payment to such Executive pursuant to the provisions of the Severance
Agreement with such Executive, then Buyer shall reimburse Seller for any such
cash payment it so makes to such Executive, such reimbursement to occur
promptly upon receipt by Buyer of evidence of the making of such payment;
provided, however, that the reimbursement obligation of Buyer to Seller under
this Section 5.2(f) with respect to any Executive shall not in any event exceed
the amount that would have been payable to such Executive under his retention
incentive agreement that is listed on Schedule 2.4(a) in the event of an
involuntary termination by Buyer without cause of the employment of such
Executive after the Closing; provided further, however, Buyer shall have no
reimbursement obligation to Seller under this Section 5.2(f) if Buyer otherwise
is obligated to make a payment to the Executive under his retention incentive
agreement pursuant to Section 2.4(a).
As used herein, "Good Reason" means the occurrence of any of
the following: (x) the assignment to the Executive in question of duties
inconsistent with, or a substantial alteration in the nature or status of, such
Executive's responsibilities with respect to the Business at the STS Division
immediately before the Closing; (y) a reduction in the Employee's base salary
or in the benefits that Buyer is required to provide such Executive pursuant to
Section 7.2; or (z) such Executive's relocation to a work site requiring an
increase in one-way commute from such Executive's residence of more than 35
miles.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Obligations of Each Party. The
obligations of the parties to consummate the transactions contemplated hereby
shall be subject to the fulfillment on or prior to the Closing Date of the
following conditions:
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(a) HSR Act Notification. In respect of the
notifications of Buyer and Seller pursuant to the HSR Act, the applicable
waiting period and any extensions thereof shall have expired or been terminated
without the receipt of any objection from any Governmental Authority.
(b) No Injunction, etc. Consummation of the
transactions contemplated hereby shall not have been restrained, enjoined or
otherwise prohibited by any Applicable Law, including any order, injunction,
decree or judgment of any court or other Governmental Authority. No court or
other Governmental Authority shall have determined that any Applicable Law
makes illegal the consummation of the transactions contemplated hereby, and no
proceeding with respect to the application of any such Applicable Law to such
effect shall be pending.
(c) Supply and License Agreements. Buyer and
Seller shall have entered into the Cross-License Agreement (substantially in
the form of Exhibit A), the Technology License Agreement (substantially in the
form of Exhibit B), the Trademark License Agreement (substantially in the form
of Exhibit C) and the Supply Agreement (substantially in the form of Exhibit
D).
6.2 Conditions to Obligations of Buyer. The obligations
of Buyer to consummate the transactions contemplated hereby shall be subject to
the fulfillment (or waiver by Buyer) on or prior to the Closing Date of the
following additional conditions:
(a) Representations, Performance. Each of the
representations and warranties of Seller contained in this Agreement that is
qualified as to materiality shall be true and correct and each such
representation and warranty that is not so qualified shall be true and correct
in all material respects in each case on the date hereof and at and as of the
Closing Date as though made on and as of the Closing Date. Seller shall have
duly performed and complied in all material respects with all agreements and
conditions required by the Agreement to be performed or complied with by it
prior to or on the Closing Date. Seller shall have delivered to Buyer a
certificate, dated the Closing Date and signed by its duly authorized officer,
to the foregoing effect.
(b) No Material Adverse Change. Since the date
hereof, (i) there shall not have occurred any material adverse change in the
financial condition, results of operations or Assets of the Business, except
for the results shown and changes forecast in Schedule 3.7(a), and other than
changes in the STS Division's intercompany account with CMI corporate, which
changes represent (x) the results of operations of the STS Division, (y) the
cash advanced to the STS Division by CMI corporate or repaid by the STS
Division
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to CMI corporate, and (z) certain allocations between CMI corporate and the STS
Division, which allocations shall have been made in the ordinary course of
business consistent in type and amount with past practice, and (ii) there shall
not have occurred, in the aggregate, any change in the ETC's and EAC's of the
Business' Contracts such as to cause a material adverse change in its financial
quarterly contribution.
(c) Consents. Seller shall have obtained and
shall have delivered to Buyer copies of (i) all Governmental Approvals required
to be obtained by Seller in connection with the execution and delivery of the
Agreement and the consummation of the transactions contemplated hereby or
thereby and (ii) all Consents (including, without limitation, all Consents
required under any Contract) necessary to be obtained in order to consummate
the sale and transfer of the Assets pursuant to this Agreement and the
consummation of the other transactions contemplated hereby and listed on
Schedule 6.2(c). Buyer shall have obtained the Consents listed on Schedule
4.2.
(d) Corporate Proceedings. All corporate and
other proceedings of Seller in connection with this Agreement and the
transactions contemplated hereby, and all documents and instruments incident
thereto, shall be reasonably satisfactory in substance and form to Buyer and
its counsel, and Buyer and its counsel shall have received all such documents
and instruments, or copies thereof, certified if requested, as may be
reasonably requested.
(e) Transfer Documents. Seller shall have
delivered to Buyer at the Closing all documents, certificates and agreements
necessary to transfer to Buyer title to the Assets, free and clear of any and
all Liens thereon, other than Permitted Liens, including without limitation:
(i) a bill of sale, assignment and
general conveyance, in form and substance reasonably satisfactory to Buyer,
dated the Closing Date, with respect to the Assets (other than any Asset to be
transferred pursuant to any of the instruments referred to in any other clause
of this Section 6.2);
(ii) assignments of all Contracts,
Intellectual Property and any other agreements and instruments constituting
Assets, dated the Closing Date, assigning to Buyer all of Seller's right, title
and interest therein and thereto;
(iii) a bargain and sale deed with
covenants against grantor's acts, dated as of the Closing Date, with respect to
each parcel of Owned Real Property;
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(iv) an assignment of lease, dated as of
the Closing Date, with respect to each Lease;
(v) certificates of title to all motor
vehicles included in the Assets to be transferred to Buyer hereunder, duly
endorsed for transfer to Buyer as of the Closing Date; and
(vi) an assignment of lease, assignment
of sale agreement, and consent by the Suffolk County Industrial Development
Agency and other necessary parties to assignment of lease and sale agreement,
and any other documents, consents or approvals necessary to convey all of
Seller's interest in the property leased from the Suffolk County Industrial
Development Agency.
(f) Title Policies. Buyer shall have received
from a nationally recognized title insurance company at its expense (the "Title
Company") a title insurance policy issued to Buyer in form and substance
reasonably satisfactory to it with respect to the Owned Real Property,
insuring Buyer and issued as of the Closing Date by the Title Company, showing
Buyer to have a fee simple title to the Owned Real Property, subject only to
Permitted Liens and the mortgage liens and easements of record described on
Schedule 3.18(c). In conjunction with the receipt of the foregoing title
policy, Seller shall deliver to Buyer a Certificate of Occupancy for each of
the Owned Real Property and the Kennedy Facility issued by the municipal
authority having the jurisdiction allowing the property to be used as a
commercial or industrial building in the manner presently used.
(g) FIRPTA Certificate. Buyer shall have
received a certificate of Seller, dated the Closing Date and sworn to under
penalty of perjury, setting forth the name, address and federal tax
identification number of Seller and stating that Seller is not a "foreign
person" within the meaning of Section 1445 of the Code, such certificate to be
in the form set forth in the Treasury Regulations thereunder.
(h) Environmental Reports. Buyer at its own
expense shall have received from an environmental consulting firm of its
choice, an environmental site assessment report and analytical report covering
the Real Property (including analyses of samples, soil and groundwater taken
from all areas of the Real Property as may be deemed appropriate by such
consulting firm), which reports shall be in form, scope and substance
satisfactory to Buyer
in all respects. In addition, Buyer shall be reasonably satisfied with the
results of its due diligence investigation of environmental matters in respect
of the Real Property.
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6.3 Conditions to Obligations of Seller. The obligation
of Seller to consummate the transactions contemplated hereby shall be subject
to the fulfillment (or waiver by Seller), on or prior to the Closing Date, of
the following additional conditions:
(a) Representations, Performance, etc. Each of
the representations and warranties of Buyer contained in this Agreement that is
qualified as to materiality shall be true and correct and each such
representation and warranty that is not so qualified shall be true and correct
in all material respects in each case on the date hereof and at and as of the
Closing Date as though made on and as of the Closing Date. Buyer shall have
duly performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date. Buyer shall have delivered to Seller a
certificate, dated the Closing Date and signed by its duly authorized officer,
to the foregoing effect.
(b) Assumption Agreement. Seller shall have
received from Buyer an Assumption Agreement, in substance and form satisfactory
to Seller, under which Buyer shall have assumed the Assumed Liabilities.
(c) Corporate Proceedings. All corporate
proceedings of Buyer in connection with this Agreement and the transactions
contemplated hereby, and all documents and instruments incident thereto, shall
be reasonably satisfactory in substance and form to Seller, and its counsel,
and Seller and its counsel shall have received all such documents and
instruments, or copies thereof, certified if requested, as may be reasonably
requested.
(d) Consents and Approvals. Seller shall have
obtained all Governmental Approvals necessary to consummate the transactions
contemplated hereby.
ARTICLE VII
EMPLOYEES AND EMPLOYEE BENEFIT PLANS
7.1 Employment of Seller's Employees. Buyer intends to
offer employment, effective as of the Closing Date, to all employees who are
employed by Seller in the STS Division primarily in the operation of the
Business at then current wage or salary levels. Those employees who accept
such offers of employment and become employees of Buyer shall be referred to
herein as the "Transferred Employees". Effective as of the Closing Date, Buyer
shall assume the liability of Seller in respect of the Transferred Employees
for accrued but unpaid salaries, wages, vacation and sick pay and 1998 cash
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incentive compensation, but only to the extent such liability is accrued or
otherwise reflected on the Final Closing Statement of Net Assets. Buyer shall
not have any liability with respect to any employee of Seller or Employee
Benefit Plan or any claim thereof or related thereto except to the extent
expressly provided in this Article VII with respect to Transferred Employees
and except as provided in Section 2.4(a).
7.2 Welfare and Fringe Benefit Plans. Following the
Closing Date and through December 31, 1998, Buyer shall provide Transferred
Employees with life insurance, medical coverage, and other employee welfare
benefit plans, programs, policies or arrangements, other than stock-based plans
relating to equity securities (or their equivalent, such as phantom stock plans
or SARs) or (except as provided in the next sentence) any incentive bonus
programs based on the achievement of financial targets, on a basis comparable
in the aggregate to those provided Transferred Employees prior to the Closing
Date. Buyer will provide or establish a cash incentive bonus program(s) based
on the achievement of financial targets to those Transferred Employees who
currently are eligible for cash incentive bonus program(s) of Seller based on
the achievement of financial targets, which cash incentive program(s) of Buyer
shall be comparable in the aggregate to such cash incentive bonus program(s) of
Seller.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any
time prior to the Closing Date:
(a) by the written agreement of Buyer and Seller;
(b) by either Seller or Buyer by written notice
to the other party if the transactions contemplated hereby shall not have been
consummated pursuant hereto by 5:00 p.m. California time on February 15, 1998,
unless such date shall be extended by the mutual written consent of Seller and
Buyer;
(c) by Buyer by written notice to Seller if (i)
the representations and warranties of Seller shall not have been true and
correct in all material respects as of the date when made or (ii) if any of the
conditions set forth in Section 6.1 or 6.2 shall not have been, or if it becomes
apparent that any of such conditions will not be, fulfilled by 5:00 p.m.
California time on February 15, 1998, unless such failure shall be due to the
failure of Buyer to
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perform or comply with any of the covenants, agreements or conditions hereof to
be performed or complied with by it prior to the Closing; or
(d) by Seller by written notice to Buyer if (i)
the representations and warranties of Buyer shall not have been true and
correct in all material respects as of the date when made or (ii) if any of the
conditions set forth in Section 6.1 or 6.3 shall not have been, or if it
becomes apparent that any of such conditions will not be, fulfilled by 5:00
p.m. California time on February 15, 1998, unless such failure shall be due to
the failure of Seller to perform or comply with any of the covenants,
agreements or conditions hereof to be performed or complied with by it prior to
the Closing.
8.2 Effect of Termination. In the event of the
termination of this Agreement pursuant to the provisions of Section 8.1, this
Agreement shall become void and have no effect, without any liability to any
Person in respect hereof or of the transactions contemplated hereby on the part
of any party hereto, or any of its directors, officers, employees, agents,
consultants, representatives, advisers, stockholders or Affiliates, except as
specified in Section 10.2 and except for any liability resulting from such
party's breach of this Agreement.
ARTICLE IX
INDEMNIFICATION
9.1 By Seller. Subject to the terms and conditions of
this Article IX, Seller covenants and agrees to defend, indemnify and hold
harmless Buyer, its officers, directors, employees, agents, advisers,
representatives and Affiliates (collectively, the "Buyer Indemnitees") from and
against, and pay or reimburse Buyer Indemnitees for, any and all claims,
liabilities, obligations, losses, fines, costs, proceedings, deficiencies or
damages (whether absolute, accrued, conditional or otherwise and whether or not
resulting from third party claims), including out-of-pocket expenses and
reasonable attorneys' fees incurred in the investigation or defense of any of
the same or in asserting any of their respective rights hereunder
(collectively, "Losses"), resulting from or arising out of:
(i) Any misrepresentation or breach of any
warranty of Seller contained in this Agreement; provided that any claim for
indemnification by Buyer under this clause (i) may be made no later than 18
months from and after the Closing Date, excepting only that any claim for
misrepresentation or breach of warranty under Sections 3.6, 3.10(a), 3.18(a),
3.19 and 3.21 may be made no later than a date thirty days from and after the
expiration of the period of the applicable statute of limitations;
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(ii) any failure of Seller to perform any covenant
or agreement made or contained in this Agreement or fulfill any obligation in
respect thereof;
(iii) any Excluded Liabilities;
(iv) any and all Benefit Liabilities in respect of
Employees except, with respect to Transferred Employees, to the extent assumed
by Buyer pursuant to Article VII; and
(v) any product liability claim with respect to
products manufactured by Seller and sold prior to the Closing.
Seller shall not be required to indemnify Buyer Indemnitees
with respect to any claim for indemnification resulting from or arising out of
matters described in clauses (i) and (v) above pursuant to this Section unless
and until the aggregate amount of all claims against Seller exceeds $270,000
and then only to the extent such aggregate amount exceeds $270,000. Claims
thereafter may be asserted regardless of amount. Seller's maximum liability to
Buyer Indemnitees under clauses (i) and (v) of this Section shall not exceed
$13,750,000.
9.2 By Buyer. Subject to the terms and condition of this
Article IX, Buyer covenants and agrees to defend, indemnify and hold harmless
Seller and its officers, directors, employees, agents, advisers,
representatives and Affiliates (collectively, the "Seller Indemnitees") from
and against any and all Losses resulting from or arising out of:
(i) any misrepresentation or breach of warranty
of Buyer contained in this Agreement or in any Schedule of Buyer; provided that
any claim for indemnification by Seller under this paragraph (i) may be made no
later than 18 months from and after the Closing Date;
(ii) any failure of Buyer to perform any covenant
or agreement made or contained in the Agreement or fulfill any other obligation
in respect thereof;
(iii) the Assumed Liabilities;
(iv) claims made on or drawings under any of the
letters of credit or performance or surety bonds referred to in Schedule 5.2(e)
attached hereto;
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(v) the use by Buyer of any Seller tradenames or
trademarks after the Closing Date other than as permitted or contemplated by
Section 5.2(d); and
(vi) the operation of the Business by Buyer or
Buyer's ownership, operation or use of the Assets following the Closing Date
except to the extent that such Loss is the result of any action of Seller prior
to the Closing.
Buyer shall not be required to indemnify Seller Indemnitees
with respect to any claim for indemnification resulting from or arising out of
matters described in clause (i) above pursuant to this Section unless and until
the aggregate amount of all claims against Buyer exceeds $270,000 and then only
to the extent such aggregate amount exceeds $270,000. Buyer's maximum
liability to Seller Indemnitees under clause (i) of this Section shall not
exceed $13,750,000.
9.3 Adjustments to Indemnification Payments. Any payment
made by Seller to Buyer Indemnitees, on the one hand, or by Buyer to Seller
Indemnitees, on the other hand, pursuant to this Article IX in respect of any
claim shall be net of any insurance proceeds realized by and paid to the
Indemnified Party in respect of such claim. The Indemnified Party shall use
its reasonable efforts to make insurance claims relating to any claim for which
it is seeking indemnification pursuant to this Article IX; provided that the
Indemnified Party shall not be obligated to make such an insurance claim if the
Indemnified Party in its reasonable judgment believes that the cost of pursuing
such an insurance claim together with any corresponding increase in insurance
premiums or other chargebacks to the Indemnified Party, as the case may be,
would exceed the value of the claim for which the Indemnified Party is seeking
indemnification.
9.4 Indemnification Procedures. In the case of any claim
asserted by a third party against a party entitled to indemnification under
this Agreement (the "Indemnified Party"), notice shall be given by the
Indemnified Party to the party required to provide indemnification (the
"Indemnifying Party") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and the Indemnified
Party shall permit the Indemnifying Party (at the expense of such Indemnifying
Party) to assume the defense of any third party claim or any litigation with a
third party resulting therefrom, provided that (i) the counsel for the
Indemnifying Party who shall conduct the defense of such claim or litigation
shall be reasonably satisfactory to the Indemnified Party, (ii) the Indemnified
Party may participate in such defense at such Indemnified Party's expense, and
(iii) the omission by any Indemnified Party to give notice as provided herein
shall not relieve the
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Indemnifying Party of its indemnification obligation under this Agreement except
and only to the extent that such Indemnifying Party is materially damaged as a
result of such failure to give notice. Except with the prior written consent of
the Indemnified Party, no Indemnifying Party, in the defense of any such claim
or litigation, shall consent to entry of any judgment or enter into any
settlement that provides for injunctive or other nonmonetary relief affecting
the Indemnified Party or that does not include as an unconditional term thereof
the giving by each claimant or plaintiff to such Indemnified Party of a release
from all liability with respect to such claim or litigation. In the event that
the Indemnified Party shall in good faith determine that the conduct of the
defense of any claim subject to indemnification hereunder or any proposed
settlement of any such claim by the Indemnifying Party might be expected to
affect adversely the Indemnified Party's Tax liability or the ability of Buyer
to conduct its business, or that the Indemnified Party may have available to it
one or more defenses or counterclaims that are inconsistent with one or more of
those that may be available to the Indemnifying Party in respect of such claim
or any litigation relating thereto, the Indemnified Party shall have the right
at all times to take over and assume control over the defense, settlement,
negotiations or litigation relating to any such claim at the sole cost of the
Indemnifying Party, provided that if the Indemnified Party does so take over and
assume control, the Indemnified Party shall not settle such claim or litigation
without the written consent of the Indemnifying Party, such consent not to be
unreasonably withheld. In the event that the Indemnifying Party does not accept
the defense of any matter as above provided, the Indemnified Party shall have
the full right to defend against any such claim or demand and shall be entitled
to settle or agree to pay in full such claim or demand. In any event, the
Indemnifying Party and the Indemnified Party shall cooperate in the defense of
any claim or litigation subject to this Article IX and the records of each shall
be available to the other with respect to such defense.
9.5 Expiration of Representations and Warranties, etc.
All representations and warranties contained in this Agreement shall survive
the Closing for a period of 18 months; provided that the representations and
warranties stated in Sections 3.6, 3.10(a), 3.18(a), 3.19 and 3.21 shall
survive the Closing for the applicable statute of limitations.
9.6 Exclusive Remedy. The indemnifications provided for
in this Article IX shall be the sole and exclusive post-Closing remedies
available to either party against the other party for any claims under or based
upon this Agreement.
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ARTICLE X
DEFINITIONS, MISCELLANEOUS
10.1 Definition of Certain Terms. The terms defined in
this Section 10.1, whenever used in this Agreement (including in the
Schedules), shall have the respective meanings indicated below for all purposes
of this Agreement. All references herein to a Section, Article or Schedule are
to a Section, Article or Schedule of or to this Agreement, unless otherwise
indicated.
Affiliate: of a Person means a Person that directly or
indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, the Person. "Control" (including the terms
"Controlled by" and "under common control with") means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of voting securities, by
contract or credit arrangement, as trustee or executor, or otherwise.
Aggregate Purchase Price: has the meaning set forth in
Section 2.3.
Agreement: means this Asset Purchase Agreement (including the
Exhibits and the Schedules), as the same from time to time may be amended,
supplemented or waived.
Applicable Law: all applicable provisions of all (i)
constitutions, treaties, statutes, laws (including the common law), rules,
regulations, ordinances, codes or orders of any Governmental Authority, (ii)
Governmental Approvals and (iii) orders, decisions, injunctions, judgments,
awards and decrees of or agreements with any Governmental Authority.
Assets: has the meaning set forth in Section 1.1.
Assumed Liabilities: has the meaning set forth in Section
2.4.
Backlog: has the meaning set forth in Section 3.24.
Books and Records: all books and records, including manuals,
price lists, mailing lists, lists of customers, production data, sales and
promotional materials, purchasing materials, personnel records, manufacturing
and quality control records and procedures, research and development files,
accounting records, tax records and litigation files (regardless of the media
in which stored), in each case relating to or used in the Business.
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Business: the business currently conducted by Buyer through
its STS Division, as described in Recital A at the head of this Agreement.
Buyer: has the meaning set forth in the first paragraph of
this Agreement.
Buyer Indemnitees: has the meaning set forth in Section 9.1.
Buyer's Arbitrator: has the meaning set forth in Section
10.6(c).
Closing: has the meaning set forth in Section 2.1.
Closing Date: has the meaning set forth in Section 2.1.
Closing Statement of Net Assets: has the meaning set forth in
Section 2.7(b).
Code: the Internal Revenue Code of 1986, as amended.
Consent: any consent, approval, authorization, waiver,
permit, grant, franchise, concession, agreement, license, exemption or order
of, registration, certificate, declaration or filing with, or report or notice
to, any Person, including but not limited to any Governmental Authority.
Cross-License Agreement: has the meaning set forth in Section
1.3(b).
Disputes: has the meaning set forth in Section 10.6(a).
Disputing Person: has the meaning set forth in Section
10.6(b).
$ or dollars: lawful money of the United States.
E&Y: has the meaning set forth in Section 2.7(b).
EAC's: has the meaning set forth in Section 2.7(b).
Employee Benefit Plans: has the meaning set forth in Section
3.21(a).
Environmental Laws: all Applicable Laws relating to the
protection of the environment, to human health and safety, or to any emission,
discharge, generation, processing, storage, holding, abatement,
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existence, Release, threatened Release, arranging for the disposal or
transportation of any Hazardous Substances.
Environmental Liabilities and Costs: all Losses imposed by,
under or pursuant to Environmental Laws, including all fees, disbursements and
expenses of counsel based on, arising out of or otherwise in respect of: (i)
the ownership or operation of the Business or Real Property, by Seller, and
(ii) the environmental conditions existing on the Closing Date on, under,
above, or about any Real Property owned, leased or operated by Seller.
ERISA: the Employee Retirement Income Security Act of 1974,
as amended.
ETC's: has the meaning set forth in Section 2.7(b).
Excluded Assets: has the meaning set forth in Section 1.2.
Excluded Liabilities: has the meaning set forth in Section
2.5.
Executive: has the meaning set forth in Section 5.2(f).
Existing Mortgage: has the meaning set forth in Section 3.6.
Final Closing Statement of Net Assets: has the meaning set
forth in Section 2.7(d).
Final Determination: has the meaning set forth in Section
10.6(e).
Financial Statements: has the meaning set forth in Section
3.4.
GAAP: generally accepted accounting principles as in effect
in the United States.
Good Reason: has the meaning set forth in Section 5.2(f).
Governmental Approval: any Consent of, with or to any
Governmental Authority.
Governmental Authority: any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including, without limitation, any government authority, agency,
department, board, commission or instrumentality of the United States, any State
of the
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United States or any political subdivision thereof, and any tribunal or
arbitrator(s) of competent jurisdiction, and any self- regulatory organization.
Hazardous Substances: any substance that: (i) requires
investigation, removal or remediation under any Environmental Law, or is
defined, listed or identified as a "hazardous waste" or "hazardous substance"
thereunder, or (ii) is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic, or otherwise hazardous and is regulated
by any Governmental Authority or Environmental Law.
HSR Act: the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"include" and "including" shall be construed as if followed by
the phrase "without being limited to".
Indemnified Party: has the meaning set forth in Section 9.4.
Indemnifying Party: has the meaning set forth in Section 9.4.
Intellectual Property: any and all United States and foreign:
(a) patents (including design patents, industrial designs and utility models)
and patent applications (including docketed patent disclosures awaiting filing,
reissues, divisions, continuations-in-part and extensions), patent disclosures
awaiting filing determination, inventions and improvements thereto; (b)
trademarks, service marks, trade names, trade dress, logos, business and
product names, slogans, and registrations and applications for registration
thereof but excluding the name "California Microwave;" (c) copyrights
(including software) and registrations thereof; (d) inventions, processes,
designs, formulae, trade secrets, know-how, industrial models, confidential and
technical information, manufacturing, engineering and technical drawings,
product specifications and confidential business information; (e) mask work and
other semiconductor chip rights and registrations thereof; (f) intellectual
property rights similar to any of the foregoing; and (g) copies and tangible
embodiments thereof (in whatever form or medium, including electronic media).
Intellectual Property Licenses: has the meaning set forth in
Section 3.16.
Inventories: has the meaning set forth in Section 1.1(c).
IRS: the Internal Revenue Service.
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Kennedy Facility: has the meaning set forth in Section
1.1(a).
June Balance Sheet: has the meaning set forth in Section 3.4.
Leased Real Property: means all space leased pursuant to the
Leases.
Leases: means the real property leases, subleases, use
agreements, licenses and occupancy agreements pursuant to which Seller is the
lessee, sublessee, user, licensee or occupant related to the Business, other
than real property leases, subleases, licenses and occupancy agreements
included in Excluded Assets.
Lien: any mortgage, pledge, hypothecation, right of others,
claim, security interest, encumbrance, lease, sublease, license, occupancy
agreement, adverse claim or interest, easement, covenant, encroachment, burden,
title defect, title retention agreement, voting trust agreement, interest,
equity, option, lien, right of first refusal, charge or other restrictions or
limitations.
Logos: has the meaning set forth in Section 5.2(d).
Losses: has the meaning set forth in Section 9.1.
Material Adverse Effect: any event, occurrence, fact,
condition, change or effect that is materially adverse to the business,
operations, results of operations, financial condition, properties, assets or
liabilities of the Business.
Names: has the meaning set forth in Section 5.2(d).
Neutral Auditor: has the meaning set forth in Section 2.7(d).
Non-Competition Period: has the meaning set forth in Section
5.1(f).
Notice of Arbitration: has the meaning set forth in Section
10.6(b).
Owned Intellectual Property: has the meaning set forth in
Section 3.16.
Owned Real Property: the real property owned by Seller and
used primarily in the Business, together with all other structures, facilities,
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improvements, fixtures, systems, equipment and items of property presently or
hereafter located thereon attached or appurtenant thereto and all easements,
licenses, rights and appurtenances relating to the foregoing.
Permitted Liens: (i) Liens reserved against in the September
Balance Sheet, to the extent so reserved, (ii) Liens for Taxes not yet due and
payable or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on
Seller's books in accordance with GAAP, (iii) contract rights of third parties
to Contracts, or (iv) Liens that, individually and in the aggregate, do not and
would not materially detract from the value of any of the property or assets of
the Business or materially interfere with the use thereof as currently used or
contemplated to be used or otherwise.
Person: any natural person, firm, partnership, association,
corporation, company, limited liability company, trust, business trust,
Governmental Authority or other entity.
Prime Rate: has the meaning set forth in Section 2.7(a).
Purchase Price: has the meaning set forth in Section 2.2.
Real Property: the Owned Real Property and the Leased Real
Property.
Release: any releasing, disposing, discharging, injecting,
spilling, leaking, leaching, pumping, dumping, emitting, escaping, emptying,
seeping, dispersal, migration, transporting, placing and the like, including
without limitation, the moving of any materials through, into or upon, any
land, soil, surface water, ground water or air, or otherwise entering into the
environment.
Resolution Period: has the meaning set forth in Section
2.7(c).
Seller: has the meaning set forth in the first paragraph of
this Agreement.
Seller Indemnitees: has the meaning set forth in Section 9.2.
Seller's Arbitrator: has the meaning set forth in Section
10.2(c).
September Balance Sheet: has the meaning set forth in Section
3.4.
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Severance Agreement: has the meaning set forth in Section
5.2(f).
STS Division: has the meaning set forth in Recital A at the
head of this Agreement.
Subsidiaries: each corporation or other Person in which a
Person owns or controls, directly or indirectly, capital stock or other equity
interests representing at least 50% of the outstanding voting stock or other
equity interests.
Target Net Assets: has the meaning set forth in Section
2.7(a).
Tax: any federal, state, provincial, local or foreign income,
alternative, minimum, accumulated earnings, personal holding company,
franchise, capital stock, net worth, capital, profits, windfall profits, gross
receipts, value added, sales, use, goods and services, excise, customs duties,
transfer, conveyance, mortgage, registration, stamp, documentary, recording,
premium, severance, environmental (including taxes under Section 59A of the
Code), real property, personal property, ad valorem, intangibles, rent,
occupancy, license, occupational, employment, unemployment insurance, social
security, disability, workers' compensation, payroll, health care, withholding,
estimated or other similar tax, duty or other governmental charge or assessment
or deficiencies thereof, and including any interest, penalties or additions to
tax attributable to the foregoing.
Tax Return: any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
Technology License Agreement: has the meaning set forth in
Section 1.3(c).
Title Company: has the meaning set forth in Section 6.2(f).
Trademark Consent Agreement: has the meaning set forth in
Section 1.3(d).
Transaction: has the meaning set forth in Section 5.1(g).
Transaction Expenses: has the meaning set forth in Section
10.2.
Transfer Taxes: has the meaning set forth in Section 10.8.
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Transferred Employee: has the meaning set forth in Section
7.1.
Treasury Regulations: the regulations prescribed pursuant to
the Code.
Window Period: has the meaning set forth in Section 5.2(d).
10.2 Expenses. Except to the extent otherwise provided
hereby, Seller, on the one hand, and Buyer, on the other hand, shall bear their
respective expenses, costs and fees (including filing fees (if any) required in
connection with the HSR Act and attorneys', auditors' and financing commitment
fees) in connection with the transactions contemplated hereby, including the
preparation, execution and delivery of this Agreement and compliance herewith
(the "Transaction Expenses"), whether or not the transactions contemplated
hereby shall be consummated.
10.3 Severability. If any provision of this Agreement,
including any phrase, sentence, clause, Section or subsection is inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering the provision in question inoperative or unenforceable in any other
case or circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.
10.4 Notices. All notices, requests, demands, waivers and
other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (a)
delivered personally, (b) mailed by first-class, registered or certified mail,
return receipt requested, postage prepaid, or (c) sent by next-day or overnight
mail or delivery or (d) sent by facsimile transmission or telegram.
(i) if to Buyer, to
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Facsimile: 212/805-5494
Attention: Christopher C. Cambria, Esq.
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with a copy to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Facsimile: 212/351-3131
Attention: James P. Gerkis, Esq.
(ii) if to Seller, to
California Microwave, Inc.
555 Twin Dolphin Drive
Redwood City, California 94065
Attn: George L. Spillane
Facsimile: 650/596-6600
with a copy to:
Richard W. Canady, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
Facsimile: 415/399-3041
or, in each case, at such other address as may be specified in writing to the
other parties hereto.
All such notices, requests, demands, waivers and other
communications shall be deemed to have been received (w) if by personal
delivery on the day after such delivery, (x) if by certified or registered
mail, on the seventh business day after the mailing thereof, (y) if by next-day
or overnight mail or delivery, on the day delivered, (z) if by facsimile or
telegram, on the next day following the day on which such facsimile or telegram
was sent, provided that a copy is also sent by certified or registered mail.
10.5 Miscellaneous.
(a) Headings. The headings contained in this
Agreement are for purposes of convenience only and shall not affect the meaning
or interpretation of this Agreement.
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(b) Entire Agreement. This Agreement (including
the Schedules and Exhibits hereto) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
(c) Counterparts. This Agreement may be executed
(including by facsimile transmission) with counterpart signature pages or in
several counterparts, each of which shall be deemed an original and all of
which shall together constitute one and the same instrument.
(d) Governing Law, etc. This Agreement shall be
governed in all respects, including as to validity, interpretation and effect,
by the internal laws of the State of New York without giving effect to the
conflict of laws rules thereof. Buyer and Seller hereby irrevocably submit to
the jurisdiction of the courts of the State of New York, and the Federal courts
of the United States of America located in the Southern District of New York
solely in respect of the interpretation and enforcement of the provisions of
this Agreement and of the documents referred to in this Agreement, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it
is not subject thereto or that such action, suit or proceeding may not be
brought or is not maintainable in said courts or that the venue thereof may not
be appropriate or that this Agreement or any of such document may not be
enforced in or by said courts, and the parties hereto irrevocably agree that
all claims with respect to such action or proceeding shall be heard and
determined in such a New York State or Federal court. Buyer and Seller hereby
consent to and grant any such court jurisdiction over the person of such
parties and over the subject matter of any such dispute and agree that mailing
of process or other papers in connection with any such action or proceeding in
the manner provided in Section 10.4, or in such other manner as may be
permitted by law, shall be valid and sufficient service thereof.
(e) Bulk Sales. Buyer and Seller hereby waive
compliance by the other with the provisions of the bulk sales laws of any
jurisdiction.
(f) Binding Effect. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective heirs, successors and permitted assigns.
(g) Assignment. This Agreement shall not be
assignable or otherwise transferable by any party hereto without the prior
written consent of the other party hereto; provided that from and after the
Closing Buyer shall have the right to assign its rights (but not its
obligations) hereunder.
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(h) No Third Party Beneficiaries. Except as
provided in Section 8.2 with respect to indemnification of Indemnified Parties
hereunder, nothing in this Agreement shall confer any rights upon any person or
entity other than the parties hereto and their respective heirs, successors and
permitted assigns.
(i) Amendment; Waivers, etc. No amendment,
modification or discharge of this Agreement, and no waiver hereunder, shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification, discharge or waiver is
sought. Any such waiver shall constitute a waiver only with respect to the
specific matter described in such writing and shall in no way impair the rights
of the party granting such waiver in any other respect or at any other time.
Neither the waiver by any of the parties hereto of a breach of or a default
under any of the provisions of this Agreement, nor the failure by any of the
parties, on one or more occasions, to enforce any of the provisions of this
Agreement or to exercise any right or privilege hereunder, shall be construed
as a waiver of any other breach or default of a similar nature, or as a waiver
of any of such provisions, rights or privileges hereunder.
10.6 Arbitration Procedure.
(a) Buyer and Seller agree that the arbitration
procedure set forth below shall be the sole and exclusive method for resolving
and remedying any and all disputes regarding claims for money damages based
upon, arising out of or in any way connected with this Agreement or the
transactions contemplated herein (the "Disputes"). Nothing in this Section
10.6 shall prohibit a party hereto from instituting litigation to enforce any
Final Determination (as defined below). The parties hereby agree and
acknowledge that, except as otherwise provided in this Section 10.6 or in the
Commercial Arbitration Rules of the American Arbitration Association as in
effect from time to time, the arbitration procedures and any Final
Determination hereunder shall be governed by and shall be enforced pursuant to
the Uniform Arbitration Act as in effect in the State of New York.
(b) In the event that any party asserts that
there exists a Dispute, such party shall deliver a written notice to each other
party involved therein specifying the nature of the asserted Dispute and
requesting a meeting to attempt to resolve the same. If no such resolution is
reached within 45 days after such delivery of such notice, the party delivering
such notice of Dispute (the "Disputing Person") may, within 75 days after
delivery of such notice, commence arbitration hereunder by delivering to each
other party involved therein a notice of arbitration (a "Notice of
Arbitration") and by filing a copy of such Notice of Arbitration with the New
York City office of the American
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Arbitration Association. Such Notice of Arbitration shall specify the matters
as to which arbitration is sought, the nature of any Dispute, the claims of
each party to the arbitration and the amount and nature of damages or other
relief sought to be recovered as a result of any alleged claim and any other
matters required by the Commercial Arbitration Rules of the American
Arbitration Association as in effect from time to time to be included therein.
(c) Buyer and Seller each shall select one
arbitrator expert in the subject matter of the Dispute (the arbitrators so
selected shall be referred to herein as "Buyer's Arbitrator" and "Seller's
Arbitrator," respectively). In the event that either party fails to select an
arbitrator as set forth herein within 30 days after the delivery of a Notice of
Arbitration, then the matter shall be resolved by the arbitrator selected by
the other party. Seller's Arbitrator and Buyer's Arbitrator shall select a
third independent, neutral arbitrator expert in the subject matter of the
Dispute, and the three arbitrators so selected shall resolve the Dispute
according to the procedures set forth in this Section 10.6. If Seller's
Arbitrator and Buyer's Arbitrator are unable to agree on a third arbitrator
within 20 days after their selection, Seller's Arbitrator and Buyer's
Arbitrator shall each prepare a list of three independent arbitrators.
Seller's Arbitrator and Buyer's Arbitrator shall each have the opportunity to
designate as objectionable and eliminate one arbitrator from the other
arbitrator's list within ten days after submission thereof, and the third
arbitrator shall then be selected by lot from the arbitrators remaining on the
lists submitted by Seller's Arbitrator and Buyer's Arbitrator.
(d) The arbitrators selected pursuant to Section
10.6(c) shall determine the allocation of the costs and expenses of
arbitration.
(e) The arbitration shall be conducted in New
York City, under the Commercial Arbitration Rules of the American Arbitration
Association as in effect from time to time, except as otherwise set forth
herein or as modified by the agreement of Buyer and Seller. The arbitrators
shall conduct the arbitration such that a final result, determination, finding,
judgment and/or award (the "Final Determination") is made or rendered as soon
as practicable, but in no event later than 120 days after the delivery of the
Notice of Arbitration nor later than ten days following completion of the
arbitration. The Final Determination shall be made in writing, shall state the
basis for such determination and shall be agreed upon and signed by the sole
arbitrator or by at least two of the three arbitrators (as the case may be).
The Final Determination shall be final and binding on all parties, and there
shall be no appeal from or reexamination of the Final Determination, except for
fraud, perjury, evident partiality or misconduct by an arbitrator prejudicing
the rights of any party and to correct manifest clerical errors.
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(f) Buyer and Seller may enforce any Final
Determination in any state or federal court having jurisdiction over the
Dispute. For the purpose of any action or proceeding instituted with respect
to any Final Determination, each party hereto hereby irrevocably submits to the
jurisdiction of such courts, irrevocably consents to the service of process by
registered mail or personal service and hereby irrevocably waives, to the
fullest extent permitted by law, any objection which it may have or hereafter
have as to personal jurisdiction, the laying of the venue of any such action or
jurisdiction, the laying of the venue of any such action or proceeding brought
in any such court and any claim that any such action or proceeding brought in
any court has been brought in an inconvenient form.
10.7 Attorneys Fees. In the event any party hereto
initiates any legal action arising out of or in connection with this Agreement,
the prevailing party shall be entitled to recover from the other party all
reasonable attorneys' fees, expert witness fees and expenses incurred by the
prevailing party in connection therewith.
10.8 Liability for Transfer Taxes. Buyer and Seller shall
each be responsible for and pay in a timely manner 50% of all sales (including,
without limitation, bulk sales), use, value added, documentary, stamp, gross
receipts, registration, transfer, conveyance, excise, recording, license and
other similar Taxes and fees ("Transfer Taxes"), arising out of or in
connection with or attributable to the transactions effected pursuant to this
Agreement. Each party hereto shall prepare and timely file all Tax Returns
required to be filed in respect of Transfer Taxes (including, without
limitation, all notices required to be given with respect to bulk sales taxes)
that are the primary responsibility of such party under applicable law;
provided, however, that such party's
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preparation of any such Tax Returns shall be subject to the other party's
approval, which approval shall not be withheld or delayed unreasonably.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
L-3 COMMUNICATIONS CORPORATION
By:_____________________________________
Name: Robert Mehmel
Title: Vice President
CALIFORNIA MICROWAVE, INC.
By:_____________________________________
Name: George L. Spillane
Title: Vice President and Secretary
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EXHIBIT A
CROSS-LICENSE AGREEMENT
CROSS-LICENSE AGREEMENT dated as of _________________, 1998 (this
"Agreement"), between L-3 Communications Corporation, a Delaware corporation
("L-3"), and California Microwave, Inc., a Delaware corporation ("CMI").
RECITALS
WHEREAS, L-3 and CMI have entered into that certain Asset Purchase
Agreement dated as of December 19, 1997 (the "Purchase Agreement"), in
connection with the sale and purchase of the Assets (as defined below) of the
Satellite Transmission System Division of CMI (the "STS Division"), which sale
and purchase has closed or is closing effective as of the date hereof (the
"Closing Date") simultaneously with the execution and delivery of this
Agreement; and
WHEREAS, effective as of the Closing Date the parties hereto and their
respective Subsidiaries currently own or have licenses to use various
intellectual property rights heretofore used primarily (in some circumstances)
and not primarily (in other circumstances) in connection with the Business (as
defined below) of the STS Division; and
WHEREAS, the parties hereto have determined that this Agreement is
appropriate in order to effectuate the purposes of the Purchase Agreement as
described therein, and in order to promote a clear understanding of their
respective intellectual property rights subsequent to the Closing Date;
NOW, THEREFORE, in consideration of the mutual agreements, undertakings
and covenants herein and therein, the sufficiency and receipt of which hereby
are acknowledged, the parties hereby agree as follows:
ARTICLE I. DEFINITIONS.
Section 1.01 General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
<PAGE>
"Affiliate" shall have the meaning set forth in the Purchase Agreement.
"Agreement" shall have the meaning specified in the first paragraph
hereof.
"Assets" shall have the meaning set forth in the Purchase Agreement.
"Business" shall have the meaning set forth in the Purchase Agreement.
"Closing" shall have the meaning set forth in the Purchase Agreement.
"Closing Date" shall have the meaning specified in the recitals to this
Agreement.
"CMI Intellectual Property" shall have the meaning specified in Section
2.02.
"Intellectual Property" shall have the meaning set forth in the Purchase
Agreement. Notwithstanding the foregoing and for the purposes of this Agreement
only, Intellectual Property shall not include: (a) Intellectual Property
relating to the GMACS software or to the Universal System Controller; (b) the
U.S. patent application serial number No. 08/815,593 filed March 12, 1997
entitled "Wireless Communications Systems Having Fixed and Dynamically Assigned
Links" and any right in or to the invention subject thereof throughout the
world; or (c) any trademarks, service marks, trade names, trade dress, logos,
business and product names, slogans, registrations and applications for
registration in respect of any of the intellectual property referred to in
either clause (a) or clause (b) above.
"L-3 Intellectual Property" shall have the meaning specified in Section
2.01.
"Notice" shall have the meaning specified in Section 10.03.
"Purchase Agreement" shall have the meaning specified in the recitals to
this Agreement.
"STS Division" shall have the meaning specified in the recitals to this
Agreement.
"Subsidiary", shall have the meaning set forth in the Purchase Agreement.
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"Term" shall have the meaning specified in Section 8.01.
ARTICLE II. OWNERSHIP OF INTELLECTUAL PROPERTY ASSETS.
Section 2.01. The parties agree that, as a result of the Closing under the
Purchase Agreement, L-3 and its Subsidiaries will acquire and own all right,
title and interest, including the right to sue and collect past and future
damages, in any Intellectual Property which relates primarily to the Business
(the "L-3 Intellectual Property").
Section 2.02. The parties agree that, as a result of the Closing under the
Purchase Agreement CMI and its Subsidiaries own all right, title and interest,
including the right to sue and collect past and future damages, in any
Intellectual Property which is being used as of the Closing Date in the
operation of the Business but does not constitute Intellectual Property that
relates primarily to the Business (the "CMI Intellectual Property").
Section 2.03. The confirmation of ownership of the Intellectual Property
rights provided for under Sections 2.01 and 2.02 is subject to all pre-existing
third party rights, obligations and restrictions as of the Closing Date.
ARTICLE III. INTELLECTUAL PROPERTY LICENSES.
Section 3.01. L-3, on behalf of itself and its Subsidiaries, hereby grants
as of the Closing Date to CMI and its Subsidiaries a non-assignable, worldwide,
fully paid-up, non-exclusive license for the duration of the Term, including the
right to grant sublicenses (but such sublicenses may be granted only to
Subsidiaries, contractors for whom Licensee is acting as a subcontractor (who
will also have the right to sub-license to end-user customers) and end-user
customers of Licensee), under the L-3 Intellectual Property, to manufacture,
have manufactured, use, offer to sell, and sell, lease, license or otherwise
transfer any and all methods, apparatus, processes, compositions and products,
and offer and provide any services, in each case in connection with all fields
of activity other than the fields of activity of the Business of L-3. Any
sublicense permitted hereunder shall not extend beyond the Term.
Section 3.02. CMI, on behalf of itself and its Subsidiaries, hereby grants
as of the Closing Date to L-3 and its Subsidiaries a non-assignable, worldwide,
fully paid-up, non-exclusive license for the duration of the Term, including the
right to grant sublicenses (but such
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sublicenses may be granted only to Subsidiaries, contractors for whom Licensee
is acting as a subcontractor (who will also have the right to sub-license to
end-user customers) and end-user customers of Licensee), under the CMI
Intellectual Property, to manufacture, have manufactured, use, offer to sell,
and sell, lease, license or otherwise transfer any and all methods, apparatus,
processes, compositions and products, and offer and provide any services, in
each case in connection with all fields of activity other than the fields of
activity of the business of CMI. Any sublicense permitted hereunder shall not
extend beyond the Term.
Section 3.03. The rights granted by the parties under Sections 3.01 and
3.02 are subject to all pre-existing third party rights, obligations and
restrictions as of the Closing Date.
Section 3.04. Each of the parties hereto understands and agrees that,
except as otherwise expressly provided, no party hereto is in this Agreement
making any representation or warranty whatsoever, including, without limitation,
as to title, value or legal sufficiency. The foregoing provisions of this
Section shall not, however, limit, modify or impact in any manner whatsoever any
of the representations and warranties of CMI or L-3 in the Purchase Agreement,
all of which shall remain unaffected hereby.
Section 3.05. The rights granted by the parties under Sections 3.01 and
3.02 are limited to the Intellectual Property owned by the parties as of the
Closing Date and do not include any intellectual property rights that are
acquired or come into existence thereafter.
Section 3.06. Except as may be specifically provided for in this Agreement
or the Purchase Agreement, the parties agree that no party shall be obligated to
provide any technical assistance, or to transfer any technical information or
documentation associated therewith, to any other party.
ARTICLE IV. UNDERTAKINGS.
Section 4.01. To the extent that the grants of Intellectual Property
rights and licenses under Article III herein would violate or be prohibited by
any agreement with a third party, and such Intellectual Property actually is
used by the grantee party, then the granting party undertakes to use reasonable
efforts to obtain the necessary consent(s) from such third party so as to be
permitted to make such grants. However, each party hereto understands and agrees
that no party hereto is, in this Agreement
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representing or warranting in any way that the obtaining of any consents or
approvals, the execution and delivery of any amendatory agreements and the
making of any filings or applications, possibly contemplated by this Agreement
will satisfy the provisions of any and all applicable agreements or the
requirements of any or all applicable laws or judgments. The foregoing
provisions of this Section shall not, however limit, modify or impact in any
manner whatsoever any of the representations and warranties of CMI or L-3 in the
Purchase Agreement, all of which shall remain unaffected hereby.
Section 4.02. To the extent a party or its Subsidiaries shall require
technical assistance in connection with technology, technical information or
software transferred or licensed from another party, then that technical
assistance may be provided (but shall not be required to be provided), if at
all, pursuant to a separate agreement entered into by the parties pursuant to
terms and conditions agreed to by the parties.
ARTICLE V. CONFIDENTIALITY.
From and after the Closing Date, each party will, and will cause its
Subsidiaries to, hold in strict confidence, and will not use to the detriment of
the other party or any of such party's Subsidiaries, all information that is
licensed pursuant to this Agreement; provided, however, that either party may
disclose any of such information to third parties performing services on behalf
of the disclosing party who have a need to know such information in order to
perform such services and have agreed in writing to maintain the same
confidential. Also, each party may disclose such information to contractors or
end user customers of such party who have a need to know such information and
have agreed in writing to maintain the confidentiality of the same or, in the
case of any such disclosure to the U.S. government, if such party has taken all
reasonable steps to maintain the confidentiality of the same. Notwithstanding
the foregoing, either party may disclose such information (i) by judicial or
administrative process or by other requirements of law, (ii) if the same
hereafter is in the public domain through no fault of such party, or (iii) if
the same is later acquired by such party from another source and the other party
is not aware that such source is under an obligation to another Person to keep
such information confidential.
ARTICLE VI. INFRINGEMENT.
Section 6.01. If L-3 determines that a person or entity is infringing on
or unlawfully using CMI Intellectual
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Property, L-3 shall notify CMI. CMI, in its sole discretion, may take all
necessary action, including, without limitation, filing suit and enjoining the
alleged infringement, at CMI's sole expense; and CMI, as a result thereof, shall
retain all damages and other compensation received as a result of taking such
actions against such infringement. L-3 shall not take any action in connection
with such infringement or unlawful use (including without limitation any action
to settle or compromise any such claim, action or proceeding).
Section 6.02. If CMI determines that a person or entity is infringing on
or unlawfully using L-3 Intellectual Property, CMI shall notify L-3. L-3, in its
sole discretion, may take all necessary action, including, without limitation,
filing suit and enjoining the alleged infringement, at L-3's sole expense; and
L-3, as a result thereof, shall retain all damages and other compensation
received as a result of taking such actions against such infringement. CMI shall
not take any action in connection with such infringement or unlawful use
(including without limitation any action to settle or compromise any such claim,
action or proceeding).
ARTICLE VII. INDEMNITY.
Section 7.01. L-3 agrees to indemnify and hold CMI, its Affiliates and
their respective officers, directors, employees and agents, harmless from and
against any damages, liabilities, losses and expenses arising out of any claim
by any third party, including, without limitation, reasonable attorneys' fees
and amounts paid in settlement of any claim, of any kind or nature whatsoever,
which may be sustained or suffered as a result of any use by L-3 of CMI
Intellectual Property.
Section 7.02. CMI agrees to indemnify and hold L-3, its Affiliates and
their respective officers, directors, employees and agents, harmless from and
against any damages, liabilities, losses and expenses arising out of any claim
by any third party, including, without limitation, reasonable attorneys' fees
and amounts paid in settlement of any claim, of any kind or nature whatsoever,
which may be sustained or suffered as a result of any use by CMI of L-3
Intellectual Property.
ARTICLE VIII. TERM AND TERMINATION.
Section 8.01. This Agreement shall commence on the Closing Date and shall
continue for a period of one year thereafter unless sooner terminated as
provided herein (the "Term").
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Section 8.02. This Agreement may be terminated by any party with respect
to the other party upon written notice to the other party if the other party
fails to perform or otherwise breaches in any material respect an obligation
under this Agreement; provided, however, that such party failing to perform or
otherwise breaching shall have 30 days from the date notice of intention to
terminate is received to cure the failure to perform or breach of an obligation.
Section 8.03. This Agreement shall terminate automatically without action
by either party if any party shall cease or threaten to cease paying its debts
when due in the ordinary course or to carry on its business, become insolvent,
propose a compromise or arrangement with its creditors or otherwise take
advantage of any law for the relief of debtors, a receiver is appointed for any
of the other party's assets or any step or proceeding is taken to have the other
party declared bankrupt or be liquidated, dissolved, wound up or reorganized.
Section 8.04. Termination under this Section 8 will be effected by notice
given by the terminating party to the other party, except with respect to a
situation described in Section 8.03 where no notice shall be required.
Section 8.05. Any termination of this Agreement shall not affect any of
the rights of either party hereto which shall have arisen prior to such
termination.
Section 8.06. Upon termination or expiration of this Agreement, (a) each
party's rights with respect to use of the other party's Intellectual Property in
any way shall be as if this Agreement had not been entered into, and (b) each
party shall cease using the other party's Intellectual Property immediately in
any way.
ARTICLE IX. MISCELLANEOUS.
Section 9.01. Entire Agreement. This Agreement, together with the Purchase
Agreement, constitutes the entire agreement and understanding between and among
the parties with respect to the subject matter hereof and shall supersede any
prior agreements and understandings among the parties with respect to such
subject matter.
Section 9.02. Counterparts. This Agreement may be executed with
counterpart signature pages or in one or more counterparts, all of which shall
be one and the same Agreement, and shall become effective when one or more
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counterparts have been signed by each of the parties and delivered to all the
parties.
Section 9.03. Notices. All notices, consents, requests, waivers or other
communications required or permitted under this Agreement (each a "Notice")
shall be in writing and shall be sufficiently given (a) if hand delivered or
sent by telecopy, (b) if sent by nationally recognized overnight courier, or (c)
if sent by registered or certified mail, postage prepaid, return receipt
requested, and in each case addressed as follows:
If to L-3:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Attention: Christopher C. Cambria, Esq.
with a copy to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Attention: James P. Gerkis, Esq.
If to CMI:
California Microwave, Inc.
555 Twin Dolphin Drive
Redwood City, California 94065
Attn: George L. Spillane
with a copy to:
Richard W. Canady, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
or such other address as shall be furnished by any of the parties in a Notice.
Any Notice shall be deemed given upon receipt.
Section 9.04. Waivers. The failure of any party to require strict
performance by any other party of any provision in this Agreement will not waive
or diminish the other party's right to demand strict performance thereafter of
that or any other provision hereof.
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Section 9.05. Amendments. This Agreement may be amended, supplemented or
waived only by a subsequent writing signed by each of the parties.
Section 9.06. Assignment. This Agreement may not be assigned by any party
without the consent of the other parties.
Section 9.07. Successors and Assigns. All terms and conditions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the successors and permitted assigns of the parties.
Section 9.08. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary of such party or
by any entity that becomes a Subsidiary of such party on and after the Closing
Date.
Section 9.09. Third Party Beneficiaries. Except with respect to
indemnified parties referred to in Article VII, each party intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto.
Section 9.10. Specific Performance. Each of the parties hereto
acknowledges that there is no adequate remedy at law for failure by such parties
to comply with the provisions of this Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that in the event of a breach or threatened breach of any
provision of this Agreement by either party, the other party, may, in addition
to all other remedies, immediately obtain and enforce injunctive relief
prohibiting the breach or compelling specific performance without the
requirement of posting a bond or other security, in addition to all other
remedies available to the parties hereto under this Agreement.
Section 9.11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER.
Section 9.12. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to
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which it has been held invalid or unenforceable, shall remain in full force and
effect and in no way be affected, impaired or invalidated thereby.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
L-3 COMMUNICATIONS CORPORATION
By:
--------------------------------
Name:
Title:
CALIFORNIA MICROWAVE, INC.
By:
--------------------------------
Name:
Title:
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EXHIBIT B
TECHNOLOGY LICENSE AGREEMENT
TECHNOLOGY LICENSE AGREEMENT dated as of ___________, 1998 (this
"Agreement"), between L-3 Communications Corporation, a Delaware corporation
("Licensor"), and California Microwave, Inc., a Delaware corporation
("Licensee").
RECITALS
WHEREAS, Licensor and Licensee have entered into that certain Asset
Purchase Agreement dated as of December 19, 1997 (the "Asset Purchase
Agreement"), in connection with the sale and purchase of certain assets of the
Satellite Transmission System Division of Licensee (the "STS Division"), which
sale and purchase has closed or is closing as of the date hereof (the "Closing
Date") simultaneously with the execution and delivery of this Agreement; and
WHEREAS, Licensor wishes to grant to Licensee a license to the Software,
the Patent Application and the USC (each as defined below), on the terms and
conditions hereof; and
WHEREAS, Licensee wishes to acquire a license from Licensor to the
Software, the Patent Application and the USC on the terms and conditions hereof;
NOW, THEREFORE, in consideration of the mutual agreements, undertakings
and covenants herein and therein, the receipt and sufficiency of which hereby
are acknowledged, the parties hereby agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01. General. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Field of Use" shall mean use in satellite earth stations contracted for
by the United States Government.
"Patent Application" shall mean U.S. patent application serial number No.
08/815,593 filed March 12, 1997 entitled "Wireless Communications System Having
Fixed and Dynamically Assigned Links" and any United States
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patents issued pursuant to such patent application, including any additions,
divisions, reissues, continuations or continuations in part, renewals and
extensions thereof.
"Person" shall mean any natural person, firm, partnership, association,
corporation, company, trust, business trust, governmental authority or other
entity.
"Software" shall mean the current version of the GMACS software (GMACS 16)
and related know-how, including source code, object code and associated
documentation as distributed by Licensee to its customers on or prior to the
Closing Date, and the current version of any software and related know-how,
including source code, object code and associated documentation, incorporated in
the USC as distributed by Licensee to its customers on or prior to the Closing
Date.
"Subsidiary" shall mean each corporation or other Person in which Licensee
owns or controls, directly or indirectly, capital stock or other equity
interests representing at least 50% of the outstanding voting stock or other
equity interests.
"USC" shall mean the Universal Systems Controller product as distributed
by Licensee to its customers on or prior to the Closing Date, but excluding any
and all software incorporated therein.
ARTICLE II. LICENSE
Section 2.01. Subject to the terms and conditions of this Agreement,
Licensor hereby grants to Licensee a non-exclusive, worldwide, perpetual, fully
paid-up, nonterminable right and license under any and all patents, copyrights,
trade secrets, know-how, and any and all other intellectual property and
proprietary rights (i) to copy, support and use the Software within Licensee and
its Subsidiaries only (as well as new versions thereof created pursuant to
Article IV) in the Field of Use, as well as any documentation relating thereto,
and (ii) except for the Software as incorporated in the USC, to make, have made,
use, sell, license, lease or otherwise transfer the USC (as well as improvements
thereto made under Article IV) in the Field of Use. In addition to the
foregoing, and subject to the terms and conditions of this Agreement, Licensor
hereby grants to licensee a non-exclusive, worldwide, perpetual, fully paid-up,
nonterminable, right and license within the Field of Use under any and all
patents, copyrights, trade secrets, know-how, and any and all other intellectual
property and proprietary rights (x) to sublicense third parties to use object
code versions of the Software and documentation concerning the use thereof, and
(y) to
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sublicense the source code for the Software for internal use by sublicensee and
to the extent necessary to enable Licensee or its sublicensee to fulfill its
contractual obligations to the U.S. Government in accordance with ordinary and
reasonable U.S. Government contracting practices, subject, inter alia, to the
restrictions of Article III hereof. Any sublicensee must impose such terms and
conditions as Licensor may reasonably specify for protecting its rights in and
to the Software, the USC and the Patent Application and shall not be in conflict
with this Agreement. Any such sublicense shall be personal to and
non-transferable by, the sublicensee.
Section 2.02. Pursuant to the license hereunder, and subject, inter alia,
to Article III hereof, Licensee, as well as any third party working for or on
behalf thereof or permitted sublicensee, may use the Software on any computers,
at any location, by any number of users, and on any number of computers at any
time.
Section 2.03. Subject to the terms and conditions of this Agreement,
(including but not limited to Section 2.05 hereof) Licensor hereby grants to
Licensee a non-exclusive, perpetual, fully paid-up, non-terminable right and
license under the Patent Application to make, have made, use, sell, license,
lease or otherwise transfer products covered thereby.
Section 2.04. Licensee shall make no use of the Software or the USC,
except as expressly permitted by the licenses granted under this Agreement.
Section 2.05. None of the rights and licenses granted hereunder to
Licensee shall be used in contravention of or to avoid full compliance with the
provisions of Section 5.1(f) of the Asset Purchase Agreement.
Section 2.06. Licensor extends no right or license under any of its
intellectual property or in or to any of its products, services or assets except
to the extent as expressly set forth in (a) this Agreement, (b) the
Cross-License Agreement of even date herewith between Licensor and Licensee, and
(c) the Trademark License Agreement of even date herewith between Licensor and
Licensee.
Section 2.07. If Licensee determines that a person or entity is infringing
or unlawfully using any intellectual property relating to the Software, the USC
or the Patent Application, Licensee shall notify Licensor. Licensor, in its sole
discretion, may take all necessary action, including, without limitation, filing
suit and enjoining the alleged infringement, at Licensor's sole expense; and
Licensor, as a result thereof, shall retain all
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damages and other compensation received as a result of taking such actions
against such infringement. Licensee shall not take any action in connection with
such infringement or unlawful use (including without limitation any action to
settle or compromise any such claim, action or proceeding).
ARTICLE III. NONDISCLOSURE
Licensee shall maintain the source code for the Software confidential, and
shall not disclose such source code to any third party except (i) for third
parties performing services on behalf of Licensee who have a need to know such
source code in order to perform such services and have agreed in writing to
maintain the same confidential, (ii) for contractors with respect to which
Licensee is acting as subcontractor who have a need to know such source code in
order to perform services for the U.S. Government and have agreed in writing to
maintain the confidentiality of the same, (iii) for the U.S. Government, as may
be required by U.S. government procurement regulations so long as Licensee takes
all reasonable steps to maintain the confidentiality of the same or (iv) as may
be required under software escrow arrangements required by such contractors or
the U.S. Government so long as Licensee takes all reasonable steps to maintain
the confidentiality of the same.
ARTICLE IV. RIGHT TO MODIFY THE SOFTWARE AND USC
Subject to the terms and conditions of this Agreement, Licensee shall have
the right within the Field of Use, in its sole discretion, either by itself or
by a third party, to make improvements to the USC, and to create new versions of
the Software. Any such improvements to the USC and any such new versions of the
Software made by Licensee after the execution of this Agreement shall be owned
exclusively by Licensee, and Licensor shall have no right therein.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
Neither party makes any representations or warranties under this
Agreement, whether express or implied, except for those representations and
warranties made in the Asset Purchase Agreement which are incorporated herein by
reference in their entirety.
ARTICLE VI. GMACS AND USC TRADEMARKS
Licensee acknowledges that Licensor is the sole owner of the GMACS and USC
trademarks throughout the world and shall make no use thereof or of any
trademark, trade name, service mark or other designation confusingly similar
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thereto anywhere in the world, except as expressly provided in the Trademark
License Agreement entered into between Licensor and Licensee concurrently
herewith.
ARTICLE VII. INDEPENDENT CONTRACTORS
The parties hereto are acting as independent contractors in connection
with this Agreement and nothing herein shall be deemed to cause this Agreement
to create an agency, partnership or joint venture between the parties.
ARTICLE VIII. INDEMNIFICATION
Licensee acknowledges that the Software, the USC and the invention that is
the subject of the Patent Application were designed and developed by its STS
Division prior to the Closing Date. Licensee agrees to indemnify and hold
Licensor, its Affiliates and their respective officers, directors, employees and
agents, harmless from and against any damages, liabilities, losses and expenses,
(including, without limitation, reasonable attorneys' fees) and amounts paid in
settlement of any claim, of any kind or nature whatsoever, which may be
sustained or suffered as a result of any cause of action, claim, demand, suit or
proceeding asserted by Licensee or any third party that relates to or arises
from any manufacture, use, sale, lease, license or other transfer by Licensee,
any Affiliate or sublicensee of Licensee or any transferee from Licensee, such
Affiliate or such sublicensee, of the USC, the Software or any product or method
relating to the Patent Application (including, without limitation, processing,
packaging, distribution, or advertising of any thereof).
ARTICLE IX. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement and understanding between
and among the parties with respect to the subject matter hereof and shall
supersede any prior agreements and understandings, whether written or oral,
among the parties with respect to such subject matter.
ARTICLE X. COUNTERPARTS
This Agreement may be executed with counterpart signature pages or in one
or more counterparts, all of which shall be one and the same Agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to all the parties.
ARTICLE XI. NOTICES
All notices, consents, requests, waivers or other communications required
or permitted under this Agreement
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(each a "Notice") shall be in writing and shall be sufficiently given (a) if
hand delivered or sent by telecopy, (b) if sent by nationally recognized
overnight courier, or (c) if sent by registered or certified mail, postage
prepaid, return receipt requested, and in each case addressed as follows:
If to Licensor:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Attention: Christopher C. Cambria, Esq.
with a copy to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Attention: James P. Gerkis, Esq.
If to Licensee:
California Microwave, Inc.
555 Twin Dolphin Drive
Redwood City, California 94065
Attn: George L. Spillane
with a copy to:
Richard W. Canady, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
or such other address as shall be furnished by any of the parties in a Notice.
Any Notice shall be deemed given upon receipt.
ARTICLE XII. WAIVERS
The failure of any party to require strict performance by any other party
of any provision in this Agreement will not waive or diminish the first party's
right to demand strict performance thereafter of that or any other provision
hereof.
ARTICLE XIII. AMENDMENTS
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This Agreement may be amended, supplemented or waived only by a subsequent
writing signed by each of the parties.
ARTICLE XIV. HEADINGS
Headings used in this Agreement are for reference purposes only and shall
not be deemed a part of this Agreement.
ARTICLE XV. SUCCESSORS AND ASSIGNS
All terms and conditions of this Agreement shall be binding upon and inure
to the benefit of and be enforceable by the successors and assigns of the
parties.
ARTICLE XVI. THIRD PARTY BENEFICIARIES
Each party intends that this Agreement shall not benefit or create any
right or cause of action in or on behalf of any person other than the parties
hereto.
ARTICLE XVII. SPECIFIC PERFORMANCE
Each of the parties hereto acknowledges that there is no adequate remedy
at law for failure by such parties to comply with the provisions of this
Agreement and that such failure would cause immediate harm that would not be
adequately compensable in damages, and therefore agree that, in the event of a
breach or threatened breach of any provision of this Agreement by either party,
the other party, may, in addition to all other remedies, immediately obtain and
enforce injunctive relief prohibiting the breach or compelling specific
performance without the requirement of posting a bond or other security, in
addition to all other remedies available to the parties hereto under this
Agreement.
ARTICLE XVIII. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER.
ARTICLE XIX. SEVERABILITY
If any provision of this Agreement or the application thereof to any
person or circumstance is determined by a court of competent jurisdiction to be
invalid, void or unenforceable, the remaining provisions hereof, or the
application of such provision to persons or circumstances other than those as to
which it has been held
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invalid or unenforceable, shall remain in full force and effect and in no way be
affected, impaired or invalidated thereby.
ARTICLE XX. ASSIGNMENT
Licensee may not assign this Agreement or any of the licenses granted
hereby without the prior written consent of Licensor; provided, however, that,
in case of any partial assignment of this Agreement relating solely to GMACS or
the USC, such consent shall not be unreasonably withheld. Licensor may assign
this Agreement to any person in Licensor's sole discretion.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the date first above written.
L-3 COMMUNICATIONS CORPORATION
By:
--------------------------------
Name:
Title:
CALIFORNIA MICROWAVE, INC.
By:
--------------------------------
Name:
Title:
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EXHIBIT C
TRADEMARK LICENSE AGREEMENT
Trademark License Agreement dated as of _________, 1998 (this
"Agreement"), between L-3 Communications Corporation, a Delaware corporation
("Licensor"), and California Microwave, Inc., a Delaware corporation
("Licensee").
RECITALS
WHEREAS, Licensee and Licensor have entered into that certain Asset
Purchase Agreement dated as of December 19, 1997 (the "Purchase Agreement"), in
connection with the sale and purchase of certain assets of the Satellite
Transmission System Division of Licensor (the "STS Division"), which sale and
purchase has closed or is closing as of the date hereof (the "Closing Date")
simultaneously with the execution and delivery of this Agreement;
WHEREAS, the STS Division has for many years used the trademark GMACS in
connection with the GMACS Product (as defined below);
WHEREAS, the STS Division has for many years used the trademark USC in
connection with the USC Product (as defined below);
WHEREAS, the Government Electronics Division of Licensee has distributed
the GMACS Product and the USC Product for use in satellite earth stations
contracted for by the United States Government (the "CMI Market");
WHEREAS, Licensee wishes to use the mark GMACS within the CMI Market from
and after the Closing Date for a reasonable period of time to permit a
transition to a replacement mark which does not include the formative GMACS; and
WHEREAS, Licensee wishes to use the mark USC within the CMI Market from
and after the Closing Date for a reasonable period of time to permit a
transition to a replacement mark which does not include the formative USC;
NOW, THEREFORE, in consideration of the mutual agreements, undertakings
and covenants herein and therein, and other good and valuable consideration, the
receipt and sufficiency of which hereby are acknowledged, the parties hereby
agree as follows:
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ARTICLE I. DEFINITIONS
Section 1.01. General. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Affiliate" shall have the meaning set forth in the Purchase Agreement.
"Agreement" shall have the meaning set forth in the first paragraph
hereof.
"Closing Date" shall have the meaning specified in the recitals to this
Agreement.
"CMI Market" shall have the meaning set forth in the recitals to this
Agreement.
"GMACS Product" shall mean the current version of GMACS (GMACS 16)
software as distributed by Licensee to its customers on or before the Closing
Date.
"Notice" shall have the meaning specified in Section 10.03.
"Purchase Agreement" shall have the meaning specified in the recitals to
this Agreement.
"STS Division" shall have the meaning specified in the recitals to this
Agreement.
"Trademarks" shall mean the GMACS and USC trademarks.
"USC Product" shall mean the Universal Systems Controller product as
distributed by Licensee to its customers on or before the Closing Date.
ARTICLE II. LICENSE
Section 2.01. Licensor hereby grants to Licensee, on the terms and
conditions set forth herein, a non-exclusive, worldwide, fully-paid-up license
(a) to use the trademark GMACS in connection with the promotion and distribution
of the GMACS Product, and (b) to use the trademark USC in connection with the
promotion and distribution of the USC Product.
Section 2.02. Licensee and its Affiliates shall not use, and shall not
permit the use of any Trademark outside the CMI Market.
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Section 2.03. Licensee shall only use the Trademarks in connection with
products adhering to Licensor's quality standards, which may be modified by
Licensor from time to time in its sole discretion. Licensee shall only use the
Trademarks in a manner as approved by Licensor, which may be modified by
Licensor from time to time in its sole discretion. Licensee recognizes the high
reputation of the GMACS Product and the USC Product and that it is essential to
Licensor's interests that Licensor's quality standards be maintained at all
times.
Section 2.04. Licensee will use the Trademarks strictly in compliance with
applicable legal requirements and will use such markings in connection therewith
as may be required for such compliance.
Section 2.05. Licensor may terminate this Agreement due to a material
breach by Licensee. For purposes of this Agreement, "material breach" by
Licensee shall include but shall not be limited to (a) any failure to observe
Licensor's quality standards, and (b) any use of the Trademarks other than a use
approved by Licensor.
Section 2.06. (a) Within a reasonable period of time following the Closing
Date (and in any event by thirty (30) days thereafter), Licensee will adopt a
mark not including the formative GMACS or any word or symbol confusingly similar
thereto to replace the GMACS mark. Notwithstanding the foregoing, neither
Licensee nor any Affiliate thereof shall use or permit the use of the GMACS mark
or of any trademark, service mark or trade name including the formative GMACS or
any word or symbol confusingly similar thereto anywhere in the world after the
date that is 180 days after the Closing Date.
(b) Within a reasonable period of time following the Closing Date,
(and in any event by thirty (30) days thereafter), Licensee will adopt a mark
not including the formative USC or any word or symbol confusingly similar
thereto to replace the USC mark. Notwithstanding the foregoing, neither Licensee
nor any Affiliate thereof shall use or permit the use of the USC mark or of any
trademark, service mark or trade name including the formative USC or any word or
symbol confusingly similar thereto anywhere in the world after the date that is
180 days after the Closing Date.
Section 2.07. The parties agree that, subject to the rights of Licensee
hereunder, the GMACS and USC trademarks are and shall be owned exclusively by
Licensor and Licensee will execute and deliver such instruments of title as
Licensor may request to confirm such ownership by Licensor. Any and all use of
the Trademarks by Licensee shall inure to the benefit of Licensor.
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Section 2.08. None of the rights and licenses granted hereunder to
Licensee shall be used in contravention of or to avoid full compliance with the
provisions of Section 5.1(f) of the Purchase Agreement.
Section 2.09. If Licensee determines that a person or entity is infringing
or unlawfully using the GMACS mark, the USC mark or any trademark, service mark
or trade name confusingly similar thereto, Licensee shall notify Licensor.
Licensor, in its sole discretion, may take all necessary action, including,
without limitation, filing suit and enjoining the alleged infringement, at
Licensor's sole expense; and Licensor, as a result thereof, shall retain all
damages and other compensation received as a result of taking such actions
against such infringement. Licensee shall not take any action in connection with
such infringement or unlawful use (including without limitation any action to
settle or compromise any such claim, action or proceeding).
Section 2.10. Neither party makes any representations or warranties under
this Agreement (it being understood and agreed that any representations and
warranties relating to the subject matter of this Agreement are made in the
Purchase Agreement).
ARTICLE III. INDEMNIFICATION
Licensee acknowledges that the GMACS Product and the USC Product were
designed and developed by its STS Division prior to the Closing Date. Licensee
agrees to indemnify and hold Licensor, and its officers, directors, affiliates,
employees and agents, harmless from and against any damages, liabilities, losses
and expenses, (including, without limitation, reasonable attorneys' fees) and
amounts paid in settlement of any claim, of any kind or nature whatsoever, which
may be sustained or suffered as a result of any use by Licensee of the
Trademarks (including, without limitation, whether by manufacturing, processing,
packaging, distribution, sale or advertising)
ARTICLE IV. MISCELLANEOUS
Section 4.01. Entire Agreement. This Agreement, together with the Purchase
Agreement, constitutes the entire agreement and understanding between and among
the parties with respect to the subject matter hereof and shall supersede any
prior agreements and understandings among the parties with respect to such
subject matter.
Section 4.02. Counterparts. This Agreement may be executed with
counterpart signature pages or in one or more counterparts, all of which shall
be one and the same Agreement, and shall become effective when one or more
counterparts have
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been signed by each of the parties and delivered to all the parties.
Section 4.03. Notices. All notices, consents, requests, waivers or other
communications required or permitted under this Agreement (each a "Notice")
shall be in writing and shall be sufficiently given (a) if hand delivered or
sent by telecopy, (b) if sent by nationally recognized overnight courier, or (c)
if sent by registered or certified mail, postage prepaid, return receipt
requested, and in each case addressed as follows:
If to Licensor:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Attention: Christopher C. Cambria, Esq.
with a copy to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Attention: James P. Gerkis, Esq.
If to Licensee:
California Microwave, Inc.
555 Twin Dolphin Drive
Redwood City, California 94065
Attn: George L. Spillane
with a copy to:
Richard W. Canady, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
or such other address as shall be furnished by any of the parties in a Notice.
Any Notice shall be deemed given upon receipt.
Section 4.04. Waivers. The failure of any party to require strict
performance by any other party of any provision in this Agreement will not waive
or diminish the other party's right to demand strict performance thereafter of
that or any other provision hereof.
Section 4.05. Amendments. This Agreement may be amended, supplemented or
waived only by a subsequent writing signed by each of the parties.
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Section 4.06. Successors and Assigns. All terms and conditions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the successors and permitted assigns of the parties.
Section 4.07. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary of such party or
by any entity that becomes a Subsidiary of such party on and after the Closing
Date.
Section 4.08. Third Party Beneficiaries. Each party intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto.
Section 4.09. Specific Performance. Each of the parties hereto
acknowledges that there is no adequate remedy at law for failure by such parties
to comply with the provisions of this Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that in the event of a breach or threatened breach of any
provision of this Agreement by either party, the other party, may, in addition
to all other remedies, immediately obtain and enforce injunctive relief
prohibiting the breach or compelling specific performance without the
requirement of posting a bond or other security, in addition to all other
remedies available to the parties hereto under this Agreement.
Section 4.10. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER.
Section 4.11. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and in no way be affected,
impaired or invalidated thereby.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the date first above written.
L-3 COMMUNICATIONS CORPORATION
By:
--------------------------------
Name:
Title:
CALIFORNIA MICROWAVE, INC.
By:
--------------------------------
Name:
Title:
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EXHIBIT D
STS SUPPLY AGREEMENT
THIS STS SUPPLY AGREEMENT (this "Agreement") is dated ____________ __,
1998 and is entered into between California Microwave, Inc., a Delaware
corporation ("CMI"), and L-3 Communications Corporation, a Delaware corporation
("L-3").
RECITALS
A. CMI and L-3 have entered into an asset purchase agreement dated as of
December 19, 1997 (the "Purchase Agreement") with respect to the acquisition by
L-3 from CMI of certain assets of the business of designing, integrating and
installing satellite communications systems in the United States and certain
other countries (such business is the "STS Division").
B. CMI and L-3 each desire to continue at favored customer prices certain
supply arrangements currently in effect between the STS Division of CMI, on
the one hand, and other subsidiaries and divisions of CMI, on the other hand,
after the date of closing (the "Closing Date") of the purchase by L-3 of the
assets of CMI contemplated by the Purchase Agreement.
NOW THEREFORE, as a condition to the closing of the transactions
contemplated by the Purchase Agreement, and in consideration of the mutual
covenants, representations and warranties made herein, and of the mutual
benefits to be derived hereby, the parties hereto agree as follows:
1. Supply of Products by CMI. Upon the terms and subject to the conditions
hereof, for two years from the Closing Date, CMI shall, or shall cause its
subsidiaries (including EF Data Corp. ("EF Data")) to, sell to L-3, and L-3
shall purchase from CMI and/or its subsidiaries the following products and
subassemblies (the "STS Products") needed in operating the STS Division's
business after the Closing Date that CMI or EF Data currently supplies to the
STS Division: satellite communications modems, codecs, transceivers, converters,
Verticom "brick" converter modules (the "Brick Modules"), the ICU-64 Channel
Unit for LYNXX (the "LYNXX"), the PL/5617-1 Modulator card for PROGENY (the
"Card") (the Brick Modules, the LYNXX and the Card are the "Source Products")
and network products. Without limiting the obligation of L-3 to purchase STS
Products under the preceding sentence, the quantities of STS Products to be
purchased by L-3 pursuant to this Section shall be at the sole discretion of L-3
and no minimum quantities of STS Products are required to be purchased
hereunder, Notwithstanding the preceding two sentences, if CMI provides written
notice to L-3 specifying any STS Products subject to this Section that CMI
intends to discontinue making or selling, CMI will be relieved of any obligation
to sell to L-3 any such product as of one year from the date that CMI so
notifies L-3.
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2. Provision of Services by L-3. For two years from the Closing Date, CMI
shall exclusively engage L-3 to provide the following services (the "Services")
to CMI for the benefit of CMI's customers that have requested CMI to arrange for
the procurement of satellite communications system engineering and/or satellite
communications systems integration services for commercial (ie, non-U.S.
government) projects or for foreign governmental authorities projects: system
design, integration, installation and/or program management. Without limiting
the obligation of CMI to purchase the Services under the preceding sentence, the
quantities of Services to be purchased by CMI pursuant to this Section shall be
at the sole discretion of CMI and no minimum quantities of Services are required
to be purchased hereunder. Notwithstanding the preceding two sentences, if L-3
provides written notice to CMI specifying any Services subject to this Section
that L-3 intends to discontinue providing, L-3 will be relieved of any
obligation to provide to CMI any such Services as of one year from the date that
L-3 so notifies CMI.
3. SIVAM Project.
(a) It is the understanding of the parties that in connection with
the SIVAM project proposals, as currently proposed or as may otherwise be
amended (the "SIVAM Proposals"), L-3 shall have exclusive access to and
communication with Raytheon Corporation ("Raytheon"), whether oral or written,
exclusive of CMI or any of its subsidiaries (including, without limitation,
CMI's Microwave Networks division (the "MN Division"), CMI's Microwave Data
Systems division ("Data Systems") and EF Data, with respect to or in connection
with the SIVAM Project including, without limitation, any proposal, discussion,
marketing, negotiation, pricing, settlement, procurement, arrangement or
understanding with respect to the SIVAM Project.
(b) From the Closing Date to December 31, 1998 (the "Supply
Period"), CMI shall, and shall cause its subsidiaries (including EF Data) to,
deliver to L-3 the products specified in the SIVAM Proposals (the "SIVAM
Products") in accordance with the quantities, product specifications and time
period proposed by such divisions in the SIVAM Proposals, and L-3 shall
purchase, during such Supply Period, the SIVAM Products from such divisions or
subsidiaries in accordance with the SIVAM Proposals, provided that:
(i) CMI accepts the terms and conditions of and performs its
duties under, as subcontractor to L-3, the contract or agreement awarded by
Raytheon to L-3 for the SIVAM Project, including, without limitation, payments
made under a vendor trust arrangement generally required by Raytheon; and
(ii) the pricing for each SIVAM Product quoted by CMI
(including EF Data, the MN Division and Data Systems) is competitive with, and
in no event more than 5% above, any proposal made in good faith by a legitimate
party which seeks to sell such SIVAM Product to L-3 and which agrees to perform
the duties and obligations as a subcontractor to L-3 under
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the SIVAM Project with respect to such Product. In the event that L-3 is
permitted to purchase a SIVAM Product from a party other than CMI or EF Data
pursuant to this clause (ii) because that product has not met the conditions set
forth in this clause (ii), L-3 will remain obligated to purchase from CMI all of
the other SIVAM Products so long as those products meet the conditions in this
clause (ii) and clause (i) above and subject to the other terms and conditions
hereof.
As used herein, the term "Product" shall mean a STS Product or a SIVAM
Product.
4. Prices.
(a) Source Products. CMI shall sell (or cause its subsidiaries to
sell) each Source Product to L-3 at the unit price (the "Unit Price") listed for
such Source Products on Schedule 4(a) attached hereto. The prices set forth in
Schedule 4(a) are not subject to increase during the first six months from the
Closing Date. Thereafter, CMI, or its subsidiaries, may increase such prices,
except that in no event shall (i) the Unit Price of any Source Product be less
favorable than the unit price given to other customer for such Source Product in
like quantities and (ii) any such increase in price increase the gross margin
percentage of CMI or its subsidiaries with respect to such Source Product from
its current gross margin percentage thereon. Upon L-3's written request, CMI
will provide L-3 with reasonable access during normal business hours to the
books and records of CMI and its subsidiaries for the sole purpose of
verifying the gross margin percentages with respect to the Source Products.
(b) STS Products. CMI shall sell (or cause its subsidiaries to
sell) the STS Products, other than the Source Products, at prices no less
favorable than the prices given to other customers of such products in like
quantities.
(c) Services. L-3 shall provide the Services to CMI at prices no
less favorable than the prices given to other customers of such Services in like
quantities.
5. Additional Terms and Conditions.
(a) CMI Terms and Conditions. Any sale of the STS Products by CMI or
any of its subsidiaries under this Agreement shall be subject to and governed by
the then-current standard terms and conditions (including as to warranty) of
CMI (or its subsidiaries), which terms and conditions shall be no less
favorable that those given to other customers for the same or similar products.
(b) L-3 Terms and Conditions. Any sale of the Services by L-3 under
this Agreement shall be subject to and governed by the then-current standard
terms and conditions (including as to warranty) of L-3, which terms
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and conditions shall be no less favorable that those given to other customers
for the same or similar services.
6. Specifications. CMI shall, or cause its subsidiaries to, manufacture
and deliver the STS Products in accordance with the electrical, mechanical,
physical, environmental and other specifications as in effect as of the Closing
Date, or if the STS Product is a non-standard product, then according to the
specifications agreed to in writing by L-3 and CMI from time to time. In the
event an improvement or a technical change in the specifications of the STS
Products is made by CMI, CMI shall be required to provide the STS Products which
meet such improved or changed specifications; provided, however, that no such
improvement or change in specifications shall be made to LYNXX without the prior
written consent of L-3. CMI shall, or cause its subsidiaries to, manufacture and
deliver the SIVAM Products to L-3 in accordance with the specifications therefor
in the SIVAM Proposals.
7. Maintenance of Standards. If CMI fails to maintain the quality,
delivery or performance standards currently applicable to the Products, or fails
to achieve standards of quality or performance specified by CMI with respect to
new variations of the standard Products, then L-3 shall have such remedies as
may be provided in the then-current standard terms and conditions of CMI, and,
if CMI fails to cure any such deficiency in any Product within 60 days after
written notice thereof by L-3, L-3 shall no longer be obligated to purchase such
Product pursuant to this Agreement.
8. Ordering. Each order by L-3 for STS Products (a "Purchase Order") will
specify the STS Products, the quantity, the appropriate specifications
corresponding to such STS Products (if necessary), and the date of delivery,
provided that the number of days from the date of the Purchase Order through the
date of delivery is at least 60 days. Notwithstanding the foregoing, the parties
hereafter may agree in writing to use a blanket purchase agreement with specific
agreed call out schedules in lieu of the foregoing ordering mechanism. Orders by
L-3 for SIVAM Products shall be made in accordance with the SIVAM Proposals.
9. Delivery.
(a) All STS Products will be delivered freight paid F.O.B. (CMI's
(or its subsidiary's) plant).
(b) L-3 reserves the right to inspect the STS Products and to
confirm the quantity of the STS Products within 30 days from the date of
delivery. Any claims for discrepant deliveries shall be reported by L-3 to CMI
in writing within such 30-day period. If L-3 fails to make such a claim within
the time specified, such order will be deemed accepted by L-3. Upon CMI
receiving notice from L-3 of such discrepancy, L-3 will have such remedies as
may be provided in the then-current standard terms and conditions of CMI.
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(c) CMI undertakes to keep L-3 promptly and regularly informed of
difficulties that CMI expects in meeting L-3's needs for delivery in accordance
with lead time(s) stated in any Purchase Order.
(d) CMI shall deliver the SIVAM Products in accordance with the
SIVAM Proposal.
10. Raw and Packaging Materials. CMI will purchase and supply all raw
materials and packaging materials necessary for the manufacture of the STS
Products. CMI will be responsible for the sampling and testing of all such raw
materials and packaging materials and for ensuring an adequate inventory of such
raw materials and packaging materials to supply the STS Products.
11. Terms of Sale. With respect to any Products or Services sold
hereunder, the selling party will invoice the other party at the time of
delivery or provision. Each invoice will be itemized in reasonable detail. The
non-selling party will pay to the selling party the amount of such invoice
within 60 days of the date of such invoice.
12. Confidentiality. Each party will preserve the confidentiality of the
other party's Confidential Information (defined below), will not use same except
in connection with the performance of its obligations hereunder, and will return
same upon request by the other party. This Section will survive expiration or
earlier termination of this Agreement for a period of three years thereafter.
"Confidential Information" means all proprietary information (including but not
limited to formulas, compilations, data, know-how, specifications, techniques,
inventions, devices, projections, drawings and plans, whether of a technical,
operational, financial or other nature) which hereafter is, or in the past has
been, disclosed in writing and marked as confidential by either party (the
"Disclosing Party") to the other party (the "Receiving Party"), and which is of
such a nature that its value would be impaired if disclosed to third parties,
but shall not include any such information that: (i) becomes part of the public
domain through no fault of the Receiving Party; (ii) at the time of receipt is
known to the Receiving Party as shown by its written records; (iii) becomes
known to the Receiving Party from another source and the Receiving Party is not
aware that such source is under an obligation to another Person to keep such
information confidential; or (iv) is required to be disclosed by the Receiving
Party as a result of judicial or administrative process or by other requirements
of law.
13. Indemnity.
(a) With respect to any Products or Services sold hereunder, the
selling party agrees to indemnify and hold the other party and its affiliates
and their respective officers, directors, employees and agents, harmless from
and against any damages, liabilities, losses, expenses, (including, without
limitation, reasonable attorneys' fees) and amounts paid in settlement of any
claim, of any kind or nature whatsoever, which may be sustained or suffered as a
result of the infringement or alleged infringement of the copyrights or
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U.S. patents of third parties or the breach by CMI of its represention in the
fourth sentence of Section 3.16 of the Purchase Agreement, and to defend, at its
expense, any actions, claims or suits against purchasing party based upon such
infringement or alleged infringement. If the use of any products furnished
hereunder is enjoined as a result of such a suit, the selling party at its
option, and at no expense to the other party, shall obtain for the other party
the right to use said products, substitute an equivalent product reasonably
acceptable to selling party and extend this indemnity thereto, or accept the
return of products and reimburse the other party the purchase price thereof,
less a charge for reasonable wear and tear. This indemnity does not extend to
any suit based upon any infringement or alleged infringement of any patent or
copyright to the extent due to the combination of any products furnished by the
selling party and other elements not supplied by or on behalf of the selling
party nor does it extend to any products to the extent such products infringe as
a result of the other party's design or formula.
(b) The purchasing party agrees to notify the selling party in
writing of any suit. At its request and at its expense the selling party shall
have the right to control the defense of said suit. Except with the prior
written consent of the purchasing party, no selling party, in the defense of any
such claim or litigation, shall consent to entry of any judgment or enter into
any settlement that provides for injunctive or other nonmonetary relief
affecting the purchasing party or that does not include as an unconditional term
thereof the giving by each claimant or plaintiff to such purchasing party of a
release from all liability with respect to such claim or litigation. In the
event that the purchasing party shall in good faith determine that the conduct
of the defense of any claim subject to indemnification hereunder or any proposed
settlement of any such claim by the selling party might be expected to affect
adversely the purchasing party's tax liability or the ability of the purchasing
party to conduct its business, or that the purchasing party may have available
to it one or more defenses or counterclaims that are inconsistent with one or
more of those that may be available to the selling party in respect of such
claim or any litigation relating thereto, the purchasing party shall have the
right at all times to take over and assume control over the defense, settlement,
negotiations or litigation relating to any such claim at the sole cost of the
selling party, provided that if the purchasing party does so take over and
assume control, the purchasing party shall not settle such claim or litigation
without the written consent of the selling party, such consent not to be
unreasonably withheld. In the event that the selling party does not accept the
defense of any matter as above provided, the purchasing party shall have the
full right to defend against any such claim or demand and shall be entitled to
settle or agree to pay in full such claim or demand. In any event, the selling
party and the purchasing party shall cooperate in the defense of any claim or
litigation subject to this Section and the records of each shall be available to
the other with respect to such defense.
(c) The foregoing Sections 13(a) and (b) state the entire liability
of the selling party for patent or copyright infringement. This Section will
survive the expiration or earlier termination of this Agreement.
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14. Term. This Agreement shall commence on the date first set forth above
and shall expire on the second anniversary of the Closing Date unless earlier
terminated pursuant to Section 15.
15. Termination.
(a) Either party may terminate this Agreement for any material
breach of this Agreement by the other party if the party seeking to terminate
has specified such breach in writing and such breach has not been cured by the
breaching party within thirty (30) days after receipt of the written notice.
(b) Termination under this Section will be effected by notice given
by the terminating party to the other party.
(c) Any termination of this Agreement will not affect any of the
rights of either party hereto that arose prior to such termination or any
liability resulting from either party's breach of this Agreement.
16. Consequences of Termination. Upon expiration or earlier termination of
this Agreement, each party will promptly return to the other all documents,
samples and other tangible items containing or representing Confidential
Information and all copies thereof, and certify, if requested by the other
party, that it has complied with the terms of this sentence. This Section will
survive expiration or earlier termination of this Agreement.
17. Sales Convey No Right to Manufacture or Copy. The Products and
Services offered for sale hereunder are offered for sale and are sold by each
party subject in every case to the condition that such sale does not convey any
license, expressly or by implication, to manufacture, duplicate or otherwise
copy or reproduce any of the Products or Services, unless expressly provided in
such sale.
18. Export Control Compliance. Each party agrees to comply fully with the
United States Export Control Administration Regulations, the United States
Department of State International Traffic in Arms Regulations and any other
United States government regulations applicable to the export or disclosure of
Products or Services provided hereunder or Confidential Information hereunder
insofar as they may control or limit the sale or use of Products or Services.
Each party also agrees to comply fully with the United States Foreign Corrupt
Practices Act.
19. Force Majeure. Except for either party's payment obligations to the
other party for Products or Services previously delivered or provided hereunder,
failure of either party to perform its obligations under this Agreement
(including but not limited to failure to make sales or deliveries of Products or
Services) shall be excused to the extent that such failure is attributable to
any cause beyond the reasonable control of the defaulting party, including,
without limitation, acts of God, fires, earthquakes, wars, sabotage, accidents,
embargo, riots, labor disputes, actions of any government or
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governmental agency or failure of same to act where action is required, and the
inability of such party to obtain material from its suppliers or to obtain
equipment or transportation; and the time during which such party may perform
will be extended to coincide with the time performance has been prevented,
hindered or delayed as a result of the foregoing. Should either party wish to
claim relief from its obligations hereunder by reason of this Section, such
party shall give notice to the other party without delay of the occurrence of
the event or circumstances in question.
20. Governing Law. This Agreement shall be governed in all respects,
including as to validity, interpretation and effect, by the internal laws of the
State of New York, without giving effect to the conflict of laws rules thereof.
The parties hereby agree that this Agreement shall not be governed by the United
Nations Convention on Contracts for the International Sale of Goods.
21. Assignment. The Agreement shall not be assignable or otherwise
transferable by either party hereto without the prior written consent of the
other party, which consent will not be unreasonably withheld. This Agreement
will bind and inure to the benefit of the successors and permitted assigns of
the parties hereto. References to a party herein also are deemed to be
references to any successor or permitted assign of such party.
22. Notices. All notices, consents, approvals, requests, demands, waivers
and other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or
delivery or (d) sent by facsimile transmission or telegram.
if to L-3, to
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Facsimile: 212/805-5494
Attn: Christopher C. Cambria
if to CMI, to
California Microwave, Inc.
555 Twin Dolphin Drive
Redwood City, California 94065
Facsimile:650/596-6682
Attn: George L. Spillane
or, in each case, at such other address as may be specified in writing to the
other parties hereto.
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All such notices, requests, demands, waivers and other communications
shall be deemed to have been received (w) if by personal delivery on the day
after such delivery, (x) if by certified or registered mail, on the seventh
business day after the mailing thereof, (y) if by next-day or overnight mail or
delivery, on the day delivered, (z) if by facsimile or telegram, on the next day
following the day on which such facsimile or telegram was sent, provided that a
copy is also sent by certified or registered mail.
23. Certain Definitions. All capitalized terms used herein and not defined
in this Section shall have the meanings assigned to them herein. When used
herein, the following terms shall have the meaning specified below:
"include" and "including" shall be construed as if followed by the
phrase "without being limited to",
"Person" means an individual, a corporation, a joint venture, a
partnership, a firm, an association, a limited liability company, a business
trust or any other legal entity or any governmental authority or
instrumentality.
24. General.
(a) It is agreed that each of parties hereto is acting as an
independent contractor and nothing contained in this Agreement shall be
construed to constitute either as a partner, agent or employee of the other.
Neither party is authorized to act for or bind the other except as specifically
provided herein.
(b) The failure of a party at any time to require performance by the
other party of any provision hereof shall in no way affect the right of the
party thereafter to enforce same against the other party, nor shall waiver by
either party of the breach of any provision hereof be taken or held to be a
waiver of any succeeding breach of such provision or as a waiver of the
provision itself or as a waiver of a breach of any other provision.
(c) If any term or provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, such
provisions will be narrowed (or deleted, if necessary) to the minimum extent
necessary to make it and the rest of this Agreement enforceable,
(d) This Agreement or any provision hereof may not be changed,
waived, discharged or terminated orally, but only by a statement in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought.
(e) This Agreement and the Purchase Agreement constitute the entire
agreement between the parties relating to the subject matter hereof and
supersede all prior and contemporaneous agreements and understandings of
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the parties relating thereto. The terms of this Agreement may not be modified
except by a writing signed by both of the parties.
(f) This Agreement may be executed with counterpart signature pages
or in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument,
(g) The agreements that comprise this Agreement, the Purchase
Agreement and any terms and conditions of either party that apply to a sale of
products or services hereunder shall have the following order of priority in the
event of a conflict between any of them: (i) the Purchase Agreement, (ii) this
Agreement and (iii) the terms and conditions of the selling party then in effect
with respect to such sale,
(h) The headings contained in this Agreement are inserted for
reference only and shall not be used to aid in the construction hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
L-3 Communications Corporation
By:
----------------------------------
Name:
Title:
California Microwave, Inc.
By:
----------------------------------
Name:
Title:
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SOURCE PRODUCTS PRICE LIST
(Schedule 4a)
Description STS/PN Quantity Pricing
- ----------- ------ -------- -------
ICU 64 Channel Unit 01070-00714 Any $5,500.00
EF Data
Modulator, Progeny, XP 01070-A71224-1 Any $5,500.00
EF DATA Not-to-exceed
Ku-Band Modulator
"Brick" 01070-A68551-1 1-9 (A)
VERTICOM 10-24
25-49
50
C-Band U/C 70Mhz
"Brick" 01070-A69532-1 1-9 (A)
VERTICOM 10-24
25-49
50
(A) To be purchased by L-3 directly from Verticom with EF Data's consent and
with EF Data agreeing to arrange with Verticom for L-3 to make such direct
purchases.
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ASSET PURCHASE AGREEMENT
BETWEEN
FAP TRUST
AND
L-3 COMMUNICATIONS CORPORATION
FEBRUARY 10, 1998
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS ............................. 1
ARTICLE II
PURCHASE AND SALE .......................... 6
II.1 Purchase and Sale ........................................ 6
II.2 Cash Purchase Price ...................................... 6
II.3 Adjustment of Cash Purchase Price ........................ 7
II.4 Post-Closing Payment ..................................... 8
II.5 Dispute Resolution ....................................... 11
II.6 Closing .................................................. 12
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER ............... 13
III.1 Due Organization of Seller ............................... 13
III.2 Requisite Consents; Nonviolation ......................... 13
III.3 Due Organization of the Company .......................... 14
III.4 Acquired Assets .......................................... 14
III.5 Subsidiaries, etc ........................................ 14
III.6 Financial Data ........................................... 14
III.7 No Material Changes ...................................... 14
III.8 Undisclosed Liabilities .................................. 15
III.9 Governmental Authorizations; Compliance with Law ......... 15
III.10 Litigation ............................................... 16
III.11 Employee Benefit Plans ................................... 16
III.12 Intellectual Property .................................... 17
III.13 Real and Personal Property ............................... 18
III.14 Insurance ................................................ 19
III.15 Tax Matters .............................................. 19
III.16 Environmental Matters .................................... 20
III.17 Contracts ................................................ 21
III.18 Inventory ................................................ 22
III.19 Accounts Receivable ...................................... 22
III.20 Condition of Plant and Equipment ......................... 22
III.21 Customers and Suppliers .................................. 22
III.22 Bank Accounts ............................................ 23
III.23 Brokers, Finders, Etc .................................... 23
III.24 Employees ................................................ 23
<PAGE>
Page
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III.25 Government Contracts ..................................... 23
III.26 Government Furnished Equipment ........................... 25
III.27 Organizational Conflicts of Interest ..................... 25
III.28 Affiliate Transactions ................................... 25
III.29 Disclosure in the Seller's Schedule ...................... 25
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER ............... 25
IV.1 Due Incorporation; Requisite Power and Authority ......... 25
IV.2 Requisite Consents; Nonviolation ......................... 26
IV.3 Broker's Fees ............................................ 26
ARTICLE V
CERTAIN TRANSACTIONS AND AGREEMENTS
PRIOR TO THE CLOSING DATE ...................... 26
V.1 Confidentiality .......................................... 26
V.2 Business Organization .................................... 26
V.3 Cooperation .............................................. 27
V.4 Subsidiary Merger ........................................ 28
V.5 No Seller Distributions .................................. 28
V.6 Further Assurances ....................................... 28
ARTICLE VI
COVENANTS REGARDING POST CLOSING ACTIVITIES ............. 29
VI.1 Employee Matters ......................................... 29
VI.2 Seller's Indemnification ................................. 30
VI.3 Contracts Requiring Consent to Assignment ................ 33
VI.4 Company Plans ............................................ 33
VI.5 Research and Experimental Expenses ....................... 33
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER AND SELLER ............ 34
VII.1 Government Approvals; Litigation ......................... 34
VII.2 Permits and Approvals .................................... 34
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Page
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ARTICLE VIII
CONDITIONS TO BUYER'S OBLIGATIONS .................. 34
VIII.1 Representations and Warranties; Performance .............. 34
VIII.2 Escrow Agreement ......................................... 34
VIII.3 Subsidiary Merger ........................................ 35
VIII.4 Material Adverse Change .................................. 35
VIII.5 Proceedings .............................................. 35
VIII.6 Ilex Agreement ........................................... 35
VIII.7 Non-Competition Agreements ............................... 35
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF SELLER ................. 35
IX.1 Representations and Warranties; Performance .............. 35
IX.2 Proceedings .............................................. 35
IX.3 Ilex Agreement ........................................... 36
ARTICLE X
FEES AND EXPENSES .......................... 36
X.1 Expenses ................................................. 36
X.2 Fees or Commissions of Brokers ........................... 36
ARTICLE XI
TERMINATION ............................. 36
XI.1 Termination of Agreement ................................. 36
XI.2 Effect of Termination .................................... 36
ARTICLE XII
MISCELLANEOUS ............................ 37
XII.1 Time of the Essence ...................................... 37
XII.2 Entire Agreement ......................................... 37
XII.3 Press Releases and Public Announcements .................. 37
XII.4 Counterparts ............................................. 37
XII.5 Descriptive Headings ..................................... 37
XII.6 Notices .................................................. 37
XII.7 Arbitration .............................................. 38
XII.8 Choice of Law ............................................ 39
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Page
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XII.9 Bulk Sale and Other Tax Filings .......................... 39
XII.10 Transfer Taxes; Sales Tax ................................ 39
XII.11 Binding Effect; Benefits ................................. 39
XII.12 Assignability ............................................ 39
XII.13 Waiver and Amendment ..................................... 39
XII.14 Attorneys' Fees .......................................... 40
XII.15 Severability ............................................. 40
XII.16 No Recourse .............................................. 40
EXHIBIT A Seller's Schedule
EXHIBIT VIII.2 Form of Assignment of Escrow Agreement
EXHIBIT VIII.7 Form of Assignment of Non-Competition Agreements
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") dated as of February 10,
1998 is entered into by and among L-3 COMMUNICATIONS CORPORATION, a Delaware
corporation ("Buyer") and FAP TRUST, a Connecticut trust ("Seller").
RECITALS
WHEREAS, the Buyer wishes to purchase from Seller, and Seller wishes to
sell to the Buyer, all of the Acquired Assets (as hereinafter defined) subject
to the assumption by the Buyer of the Assumed Liabilities (as hereinafter
defined), upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used herein:
"Acquired Assets" means all of the assets (tangible and intangible)
of the Seller, including those of the Acquired Company (as hereinafter defined)
(except for those assets listed in the proviso to this definition), including,
without limitation, all of its right, title and interest in and to:
(a) Leaseholds and subleaseholds of real property to which it is a
party, and all, improvements, fixtures, and fittings thereon, and
easements, rights-of-way, and other appurtenants thereto (such as
appurtenant rights in and to public streets);
(b) Tangible personal property (such as machinery, equipment,
inventories of raw materials and supplies, manufactured and purchased
parts, goods in process and finished goods, furniture, automobiles,
trucks, tractors, trailers, tools, jigs, and dies);
(c) Intellectual Property, goodwill associated therewith, licenses
and sublicenses granted and obtained with respect thereto, and rights
thereunder, remedies against infringements thereof, and rights to
protection of interests therein under the laws of all jurisdictions;
(d) Leases, subleases, and rights thereunder;
(e) Agreements, contracts, indentures, mortgages, instruments,
security interests, guaranties, other similar arrangements, and rights
thereunder;
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(f) Accounts, notes, and other receivables, except those excluded
under clause (iv) of the proviso to this definition;
(g) Claims, deposits, prepayments, refunds, causes of action, choses
in action, rights of recovery, rights of set off, and rights of
recoupment;
(h) Franchises, approvals, permits, licenses, orders, registrations,
certificates, variances, and similar rights obtained from governments and
governmental agencies;
(i) Prepaid expenses, except those excluded under clause (v) of the
proviso to this definition;
(j) Books, records, ledgers, files, documents, correspondence,
lists, plats, architectural plans, drawings, and specifications, creative
materials, advertising and promotional materials, studies, reports, and
other printed or written materials (collectively, the "Books and
Records"), except those excluded under clause (i) of the proviso to this
definition; and
(k) All cash and all bank accounts and brokerage accounts and
similar accounts and cash equivalents, including deposits in transit,
except as set forth in clause (iii) of the proviso to this definition.
PROVIDED, HOWEVER, that notwithstanding the foregoing, the Acquired Assets shall
not include:
(i) With respect to the Company, the corporate charter,
qualifications to conduct business as a foreign corporation,
arrangements with registered agents relating to foreign
qualifications, taxpayer and other identification numbers, seals,
minute books, stock transfer books, blank stock certificates,
original Tax Returns and other documents relating to the
organization, maintenance, and existence of the Company as a
corporation;
(ii) Any assets or rights which are not assignable pursuant to
the terms of the document or instrument creating same or which are
only assignable with the consent of a third party who refuses to
grant such consent, which shall be transferred as and when such
consent is obtained and otherwise as provided in Section VI.3 of
this Agreement;
(iii) Any cash held on deposit in a tax reserve account
established by the Company for the payment of any federal, state,
local or foreign income Taxes payable with respect to periods prior
to the date three (3) Business Days prior to the Closing Date, so
long as notice of the amount of such cash and the account number of
such account shall be provided to the Buyer not later than such
third Business Day); and
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(iv) $1,000,000 book value of trade accounts receivable of the
Acquired Company (which specific receivables shall be identified and
reasonably agreed upon by the parties on or prior to the Closing
Date); and
(v) Prepaid expenses relating to the expenses incurred in
connection with the negotiation and consummation of the transactions
contemplated by this Agreement.
"Acquired Company" means the direct and indirect assets, liabilities
and business as a going concern of the Company transferred to Seller in the
dissolution and liquidation of the Company.
"Agreement" has the meaning set forth in the preface above.
"Assumed Liabilities" means all Liabilities of the Acquired Company
(except for those Liabilities expressly excluded in the proviso to this
definition), including, but not limited to:
(a) All Liabilities of the Company to be performed following the
Closing expressly provided for under or incurred pursuant to the terms of
the written agreements, contracts, employment agreements, leases,
licenses, instruments and other items which are included as Acquired
Assets, but only to the extent any required consents to the assignment
thereof have been obtained or Buyer has otherwise expressly agreed to
assume liability under such agreement;
(b) All Liabilities for product warranty claims or any use of or
defect in any of the products or services sold by the Company, the
Subsidiary or the Acquired Company prior to the Closing Date;
(c) Liabilities to employees of Acquired Company arising out of
workers' compensation or disability leaves of absence if said employee is
entitled to an offer of employment pursuant to this Agreement and any
other similar obligations or liabilities; and
(d) Liabilities resulting from, arising out of or caused by any
breach of contract by the Company, the Subsidiary or the Acquired Company,
tort, infringement, violation of law or any environmental liability or
contamination, including, without limitation, Liabilities arising out of
or relating in any way to any Government Bid, Government Contract or
Government Disclosure.
PROVIDED, HOWEVER, that notwithstanding the foregoing, the Assumed Liabilities
shall not include:
(A) Any Liability of the Acquired Company or Seller for income
and other Taxes, including, but not limited to, any Taxes arising in
connection with the consummation of the transactions contemplated
hereby; provided, however, that any Taxes (other than federal,
state, local or foreign income Taxes and other
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than Taxes arising in connection with the consummation of the
transactions contemplated hereby) accrued on the Closing Statement
of Net Assets shall be Assumed Liabilities;
(B) Except as otherwise provided for in this Agreement
(including, without limitation, as provided for in Section VI.1
hereof), any Liability of the Company related to the employment or
compensation of employees and former employees (including with
respect to any Company Plan or any post-retirement benefits plan, if
any));
(C) Except as otherwise provided for in this Agreement, any
Liability of the Company for costs and expenses incurred in
connection with this Agreement and the transactions contemplated
hereby; or
(D) Any Liability of Seller which was not related to the
Company, the Subsidiary or the Business or arising under this
Agreement.
"Business" means the business conducted or proposed or planned to be
conducted by the Acquired Company on and as of the Closing Date.
"Buyer" has the meaning set forth in the preface above.
"Closing" has the meaning set forth in Section II.6 below.
"Closing Date" has the meaning set forth in Section II.6 below.
"Company" means Ilex Systems, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Employee" has the meaning set forth in Section VI.1 below.
"GAAP" means United States generally accepted accounting principles
as in effect as of the date hereof.
"Government Bid" means any offer to sell made by the Acquired
Company prior to the Closing Date which, if accepted, would result or may result
in a "Government Contract".
"Government Contract" means any prime contract, subcontract, teaming
agreement or arrangement, joint venture, basic ordering agreement, pricing
agreement, letter contract, purchase order, delivery order, change order,
Government Bid or other arrangement of any kind between the Acquired Company and
(i) the U.S. Government, (ii) any prime contractor of the U.S. Government in its
capacity as a prime contractor or (iii) any subcontractor with respect to any
contract of a type described in clauses (i) or (ii) above.
"Government Disclosure" means any certification, representation,
warranty or statement by the Acquired Company to the U.S. Government in that
capacity, or any agent or
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instrumentality thereof, which in any way relates to the operation of the
Business or any business of the Acquired Company carried on prior to the Closing
Date.
"Knowledge of Seller" (or any similar expression) shall mean the
actual knowledge of (i) W. Jeffrey Kramer, Vice President of First Union
National Bank, trustee of Seller, Frederick Forster, Jeffrey Furman or Howard
Tieg or (ii) each of Joseph Lopez, John Medea, Joseph Leadley, Scott Feldman,
and all of the Vice Presidents and the members of the Board of Directors of the
Company and the Subsidiary (provided, however, that for purposes of Section
III.27, the individuals referred to in clause (ii) shall be limited to Joseph
Lopez, John Medea, Thomas Deet and Robert Marchand), after, only in the case of
those individuals referred to in clause (ii) of this definition, a reasonable
investigation or inquiry of the subject matter thereof by or on behalf of such
individuals.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Ilex Agreement" means the agreement, dated as of February 9, 1998
by and among Seller, the Company and shareholders of the Company.
"Liability" or "Liabilities" means any direct or indirect
indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise.
"Losses" means all losses, liabilities, obligations, amounts paid in
settlement, costs and expenses, including court costs, and reasonable attorneys'
fees and expenses, incurred in connection with any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, injunction, judgment,
order, decree, ruling.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Purchase Price" shall mean the sum of (i) any amounts paid by Buyer
under Sections II.2 and II.4 and (ii) the amount of the adjustment, if any, to
the Cash Purchase Price (as hereinafter defined) pursuant to Section II.3.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Seller's Schedule" has the meaning set forth in Article III below.
"Subsidiary" means Hygienetics Environmental Services, Inc., a
California corporation, all of the issued and outstanding shares of capital
stock of which are owned by the Company.
"Subsidiary Merger" means the merger of the Subsidiary with and into
the Company.
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"Tax" and "Taxes" means all taxes, charges, fees, levies or other
assessments imposed by any federal, state, local or foreign taxing authority,
whether disputed or not, including without limitation, income, profits, gross
receipts, capital, estimated, excise, occupational, custom, duty, ad valorem,
value-added, stamp, property, sales, transfer, withholding, real estate, use,
employment, payroll, alternative or add-on minimum, environmental (including
Taxes under Section 59A of Code) and franchise taxes and such terms shall
include any interest, penalties or additions attributable to or imposed on or
with respect to such assessments and any expenses incurred in connection with
the settlement of any tax liability.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
ARTICLE II
PURCHASE AND SALE
II.1 Purchase and Sale.
(a) General. On and subject to the terms and conditions of this Agreement,
the Buyer agrees to purchase from Seller and Seller agrees to sell, transfer,
convey, assign and deliver to the Buyer, all of the Acquired Assets at the
Closing for the consideration specified below in Section II.2.
(b) Assumption of Liabilities. On and subject to the terms and conditions
of this Agreement, the Buyer agrees to assume and become responsible for the
Assumed Liabilities at the Closing.
II.2 Cash Purchase Price.
(a) Subject to adjustment as set forth in Section II.3, at the Closing (as
defined in Section II.6), as consideration for the purchase of the Acquired
Assets, Buyer agrees to pay in aggregate:
(i) Fifty-One Million Nine Hundred Twenty-Three Thousand Dollars
($51,923,000), plus or minus, respectively;
(ii) the amount equal to one hundred seven and one-half percent
(107.5%) of the amount by which the Estimated Closing Date Net Assets (as
defined in Section II.3) as determined in accordance with Section II.3 below
exceeds or fails to equal Ten Million Two Hundred Thousand Dollars
($10,200,000). The above consideration, in the aggregate, is hereinafter
referred to from time to time as the "Cash Purchase Price."
(b) The Cash Purchase Price shall be paid on the Closing Date by wire
transfer in immediately available funds to the account designated by the Seller
in a written notice delivered
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to Buyer at least 5 Business Days (as defined in Section II.3) prior to the
Closing Date (as defined in Section II.6);
(c) (i) If the Company shall be awarded the Software Engineering and
Technical Support ("SWEATS") contract at Fort Huachuca upon the terms of the bid
proposal submitted by the Company in effect as of November 25, 1997, or awarded
the SWEATS contract based on such bid as amended after the date of this
Agreement with the prior written consent of Buyer, in addition to the Cash
Purchase Price, Buyer shall pay to the Seller as additional consideration for
the Acquired Assets in aggregate an amount (the "SWEATS Payment") equal to (i)
$3,762,500, if the SWEATS contract is awarded to the Company as a "prime"
contractor, or (ii) $1,612,500, if the SWEATS contract is awarded to the Company
as a subcontractor. The SWEATS Payment shall be paid by Buyer within 30 days
following the later of (x) the Business Day following the expiration of the
period to protest the SWEATS contract award and (y) the date of final resolution
of any bid protest raised in respect of the award of the SWEATS contract. No
payment shall be due from Buyer if any such bid protest is upheld.
(d) The parties to this Agreement agree to allocate the Purchase Price in
accordance with the rules under Section 1060 of the Internal Revenue Code of
1986, as amended (the "Code") and the Treasury Regulations promulgated
thereunder. The parties recognize that the Purchase Price does not include
Buyer's acquisition expenses and that Buyer will allocate such expenses
appropriately. The Seller and Buyer agree to act in accordance with such
allocations (including any modifications thereto reflecting any post-closing
adjustment of the Purchase Price pursuant to Sections II.3 and II.4, as
applicable) in any relevant Tax returns or filings, including any forms or
reports required to be filed pursuant to Section 1060 of the Code, the Treasury
Regulations promulgated thereunder or any provisions of local, state and
Commonwealth law ("1060 Forms"), and to cooperate in the preparation of any 1060
Forms and to file such 1060 Forms in the manner required by applicable law.
II.3 Adjustment of Cash Purchase Price.
(a) Preparation of Estimated Closing Statement of Net Assets. At least
five Business Days prior to the Closing Date, the Seller shall cause to be
delivered to Buyer a statement of estimated Acquired Assets and Assumed
Liabilities (the "Estimated Closing Statement of Net Assets") as of the date
three Business Days prior to the Closing Date. The Estimated Closing Statement
of Net Assets shall be prepared in the same manner and in accordance with the
procedures that the Closing Statement of Net Assets is to be prepared pursuant
to Section II.3(c), except that it shall be unaudited. The term "Estimated
Closing Date Net Assets" shall mean the book value of the Acquired Assets set
forth on the Estimated Closing Statement of Net Assets in excess of the amount
of the Assumed Liabilities set forth on the Estimated Closing Statement of Net
Assets, determined in accordance with the procedures set forth in Section
II.3(c). For the purposes of this Agreement, "Business Day" means any day that
is not a Saturday, Sunday or day in which banks in New York, New York or San
Francisco, California are authorized or obligated by law or governmental action
to close.
(b) Calculation of Adjustment. The Cash Purchase Price shall be (i)
increased by one hundred seven and one-half percent (107.5%) of the amount that
the Closing Date Net Assets (as hereinafter defined) is greater than the
Estimated Closing Date Net Assets; or (ii) decreased by
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one hundred seven and one-half percent (107.5%) of the amount that the Closing
Date Net Assets is less than the Estimated Closing Date Net Assets. The term
"Closing Date Net Assets" as used herein shall mean the book value of the
Acquired Assets set forth on the Final Closing Statement of Net Assets (as
hereinafter defined) in excess of the amount of the Assumed Liabilities set
forth on the Final Closing Statement of Net Assets, determined in accordance
with the procedures set forth in Section II.3(c). The amount of any decrease or
increase to the Cash Purchase Price pursuant to this Section II.3(b) plus
interest from the Closing Date at the Prime Rate (as hereinafter defined) shall
be paid by the Seller or Buyer, as the case may be, by wire transfer in
immediately available funds within five (5) Business Days after the Final
Closing Statement of Net Assets agreed to on behalf of the Seller and Buyer or
is determined by the Neutral Auditor (as hereinafter defined). For purposes of
this Agreement, "Prime Rate" means the rate of interest announced from time to
time by Bank of America as its prime rate of interest.
(c) Preparation of Closing Statement of Net Assets. As soon as
practicable, and in any event within thirty (30) days after the Closing Date,
the Buyer shall cause to be prepared a statement of net assets for the Business
consisting of the Acquired Assets and the Assumed Liabilities, as of the close
of business on the date three (3) Business Days prior to the Closing Date
determined on a pro forma basis as if the parties to the Ilex Agreement had not
consummated the transactions contemplated thereby on such date (the "Closing
Statement of Net Assets"). The Closing Statement of Net Assets will be prepared
in accordance with United States generally accepted accounting principles
("GAAP") applied on a basis consistent with the September Balance Sheet through
full application of the policies and procedures used in preparing the September
Balance Sheet and with changes in contract estimates at completion ("EAC's") and
estimates to complete ("ETC's") determined on a basis consistent with the method
used for the determination of the September Balance Sheet, and will, at the
option of the Buyer, be audited by an independent public accounting firm
selected by Buyer (the "Auditor"). The Closing Statement of the Net Assets shall
be accompanied by an Auditor's report based upon the audit of the Audited
Closing Statement of Net Assets stating that such statement presents fairly, in
all material respects, the Acquired Assets and Assumed Liabilities presented on
such statement as provided for in this Agreement at the third Business Day prior
to the Closing Date in conformity with GAAP consistently applied with the
September Balance Sheet, except as modified by any modification which is
mutually agreed upon by the parties hereto. Buyer shall provide the Auditor
access to the Books and Records as may reasonably be required for the
preparation of the Closing Statement of Net Assets. Buyer shall be responsible
for the costs and expenses of the Auditor in preparing the Closing Statement of
Net Assets.
II.4 Post-Closing Payment.
(a) As additional consideration for the Acquired Assets ("Additional
Consideration"), Buyer shall make the payments or deliveries to the Seller
required pursuant to this Section II.4. With respect to each of fiscal years of
the Acquired Company ending December 31, 1998, 1999 and 2000, respectively.
Buyer shall pay to the Seller in aggregate for any such fiscal year an amount in
cash (subject to Section II.4(c)) equal to the product of (i) $3,000,000 for
1998, $3,300,000 for 1999 and $3,630,000 for 2000 and (ii) a percentage (the
"Percentage") calculated by dividing (x) EBIT (as defined below) for the
Acquired Company for each in each of fiscal 1998, 1999 and 2000 by (y)
$8,800,000 for 1998, $10,300,000 for 1999 and $12,300,000 for 2000, respectively
provided that the maximum Percentage for any fiscal year shall be 120%.
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No Additional Consideration will be due to the Seller under this Section II.4 in
respect of any fiscal year if the Percentage for that fiscal year shall be less
than 60%. "EBIT" means for any fiscal year operating income of the Acquired
Company before interest and income taxes; provided that for purposes of
calculating EBIT there shall be eliminated (i) the effect of any purchase
accounting adjustments (including any increase in depreciation or amortization
of tangible or intangible assets of the Business resulting from a write-up of
the Acquired Assets for accounting purposes) in connection with the acquisition
of the Company, (ii) all costs and expenses paid in connection with financing
and refinancing the purchase of the Company, (iii) all operating income, if any,
attributable to the SWEATS contract, (iv) all gains (or losses) from
extraordinary items and investments, (v) the cumulative effect of changes in
accounting principles and (vi) the effect (whether revenue or expense) as a
result of any allocation by Buyer of any Buyer-incurred general and
administration expenses or management fees (but only to the extent such
allocation of expenses or fees exceeds amounts which would be an expense of the
operation of the Acquired Company on a stand-alone basis consistent with the
Company's method of operation prior to February 10, 1998). In the event of the
disposition or discontinuation of any of the Acquired Company's current
businesses or operations or the addition of any business or operation to the
Acquired Company, the target EBIT amount referred to above shall be adjusted
appropriately (determined in good faith by the Buyer, in consultation with the
Seller) to reflect such disposition, discontinuation or addition, for purposes
of calculating the Percentage.
(b) For each of the 1998, 1999 and 2000 fiscal years, Buyer shall, no
later than 45 days following the availability of financial statements for such
period, prepare and deliver to Seller a report (the "EBIT Report") reflecting in
reasonable detail Buyer's calculation of EBIT for the applicable fiscal year
(including any adjustments to Buyer's financial statements made in connection
with such calculation), together with a copy of the financial statements from
which such calculation is derived. EBIT will be calculated in accordance with
GAAP applied on a basis consistent with the Financial Statements (as defined in
Section II.6) and with changes to EAC's and ETC's determined on a basis
consistent with the methods used in the Financial Statements.
(c) Any payment of Additional Consideration with respect to any fiscal
year shall be payable to the Seller within 30 days after the date on which the
calculation of EBIT for such fiscal year shall have been finally determined
pursuant to this Section II.4 and Section II.5; provided that no such payment of
Additional Consideration (except portions thereof as to which Early Cash Payment
Elections (as defined in Section II.4(e)) have been received by Buyer in
accordance with Section II.4(e)) with respect to any fiscal year shall be
payable by Buyer pursuant to this Section II.4 prior to the earlier of (i) the
date 60 days following the completion of the initial sale to the public pursuant
to an effective registration statement (other than a registration statement on
Form S-4 or Form S-8 or any similar or successor form) (the "Initial Public
Offering") filed under the Securities Act of 1933, as amended (the "Securities
Act"), of shares of the Class A Common Stock, par value $.0l per share of L-3
Communications Holdings Inc. ("Holdings") (or such other class of common stock
of Holdings issued to the holders of such Class A Common Stock in connection
with a reclassification thereof) ("Class A Common Stock") and (ii) September 30,
2001. Seller shall not be permitted to elect to receive shares in lieu of
Additional Consideration for any fiscal year in an amount less than $250,000
unless the Seller is electing to receive shares for all of such Additional
Consideration for such fiscal year. Each cash payment pursuant to this Section
II.4 shall be made by wire transfer of immediately
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available funds to the account designated by the Seller in a written notice to
Buyer given at least 5 Business Days prior to the date of payment.
(d) Prior to the date of any payment of Additional Consideration pursuant
to Section II.4(b) (other than payments pursuant to Early Cash Payment
Elections), Buyer shall offer the Seller the opportunity to elect to receive, in
lieu of such payment, any Additional Consideration in the form of shares of
Freely Tradable (as defined below) Class A Common Stock. Such offer of such
shares shall be made in a transaction meeting the requirements of the Securities
Act (and any applicable state securities laws). The number of shares of Class A
Common Stock to be delivered if the Seller elects to receive such shares
pursuant to such offer shall be determined by dividing (i) the amount of such
payment of Additional Consideration by (ii) $20 to the extent such Additional
Consideration relates to fiscal 1998, $22 to the extent such Additional
Consideration relates to fiscal 1999 and $24.20 to the extent such Additional
Consideration relates to fiscal 2000. In the event of any change in the
outstanding Class A Common Stock by reason of stock split, stock combination,
reclassification or similar event, the number of shares to be delivered pursuant
to the preceding sentence shall be adjusted appropriately (e.g., if the
outstanding shares of Class A Common Stock are split on a two-for-one basis, the
$20, $22 and $24.20 amounts referred to in clause (ii) would be adjusted to be
$10, $11 and $12.10, respectively). In the event that the Initial Public
Offering is not completed by August 1, 2001, no offer to elect to receive shares
of Class A Common Stock shall be made pursuant to this Section II.4(d). If the
Seller elects to receive shares pursuant to this Section II.4(d) such shares
will be delivered by registered mail to the address designated by the Seller in
a written notice to Buyer given at least five (5) Business Days prior to the
date of delivery. No fractional shares of Class A Common Stock will be issuable
pursuant to this Section II.4. In lieu thereof, any person who would otherwise
be entitled to a fractional share pursuant to the provisions hereof shall
receive an amount in cash equal to the amount of Additional Consideration which
would have been payable in cash with respect to such fraction. For purposes of
this Section II.4, "Freely Tradable" shall mean Class A Common Stock which (a)
may be sold (without legal restriction) to any member of the public, including a
sale by or through a securities exchange and/or broker-dealer, without the
necessity of (I) obtaining an opinion of counsel, obtaining permission or
authorization of the United States Securities & Exchange Commission or any state
securities administrator, (II) providing any advance notice to any such body or
(III) taking other action to remove any legend or legend condition applicable to
such shares of Class A Common Stock that would delay the sale thereof and (b) is
not subject to any material delay in attempting the sale thereof on a public
securities exchange due to any attribute of the Class A Common Stock.
(e) At any time and from time to time, the Seller shall have the right, by
written notice (an "Early Cash Payment Election") to Buyer, to elect to require
Buyer to pay to the Seller the cash amount of any Additional Consideration
payable to the Seller pursuant to Section II.4(c), with the date of payment
being determined pursuant to the first sentence of such Section without regard
to the proviso thereto.
(f) Upon a Change of Control (as hereinafter defined) that occurs prior to
the earlier to occur of the dates referred to in clauses (i) and (ii) of the
proviso to the first sentence of Section II.4(c), the Seller shall receive in
connection with such Change of Control all Additional Consideration payable to
the Seller pursuant to Section II.4(c) but not then paid by reason of the
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proviso contained in the first sentence of such Section prior to the date of
such Change of Control the amount and kind of consideration the Seller would
have received in respect of the shares of Class A Common Stock which the Seller
would have been entitled to elect to receive pursuant to subsection (d) of this
Section II.4 if there had been an Initial Public Offering immediately prior to
the date of the Change of Control. Such amount shall be payable at such time as
the holders of Class A Common Stock receive consideration in connection with
such Change of Control. In the event of a Change of Control, notwithstanding
anything to the contrary contained herein, any Additional Consideration which
becomes payable pursuant to Section II.4(c) following the date of such Change of
Control shall be payable in cash.
For purposes of this Section II.4(f), "Change of Control" shall mean (i)
an acquisition by any person (other than stockholders of Holdings as of the
Closing Date or any of their affiliates) of more than 50% of the combined voting
power of the outstanding voting securities entitled to vote generally of
Holdings or (ii) the sale of substantially all of the direct or indirect assets
of Holdings to any person (other than stockholders of Holdings as of the Closing
Date or any of their affiliates).
(g) The rights of the Seller under this Section II.4 shall be assignable
(in whole or in part) by Seller, subject to the following requirements: (i) any
such assignment shall be made prior to the date six months following the Closing
Date; (ii) if such assignment is to more than one person or entity, (1) any
payment or delivery pursuant to this Section II.4 shall be pro rata, based on
the relative percentage of Additional Consideration to which such person or
entity is entitled hereunder, (2) the $250,000 limitation contained in Section
II.4(c) shall apply to each such person or entity and (3) adequate provision
shall be made in connection with such assignment so that one assignee in
connection with any disputes concerning the calculation and determination of any
amounts payable pursuant to this Section II shall be authorized to resolve any
and all disputes with the Buyer on behalf of all assignees; and (iii)
notwithstanding any such assignment, the right of offset against Seller referred
to in the last sentence of Section VI.2(a) shall continue to apply
notwithstanding such assignment (i.e., a claim against the Seller under Section
VI.2 may be satisfied by exercising such right of offset against amounts due to
an assignee of Seller).
II.5 Dispute Resolution.
(a) Review of Closing Statement of Net Assets and EBIT Report. After
receipt of the Closing Statement of Net Assets or the EBIT Report, Buyer or the
Seller, as the case may be, shall have thirty (30) days to review it. Buyer or
the Seller, as applicable, and their respective authorized representatives shall
have full access to all Books and Records and employees of the Company and, with
respect to the Closing Statement of Net Assets, the Auditor to the extent
required to complete their review of the Closing Statement of Net Assets or the
EBIT Report, as applicable, including Auditor work papers used in preparation or
the Closing Statement of Net Assets. Unless the Buyer delivers written notice to
the Seller, or the Seller delivers written notice to Buyer, on or prior to, the
30th day after receipt of the Closing Statement of Net Assets or the EBIT Report
specifying in reasonable detail all disputed items and the basis therefor, the
parties shall be deemed to have accepted and agreed to the Closing Statement of
Net Assets or the EBIT Report. The parties shall, within thirty (30) days
following the date of such notice (the "Resolution Period"), attempt to resolve
their differences and any resolution by them as to any
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disputed amount shall be final, binding, conclusive and nonappealable for all
purposes under this Agreement.
(b) Resolution. If at the conclusion of the Resolution Period the parties
have not reached an agreement on the objections, then all amounts remaining in
dispute may, at the election of either party, be submitted to Price Waterhouse
or another large international accounting firm not otherwise engaged by either
party (the "Neutral Auditor"). Each party agrees to execute if requested by the
Neutral Auditor, a reasonable engagement letter. All fees and expenses relating
to the work, if any, to be performed by the Neutral Auditor shall be borne
equally by the Seller and Buyer, unless the Neutral Auditor finds one party
acted in bad faith in which case that party pays all such fees and expenses.
Except as provided in the preceding sentence, all other costs and expenses
incurred by the parties in connection with resolving any dispute hereunder
before the Neutral Auditor shall be borne by the party incurring such cost and
expense. The Neutral Auditor shall act as an arbitrator to determine, based
solely on the presentations by the Seller and Buyer, and not by independent
review, only those issues still in dispute. The Neutral Auditor's determination
shall be made within thirty (30) days of its engagement (which engagement shall
be made no later than five (5) business days after an election by either party
to submit the objections to the Neutral Auditor) or as soon thereafter as
possible, shall be set forth in a written statement delivered to the Seller and
Buyer and shall be final, binding, conclusive and nonappealable for all purposes
hereunder. The term "Final Closing Statement of Net Assets" shall mean the
definitive Closing Statement of Net Assets agreed to in accordance with Section
II.5(a) or the definitive Closing Statement of Net Assets resulting from the
determination made by the Neutral Auditor in accordance with this Section
II.5(b).
II.6 Closing.
(a) Subject to satisfaction or waiver of the conditions to closing set
forth in Articles VII, VIII and IX, the closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the local close of
business, or such other time as the parties may mutually agree (the "Effective
Time") on February 26, 1998, at the offices of Pillsbury Madison & Sutro LLP,
235 Montgomery Street, San Francisco, California, or at such other date and
place as the parties may mutually agree (the "Closing Date").
(b) At the Closing (i) Seller will execute, acknowledge (if appropriate),
and deliver to the Buyer (A) an assignment of lease(s), in reasonable customary
form, (B) such other instruments of sale, transfer, conveyance, and assignment
as the Buyer and its counsel may reasonably request; and (C) an Assignment of
Non-Competition Agreements in the form attached hereto as Exhibit VIII.5 (the
"Assignment of Non-Competition Agreements"); (ii) the Buyer will execute,
acknowledge (if appropriate), and deliver to Seller such instruments of
assumption as Seller and its counsel reasonably may request; (iii) the Buyer
will deliver to Seller the consideration specified in sections II.2 and II.3
herein; and (iv) the Buyer and Seller will execute and deliver an Assignment of
Escrow Agreement, in the form attached hereto as Exhibit VIII.2 (the "Assignment
of Escrow").
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to the Buyer as follows (except as
specified to the contrary in the disclosure schedule prepared by Seller and
attached hereto as Exhibit A (the "Seller's Schedule"). The Seller's Schedule is
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Article III):
III.1 Due Organization of Seller; Authorization; Title to Acquired Assets.
Seller is a trust duly organized and is validly existing and in good standing
under the laws of the State of Connecticut. Seller has all requisite trust power
and authority to execute, deliver and perform its obligations under this
Agreement, the Assignment of Non-Competition Agreements and the Assignment of
Escrow Agreement (collectively, the "Transaction Documents"), and consummate all
the transactions in the manner contemplated by the Transaction Documents. This
Agreement has been and, when delivered, the remainder of the Transaction
Documents will have been, duly executed and delivered by Seller and duly
authorized and approved by all necessary action on the part of Seller. This
Agreement constitutes and, when delivered, the remainder of the Transaction
Documents will constitute, the valid and binding obligations of Seller,
enforceable against Seller in accordance with its or their terms, subject to
bankruptcy and similar laws and equitable principles regarding the enforcement
of contracts. As of the Closing Date, following Seller's acquisition of the
Company pursuant to the Stock Purchase Agreement, the Company will be dissolved
in accordance with applicable law and all of its assets and Liabilities will be
distributed to Seller. Seller does not have and will not as of Closing Date have
any Liabilities other than the Assumed Liabilities except as set forth in
Section III.1 of the Seller's Schedule. At the Closing, the Seller will hold the
entire legal, equitable and beneficial title (in the case of assets owned by the
Acquired Company) and interest in the assets of the Company and the Subsidiary
and will transfer to Buyer good title to the Acquired Assets, free and clear of
all liens, claims, encumbrances and restrictions of any kind or nature
whatsoever ("Liens").
III.2 Requisite Consents; Nonviolation. The execution, delivery and
performance of this Agreement by Seller and, when delivered, the execution,
delivery and performance of the remainder of the Transaction Documents by Seller
do not on the date hereof and will not on the Closing Date (a) require the
consent, approval or authorization of any governmental person or entity or other
third party (except such approvals or filings as may be required to comply with
applicable state securities and antitrust laws), (b) violate or conflict with
the trust agreement under which Seller is organized, (c) constitute a default
under, violate or conflict with, result in the acceleration of or give rise to
any party the right to terminate, modify or cancel, or result in the loss of any
rights, privileges, options or alternatives under or result in the creation of
any Liens on any assets of the Company or the Subsidiary under or require the
consent of any other party to any material contract, note, lease, mortgage or
other agreement or instrument to which the Seller or the Company or the
Subsidiary is a party or by which the Seller or the Company or the Subsidiary is
bound or to which any Seller, the Company or the Subsidiary or any of their
respective properties is subject (except any Liens held by Seller's lender which
Liens shall be released at or prior to Closing) or (d) violate or conflict with
the charter documents of the Company or the Subsidiary or any material statute,
ordinance, rule, regulation, order, judgment or degree of any court or
governmental or regulatory agency or authority applicable to the Seller
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or the Company or the Subsidiary or by which any of their respective properties
or assets may be bound.
III.3 Due Organization of the Company and the Subsidiary.
The Company and the Subsidiary (i) have been duly organized and are
validly existing and in good standing as corporations under the laws of the
State of California, (ii) except as set forth in Section III.3 of the Seller's
Schedule, are duly qualified to do business in and are in good standing under
the laws of every jurisdiction where each of them is required to be so
qualified, except where the failure to be so qualified would not materially
adversely affect their properties, assets, results of operations or financial
condition and (iii) have all requisite corporate power and authority to own or
lease and to operate their properties and carry on the Business.
III.4 Acquired Assets. The Acquired Assets constitute all of the property
and assets necessary to conduct the business of the Company and the Subsidiary
as currently conducted and as conducted immediately prior to the Subsidiary
Merger.
III.5 Subsidiaries, etc. The Company does not, directly or indirectly, own
or control any equity interest in any corporation, partnership, joint venture or
other legal entity other than, prior to the Subsidiary Merger, its ownership of
all of the outstanding capital stock of the Subsidiary.
III.6 Financial Data. Buyer has been provided with (a) the unaudited
consolidated balance sheet of the Company at September 30, 1997 (the "September
Balance Sheet"), together with the related unaudited consolidated statements of
income and shareholders equity for the nine-month period ended September 30,
1997, and (b) the audited consolidated balance sheets of the Company at December
31, 1996 and 1995, together with the related unaudited consolidated statements
of income and shareholder equity and the notes thereto (the "Financial
Statements"). The Financial Statement are in accordance with the Company's books
and records, have been prepared in accordance with GAAP, consistently applied,
and fairly present the financial position of the Company and the Subsidiary as
of their respective dates and the results of the Company's and the Subsidiary's
operations for the periods then ended.
III.7 No Material Changes. Since September 30, 1997, there has not been
(a) any material adverse change (or any event specifically relating to the
Company that would reasonably be expected to result in such a change) in the
business, financial condition or results of operations of the Acquired Company,
or any change that could materially delay or impair the ability of Seller to
effect the Closing on materially and adversely affect the operation of the
business of the Acquired Company after the Closing Date as the Company had been
operated immediately prior to Seller's acquisition thereof pursuant to the Stock
Purchase Agreement, (b) any damage, destruction or loss (whether or not covered
by insurance) individually or in the aggregate in excess of $100,000; (c) any
labor dispute or any labor union organizing activity, or any actual or
threatened strike, work stoppage, slowdown or lockout, or any material change in
its relationship with employees, customers, distributors or suppliers; (d) any
sale, lease, transfer or other disposition of any asset of the Company or the
Subsidiary having a fair material value in excess of $l00,000 or for proceeds in
excess of $100,000; or (e) army discharge or satisfaction of any obligation or
liability of the Company or the Subsidiary other than in the ordinary course of
business in accordance with the terms of such obligation or liability.
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Since September 30, 1997, except in connection with the transactions
contemplated hereby, neither the Company nor the Subsidiary has engaged in any
of the following transactions, (i) issued or committed to issue any shares of
common stock (except upon exercise of duly issued stock options which were
outstanding as of such date) or other ownership interest of the Company or the
Subsidiary, or any obligations, understanding or commitment regarding the
issuance of capital stock or any option, right, warrant or other security
exercisable or exchangeable for or convertible into capital stock of the Company
or the Subsidiary, (ii) redeemed, purchased or otherwise acquired or committed
to acquire any shares or other ownership interest of the Company or the
Subsidiary, (iii) effected a split or reclassification of any shares of the
Company or the Subsidiary or a recapitalization of the Company or the
Subsidiary, (iv) made any change in the compensation of, or increased benefits
available to, any officer, other employee, sales agent or representative of the
Company or the Subsidiary under any bonus or pension plan or other contract or
commitment, or paid or agreed or promised to pay, whether conditionally or
otherwise, any bonus, incentive, retention or composition, or increased or
agreed or promised to increase any retirement, welfare, fringe or severance
benefits or vacation pay, to or in respect of any officer, other employee, sales
agent or representative of the Company or the Subsidiary, other than, with
respect to any employee other than officers, in the ordinary course of business
and consistent with past practice, (v) incurred, assumed or guaranteed any
obligation or liability, whether absolute, accrued, contingent or otherwise, or
any indebtedness for borrowed money, except current liabilities for trade or
business obligations incurred in connection with the purchase of goods or
services in the ordinary course of the business consistent with past practice,
(vi) mortgaged, pledged or subjected to any lien any property or assets,
tangible or intangible of the Company or the Subsidiary, (vii) transferred or
granted any rights under, or entered into any settlement regarding the breach or
infringement of, any Intellectual Property, or modified any existing rights with
respect thereto, (viii) received any notice of termination or of default or
breach of any material contract, lease or other agreement, (ix) made any capital
expenditures, or commitments to make any capital expenditure in excess of
$250,000 in the aggregate (x) entered into any transaction, contract or
commitment with any affiliate of the Company or (xi) entered into any
transaction, contract or commitment other than in the ordinary course of
business.
III.8 Undisclosed Liabilities. The Acquired Company has no debts, claims,
liabilities or obligations (whether absolute, contingent or otherwise) which are
material to the Acquired Company, except for (a) those reflected, reserved
against or otherwise disclosed in the September Balance Sheet or the notes
thereto and not heretofore paid or discharged or (b) those incurred in, or as a
result of, the ordinary course of business of the Company and the Subsidiary
since the date of the September Balance Sheet to the extent reflected in the
Closing Statement of Net Assets.
III.9 Governmental Authorizations; Compliance with Law.
(a) The Acquired Company has all material governmental licenses, permits,
approvals and other governmental authorizations necessary to permit the
operation of the business of the Company as presently conducted and is in
compliance in all material respects with such governmental licenses, permits,
approvals and other governmental authorizations. Section III.9 of the Seller's
Schedule sets forth a complete and accurate list of all such governmental
licenses, permits, approvals and other governmental authorizations.
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(b) The Acquired Company is in compliance in all material respects with
all laws, statutes, ordinances, rules, regulations, orders, judgements or
degrees applicable to it and its business and none of Seller, the Company or the
Subsidiary has received any notice that any violation or potential violation or
any action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand or notice has been filed or commenced against the Company or the
Subsidiary alleging failure to comply.
III.10 Litigation. There is no pending or, to the Knowledge of the Seller,
threatened action, suit, arbitration proceeding or investigation in any court or
before any governmental commission or agency against the Company or the
Subsidiary seeking unspecified damages, damages in excess of $50,000, or
injunctive or other equitable relief. There is no order, judgment or decree of
any court or governmental authority or agency which specifically applies to the
Company or the Subsidiary except as listed in Section III.10 of the Seller's
Schedule.
III.11 Employee Benefit Plans.
(a) Section III.11 of the Seller's Schedule contains a true and complete
list of each "employee benefit plan" (within the meaning of section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including, without limitation, multi-employer plans within the meaning of ERISA
section 3(37)), stock purchase, stock option, severance, employment, change-in-
control, fringe benefit, collective bargaining, bonus, incentive, deferred
compensation and all other employee benefit plans, agreements, programs,
policies or other arrangements, whether or not subject to ERISA (including any
funding mechanism therefor now in effect or required in the future as a result
of the transaction contemplated by this Agreement or otherwise), whether formal
or informal, oral or written, legally binding or not, under which any employee
or former employee of the Company or its Subsidiary has any present or future
right to benefits or under which the Company or its Subsidiary has any present
or future liability. All such plans, agreements, programs, policies and
arrangements shall be collectively referred to as the "Company Plans".
(b) With respect to each Company Plan, the Seller has delivered to the
Buyer a current, accurate and complete copy (or, to the extent no such copy
exists, an accurate summary thereof) and, to the extent applicable; (i) any
related trust agreement or other funding instrument; (ii) the most recent
determination letter, if applicable; (iii) any summary plan description and
other written communications (or a description of any oral communications) by
the Company or its Subsidiary to their employees concerning the extent of the
benefits provided under a Company Plan; and (iv) for the three most recent years
(A) the Form 5500 and attached schedules, (B) audited financial statements, (C)
actuarial valuation reports and (D) attorney's response to an auditor's request
for information.
(c) (i) Each Company Plan has been established and administered in
accordance with its terms, and in compliance with the applicable provisions of
ERISA, the Code and other applicable laws, rules and regulations; (ii) each
Company Plan which is intended to be qualified within the meaning of Code
section 401(a) is so qualified and has received a favorable determination letter
as to its qualification, and nothing has occurred, whether by action or failure
to act, that could reasonably be expected to cause the loss of such
qualification; (iii) no event has occurred and no condition exists that would
subject the Company or its Subsidiary, either directly
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or by reason of their affiliation with any member of their "Controlled Group"
(defined as any organization which is a member of a controlled group of
organizations within the meaning of Code sections 414(b), (c), (m) or (o)), to
any tax, fine, lien, penalty or other liability imposed by ERISA, the Code or
other applicable laws, rules and regulations; (iv) for each Company Plan with
respect to which a Form 5500 has been filed, no material change has occurred
with respect to the matters covered by the most recent Form since the date
thereof; (v) no "reportable event" (as such term is defined in ERISA section
4043), "prohibited transaction" (as such term is defined in ERISA section 406
and Code section 4975) or "accumulated funding deficiency" (as such term is
defined in ERISA section 302 and Code section 412 (whether or not waived)) has
occurred with respect to any Company Plan; and (vi) no Company Plan provides
retiree welfare benefits and neither the Company nor its Subsidiary have any
obligations to provide any retiree welfare benefits.
(d) None of the Company Plans is subject to Title IV of ERISA and none of
the Company Plans is a multi-employer Plan (within the meaning of Section
400l(a)(3) of ERISA).
(e) With respect to any Company Plan, (i) no actions, suits or claims
(other than routine claims for benefits in the ordinary course) are pending or
threatened, (ii) to the Knowledge of Seller, no facts or circumstances exist
that could give rise to any such actions, suits or claims, and (iii) no written
or oral communication has been received from the PBGC in respect of any Company
Plan subject to Title IV of ERISA concerning the funded status of any such plan
or any transfer of assets and liabilities from any such plan in connection with
the transactions contemplated herein.
(f) No Company Plan exists that could result in the payment to any present
or former employee of the Company or its Subsidiary of any money or other
property or accelerate or provide any other rights or benefits to any present or
former employee of the Company or its Subsidiary as a result of the transaction
contemplated by this Agreement, whether or not such payment would constitute a
parachute payment within the meaning of Code section 280G.
III.12 Intellectual Property. Each of the Company and the Subsidiary owns
or has the right to use all Intellectual Property necessary to conduct their
businesses substantially as such businesses are currently conducted. All of the
material Intellectual Property owned by the Company and the Subsidiary that has
been issued or registered by or filed with any Governmental Authority (as
defined in Section III.25(b)) and all material license agreements in which the
Company or the Subsidiary is the licensee of Intellectual Property or by which
the Company or the Subsidiary permits any person to use the Intellectual
Property owned by it are listed in Section III.12(a) of the Seller's Schedule.
As of the date hereof and at the Closing, all Intellectual Property licenses are
and will be in full force and effect in accordance with their terms, and are and
will be free and clear of any Liens. Except as set forth in Section III.12(b) of
the Seller's Schedule, (i) all of the Intellectual Property owned or used by the
Company or the Subsidiary is valid, subsisting and unexpired, has not been
abandoned, and is not the subject of any Lien; (ii) no judgment, decree,
injunction, rule or order has been rendered by any court, tribunal or other
government entity which would limit, cancel or question the validity of, or the
Company or the Subsidiary's rights in and to, any Intellectual Property; (iii)
the Company has taken adequate steps to protect, maintain and safeguard its
Intellectual Property and its rights therein including any Intellectual Property
for which improper or unauthorized disclosure would
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impair its value or validity, and has executed appropriate agreements (including
nondisclosure agreements and employee assignments) and made appropriate filings
and registrations in connection with the foregoing, (iv) there is no claim or
demand pertaining to, or any proceeding which is pending, or to the Knowledge of
the Seller, threatened that challenges the rights of the Company or the
Subsidiary to or the validity of any of its Intellectual Property or claims that
a default exists under license by the Company or the Subsidiary of Intellectual
Property and (v) to the Knowledge of Seller, none of the Company's or the
Subsidiary's Intellectual Property is being infringed or otherwise impaired by
third parties.
"Intellectual Property" means all intellectual property, including without
limitation all (i) inventions, discoveries, processes, formulae, designs,
methods, techniques, procedures, concepts, developments, technology, new and
useful improvements thereof and know-how relating thereto, whether or not
patented or eligible for patent protection; copyrights and copyrightable works,
including computer applications, programs, software, databases and related
items; trademarks, service marks, trade names, brand names, corporate names,
logos and trade dress, the goodwill of any business symbolized thereby, and all
common-law rights relating thereto; trade secrets and other confidential
information; (ii) registrations, applications, recordings, and licenses or other
similar agreements related to the foregoing; (iii) rights to sue at law or in
equity for any infringement or other impairment of the foregoing occurring prior
to the Closing Date, including the right to receive all damages and proceeds
therefrom; and (iv) rights to obtain reissues, re-examinations, continuations,
continuations-in-part, divisions, extensions, renewals or other legal
protections pertaining to the foregoing.
III.13 Real and Personal Property. (a) Section III.13 of the Seller's
Schedule contains a list of all real and personal property owned or leased by
the Company and the Subsidiary as of the date hereof having, in the case of
leased property, an annual lease obligation in excess of $10,000 or, in the case
of owned property, a fair market value in excess of $100,000. The Company has
good, valid and marketable title to such owned property. Each lease covering
leased real property is a legal, valid and binding agreement enforceable in
accordance with its terms and there is not under any of such leases any existing
default on the part of the Company or the Subsidiary or, to the Knowledge of
Seller, any other party thereto nor any facts that would, with the passage of
time or notice, or both, constitute such a default.
(b) All material property and assets owned or utilized by the Company and
the Subsidiary are in good standing condition and repair (except for ordinary
wear and tear), free from any material defects (except such minor defects as do
not materially interfere with the use thereof in the conduct of normal
operations), have been maintained consistent with standards generally followed
in the industry and are sufficient to carry on the business of the Company and
the Subsidiary as presently conducted. All buildings, plants and other
structures utilized by the Company and the Subsidiary are in good condition and
repair (except for ordinary wear and tear).
(c) The Company and the Subsidiary enjoy peaceful and quiet possession of
the real property owned or leased by the Company and the Subsidiary. Buyer has
been provided with a true and complete copy of each lease and all amendments
thereto pertaining to any leased real property. The rental set forth in each
lease is the actual rental being paid, and there are not separate agreements or
understandings with respect to the same. Except as listed in Section III.13(c)
of the Seller's Schedule, neither the execution of this Agreement nor the
consummation
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of the transactions contemplated hereby shall cause a default under any lease or
require prior written consent of any landlord under any lease.
III.14 Insurance. Section 111.14 of the Seller's Schedule lists all
material insurance policies in force with respect to the Company, the Subsidiary
and their respective employees and directors. Such policies are in full force
and effect and all premiums due thereon have been paid or accrued. No notice of
cancellations, terminations or reductions of coverage, and no notice of
intention to cancel, terminate or reduce coverage, has been received by the
Company or the Subsidiary.
III.15 Tax Matters.
(a) Tax Returns Filed and Taxes Paid. All Tax Returns required to be filed
by the Company have been duly filed on a timely basis and all Taxes shown to be
payable on the Tax Returns or on subsequent assessments with respect thereto
have been paid in full on a timely basis or are being disputed in good faith by
the Company. All Tax Returns filed by the Company are true and correct in all
material respects.
(b) Tax Reserves. The Company's liability for unpaid Taxes for all periods
ending before the date of this Agreement has been reserved or accrued for in the
Financial Statements (other than reserves or accruals for deferred income Taxes
established to reflect differences between book basis and Tax basis of assets
and liabilities), applicable to all periods ending on or before the Closing Date
in conformity with GAAP. The Company's liability for unpaid Taxes for all
periods ending on or before the Closing Date will be reserved for or accrued for
in the Closing Statement of Net Assets in conformity with GAAP (other than
reserves or accruals for deferred income Taxes established to reflect
differences between book basis and Tax basis of assets and liabilities).
(c) Tax Returns Furnished. For all periods ending on and after December
31, 1992, Buyer has been provided access to true and complete copies of (i)
relevant portions of income tax audit reports, statements of deficiencies,
closing or other agreements received by the Company or Seller or on behalf of
the Company or Seller relating to Taxes, and (ii) all pro-forma separate federal
and state income or franchise tax returns for the Company and Seller.
(d) Tax Deficiencies; Audits; Statutes of Limitations. No deficiencies
have been asserted with respect to Taxes of the Company. The Company is not a
party to any action or proceeding for assessment or collection of Taxes, nor has
such event been asserted or threatened against the Company or any of its assets.
No waiver or extension of any statute of limitations is in effect with respect
to Taxes or Tax Returns of the Company. Except as set forth in Section III.15 of
the Seller's Schedule, the Tax Returns of the Company have not in the past four
(4) years been audited by a government or taxing authority, nor is any such
audit in process, pending or threatened. There is no material agreement or other
document extending, or having the effect of extending, the period of assessment
or collection of any Taxes and no power of attorney with respect to any material
Taxes of the Company has been executed or filed with any Governmental Authority,
and, no power of attorney granted by or with respect to the Company relating to
any material Taxes claimed to be due from the Company is currently in force. The
Company has not executed or entered into a Closing agreement pursuant to section
7121 of the Code or any
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predecessor provisions thereof (or similar provision for purposes of state,
local or foreign income taxes).
(e) Tax Elections and Special Tax Status. The Company is not a party to
any safe harbor lease within the meaning of Section 168(f)(8) of the Code, as in
effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of
1982. The Company is not a "consenting corporation" under Section 341(f) of the
Code. The Company has not entered into any compensatory agreements with respect
to the performance of services which payment thereunder would result in a
nondeductible expense to the Company pursuant to Section 280G of the Code or any
excise tax to the recipient of such payment pursuant to Section 4999 of the
Code.
(f) Tax Liens. There are no unpaid Taxes with respect to any period, or a
portion thereof, ending on or before the Closing Date which are or could become
a lien on the Acquired Assets, except for current Taxes not yet due and payable
or reserved for in the Financial Statements.
(g) Tax Sharing or Other Agreements. The Company is not a party to or
bound by (nor will it become a party to or bound by on or prior to the Closing
Date) any Tax indemnity, Tax sharing, Tax allocation or similar agreement
(whether or not written).
(h) Sales Taxes. The Company (i) has collected all material sales and use
Taxes required to be collected, and has remitted, or will remit, such Taxes as
required by all applicable statutes and regulations, and (ii) regarding all
exempt transactions for all periods open under the applicable statute of
limitations as of the Closing Date, has maintained all such records and
supporting documents, in all material respects in substantial compliance with
all applicable sales and use Tax statutes and regulations.
(i) FIRPTA. The Company is not, and for the applicable period specified in
section 897(c)(1)(A)(ii) of the Code, has not been, a United States real
property holding corporation under section 897 of the Code.
(j) Affiliated Group Liability. The Company (and any predecessor) (i) has
not been a member of an affiliated group filing a consolidated federal income
Tax Return and (ii) has no liability for the Taxes of any person under Treasury
Regulation section 1.1502-6(a) (or any analogous or similar provision of state,
local or foreign law or regulation), as a transferee or successor, by contract,
or otherwise.
III.16 Environmental Matters.
(a) For purposes of this Agreement, the following definitions shall apply:
(i) "Hazardous Materials" shall include any hazardous substance,
pollutant, contaminant, flammable explosives, radioactive materials and
hazardous, toxic or dangerous wastes and any other chemicals, materials or
substances which are identified, defined or regulated pursuant to any Hazardous
Materials Laws, or the release, discharge or exposure to which is prohibited,
limited or regulated by any federal, state or local government under Hazardous
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Materials Laws and any petroleum, waste oil and petroleum by-products, asbestos
in any form, urea formaldehyde.
(ii) "Hazardous Materials Laws" shall mean all applicable laws,
statutes, ordinances, rules, regulations, orders, judgements, or decrees
relating to the protection of the environment, to human health and safety, or to
any emission, discharge, generation, processing, storage, holding, abatement
exercise, release, threatened release, arrangement for the disposal or
transportation of Hazardous Materials, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act, as
amended (42 U.S.C. Section 9601 et seq.); the Hazardous Materials Transportation
Act (49 U.S.C. Section 1801 et seq.); Resource Conservation and Recovery Act (42
U.S.C. Section 6901 et seq.); and any so called "Superfund" law.
(iii) "Environmental Report" shall mean any report, study,
assessment, audit, or other similar document that addresses any issue of actual
or potential noncompliance with, or actual or potential liability under or cost
arising out of, any Environmental Law that may in any way affect the Company or
the Subsidiary; provided, however, that "Environmental Report" shall not include
any such document prepared by Subsidiary in the ordinary course of business for
any of its clients.
(b) Each of the Company and the Subsidiary is and, to the Knowledge of
Seller, has been in compliance in all material respects with applicable
Hazardous Materials Laws and has all environmental permits required for the
handling, use, storage and disposition of Hazardous Materials under Hazardous
Materials Laws that are applicable to its operations as presently conducted.
(c) Neither the Company nor the Subsidiary has received any notice from
any Governmental Authority that the Company or the Subsidiary is in violation
of, or may be subject to liability under, any of the terms or conditions of
Hazardous Materials Laws or the Company's or the Subsidiary's material
environmental permits for the handling, use, storage or disposition of Hazardous
Materials under Hazardous Materials Laws.
(d) Buyer has been provided with true and complete copies of all
Environmental Reports in the possession or control of Seller, the Company, or
the Subsidiary.
III.17 Contracts. Section 111.17 of the Seller's Schedule contains a
complete list of the material agreements, contracts, commitments, proposals,
orders, licenses, leases and other instruments ("Contracts") of the Company and
the Subsidiary which (i) is made with any officer, director or stockholder of
the Company or the Subsidiary, or with any affiliate or relative of any such
officer, director or stockholder, (ii) is a contract of employment, consulting,
agency or other similar agreement or arrangement relating to or for the benefit
of employees, sales representatives, distributors, dealers, agents, independent
contractors or consultants, (iii) is made with any labor union, or other labor
organization, (iv) is a loan or other credit agreement, indenture, mortgage,
letter of credit, security agreement, pledge agreement, deed of trust, bond,
note, guarantee or other agreement or instrument relating to the borrowing of
money or extension of credit in excess of $25,000, (v) requires, individually,
annual payments of more than $50,000 or aggregate payments over the life of the
contract of more than $250,000, (vi) is for a remaining
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term of more than one year and is not cancelable as to all its provisions upon
90 days or less notice without payment of any material penalty, (vii) provides
in whole or in part for the use of, or limiting the use of, Intellectual
Property, (viii) is a joint venture, partnership and other similar contract
involving a sharing of profits or expenses (including but not limited to joint
research and development and joint marketing, contracts), (ix) is an asset
purchase agreement or other acquisition or investment agreement, (x) is a
contract or arrangement with respect to the representation of the Company or the
Subsidiary in foreign countries, (xi) restricts or limits in any manner the
operation of the business of the Company or the Subsidiary, or (xii) is material
to the business of the Company or the Subsidiary and was entered into outside of
the normal course of business.
Buyer has been provided with true and complete copies of each Contract so
listed. The Company, the Subsidiary and, to the Knowledge of Seller, each of the
other parties to the Contracts set forth in Section III.17 of the Seller's
Schedule have in all respects performed all material obligations required to be
performed by them under such Contracts and, no event has occurred which, after
notice or lapse of time or both would constitute a default or an event of
default that would give any other party to any such Contract the right to
terminate or otherwise fail to perform its obligations under the Contracts. Each
Contract is the legal, valid and binding obligation of the Company, the
Subsidiary and, to the Knowledge of the Seller, the other parties thereto
enforceable in accordance with its terms against the parties thereto. No consent
of any third party is required under any Contract as a result of or in
connection with the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby.
III.18 Inventory. All inventory of the Company and the Subsidiary consists
of a quality and quantity consistent with good business practices net of any
reserves reflected in (i) the case of inventory on the date hereof, the
September Balance Sheet or (ii) the Closing Statement of Net Assets in the case
of inventory on the Closing Date and are salable in the ordinary course
consistent with past practice.
III.19 Accounts Receivable. The accounts receivable of the Company and the
Subsidiary reflected in the September Balance Sheet represent bona fide sales
actually made in the ordinary course of business, and have been properly accrued
in accordance with GAAP, net of any reserves reflected in the September Balance
Sheet. To the Knowledge of Seller there are no facts or circumstances (other
than general economic conditions) which would result in any material increase in
the uncollectibility of the accounts receivable as a class in excess of the
reserves therefor set forth in the September Balance Sheet.
III.20 Condition of Plant and Equipment. To the Knowledge of Seller there
are no material structural defects in the improvements to the real property
owned or leased by the Company or the Subsidiary. To the Knowledge of the
Seller, the equipment of the Company and the Subsidiary is in good operating
condition and repair, ordinary wear and tear excepted.
III.21 Customers and Suppliers. Section III.21 of the Seller's Schedule
lists the ten largest customers of the Company and the ten largest suppliers of
the Company for the most recent fiscal year. To the Knowledge of the Seller,
since January 1, 1997, there has been no
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material adverse change in the business relationship of the Company with any
customer or supplier named on Section III.21 of the Seller's Schedule.
III.22 Bank Accounts. Section III.22 of the Seller's Schedule sets forth
the names and locations of all banks, trust companies, brokerage firms or other
financial institutions at which the Company maintains an account and the name of
each person authorized to draw thereon or make withdrawals therefrom.
III.23 Brokers, Finders, Etc. All negotiations relating to this Agreement,
and the transactions contemplated hereby, have been carried on without the
participation of any person or entity acting on behalf of the Seller in such a
manner as to give rise to any valid claim against Buyer or the Company for any
brokerage or finder's commission, fee or similar compensation, or for any bonus
payable to any officer, director, employee, agent or sales representative of or
consultant to Seller upon consummation of the transactions contemplated hereby.
III.24 Employees. All sums payable to Employees (as defined in Section
VI.1(a)) after the Closing Date with respect to pre-Closing pending items, which
sums shall include, without limitation, salary, wages, overtime, bonuses,
accrued and unused vacation time and any other payments due pursuant to any
agreements between the Acquired Company and such Employees or as required by
applicable law, shall be accrued as a liability on the Closing Statement of Net
Assets.
III.25 Government Contracts.
(a) With respect to each and every Government Contract or bid to obtain a
Government Contract to which the Company is a party and except as set forth in
Section III.25 of the Seller's Schedule: (i) the Company has fully complied with
all material terms and conditions of such Government Contract or bid for a
Government Contract as required as of the date hereof and as of the Closing
Date; (ii) the Company has fully complied with all material requirements of
statute, rule or regulation pertaining to such Government Contract or bid for a
Government Contract; (iii) all representations and certifications executed with
respect to such Government Contract were accurate in every material respect as
of their effective date and the Company has fully complied with all such
representations and certifications in every material respect; and (iv) no
termination or default, cure notice or show cause notice has been issued or, to
the Knowledge of the executive officers of Seller and the management of the
Business, will be issued.
(b) To the Knowledge of Seller, except as set forth in Section III.25(b)
of the Sellers Schedule, (i) none of the Company's or the Subsidiary's
respective employees, consultants or agents is (or during the last three years
has been) under administrative, civil or criminal investigation, indictment or
information by any foreign, domestic, federal, territorial, state or local
governmental authority, quasi-governmental authority, instrumentality, court,
government or self-regulatory organization, commission, tribunal or organization
or any regulatory, administrative or other agency, or any political or other
subdivision, department or branch of any of the foregoing ("Governmental
Authority"), (ii) there is not any pending audit or investigation of the
Company, its officers, employees or representatives nor within the last three
years has there been any audit or investigation of the Company, officers,
employees or representatives
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resulting in a material adverse finding with respect to any alleged
irregularity, misstatement or omission arising under or relating to any
Government Contract or bid; and (iii) during the last three years, neither the
Company nor the Subsidiary has made a voluntary disclosure to the U.S.
Government or any non-U.S. government, with respect to any alleged irregularity,
misstatement or omission arising under or relating to a Government Contract or
bid. Except as set forth in Section III.25(b) Seller's Schedule, to the
Knowledge of Seller neither the Company nor the Subsidiary has had any
irregularities, misstatements or omissions arising under or relating to any
Government Contract or bid that has led or is expected to lead, either before or
after the Closing Date, to any of the consequences set forth in clause (i) or
(ii) of the immediately preceding sentence or any other material damage, penalty
assessment, recoupment of payment or disallowance of cost.
(c) Except as set forth in Section III.25(c) of the Seller's Schedule,
there are (i) no outstanding claims against the Company or the Subsidiary,
either by the U.S. Government or by any non-U.S. government or by any prime
contractor, subcontractor, vendor or other third party, arising under or
relating to any Government Contract or bid referred to in Section III.25(a) of
the Seller's Schedule and (ii) no disputes between the Company or the Subsidiary
and the U.S. Government or any non-U.S. Government under the Contract Disputes
Act or any other Federal statute or between the Company or the Subsidiary and
any prime contractor, subcontractor or vendor arising under or relating to any
such Government Contract or bid. Except as set forth in Section III.25(c) of the
Seller's Schedule, to the Knowledge of Seller, there are no facts that could
reasonably be expected to result in a claim or a dispute under clause (i) or
(ii) of the immediately preceding sentence.
(d) Except as set forth in Section III.25(d) of the Seller's Schedule,
neither the Company or the Subsidiary nor any of their respective employees,
consultants or agents is (or during the last three years has been) suspended or
debarred from doing business with the U.S. Government or any non-U.S. government
or is (or during such period was) the subject of a finding of non-responsibility
or ineligibility for U.S. Government or non-U.S. government contracting. Except
as set forth in Section III.25(d) of the Seller's Schedule, the Company and its
affiliates conducted their operations in compliance with all requirements of all
material laws pertaining to all Government Contracts and bids.
(e) Except as set forth in Section III.25(e) of the Seller's Schedule, no
statement, representation or warranty made by the Company in any Government
Contract, any exhibit thereto or in any certificate, statement, list, schedule
or other document submitted or furnished to the U.S. Government or any non-U.S.
government in connection with any Government Contract or bid (i) contained on
the date so furnished or submitted any untrue statement of a material fact, or
failed to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading
or (ii) contains on the date hereof any untrue statement of a material fact, or
fails to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they are made, not misleading,
except in the case of both clauses (i) and (ii) any untrue statement or failure
to state a material fact that would not result in any material liability to the
Company or the Subsidiary as a result of such untrue statement or failure to
state a material fact.
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III.26 Government Furnished Equipment. Section III.26 of the Seller's
Schedule incorporates the most recent schedule delivered to the U.S. Government
or any non-U.S. Government which identifies by description or inventory number
certain equipment and fixtures loaned, bailed or otherwise furnished to or held
by the Company or the Subsidiary by or on behalf of the United States or any
foreign country. To the Knowledge of Seller, such schedule was accurate and
complete on its date and, if dated as of the Closing Date, would contain only
those additions and omit only those deletions of equipment and fixtures that
have occurred in the ordinary course of business, except for such inaccuracies
that could not reasonably be expected to have a material adverse effect on the
operations of the Company and the Subsidiary.
III.27 Organizational Conflicts of Interest. Except as set forth in
Section III.27 of the Seller's Schedule, prior to the close of business on the
date three Business Days prior to the Closing Date, to the Knowledge of the
Seller each of the Company and the Subsidiary as part of its performance of the
"IEW Contract" has, in the past four years, not had access to non-public
information nor provided systems engineering, technical direction, consultation,
technical evaluation, source selection services of services any type, nor
prepared specifications or statements of work, nor engaged in any other conduct
that would create in any current Government procurement an Organizational
Conflict of Interest, as defined in Federal Acquisition Regulation 9.501, with
the Company or, based on the Knowledge of the Seller of the business of L-3 as
conducted on the date three Business Days prior to the Closing Date, with L-3 if
the Company or the Subsidiary were to become an affiliate or division thereof.
III.28 Affiliate Transactions. Except with respect to the Ilex Agreement
and the agreements, arrangements, undertakings and transactions contemplated
thereby, there are no agreements, arrangements, undertakings or other
transactions between the Company or the Subsidiary and the Seller or any
affiliate of the Seller.
III.29 Disclosure in the Seller's Schedule. The disclosure in any Section
of the Seller's Schedule to this Agreement of an exception to any representation
and warranty shall constitute disclosure of such exception for all applicable
representations and warranties under this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that the statements related to
Buyer contained in this Article IV are correct and complete as of the as of the
date hereof and will be correct and complete as of the Closing Date, except as
specified to the contrary in the disclosure schedule prepared by Buyer and
attached hereto as Exhibit B (the "Buyer's Schedule"). The Buyer's Schedule is
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Article IV.
IV.1 Due Incorporation; Requisite Power and Authority. Buyer is a
corporation duly organized, validly existing and in good standing as a
corporation under the laws of the State of Delaware and has all the requisite
power and authority to execute and deliver the Transaction
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Documents and to perform all transactions in the manner contemplated by the
Transaction Documents. This Agreement has been and, when delivered, the
remainder of the Transaction Documents will have been duly executed and
delivered by Buyer and duly authorized and approved by all necessary corporate
action on the part of Buyer. This Agreement constitutes and, when delivered, the
remainder of the Transaction Documents will constitute the valid and binding
obligations of Buyer, enforceable against Buyer in accordance with its or their
terms, subject to bankruptcy and similar laws and equitable principles regarding
the enforcement of contracts.
IV.2 Requisite Consents; Nonviolation. The execution, delivery and
performance of this Agreement by Buyer does not and the execution, delivery and
performance of the remainder of the Transaction Documents by Buyer will not (a)
violate or conflict with (i) the provisions of the Certificate of Incorporation
or Bylaws of Buyer, (ii) any applicable law, rule or regulation, (iii) any
resolution of the Board of Directors or the shareholders of Buyer, or (iv)
order, writ, injunction or decree by which Buyer is bound; or (b) except as set
forth in this Agreement, require the consent, license, permit, approval,
authorization or other action by or with respect to, any governmental person or
entity (except such approvals, permits or filings as may be required to comply
with applicable state securities and antitrust laws).
IV.3 Broker's Fees. Buyer has no Liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
ARTICLE V
CERTAIN TRANSACTIONS AND AGREEMENTS
PRIOR TO THE CLOSING DATE
V.1 Confidentiality. The Company and Seller have provided Buyer
information relating to the Company, the Subsidiary and Seller and have
permitted Buyer to make an investigation of the Company, the Subsidiary and
their business. To facilitate a smooth transition in ownership of the Company,
prior to the Closing Date, Buyer, through its officers, employees, counsel,
accountants and other authorized representatives, will continue to discuss the
Company's business with Seller and the Company's and the Subsidiary's officers,
employees, independent accountants, actuaries and other agents during the
Company's normal business hours only in a manner that does not interfere with
the Company's normal business or contravene any agreement to which the Company
is bound.
V.2 Business Organization.
(a) Seller shall use its reasonable best efforts to cause each of the
Company and the Subsidiary, through the Closing Date, (i) to operate its
business only in the usual, regular and ordinary manner, on a basis consistent
with past practice and to the extent consistent with such operation to preserve
substantially intact its business organization, (ii) to keep available the
services of the present officers and employees of the Company and the
Subsidiary, and (iii) to preserve the present relationships of the Company and
the Subsidiary with all entities or persons having significant business dealings
with either of them.
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(b) Except as may be approved in writing by Buyer, (1) from the date
hereof to and including the date four Business Days prior to the Closing Date,
Seller shall use its reasonable best efforts to cause the Company and its
affiliates not to, and (2) from the date three Business Days prior to the
Closing Date to and including the Closing Date, Seller shall not and shall cause
its affiliates not to (i) transfer, sell, encumber or otherwise convey any asset
of the business of the Company and the Subsidiary other than the sale of
inventory in the ordinary course, (ii) grant or agree to any bonuses to any
employee of the Company or the Subsidiary, any general increase in the rate of
salary or compensation of the employees of the Company or the Subsidiary, (iii)
commit the Company or the Subsidiary to provide any additional pension,
retirement or other employee benefits to any employee of the Company or the
Subsidiary, or any increase of existing benefits for such employees, (iv) enter
into any contract, agreement or commitment other than in the ordinary course of
business which involves aggregate consideration of in excess of $100,000 and
which is not cancelable without penalty within 30 days, (v) incur or increase
any indebtedness for borrowed money or guarantee the debt of any other person
(other than any incurrence or increase in the ordinary course of business and
then only if the amount of such incurrence or increase (to the extent not repaid
prior to the date three Business Days prior to the Closing Date) is reflected as
a liability on the Estimated Closing Statement of Net Assets), (vi) submit any
bid or proposal, or modify any existing bid or proposal, in excess of
$2,000,000, (vii) make any capital expenditure, or commit to make any capital
expenditure, in excess of $100,000 in the aggregate, (viii) take any act on
inconsistent with the representations and warranties of Seller hereunder or that
would cause any of the representations and warranties of Seller hereunder to
become untrue in any material respect, (ix) except for conversion of the Company
from its status as a subchapter S Corporation under the Code to a subchapter C
Corporation under the Code, make or change any material tax election or settle
or compromise any material federal, state, local or foreign income tax liability
or file any amended Tax Returns, (x) increase the compensation or fringe
benefits of any present or former director, officer or employee of the Company
or its Subsidiary (except for the payment of bonuses and increases in salary or
wages of employees (other than officers) in the ordinary course of business
consistent with past practice), (xi) grant severance or termination pay to any
present or former director, officer or employee of the Company or its
Subsidiary, in excess of $100,000 in the aggregate, (xii) loan or advance any
money or other property to any present or former director, officer or employee
of the Company or its Subsidiary (except for travel and other similar advances
in the ordinary course of business and consistent with past practice), (xiii)
establish, adopt, enter into, amend or terminate any Company Plan or any plan,
agreement, program, policy, trust, fund or other arrangement that would be a
Company Plan if it were in existence as of the date of this Agreement, (xiv)
following the fourth Business Day prior to the Closing Date, make, declare or
set a record date with respect to any distribution of assets of the Company or
the Subsidiary in respect of the capital stock of the Company (whether by
dividend, redemption, share purchase or otherwise) other than a liquidation and
dissolution of all of the assets of the Company or (xv) agree, whether or not in
writing, to do any of the foregoing.
V.3 Cooperation.
(a) General. Each of the parties will use all reasonable efforts to take
all action and to do all things reasonably necessary, proper or advisable in
order to consummate and make effective the transaction contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions).
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(b) Filings and Consents. As soon as practicable, Buyer and Seller shall
make, or cause to be made, any and all filings which are required under the
Hart-Scott-Rodino Act, or any other required filings in any jurisdiction. The
parties will furnish to each other such necessary information and assistance as
each may reasonably request in connection with their preparation of necessary
filings or submissions to any governmental agency, including, without
limitation, any filings necessary under the provisions of the Hart-Scott-Rodino
Act or any other required filings in any jurisdiction. Buyer shall pay the
filing fee(s) associated with all Hart-Scott-Rodino Act filings.
Seller shall use its reasonable efforts to obtain at the earliest
practicable date all material required third party consents, identified in
Section V.3(b) of the Seller's Schedule, of all third parties to leases,
licenses, agreements, indentures or other instruments necessary to the
consummation of the transactions contemplated hereby, and Buyer shall cooperate
with Seller in order to obtain such consents at the earliest practicable date by
performing such actions and by providing Seller with such information,
including, without limitation, publicly-available financial information relating
to Buyer, all as Seller may reasonably request. Anything contained in this
Section V.3(b) to the contrary notwithstanding this Agreement shall not
constitute an agreement to assign any claim, contract, license, lease,
commitment, sales order or purchase order if an attempted assignment of the same
without the consent of the other party thereto would constitute a breach thereof
or in any way materially and adversely affect the rights of Seller thereunder.
(c) Access. Prior to Closing, Seller will use its reasonable best efforts
to cause the Company to permit representatives of Buyer to have reasonable
access at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Company upon reasonable advance notice, to all
premises, properties, personnel, books, records (including Tax records),
contracts and documents of or pertaining to the Company.
(d) Notice of Developments. Each party will give prompt written notice to
the other of any material adverse development causing or constituting a breach
of any of its own representations and warranties.
V.4 Subsidiary Merger. Prior to the Closing, Seller shall consummate the
Subsidiary Merger.
V.5 No Seller Distributions. Until such time as the transactions pursuant
to this Agreement have been consummated in accordance with the terms hereof,
Seller shall not distribute nor transfer any of its assets now owned or
hereafter acquired.
V.6 Further Assurances. Each of the parties hereto agrees that it will,
from time to time after the date of the Agreement, execute and deliver such
other certificates, documents and instruments and take such other action as may
be reasonably requested by the other party to carry out the actions amid
transactions contemplated by this Agreement.
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ARTICLE VI
COVENANTS REGARDING POST CLOSING ACTIVITIES
VI.1 Employee Matters.
(a) Immediately following the Closing on the Closing Date, Buyer shall
offer employment at will in a similar position to each employee of the Business
who on the Closing Date is employed by the Acquired Company or on an approved
leave of absence (the "Employees") at a rate of base compensation and salary
equal to not less than one hundred percent (100%) of their base compensation and
salary immediately prior to the Closing Date; provided, however, that nothing
herein shall interfere with or otherwise impair any right of Buyer to terminate
the employment of any employee at any time. Buyer shall assume the
responsibility for all obligations and liabilities arising out of or in any way
connected with its employment of the Employees or the termination thereof,
including, without limitation, any and all claims for wrongful discharge,
discrimination or other violations of law or for payment under any employee
benefit plans for claims incurred after the Closing on the Closing Date. Buyer
shall also offer to Employees participation in benefit programs in accordance
with Buyer's employee benefit plans and other fringe benefits which programs
shall be, at a minimum, substantially comparable, in the aggregate, to the
Company Plans (excluding for these purposes any Company Plans providing equity
awards or equity based awards) and shall be eligible to participate in said
employee benefit plans and other fringe benefits of Buyer immediately and on the
same basis as such plans and benefits are offered to new employees of Buyer;
provided, however, that payment of any deductibles under the Company Plans by
such Employees will be credited under Buyer's plans during 1998; provided,
further, that Buyer may change, amend or terminate any such Company Plans at any
time following the Closing Date. In addition, Buyer agrees that any preexisting
condition clause in any of the Acquired Company's health or disability insurance
coverage shall not be applicable to the Employees to the extent allowable.
(b) Buyer shall assume and be responsible for all sums then due any
Employee who accepts Buyer's offer of employment, which sums shall include,
without limitation, salary, wages, overtime, bonuses, accrued and unused
vacation time and any other payments due pursuant to any agreements between the
Acquired Company and such Employee payable after the Closing Date or as required
by applicable law. All Employees who accept Buyer's offer of employment shall
receive credit for years of service with or as granted by the Acquired Company.
(c) Any former employee of the Acquired Company (or their dependents) who
becomes eligible for health continuation coverage under the Acquired Company's
major medical plan by virtue of his or her failure to accept Buyer's offer of
employment being tantamount to a qualifying event, for the entitlement to such
coverage, shall have available health continuation coverage satisfying the
requirements of Section 4870 B of the Code and Section 601 through 608 of ERISA
after the Closing through health benefit plans maintained by Buyer or its
affiliates.
(d) Buyer covenants and agrees that it will assume and be responsible for
any obligations after the Closing Date to Employees who are on workers'
compensation or a similar leave of absence from the Acquired Company on the
Closing Date to the extent such obligations
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are (i) pursuant to fully insured Company Plans, or (ii) fully accrued on the
Closing Statement of Net Assets.
VI.2 Seller's Indemnification.
(a) Seller's Indemnification. Subject to the limitation of Section
VI.2(c), Seller shall indemnify, defend and hold Buyer and its affiliates (and
their respective officers, directors, employees and agents), harmless from any
liability, damages, deficiency, loss, cost or expense (including but not limited
to reasonable attorney's fees and any expenses of investigation in connection
with any claim hereunder) actually incurred or paid by Buyer and its affiliates
(or their respective officers, directors, employees and agents), arising out of
or resulting from (i) the inaccuracy of any representation or the breach of any
warranty made in this Agreement by Seller to Buyer; (ii) any failure of Seller
to perform or comply with any of its covenants and agreements set forth in this
Agreement; (iii) any Liability of the Seller or any of its affiliates or the
Company or any of its affiliates other than Assumed Liabilities; or (iv) any
Government Bid, Government Contract or Government Disclosure; provided, however,
that Seller shall only indemnify Buyer and its affiliates for the first
$10,000,000 of claims related to any Government Bid, Government Contract or
Government Disclosure. Notwithstanding anything to the contrary contained
herein, the Buyer shall be permitted to offset any amounts which would otherwise
become payable to the Seller under Section 11.4 against amounts owing by the
Seller under this Section VI.2(iv); provided that such right of offset shall
only be exercisable with respect to Additional Consideration if notice of the
exercise of such right is delivered to the Seller by the Buyer prior to the date
on which the calculation of EBIT with respect to such Additional Consideration
shall have been finally determined and agreed to pursuant to Section II.5.
(b) Tax Indemnification. Seller shall indemnify and hold harmless the
Buyer and its affiliates (and their respective officers, directors, employees
and agents) from and against any and all Taxes for or in respect of each of the
following (excluding, in all cases, Taxes included within the definition of
Assumed Liabilities):
(i) any and all Taxes with respect to any taxable period or a
portion thereof, of the Company (or any predecessor) ending on or before
the close of business on the date three Business Day's prior to the
Closing Date;
(ii) with respect to any and all Taxes of any member of a
consolidated, combined or unitary group of which the Company (or any
predecessor) is or was a member on or prior to the close of business on
the date three Business Days prior to the Closing Date by reason of the
liability of the Company pursuant to Treasury Regulation Section
1.1502-6(a) (or any analogous or similar state, local or foreign law or
regulation), as a transferee or successor, by contract, or otherwise;
(iii) any Taxes arising out of a breach of the representations and
warranties contained in Section III.15; and
(iv) any payments required to be made after the Closing Date under
any Tax sharing, Tax indemnity, Tax allocation or similar contracts
(whether or not written), to
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which the Company or any predecessor was obligated, or was a party, on or
prior to the close of business on the date three Business Days prior to
the Closing Date.
(c) Notification; Control of Proceedings. Buyer shall promptly give to the
Seller written notice if it becomes aware of any liability, loss, damage, claim,
cost and expense with respect to which indemnity may be asserted; provided that
the failure to give prompt notice will not release the Seller from liability
hereunder, except to the extent they are actually prejudiced thereby. If any
claim is made by a third person or an action or proceeding commenced for which
Buyer shall seek indemnity from Seller, Buyer shall give to the Seller
reasonable written notice of the claim and request Seller to defend the same.
Seller shall have the right to defend against such liability at their expense,
and shall give written notice to Buyer of the commencement of such defense with
reasonable promptness after the giving of the written notice of the claim by
Buyer. Buyer shall be entitled to participate with Seller in such defense, but
shall not be entitled in any way to release, waive, settle, modify or pay such
claim without the written consent of the Seller, if Seller have assumed such
defense. In the event Seller does not assume the defense of the matter as
provided above, or does not notify Buyer of its election to defend such a matter
within 30 days, Buyer shall have the full right to defend against such liability
in such manner as it may deem appropriate. In the event Seller shall assume the
defense, Buyer shall cooperate in the defense of such action, and the records of
each shall be available to the other with respect to such defense, provided,
however, that the Seller shall not, in the defense of any such action, consent
to the entry of any judgment or enter into any settlement where such entry of
judgment or settlement does not include a provision releasing the Buyer from all
liability with respect to such action or that provides for a remedy other than
the payment of money damages, except with the written consent of Buyer, such
consent not to be unreasonably withheld or delayed.
(d) Limitation on Indemnification. Notwithstanding the provisions of
Sections VI.2(a) (except with respect to (A) clauses (ii), (iii) and (iv) of
Section VI.2(a) and (B) Taxes as provided under Section VI.2(b)), (i) Seller
shall not be liable to Buyer on account of any breach of any warranty or
representation by Seller in this Agreement until the aggregate amount of all
claims against Seller for which indemnification would have been available
hereunder but for the application of the limitation set forth in this clause (i)
for all breaches exceeds one percent (1%) of the Cash Purchase Price and then
only for the amount by which such aggregate cumulative liability is in excess of
one percent (1%) of the Cash Purchase Price; and (ii) in no event shall Seller's
obligations to Buyer under Section VI.2(a)(i) exceed, in the aggregate,
$5,000,000.
(e) Survival. The indemnification obligations of Seller under this Section
VI.2 (except with respect to indemnification pursuant to Section VI.2(a)(ii),
(iii) and (iv)) shall terminate on June 30, 1999 as to any claim not asserted
prior to such date, except that the indemnification obligations of Seller for
(x) a breach of Sections III.1, III.2, III.3, III.5 and III.15 and (y) for Taxes
under Section VI.2(b) shall not terminate until the expiration of the sixty-day
period after the expiration of the applicable statute of limitations as to any
claim not asserted prior to such date and that the indemnification obligations
of Seller for a breach of Sections III.4, III.11 and III.16 shall terminate
three (3) years after the date hereof as to any claim not asserted prior to such
date. The indemnification obligations of Seller (I) under Section VI.2(a)(ii)
shall terminate ten (10) years after the date hereof and (II) under Section
VI.2(a)(iv) shall terminate on June 30, 2000, in each case as to any claim not
asserted prior to such date.
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(f) Indemnification Provisions for Benefit of Seller.
(i) In the event Buyer breaches (or in the event any third party
alleges facts that, if true, would mean Buyer has breached) any of its
representations, warranties, and covenants contained in this Agreement or
in any of the Transaction Documents, then the Buyer agrees to indemnify
Seller and its affiliates (and their respective officers, directors,
employees and agents) from and against the entirety of any Losses (up to
but not in excess of the Cash Purchase Price) Seller or its affiliates
(and their respective officers, directors, employees and agents) may
suffer through and after the date of the claim for indemnification
(including any Losses Seller or its affiliates (and their respective
officers, directors, employees and agents) may suffer after the end of any
applicable survival period) resulting from, arising out of, or caused by
the breach (or the alleged breach).
(ii) Notwithstanding anything to the contrary herein contained, (i)
Buyer will indemnify, defend and hold harmless Seller and its affiliates
(and their respective officers, directors, employees and agents) from and
against any Losses as a result of claims based on or arising from any
Assumed Liabilities or the operation of the Business after the Closing
Date and (ii) such indemnification shall not be limited in time or amount
or subject to any deductible or cap.
(iii) Seller or its affiliates shall with reasonable promptness give
to the Buyer written notice if it becomes aware of any Losses with respect
to which indemnity may be asserted; provided that the failure to give
prompt notice will not release the Buyer from liability thereunder, except
to the extent they are actually prejudiced thereby. If any claim is made
by a third person or an action or proceeding commenced for which Seller or
other indemnified parties shall seek indemnity from Buyer, Seller or its
affiliates shall give to Buyer reasonable written notice of the claim and
request Buyer to defend the same. Buyer shall have the right to defend
against such liability at their expense, and shall give written notice to
Seller of the commencement of such defense with reasonable promptness
after the giving of the written notice of the claim by Seller or its
affiliates. Seller or other indemnified parties shall be entitled to
participate with Buyer in such defense, but shall not be entitled in any
way to release, waive, settle, modify or pay such claim without the
written consent of the Buyer, if Buyer has assumed such defense. In the
event Buyer does not assume the defense of the matter as provided above,
or does not notify Seller of their election to defend such a matter within
30 days, Seller or other indemnified parties shall have the full right to
defend against such liability in such manner as it or they may deem
appropriate. In the event Buyer shall assume the defense, Seller or other
indemnified parties shall cooperate in the defense of such action, and the
records of each shall be available to the other with respect to such
defense, provided, however, that the Buyer shall not, in the defense of
any such action, consent to the entry of any judgment or enter into any
settlement where such entry of judgment or settlement does not include a
provision releasing the Seller or other indemnified parties from all
liability with respect to such action or that provides for a remedy other
than the payment of money damages, except with the written consent of
Seller or other indemnified parties.
(iv) The indemnification obligations of Buyer under this Section
VI.2(f) shall not terminate until the expiration of the applicable statute
of limitations; provided, however,
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that the indemnification obligations of Buyer related to any failure of
Seller to perform or comply with any of its covenants and agreements set
forth in this Agreement shall terminate ten years from the date hereof as
to any claim not asserted prior to such date.
VI.3 Contracts Requiring Consent to Assignment. Notwithstanding anything
in this Agreement, neither this Agreement nor any document or instrument
delivered pursuant hereto shall constitute an assignment of any claim, contract,
agreement, license, lease, commitment, sales order or purchase order or any
claim or right or any benefit arising thereunder or resulting therefrom if an
attempted assignment thereof without the consent of any other Person would
constitute a breach thereof or in any way adversely affect the rights to be
assigned. Until such consent is obtained, or if an attempted assignment
thereunder would be ineffective or would affect the rights of Seller or any
affiliate thereunder so that the Buyer would not in fact receive all such
rights, Seller and the Buyer will cooperate with each other (and, to the extent
required, Seller shall cause its affiliates to cooperate with the Buyer) to
provide for the Buyer the benefits of, and to permit the Buyer to assume all
liabilities under, any such claim, contract, agreement, license, lease,
commitment, sales order or purchase order, including enforcement at the request
and expense of the Buyer for the benefit of the Buyer of any and all rights of
Seller or any affiliate against a third party thereto arising out of the breach
or cancellation thereof by such third party; and any transfer or assignment to
the Buyer by Seller or any affiliate of any property or property rights or any
contract or agreement which shall require the consent or approval of any third
party shall be made subject to such consent or approval being obtained. The
parties shall each use their best efforts to obtain any required consent to
assignment.
VI.4 Company Plans. From and after the Closing, Buyer agrees to assume
Seller's obligations under and become the plan sponsor of each of the Company
Plans in effect immediately prior to the Closing Date and Buyer shall be
entitled to all rights, obligations and duties of Seller under such Company
Plans and Seller shall cause any assets, set-aside or otherwise, pertaining to
the Company Plans to be transferred to Buyer; such assets shall include, but not
be limited to, qualified trusts, VEBAs, and grantor trusts and insurance
policies. Notwithstanding anything to the contrary herein contained, the
assumption of such obligations is not intended to and shall not be construed to
impair the right or ability of Buyer to unilaterally amend or terminate any such
benefit plans and other fringe benefits, or any Company Plan in effect
immediately prior to the Closing Date, at any time after the Closing Date.
VI.5 Research and Experimental Expenses. Seller will use its reasonable
best efforts to cause to be furnished to Buyer as soon as reasonably
practicable, but in no event more than 180 days after Closing, all information
reasonably requested relating to the base period research expenses and any other
information to allow Buyer to claim research and experimental credits in
accordance with the relevant sections of the Code and treasury regulations
promulgated thereunder.
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ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER AND SELLER
The obligations of Buyer and Seller to consummate the transactions
contemplated by this Agreement on the Closing Date shall be subject to the
fulfillment at or prior to the Closing of each of the following conditions,
except to the extent such conditions are waived in writing by Buyer and Seller:
VII.1 Government Approvals; Litigation. All requisite governmental
approvals and authorizations necessary, including, but not limited to, any such
approvals or authorizations under the Hart-Scott-Rodino Act, for the
consummation of the transactions contemplated hereby shall have been duly issued
or granted and all applicable waiting periods shall have expired or otherwise
been terminated. No action or proceeding by any governmental authority or any
third party challenging the transactions contemplated by this Agreement or any
parties' ability or right to participate therein shall be pending or threatened
against any party. No unfavorable decree or order shall exist that would prevent
or make the consummation of any of the transactions contemplated by this
Agreement unlawful or would result in the payment of damages or other
consequences materially adverse to the business or assets of Seller, Buyer or
the Company.
VII.2 Permits and Approvals. Buyer, Seller and the Company shall each have
received all consents, waivers, approvals, licenses, or other authorizations
required for the performance of this Agreement by the parties hereto.
ARTICLE VIII
CONDITIONS TO BUYER'S OBLIGATIONS
The obligation of Buyer to consummate the transactions contemplated by
this Agreement on the Closing Date shall be subject to the fulfillment at or
prior to the Closing of each of the following conditions, except to the extent
such conditions are waived by Buyer, such waiver to be evidenced by Buyer's
consummation of the transaction contemplated hereby:
VIII.1 Representations and Warranties; Performance. The representations
and warranties of the Seller set forth in this Agreement shall be true in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) as of the Closing Date with the same effect as
though made at such time. Seller shall have performed and complied in all
material respects with all agreements, covenants and conditions required by this
Agreement to be performed or complied with by it prior to or at the Closing.
Seller shall have delivered to Buyer a certificate, dated the Closing Date, as
to the foregoing.
VIII.2 Escrow Agreement. The Escrow Agreement to be entered into pursuant
to the Stock Purchase Agreement shall have been assigned to Buyer pursuant to an
Assignment of Escrow Agreement in substantially the form of Exhibit VIII.2
hereto.
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VIII.3 Subsidiary Merger. The Subsidiary Merger shall have been
consummated.
VIII.4 Material Adverse Change. Between the date of this Agreement and the
Closing, there shall have been no material adverse change (or any event that
would reasonably be expected to result in such change) in the condition
(financial or otherwise), results of operation, business, assets or properties
of the Company.
VIII.5 Proceedings. All proceedings to he taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to Buyer and its counsel,
and Buyer shall have received copies of such documents and such other evidence
as it or its counsel may reasonably request in order to establish the
consummation of such transaction and the taking of all proceedings in connection
therewith.
VIII.6 Ilex Agreement. The Closing (as defined therein) under the Ilex
Agreement shall have occurred in accordance with the terms thereof.
VIII.7 Non-Competition Agreements. The Non-Competition Agreements entered
into pursuant to the Stock Purchase Agreement shall have been assigned to Buyer
pursuant to an Assignment of Non-Competition Agreements in substantially the
form of Exhibit VIII.6 hereto.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller to consummate the transactions contemplated by
this Agreement on the Closing Date shall be subject to the fulfillment at or
prior to the Closing of each of the following conditions, except to the extent
such conditions are waived by Seller, such waiver to be evidenced by Seller's
consummation of the transaction contemplated hereby.
IX.1 Representations and Warranties; Performance. The representations and
warranties of Buyer set forth in this Agreement shall be true in all material
respects (except that where any statement in a representation or warranty
expressly includes a standard of materiality, such statement shall be true and
correct in all respects) as of the Closing Date, with the same effect as though
made at such time. Buyer shall have paid the Cash Purchase Price and otherwise
performed and complied in all material respects with all agreements, covenants
and conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing.
IX.2 Proceedings. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to Seller and their
counsel, and Seller shall have received copies of such documents and such other
evidence as they or their counsel may reasonably request in order to establish
the consummation of such transactions and the taking of all proceedings in
connection therewith.
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IX.3 Ilex Agreement. The Closing (as defined therein) under the Ilex
Agreement shall have occurred.
ARTICLE X
FEES AND EXPENSES
X.1 Expenses. Except as explicitly provided hereunder each party hereto
shall bear its own expenses incurred in connection with the negotiation and
consummation of the transactions contemplated by this Agreement.
X.2 Fees or Commissions of Brokers. Buyer has no obligation to pay any
fees or commissions of any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which Seller could be liable.
ARTICLE XI
TERMINATION
XI.1 Termination of Agreement. This Agreement and the transactions
contemplated hereby may be terminated at any time before the Closing Date, as
follows, and in no other manner:
(a) by mutual consent of Buyer and Seller;
(b) by either Buyer or Seller if the Closing shall not have occurred on or
before 5:00 p.m., Pacific Time, on March 31, 1998; provided that the right to
terminate this Agreement under this Section XI.1 shall not be available to any
party whose failure to fulfill any obligations under this Agreement has been the
cause of, or results in, the failure of the Closing to have occurred within such
period;
(c) by either Buyer or Seller, respectively, if there has been a material
breach of any representation, warranty, covenant or agreement contained in this
Agreement on the part of the other party and such breach of a covenant or
agreement has not been cured within ten (10) days after notice of such breach
has been given to the other party; or
(d) by either Buyer or a majority in interest of Seller if (i) there shall
be a final, non-appealable order of a federal or state court in effect
preventing consummation of the transaction, or (ii) there shall be any action
taken, or any statute, rule, regulation or order enacted, promulgated or issued
or deemed applicable to the acquisition by any governmental entity which would
make consummation of the transaction illegal.
XI.2 Effect of Termination. In the event of a termination of this
Agreement by any party pursuant to Section XI.1, this Agreement shall become
void and have no effect, and there shall be no obligations or liability on the
part of any party or its respective officers, directors or
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trustees, except as set forth in Sections V.1 and X.1 (except to the extent that
termination has occurred pursuant to subsection XI.1(c), above).
ARTICLE XII
MISCELLANEOUS
XII.1 Time of the Essence. Time is of the essence in this Agreement;
provided, however, that the parties shall have a reasonable period of time to
cure any failure to perform their obligations hereunder, which period shall not
be longer than three (3) Business Days for purposes of any obligations under
Article II.
XII.2 Entire Agreement. Except as set forth in Section V.1 above, this
Agreement and the other agreements contemplated hereby contain the entire
agreement of the parties hereto, and supersedes any prior written or oral
agreements between them concerning the subject matter contained herein. There
are no representations, agreements, arrangements or understandings, oral or
written, between the parties to this Agreement, relating to the subject matter
contained in this Agreement, which are not fully expressed herein or the
agreement identified in Section V.1 above. The Schedules and each Exhibit
attached to this Agreement or delivered pursuant to this Agreement is
incorporated herein by this reference and constitutes a part of this Agreement.
XII.3 Press Releases amid Public Announcements. Neither Seller nor Buyer
shall issue any press release or make any public announcement concerning the
matters set forth in this Agreement (other than as required by applicable
disclosure rules or regulations) without the consent of the other party, which
consent shall not be unreasonably delayed or withheld. Seller and Buyer will
cooperate to jointly prepare and issue any press release which may be issued to
announce the entering into this agreement or the closing of the transaction
contemplated by this Agreement.
XII.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
XII.5 Descriptive Headings. The Article and Section headings in this
Agreement are for convenience only and shall not affect the meanings or
construction of any provision of this Agreement.
XII.6 Notices. Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given on the date
delivered personally or by telecopier (if a copy is sent by mail), or five (5)
days after posting by registered or certified mail, postage prepaid, addressed
as follows:
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If to Buyer:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Telecopier Number: (212) 805-5494
Attention: Christopher C. Cambria
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
Attention: William E. Curbow
And if to Seller:
FAP Acquisition Trust
c/o First Union National Bank
10 State House Square
Hartford, CT 06103-3698
Telecopier Number: (860) 247-1356
Attention: W. Jeffrey Kramer
With copies to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Telecopier Number: (415) 983-1200
Attention: Graham Taylor
and
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Telecopier Number: (860) 527-5188
Attention: James G. Scantling
or to such other address or addresses as a party shall have previously
designated by notice to the sender given in accordance win this Section.
XII.7 Arbitration. Any dispute under this Agreement prior to June 30, 2000
(and after such date, but in such case only if and for so long as there are
Impounded Funds (as defined in the Escrow Agreement between Seller, the Company
and the stockholders of the Company (the
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"Escrow Agreement")) with respect to such dispute) (the "Initial Arbitration
Period") which is not settled by mutual agreement among the parties hereto,
shall be finally settled by binding arbitration in New York, New York, conducted
by and in accordance with the rules then in effect of the Judicial Arbitration
and Mediation Service; provided that after the Initial Arbitration Period or the
payment or distribution of all amounts held in escrow pursuant to the Escrow
Agreement (or when a Notice of Release (as defined in the Escrow Agreement) has
been received with regard to all remaining amounts in such escrow), whichever
occurs earlier, any such dispute shall be settled by binding arbitration in San
Francisco, California, conducted by and in accordance with the rules then in
effect of the Judicial Arbitration and Mediation Service. Each party shall bear
its own costs and attorneys' and witness' fees. The prevailing party in any
arbitration, as determined by the arbitration panel, shall be entitled to an
award against the other party in the amount of the prevailing party's costs and
reasonable attorneys' fees. In making any such award, the arbitration panel
shall take into consideration the outcome of the proceeding and the
reasonableness of the conduct of each such party in connection with the dispute,
in light of the facts known to such party at the time such party engaged in such
conduct. The arbitrator shall not have authority to award punitive damages
hereunder.
XII.8 Choice of Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of New York.
XII.9 Bulk Sale and Other Tax Filings. The Buyer and Seller agree to waive
compliance with applicable state sales Tax, bulk sales notification statutes and
regulations and any applicable state tax statutes, in connection with the sale
of the Acquired Assets to the Buyer.
XII.10 Transfer Taxes; Sales Tax. The parties agree that the Buyer shall
pay the sales Tax on the transfer of personal property and each of the Seller or
the Buyer, as appropriate, shall be responsible for such other transfer Taxes
applicable to the transaction contemplated hereby as are customary in the
jurisdiction in which the Tax is payable (other than Taxes computed on the basis
of income) and each party so responsible shall indemnify, defend and hold the
other harmless with respect to such Taxes. Each Party shall file, or cooperate
with the other Party in filing, all necessary documentation and Tax Returns with
respect to such Transfer Taxes.
XII.11 Binding Effect; Benefits. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective successors and permitted
assigns. Nothing in this Agreement, express or implied, is intended to confer on
any person other than the parties or their respective successors and permitted
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
XII.12 Assignability. Except as explicitly contemplated hereunder, neither
this Agreement nor any of the parties' rights hereunder shall be assignable by
any party without the prior written consent of the other party and any attempted
assignment without such consent shall be void provided, however, that this
Agreement may be assigned by Buyer to an affiliate of Buyer which shall have
been formed for the purpose of consummating the transactions contemplated
hereby.
XII.13 Waiver and Amendment. Any term or provision of this Agreement may
be waived at any time by the party which is entitled to the benefits thereof.
The waiver by any
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party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach. The parties may, by mutual
agreement in writing, amend this Agreement in any respect.
XII.14 Attorneys' Fees. In the event of any action or proceeding to
enforce the terms and conditions of this Agreement, the prevailing party shall
be entitled to an award of reasonable attorneys' and experts' fees and costs, in
addition to such other relief as may be granted.
XII.15 Severability. If and to the extent that any court of competent
jurisdiction holds any provisions (or any part thereof) of this Agreement to be
illegal, invalid or unenforceable, such holding shall not affect the validity of
the remainder of this Agreement.
XII.16 No Recourse. It is expressly understood and agreed that this
Agreement is executed and delivered on behalf of Seller by First Union National
Bank ("First Union"), not in its individual capacity but solely as Trustee under
the trust agreement under which Seller is organized, in the exercise of the
powers and authority conferred and vested in it as the Trustee thereunder, and
each of the representations, warranties, undertakings and agreements herein made
on the part of Seller is made and intended not as a personal representations,
warranty, undertaking and agreement by First Union but is made and intended for
the purpose of binding only the trust estate created by the trust agreement
under which Seller is organized (the "Trust Estate"), and all persons having any
claim against First Union or Seller by reason of the transactions contemplated
by this Agreement shall for payment or satisfaction thereof not seek recourse
against First Union except in its capacity as trustee and then only to the
extent of the Trust Estate.
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IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the day and year first above written.
L-3 COMMUNICATIONS CORPORATION
By: /s/ [ILLEGIBLE]
---------------------------------
Name:
Title:
FAP TRUST
By: First Union National Bank, not
in its individual capacity but
solely as trustee
By:
---------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the day and year first above written.
L-3 COMMUNICATIONS CORPORATION
By:
---------------------------------
Name:
Title:
FAP TRUST
By: First Union National Bank, not
in its individual capacity but
solely as trustee
By: /s/ W. Jeffrey Kramer
---------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
<PAGE>
EXHIBIT VIII-2
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by
and between L-3 COMMUNICATIONS CORPORATION, a Delaware corporation
("Assignee"), and FAP TRUST, a Connecticut trust ("Assignor").
WITNESSETH
WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of
February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller
intends to acquire all of the outstanding capital stock of Ilex Systems, Inc.
(the "Company"); and
WHEREAS, pursuant to the Stock Purchase Agreement, Assignor, the Company,
all of the stockholders of the Company (the "Sellers") and The First National
Bank of Chicago, a national banking association ("Escrow Agent"), have entered
into that certain Escrow Agreement dated as of February __, 1998 (the "Escrow
Agreement") for the purpose of establishing a fund to satisfy certain
indemnification obligations of the Sellers that may arise under the Stock
Purchase Agreement and to facilitate the payment of the cash purchase price
adjustment contemplated thereby; and
WHEREAS, Assignor and Assignee have entered into an Asset Purchase
Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement")
pursuant to which Assignee will acquire substantially all of the assets and
assume substantially all of the liabilities of the Company; and
WHEREAS, in connection with the Asset Purchase Agreement and the
transactions contemplated thereby, Assignor desires to assign to Assignee its
entire right, title and interest in, under and to the Escrow Agreement, and
Assignee desires to take such assignment from Assignor, all upon the terms and
conditions set forth below:
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Assignment of the Escrow Agreement. Assignor hereby assigns to
Assignee all of Assignor's right, title and interest in, under and to the
Escrow Agreement, and Assignee hereby assumes all of Assignor's duties and
obligations under the Escrow Agreement.
2. Assertion of Claims Under the Escrow Agreement. Assignor and Assignee
understand that any and all claims which Assignee may have under the Escrow
Agreement will in most instances, but not in all, be based on facts and
circumstances that constitute both breaches of certain representations,
warranties and covenants of Assignor contained in the Asset Purchase Agreement
and breaches of similar representations, warranties and
<PAGE>
covenants of the Company and the Sellers contained in the Stock Purchase
Agreement. Accordingly, Assignor and Assignee agree as follows:
(i) For purposes of this Section 2, capitalized terms used but not
otherwise defined herein shall have the respective meanings given to them
in the Escrow Agreement.
(ii) Assignor shall promptly provide written notice to Assignee
upon its becoming aware of any facts or circumstances that give rise to a
breach of representation, warranty or covenant under the Stock Purchase
Agreement. Assignee shall promptly provide written notice to Assignor
upon its becoming aware of any facts or circumstances that give rise to a
breach of representation, warranty or covenant under the Asset Purchase
Agreement.
(iii) Assignee agrees that it will promptly provide Escrow Agent
with a Notice of Claim in all instances where Assignee's claims pursuant
to the Asset Purchase Agreement may also be asserted by Assignor pursuant
to the Stock Purchase Agreement (a "Matching Claim"). The following
procedure shall be followed by Assignor and Assignee in connection with
each Matching Claim:
(a) Upon submission by Assignee to Escrow Agent of a Notice
of Claim with respect to any Matching Claim, Assignee shall direct
Escrow Agent in writing to make any disbursements required in
respect thereof directly to Assignee; and
(b) Upon the determination of the amount, if any, payable to
Assignee with respect to such Matching Claim, whether by
negotiation or litigation, and disbursement by Escrow Agent to
Assignee of such amount out of the Escrow Fund in respect of any
Matching Claim, Assignee agrees that such Matching Claim shall be
deemed fully paid and satisfied and neither Assignor nor Escrow
Agent shall have any further liability to Assignee with respect to
such Matching Claim, nor shall Assignee have any right to seek any
additional payments out of the Escrow Fund pursuant to the Asset
Purchase Agreement with respect to such Matching Claim.
(iv) In consideration of the mutual promises contained in this
Agreement, Assignee agrees that it will, if known, provide Escrow Agent
with a Notice of Claim in respect of any and all claims that may be
asserted by Assignor pursuant to the Stock Purchase Agreement but may not
be asserted by Assignee pursuant to the Asset Purchase Agreement (an
"Assignor Claim"). The following procedure shall be followed by Assignor
and Assignee in connection with each Assignor Claim:
(a) Upon submission by Assignee to Escrow Agent of a Notice
of Claim with respect to any Assignor Claim, Assignee shall direct
Escrow Agent in writing to make any disbursements required in
respect thereof directly to Assignee; and
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(b) Upon determination of the amount, if any, payable to
Assignee with respect to such Assignor Claim, whether by
negotiation or litigation, and disbursement by Escrow Agent to
Assignee of such amount out of the Escrow Fund in respect of any
Assignor Claim, Assignee shall within two business days thereafter
remit to Assignor by certified check or wire transfer to an account
designated by Assignor in writing an amount equal to the amounts
disbursed to Assignee with respect to such Assignor Claim, and
Assignor agrees that its claim shall be deemed fully paid and
satisfied upon receipt of such certified check or wire transfer and
that neither Assignee nor Escrow Agent shall have any further
liability to Assignor with respect to that claim, nor shall
Assignor have any right to seek any additional payments out of the
Escrow Fund pursuant to the Stock Purchase Agreement with respect
to that claim. Assignee shall not in any way be responsible to
Assignor with respect to any such claim except for the requirement
to deliver to Assignor amounts disbursed to Assignee with respect
to such claim from the Escrow Fund.
(v) Assignee agrees to pursue any Matching Claim only under the
claims procedures set forth in this Agreement and the Escrow Agreement.
(vi) Assignee shall promptly deliver to Assignor copies of any and
all Award Notices, Notices of Claims, Notices of Releases, Objections and
Withdrawal Notices received by it pursuant to Section 5 of the Escrow
Agreement.
(vii) Assignor and Assignee shall cooperate with each other
regarding the submission of any and all Notices of Claims to Escrow Agent
in connection with the Escrow Agreement, and each of them agree to take
any and all such reasonable actions that either of them deem necessary or
appropriate to otherwise effectuate the purpose and intent of this
Section 2.
3. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
5. Arbitration. Any dispute under this Agreement which is not settled by
mutual agreement among the parties hereto, shall be finally settled by binding
arbitration in New York, New York, conducted by and in accordance with the
rules then in effect of the Judicial Arbitration and Mediation Service. Each
party shall bear its own costs and attorneys' and witness' fees. The prevailing
party in any arbitration, as determined by the arbitration panel, shall be
entitled to an award against the other party in the amount of the prevailing
party's costs and reasonable attorneys' fees. In making any such award, the
arbitration panel shall take into consideration the outcome of the proceeding
and the reasonableness of the conduct of each such party in connection with the
dispute, in light of
-3-
<PAGE>
the facts known to such party at the time such party engaged in such conduct.
The arbitrator shall not have authority to award punitive damages hereunder.
6. Entire Agreement. This Agreement and the Asset Purchase Agreement
constitute the entire agreement between Assignor and Assignee with respect to
the subject matter hereof. This Agreement cancels and supersedes all prior
agreements, understandings and negotiations between the parties to this
Agreement with respect to the subject matter of this Agreement. This Agreement
may only be varied or modified by a written document executed by each of the
parties hereto.
7. Assignment. The rights and benefits of the parties under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of such parties. Neither this Agreement nor any rights
or benefits hereunder may be assigned or transferred by any party hereto
without the prior written consent of all other parties hereto.
8. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to Assignee:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Telecopier Number: (212) 805-5494
Attention: Christopher C. Cambria
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
Attention: William E. Curbow
And if to Assignor:
FAP Trust
c/o First Union National Bank
10 State House Square
Hartford, CT 06103-3698
Telecopier Number: (860) 247-1356
Attention: W. Jeffrey Kramer
-4-
<PAGE>
With copies to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Telecopier Number: (415) 983-1200
Attention: Graham Taylor
and
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Telecopier Number: (860) 527-5188
Attention: James G. Scantling
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been
duly given unless and until it actually is received by the intended recipient.
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
9. Further Assurances. Each of the parties to this Agreement shall
execute such other documents and instruments and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof.
10. No Recourse. It is expressly understood and agreed that this
Agreement is executed and delivered on behalf of Assignor by First Union
National Bank ("First Union"), not in its individual capacity but solely as
Trustee under the trust agreement under which Assignor is organized, in the
exercise of the powers and authority conferred and vested in it as the Trustee
thereunder, and each of the representations, warranties, undertakings and
agreements herein made on the part of Assignor is made and intended not as a
personal representation, warranty, undertaking or agreement by First Union but
is made and intended for the purpose of binding only the trust estate created
by the trust agreement under which Assignor is organized (the "Trust Estate"),
and all persons having any claim against First Union or Assignor by reason of
the transactions contemplated by this Agreement shall for payment or
satisfaction thereof not seek recourse against First Union except in its
capacity as trustee and then only to the extent of the Trust Estate.
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By: /s/ Christopher Cambria
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By:
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
Consented to by:
THE FIRST NATIONAL BANK OF
CHICAGO as Escrow Agent under the
Escrow Agreement
By:
-------------------------------
Name:
Title:
6
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By:
-------------------------------
Name:
Title:
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By: /s/ W. Jeffrey Kramer
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
Consented to by:
THE FIRST NATIONAL BANK OF
CHICAGO as Escrow Agent under the
Escrow Agreement
By:
-------------------------------
Name:
Title:
6
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By:
-------------------------------
Name:
Title:
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By:
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
Consented to by:
THE FIRST NATIONAL BANK OF
CHICAGO as Escrow Agent under the
Escrow Agreement
By: /s/ John R. Prenolville
-------------------------------
Name: John R. Prenolville
Title: Vice President
6
<PAGE>
EXHIBIT VIII-7
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by
and between L-3 COMMUNICATIONS CORPORATION a Delaware corporation, ("Assignee")
and FAP TRUST, a Connecticut trust ("Assignor").
WITNESSETH
WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of
February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller
intends to acquire all of the outstanding capital stock of Ilex Systems, Inc.
(the "Company"); and
WHEREAS, pursuant to the Stock Purchase Agreement, Assignor and Joseph
Lopez ("Seller") have entered into that certain Confidentiality and
Non-Competition Agreement dated as of February __, 1998 (the "Non-Competition
Agreement"); and
WHEREAS, Assignor and Assignee have entered into an Asset Purchase
Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement")
pursuant to which Assignee will acquire substantially all of the assets and
assume substantially all of the liabilities of the Company; and
WHEREAS, in connection with the Asset Purchase Agreement and the
transactions contemplated thereby, Assignor desires to assign to Assignee its
entire right, title and interest in, under and to the Non-Competition
Agreement, and Assignee desires to take such assignment from Assignor, all upon
the terms and conditions set forth below:
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Assignment of the Non-Competition Agreement. Pursuant to and in
accordance with terms of Section 8 of the Non-Competition Agreement, Assignor
hereby assigns to Assignee all of Assignor's right, title and interest in,
under and to the Non-Competition Agreement, and Assignee hereby assumes all of
Assignor's duties and obligations under the Non-Competition Agreement.
2. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE>
4. Entire Agreement. This Agreement and the Asset Purchase Agreement
constitute the entire agreement between Assignor and Assignee with respect to
the subject matter hereof. This Agreement cancels and supersedes all prior
agreements, understandings and negotiations between the parties to this
Agreement with respect to the subject matter of this Agreement. This Agreement
may only be varied or modified by a written document executed by each of the
parties hereto.
5. Assignment. The rights and benefits of the parties under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of such parties. Neither this Agreement nor any rights
or benefits hereunder may be assigned or transferred by any party hereto
without the prior written consent of all other parties hereto.
6. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to Assignee:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Telecopier Number: (212) 805-5494
Attention: Christopher C. Cambria
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
Attention: William E. Curbow
And if to Assignor:
FAP Trust
c/o First Union National Bank
10 State House Square
Hartford, CT 06103-3698
Telecopier Number: (860) 247-1356
Attention: W. Jeffrey Kramer
-2-
<PAGE>
With copies to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Telecopier Number: (415) 983-1200
Attention: Graham Taylor
and
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Telecopier Number: (860) 527-5188
Attention: James G. Scantling
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been
duly given unless and until it actually is received by the intended recipient.
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
7. Further Assurances. Each of the parties to this Agreement shall
execute such other documents and instruments and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof.
8. No Recourse. It is expressly understood and agreed that this
Agreement is executed and delivered on behalf of Assignor by First Union
National Bank ("First Union"), not in its individual capacity but solely as
Trustee under the trust agreement under which Assignor is organized, in the
exercise of the powers and authority conferred and vested in it as the Trustee
thereunder, and each of the representations, warranties, undertakings and
agreements herein made on the part of Assignor is made and intended not as a
personal representation, warranty, undertaking or agreement by First Union but
is made and intended for the purpose of binding only the trust estate created
by the trust agreement under which Assignor is organized (the "Trust Estate"),
and all persons having any claim against First Union or Assignor by reason of
the transactions contemplated by this Agreement shall for payment or
satisfaction thereof not seek recourse against First Union except in its
capacity as trustee and then only to the extent of the Trust Estate.
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By: /s/ Christopher Cambria
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By:
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
4
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By:
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By: /s/ W. Jeffrey Kramer
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
5
<PAGE>
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by
and between L-3 COMMUNICATIONS CORPORATION, a Delaware corporation,
("Assignee") and FAP TRUST, a Connecticut trust ("Assignor").
WITNESSETH
WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of
February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller
intends to acquire all of the outstanding capital stock of Ilex Systems, Inc.
(the "Company"); and
WHEREAS, pursuant to the Stock Purchase Agreement, Assignor and Donald
Potter ("Seller") have entered into that certain Confidentiality and
Non-Competition Agreement dated as of February __, 1998 (the "Non-Competition
Agreement"); and
WHEREAS, Assignor and Assignee have entered into an Asset Purchase
Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement")
pursuant to which Assignee will acquire substantially all of the assets and
assume substantially all of the liabilities of the Company; and
WHEREAS, in connection with the Asset Purchase Agreement and the
transactions contemplated thereby, Assignor desires to assign to Assignee its
entire right, title and interest in, under and to the Non-Competition
Agreement, and Assignee desires to take such assignment from Assignor, all upon
the terms and conditions set forth below:
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Assignment of the Non-Competition Agreement. Pursuant to and in
accordance with terms of Section 8 of the Non-Competition Agreement, Assignor
hereby assigns to Assignee all of Assignor's right, title and interest in,
under and to the Non-Competition Agreement, and Assignee hereby assumes all of
Assignor's duties and obligations under the Non-Competition Agreement.
2. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE>
4. Entire Agreement. This Agreement and the Asset Purchase Agreement
constitute the entire agreement between Assignor and Assignee with respect to
the subject matter hereof. This Agreement cancels and supersedes all prior
agreements, understandings and negotiations between the parties to this
Agreement with respect to the subject matter of this Agreement. This Agreement
may only be varied or modified by a written document executed by each of the
parties hereto.
5. Assignment. The rights and benefits of the parties under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of such parties. Neither this Agreement nor any rights
or benefits hereunder may be assigned or transferred by any party hereto
without the prior written consent of all other parties hereto.
6. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to Assignee:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Telecopier Number: (212) 805-5494
Attention: Christopher C. Cambria
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
Attention: William E. Curbow
And if to Assignor:
FAP Trust
c/o First Union National Bank
10 State House Square
Hartford, CT 06103-3698
Telecopier Number: (860) 247-1356
Attention: W. Jeffrey Kramer
-2-
<PAGE>
With copies to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Telecopier Number: (415) 983-1200
Attention: Graham Taylor
and
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Telecopier Number: (860) 527-5188
Attention: James G. Scantling
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been
duly given unless and until it actually is received by the intended recipient.
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
7. Further Assurances. Each of the parties to this Agreement shall
execute such other documents and instruments and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof.
8. No Recourse. It is expressly understood and agreed that this
Agreement is executed and delivered on behalf of Assignor by First Union
National Bank ("First Union"), not in its individual capacity but solely as
Trustee under the trust agreement under which Assignor is organized, in the
exercise of the powers and authority conferred and vested in it as the Trustee
thereunder, and each of the representations, warranties, undertakings and
agreements herein made on the part of Assignor is made and intended not as a
personal representation, warranty, undertaking or agreement by First Union but
is made and intended for the purpose of binding only the trust estate created
by the trust agreement under which Assignor is organized (the "Trust Estate"),
and all persons having any claim against First Union or Assignor by reason of
the transactions contemplated by this Agreement shall for payment or
satisfaction thereof not seek recourse against First Union except in its
capacity as trustee and then only to the extent of the Trust Estate.
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By: /s/ Christopher Cambria
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By:
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
4
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By:
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By: /s/ W. Jeffrey Kramer
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
4
<PAGE>
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT dated as of March 4, 1998 is entered into by
and between L-3 COMMUNICATIONS CORPORATION, a Delaware corporation,
("Assignee") and FAP TRUST, a Connecticut trust ("Assignor").
WITNESSETH
WHEREAS, Assignor is a party to a Stock Purchase Agreement dated as of
February 9, 1998 (the "Stock Purchase Agreement") pursuant to which Seller
intends to acquire all of the outstanding capital stock of Ilex Systems, Inc.
(the "Company"); and
WHEREAS, pursuant to the Stock Purchase Agreement, Assignor and Erwin P.
Frech, Jr. ("Seller") have entered into that certain Confidentiality and
Non-Competition Agreement dated as of February __, 1998 (the "Non-Competition
Agreement"); and
WHEREAS, Assignor and Assignee have entered into an Asset Purchase
Agreement dated as of February 10, 1998 (the "Asset Purchase Agreement")
pursuant to which Assignee will acquire substantially all of the assets and
assume substantially all of the liabilities of the Company; and
WHEREAS, in connection with the Asset Purchase Agreement and the
transactions contemplated thereby, Assignor desires to assign to Assignee its
entire right, title and interest in, under and to the Non-Competition
Agreement, and Assignee desires to take such assignment from Assignor, all upon
the terms and conditions set forth below:
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Assignment of the Non-Competition Agreement. Pursuant to and in
accordance with terms of Section 8 of the Non-Competition Agreement, Assignor
hereby assigns to Assignee all of Assignor's right, title and interest in,
under and to the Non-Competition Agreement, and Assignee hereby assumes all of
Assignor's duties and obligations under the Non-Competition Agreement.
2. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE>
4. Entire Agreement. This Agreement and the Asset Purchase Agreement
constitute the entire agreement between Assignor and Assignee with respect to
the subject matter hereof. This Agreement cancels and supersedes all prior
agreements, understandings and negotiations between the parties to this
Agreement with respect to the subject matter of this Agreement. This Agreement
may only be varied or modified by a written document executed by each of the
parties hereto.
5. Assignment. The rights and benefits of the parties under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of such parties. Neither this Agreement nor any rights
or benefits hereunder may be assigned or transferred by any party hereto
without the prior written consent of all other parties hereto.
6. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to Assignee:
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Telecopier Number: (212) 805-5494
Attention: Christopher C. Cambria
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
Attention: William E. Curbow
And if to Assignor:
FAP Trust
c/o First Union National Bank
10 State House Square
Hartford, CT 06103-3698
Telecopier Number: (860) 247-1356
Attention: W. Jeffrey Kramer
-2-
<PAGE>
With copies to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Telecopier Number: (415) 983-1200
Attention: Graham Taylor
and
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Telecopier Number: (860) 527-5188
Attention: James G. Scantling
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been
duly given unless and until it actually is received by the intended recipient.
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
7. Further Assurances. Each of the parties to this Agreement shall
execute such other documents and instruments and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof.
8. No Recourse. It is expressly understood and agreed that this
Agreement is executed and delivered on behalf of Assignor by First Union
National Bank ("First Union"), not in its individual capacity but solely as
Trustee under the trust agreement under which Assignor is organized, in the
exercise of the powers and authority conferred and vested in it as the Trustee
thereunder, and each of the representations, warranties, undertakings and
agreements herein made on the part of Assignor is made and intended not as a
personal representation, warranty, undertaking or agreement by First Union but
is made and intended for the purpose of binding only the trust estate created
by the trust agreement under which Assignor is organized (the "Trust Estate"),
and all persons having any claim against First Union or Assignor by reason of
the transactions contemplated by this Agreement shall for payment or
satisfaction thereof not seek recourse against First Union except in its
capacity as trustee and then only to the extent of the Trust Estate.
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By: /s/ Christopher Cambria
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By:
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
4
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNEE
L-3 COMMUNICATIONS
CORPORATION
By:
-------------------------------
Name: Christopher Cambria
Title: Vice President
ASSIGNOR:
FAP TRUST
By: FIRST UNION NATIONAL BANK, not
in its individual capacity but
solely as trustee
By: /s/ W. Jeffrey Kramer
-------------------------------
Name: W. Jeffrey Kramer
Title: Vice-President
4
<PAGE>
ASSET PURCHASE AGREEMENT
AMONG
ALLIEDSIGNAL INC.,
ALLIEDSIGNAL TECHNOLOGIES, INC.,
ALLIEDSIGNAL DEUTSCHLAND GMBH
AND
L-3 COMMUNICATIONS CORPORATION
DATED AS OF MARCH 30, 1998
<PAGE>
ASSET PURCHASE AGREEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1. PURCHASE AND SALE................................................................................... 1
1.1 Purchase and Sale........................................................................ 1
1.2 Non-Assignable Assets.................................................................... 3
1.3 Excluded Assets.......................................................................... 3
1.4 Transfer of the Assets................................................................... 4
1.5 Sale and Transfer of ELAC Shares......................................................... 4
1.6 License Agreement........................................................................ 5
ARTICLE 2. CLOSING; PURCHASE PRICE............................................................................. 5
2.1 Closing Date and Place................................................................... 5
2.2 Purchase Price........................................................................... 5
2.3 Income Taxes............................................................................. 5
2.4 Cash True-Up............................................................................. 5
2.5 Allocation of Purchase Price............................................................. 6
2.6 Payments................................................................................. 6
2.7 Transfer Taxes........................................................................... 6
ARTICLE 3. ASSUMPTION OF LIABILITIES AND OBLIGATIONS............................................................ 7
3.1 Assumed Liabilities...................................................................... 7
3.2 Excluded Liabilities..................................................................... 7
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLERS........................................................... 8
4.1 Corporate Status......................................................................... 8
4.2 Authorization............................................................................ 8
4.3 Compliance............................................................................... 9
4.4 [Intentionally left blank]............................................................... 9
4.5 Personal Property........................................................................ 9
4.6 Intellectual Property.................................................................... 10
4.7 Contracts and Binding Commitments........................................................ 10
4.8 Title.................................................................................... 11
4.9 Litigation............................................................................... 11
4.10 Environmental Matters.................................................................... 11
4.11 Employee Benefit Plans and Policies...................................................... 12
4.12 Material Changes......................................................................... 13
4.13 [Intentionally left blank]............................................................... 15
4.14 Compliance with Law...................................................................... 15
4.15 Consents................................................................................. 15
4.16 Taxes.................................................................................... 15
4.17 Permits and Licenses..................................................................... 16
4.18 Ownership of ELAC Shares................................................................. 16
4.19 Labor Relations.......................................................................... 16
4.20 Brokerage Fees........................................................................... 17
i
<PAGE>
Page
----
4.21 Government Contracts..................................................................... 17
4.22 Government Furnished Equipment........................................................... 19
4.23 Entire Business.......................................................................... 19
4.24 Real Estate.............................................................................. 19
4.25 Insurance................................................................................ 20
4.26 Affiliate Transactions................................................................... 20
4.27 No Additional Representations............................................................ 21
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER......................................................... 21
5.1 Corporate Status......................................................................... 21
5.2 Authorization............................................................................ 21
5.3 Compliance............................................................................... 21
5.4 Due Diligence............................................................................ 22
5.5 Financing................................................................................ 22
5.6 Investment Representation................................................................ 22
5.7 Conveyances and Restrictions............................................................. 22
5.8 Brokerage Fees........................................................................... 22
ARTICLE 6. EMPLOYEES AND EMPLOYEE BENEFITS..................................................................... 22
6.1 Employment............................................................................... 22
6.2 Compensation and Benefits - U.S. Employees............................................... 23
6.3 Severance and WARN Act................................................................... 24
6.4 Health Care Continuation Liability....................................................... 24
6.5 Pension Plan............................................................................. 24
6.6 Savings Plan............................................................................. 26
6.7 Labor Agreements......................................................................... 27
ARTICLE 7. PRE-CLOSING COVENANTS............................................................................... 27
7.1 [Intentionally left blank]............................................................... 27
7.2 [Intentionally left blank]............................................................... 27
7.3 [Intentionally left blank]............................................................... 27
7.4 [Intentionally left blank]............................................................... 27
7.5 Workers' Compensation.................................................................... 27
7.6 Insurance-Primary Casualty Program....................................................... 27
7.6.1 Claims Responsibility and Procedures........................................ 27
7.7 No Inconsistent Action................................................................... 28
7.8 [Intentionally left blank]............................................................... 28
7.9 Non-Solicitation......................................................................... 28
7.10 Refunds and Remittances.................................................................. 28
7.11 Enforcement of Confidentiality Provisions................................................ 28
7.12 Novation of Government Contracts......................................................... 28
7.13 Further Actions.......................................................................... 28
7.14 Letters of Credit........................................................................ 29
7.15 1985 Capitalization of ELAC.............................................................. 29
7.16 MCDV Subcontract......................................................................... 29
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ARTICLE 8. CONDITIONS TO CLOSING............................................................................... 30
8.1 Conditions to the Obligations of Purchaser............................................... 30
8.2 Conditions to the Obligations of Sellers................................................. 31
ARTICLE 9. TERMINATION AND SURVIVAL............................................................................ 31
9.1 Termination.............................................................................. 31
9.2 Effect of Termination.................................................................... 32
ARTICLE 10. CLOSING DOCUMENTS.................................................................................. 32
10.1 Documents to be Delivered by Sellers..................................................... 32
10.2 Documents to be Delivered by Purchaser................................................... 33
ARTICLE 11. POST CLOSING OBLIGATIONS........................................................................... 34
11.1 Further Assurances....................................................................... 34
11.2 Access to Books and Records.............................................................. 34
11.3 Cooperation in Litigation................................................................ 34
11.4 Proprietary Information.................................................................. 34
11.5 Covenant Not to Compete.................................................................. 35
11.6 Change of Name........................................................................... 35
11.7 Tax Election............................................................................. 35
11.8 Research and Experimental Expenses....................................................... 35
11.9 Pooling Arrangement...................................................................... 35
ARTICLE 12. INDEMNIFICATION.................................................................................... 35
12.1 Indemnification by Sellers............................................................... 35
12.2 Tax Indemnification...................................................................... 36
12.3 Indemnification by Purchaser............................................................. 36
12.4 Indemnification Procedure................................................................ 37
12.5 Survival and Limitations................................................................. 38
12.6 Adjustment for Insurance and Taxes....................................................... 38
12.7 Environmental Liabilities................................................................ 39
12.8 Facility Sale Agreement.................................................................. 39
ARTICLE 13. MISCELLANEOUS...................................................................................... 39
13.1 Expenses................................................................................. 39
13.2 Notices.................................................................................. 39
13.3 Confidentiality.......................................................................... 40
13.4 Counterparts............................................................................. 40
13.5 Entire Agreement/Termination of December Agreement....................................... 40
13.6 Construction............................................................................. 41
13.7 Assignment............................................................................... 41
13.8 Amendment................................................................................ 41
13.9 Applicable Law........................................................................... 41
13.10 No Third Party Rights.................................................................... 41
13.11 Exhibits and Schedules................................................................... 41
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13.12 Waivers.................................................................................. 41
13.13 Severability............................................................................. 42
13.14 Bulk Sales Law........................................................................... 42
13.15 Knowledge of Sellers..................................................................... 42
13.16 Personal Liability....................................................................... 42
EXHIBIT A -- License Agreement
EXHIBIT B -- Transition Services Agreement
</TABLE>
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SCHEDULES
1 Products
1.1(a) Personal Property
1.3(j) Excluded Assets
4.6(a) Intellectual Property
4.6(c) Licensed Intellectual Property
4.6(d) Intellectual Property
4.7 Contracts
4.8 Title and Leases
4.9 Litigation
4.10 Environmental Disclosure
4.11 Benefit Plans and Policies
4.12 Material Changes
4.14 Compliance with Law
4.15 Consents
4.16 ELAC Taxes
4.17 Permits and Licenses
4.19 Labor Relations
4.19(x) Labor Relations
4.21(a) - (e) Government Contracts
4.22 Government Furnished Equipment
4.23 Entire Business
4.24 Real Estate
4.25 Insurance
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4.26 Affiliate Transactions
6.2(a) Retention Agreements
6.5(b) Actuarial Methods and Assumptions
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ASSET PURCHASE AGREEMENT
------------------------
ASSET PURCHASE AGREEMENT (the "Agreement") dated as of March 30, 1998
among AlliedSignal Inc., a Delaware corporation ("AlliedSignal"), AlliedSignal
Technologies, Inc., an Arizona corporation and a wholly owned subsidiary of
AlliedSignal ("ASTI"), AlliedSignal Deutschland GmbH, a German corporation and
a wholly owned subsidiary of AlliedSignal ("AS Deutschland" and, collectively
with ASTI and AlliedSignal, the "Sellers"), and L-3 Communications Corporation,
a Delaware corporation ("Purchaser").
WITNESSETH:
WHEREAS, AlliedSignal is engaged exclusively through AlliedSignal's
Ocean Systems business unit ("Ocean Systems") and through AlliedSignal ELAC
Nautik GmbH ("ELAC"), a wholly owned subsidiary of AS Deutschland, in the
business (the "Business") of developing, manufacturing and selling the products
and services (the "Products") listed on Schedule 1 hereto, together with
services associated with such Products; all of which Products as produced by
the Business during the last 24 months are listed in Schedule 1 hereto;
WHEREAS, certain of the intellectual property used by Ocean Systems
is owned by ASTI;
WHEREAS, AlliedSignal desires to sell and Purchaser desires to
purchase the assets of Sellers primarily related to, or used primarily in
connection with, the Business as described herein.
NOW, THEREFORE, in consideration of the mutual covenants, agreements
representations and warranties contained herein, the parties agree as follows:
ARTICLE 1. PURCHASE AND SALE
1.1 Purchase and Sale of Assets and Stock. Subject to the terms and
conditions of this Agreement and except as otherwise provided herein, at the
Closing (as defined in Section 2.1), Sellers shall sell, convey, transfer,
assign and deliver to Purchaser, and Purchaser shall purchase and accept from
Sellers, all direct or indirect right, title and interest of Sellers in the
assets, whether tangible or intangible, real or personal, primarily related to,
or used primarily in connection with, the Business prior to the Closing, other
than Excluded Assets (as defined in Section 1.3), together with all of AS
Deutschland's right, title and interest in the ELAC capital stock described in
Section 1.1(o) below (the "Assets"), including, without limitation, the
following:
(a) all machinery and equipment, fixtures, furniture, office
equipment, vehicles, boats, ships, tools and other tangible personal property
set forth on Schedule 1.1(a) as of the date indicated thereon (collectively,
the "Personal Property");
(b) all accounts receivable and other receivables as of the
Closing Date, whether recorded or unrecorded (the "Accounts Receivable");
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(c) all inventory and other supplies on hand, in transit or
on order as of the Closing Date, wherever located, including raw materials,
work-in-process and finished goods (the "Inventory");
(d) subject to the exclusions set forth in Section 1.3(f) and
(h), all intellectual property, including without limitation all (i)
inventions, discoveries, processes, formulae, designs, methods, techniques,
procedures, concepts, developments, technology, new and useful improvements
thereof and know-how relating thereto, whether or not patented or eligible for
patent protection; copyrights and copyrightable works, including computer
applications, programs, software, databases and related items; trademarks,
service marks, trade names (including, but not limited to, the "Ocean Systems"
trade name), brand names, logos and trade dress, the goodwill of any business
symbolized thereby, and all common-law rights relating thereto; trade secrets
and other confidential information; (ii) registrations, applications,
recordings, and licenses or other similar agreements related to the foregoing;
(iii) rights to sue at law or in equity for any infringement or other
impairment of the foregoing occurring prior to the Closing Date; and (iv)
rights to obtain reissues, re-examinations, continuations,
continuations-in-part, divisions, extensions, renewals or other legal
protections pertaining to the foregoing (the "Intellectual Property");
(e) all contracts, agreements, arrangements and/or
commitments (the "Contracts");
(f) all transferable governmental and other permits,
licenses, approvals, certificates of inspection, filings, franchises and other
authorizations relating to the Assets including, but not limited to, those
listed in Schedules 4.10 and 4.17 hereto (the "Permits and Licenses");
(g) prepaid expenses, except insurance premiums, but only
if and to the extent of the benefit conferred by such prepaid expenses to the
Business after the Closing Date;
(h) all transferable rights of Sellers pursuant to any
express or implied warranties, representations or guarantees relating to any
Personal Property or made by suppliers furnishing goods or services to Sellers;
(i) all lists, files and documents, including, but not
limited to, all business records, tangible data, computer software, electronic
media and management information systems, disks, files, customer lists,
supplier lists, blueprints, specifications, designs, drawings, plans, operation
or maintenance manuals, bids, personnel records, policy manuals, invoices,
credit reports, sales literature, tax, financial and accounting records and all
other books and records (the "Books and Records").
(j) all interests in real estate, whether leased or owned,
excluding the land, building and improvements located at Sylmar, California
(the "Facility"),
(k) all security (including cash) deposited with third
parties and all security bonds;
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(l) all goodwill and going concern value (without any
representation as to any value thereof);
(m) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind against other parties (other than
those related to Excluded Assets or Excluded Liabilities);
(n) all insurance proceeds arising out of or related to
damage, destruction or loss of any property or asset of or used primarily in
connection with the Business to the extent of any damage or destruction that
remains unrepaired, or to the extent any property or asset remains unreplaced,
at the Closing Date; and
(o) all the issued and outstanding capital stock and rights
in respect of such capital stock of ELAC (the "ELAC Shares").
1.2 Non-Assignable Assets. Notwithstanding anything to the contrary
contained in this Agreement, to the extent the sale, assignment, transfer,
conveyance or delivery to Purchaser of any Asset, or any other item to be
delivered at Closing, such as a permit, license or consent, is prohibited by
any foreign, federal, state or local statutes, laws or regulations applicable
to the Assets or the operation of the Business (an "Applicable Law") or would
require any governmental or third party authorizations, approvals, consents or
waivers which shall not have been obtained prior to the Closing (after Sellers'
reasonable best efforts to obtain them), this Agreement shall not constitute a
sale, assignment, transfer, conveyance or delivery thereof. Following the
Closing, the parties shall use reasonable best efforts and cooperate with each
other to obtain promptly such authorizations, approvals, consents or waivers;
provided, however, that neither Sellers nor Purchaser shall be required to pay
any consideration therefor, other than filing, recordation or similar fees
payable to any governmental authority, which fees shall be paid in accordance
with Section 2.6. Pending such authorization, approval, consent or waiver, the
parties shall cooperate with each other in any commercially reasonable and
lawful arrangements designed to provide to Purchaser the benefits of use of
such Asset. Once such authorization, approval, consent or waiver is obtained,
the Sellers shall promptly assign, transfer, convey and deliver such Asset to
Purchaser for no additional consideration. To the extent that any such Asset
cannot be transferred or the full benefits of use of any such Asset cannot be
provided to Purchaser following the Closing, then Purchaser and Sellers shall
enter into such arrangements for no additional consideration from Purchaser
(including subleasing or subcontracting if permitted) to provide Purchaser the
economic (taking into account tax costs and benefits) and operational
equivalent of obtaining such authorization, approval, consent or waiver.
1.3 Excluded Assets. Notwithstanding anything to the contrary
contained in this Agreement, the following are not included in the Assets and
not intended to be sold, assigned, transferred or conveyed to Purchaser
hereunder (the "Excluded Assets"):
(a) assets primarily related to, or used primarily in
connection with, Sellers' businesses other than the Business, including, but
not limited to, the assets primarily related to, or used primarily in
connection with, Sellers' avionics repair and overhaul business conducted at
the Facility;
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(b) except as set forth in Section 2.4, cash, cash
equivalents and overdrafts;
(c) intercompany receivables and intercompany prepaid
expenses, other than (i) trade receivables of the Business for goods delivered
in the ordinary course of business and (ii) the intercompany note receivable
between Ocean Systems and ELAC with respect to cash in the AlliedSignal German
cash pool (the "Intercompany Note");
(d) Books and Records which Sellers are required by law to
retain; provided, however, that in the event of such legal requirement, Sellers
shall retain copies of such Books and Records and deliver the original Books
and Records to Purchaser unless Sellers are legally obligated to retain the
original records in which case the copies of such Books and Records shall be
provided to Purchaser;
(e) the basic books and records of account and all supporting
vouchers, invoices and other records and materials relating to any or all
income taxes of Sellers; other than all such materials relating solely to the
Business and located at the Facility or at ELAC's headquarters in Kiel, Germany
(the "ELAC Facility");
(f) except as granted pursuant to Section 1.1(d) any right to
use any name or logo of Sellers or any Affiliate or any confusingly similar
variant or derivative thereof, including but not limited to "Allied-Signal",
"AlliedSignal", "Allied", "Allied Chemical," "Signal," "Bendix," "Bendix
Oceanics" or "Bendix Oceanics, Inc.";
(g) the insurance policies of Sellers, including without
limitation those pertaining to the Business and the Facility, and the rights
of Sellers thereunder;
(h) the Intellectual Property listed in Schedule 4.6 (c)
(the "Licensed Property");
(i) assets of employee benefit plans, except as provided
in Article 6;
(j) the assets listed in Schedule 1.3(j); and
(k) the Facility.
1.4 Transfer of the Assets. Sellers shall sell, convey, transfer,
assign and deliver the Assets to Purchaser at the Closing by means of deeds,
bills of sale, assignments, endorsements, consents, certificates and such other
good and sufficient instruments of transfer in form and substance reasonably
satisfactory to Purchaser, and all in recordable form, where applicable, as
shall be necessary or appropriate to vest in Purchaser all right, title,
ownership and interest of Sellers in and to the Assets as provided in this
Agreement or in the Schedules hereto.
1.5 Sale and Transfer of ELAC Shares. Sellers shall cause to be
delivered to the Purchaser certificates representing the ELAC Shares, duly
endorsed, or accompanied by stock powers duly executed, with all necessary
stock transfer stamps attached thereto and cancelled,
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or such other assignments, deeds, share transfer forms, endorsements, notarial
deeds of transfer or other instruments or documents, duly stamped where
necessary.
1.6 License Agreement. On or prior to the Closing Date, ASTI and
Purchaser shall enter into a license agreement in the form attached hereto as
Exhibit A, with respect to the intellectual property identified in Schedule
4.6(c).
ARTICLE 2. CLOSING; PURCHASE PRICE
2.1 Closing Date and Place. On and subject to the conditions set forth
herein, the consummation of the purchase and sale contemplated hereby (the
"Closing") will take place at the offices of AlliedSignal in Morristown, NJ at
10:00 a.m., local time, on March 30, 1998, or at such other time and place as
shall be agreed upon by the parties hereto. The date upon which the Closing
occurs is referred to herein as the "Closing Date". The Closing shall be
effective as of 11:59 p.m. on the Closing Date. In addition, subsequent to the
Closing, Purchaser and Sellers shall call the notary in Europe in order to
perfect the transfer of the ELAC Shares by way of a notarial deed.
2.2 Purchase Price. (a) The purchase price to be paid by
Purchaser for the Assets including the ELAC Shares, is Sixty-Seven Million
Five Hundred Thousand Dollars ($67,500,000) (the "Purchase Price"). The
Purchase Price shall be paid by Purchaser in full at Closing in immediately
available funds.
(b) The parties acknowledge the existence of a receivable
relating to a contract dated December 19, 1997 (the "Turkey Contract") pursuant
to which Ocean Systems is to supply to the Turkish Navy four (4) AQS-18A
dipping sonar systems, plus spares, ground support equipment and performance
testing (the "Turkey Receivable"). In the event that any cash is received by
AlliedSignal in respect of the Turkey Receivable, whether before, on or after
the Closing Date (each a "Turkey Cash Receipt"), AlliedSignal shall pay to L-3
an amount in cash equal to all Turkey Cash Receipts, on April 1, 1998, or if
any Turkey Cash Receipt is received by AlliedSignal after April 1, 1998, on the
date of such receipt.
2.3 Income Taxes. As soon as reasonably practicable, the parties shall
prepare a calculation of income tax liability or tax benefit based on the
income or loss reflected on the books and records of the Business determined on
a basis consistent with prior periods (excluding any income or loss
attributable to the Turkey Contract) for the period beginning after December
31, 1997 (the "Effective Date") and ending on the close of the Closing Date
multiplied by 36.6%. The calculation of book income or loss for such period
shall be computed by means of a closing of the books and records of the
Business as of the Closing Date, and, to the extent not practical, by
apportionment on the basis of elapsed days. Buyer shall pay to Seller any such
income tax liability and Seller shall pay to Buyer any such income tax benefit
within 60 days thereof.
2.4 Cash True-Up. Within fifteen business days after the
Closing Date, AlliedSignal shall prepare and deliver to Purchaser a schedule
setting forth, on a daily basis, the cash generated by the Business from
12:01 a.m. on the first day following the Effective
5
<PAGE>
Date through and including the Closing Date. Purchaser shall have three
business days from receipt to review the schedule and AlliedSignal shall give
Purchaser reasonable access to its books and records for the purpose of
confirming the calculations of AlliedSignal pursuant to this Section 2.4. Any
dispute with respect to the schedule shall be resolved in good faith by the
parties. Within three business days after the expiration of such review period
(or the resolution of any dispute), Purchaser shall make payment to
AlliedSignal if the schedule shows a net cash usage by the Business during such
period and AlliedSignal shall make payment to Purchaser if the schedule shows
net cash generation during such period in an amount equal to such net cash
usage or net cash generation, as the case may be; provided, however, that if
AlliedSignal shall pay to Purchaser any amount pursuant to Section 2.2(b) in
respect of a Turkey Cash Receipt received on or prior to the Closing Date, and
the amount of such Turkey Cash Receipt would have been a cash generation under
this Section 2.4 but for this proviso, then the amount of any such Turkey Cash
Receipt shall be excluded in calculating net cash generation or a cash usage
under this Section 2.4. Any payment to be made pursuant to this Section 2.4
shall be made in immediately available funds by wire transfer to a bank account
designated in writing by the party entitled to receive the payment.
AlliedSignal shall be responsible for paying any checks outstanding as of the
Effective Date.
2.5 Allocation of Purchase Price. The Sellers and the Purchaser agree
to allocate the Purchase Price of the Assets including the covenant not to
compete, in accordance with the rules under Section 1060 of the Internal
Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations
promulgated thereunder. Such allocation shall be mutually agreed between the
Sellers and the Purchaser. The Sellers and the Purchaser recognize that the
Purchase Price does not include Purchaser's acquisition expenses and that
Purchaser will allocate such expenses appropriately. Sellers and the Purchaser
agree to act in accordance with the computations and allocations as determined
pursuant to this Section 2.5 (including any modifications thereto reflecting
any post-Closing adjustments, such adjustments shall be allocated in accordance
with the character of each such adjustment, on a basis consistent with the
allocation under this Section 2.5) in any relevant Tax Returns or filings,
including any forms or reports required to be filed pursuant to Section 1060 of
the Code, the Treasury Regulations promulgated thereunder or any provisions of
local, state and foreign law ("1060 Forms"), and to cooperate in the
preparation of any 1060 Forms and to file such 1060 Forms in the manner
required by Applicable Law.
2.6 Payments. All payments required to be made pursuant to this
Article 2 and other provisions of this Agreement shall be made in United States
dollars in immediately available funds by wire transfer to an account
designated by the party to receive payment in writing to the party making
payment.
2.7 Transfer Taxes. Purchaser and Sellers shall each bear 50% of all
sales, transfer and similar taxes, duties or levies (other than taxes computed
on the basis of income) assessed or payable in connection with the transfer of
the Assets including the ELAC Shares to Purchaser, including notary fees
relating to the transfer of the ELAC Shares; provided that in no event shall
Sellers be required to pay more than $500,000 in respect thereof, including any
amounts paid by AlliedSignal pursuant to Section 2.4 of the real estate
purchase agreement, dated as of December 22, 1997 (the "Facility Sale
Agreement"), between AlliedSignal and Purchaser. Purchaser and Sellers agree to
cooperate with one another to try
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to minimize such taxes to the extent practicable without additional costs or
liabilities to Purchaser or Sellers. To the extent any exemptions from such
taxes are available, Purchaser and Sellers shall cooperate to obtain and
prepare all required resale or other exemption certificates with respect to the
Assets and the ELAC Shares.
ARTICLE 3. ASSUMPTION OF LIABILITIES AND OBLIGATIONS
3.1 Assumed Liabilities. Except for the Excluded Liabilities,
Purchaser shall, without any further responsibility or liability of, or
recourse to, Sellers, except as set forth herein, absolutely and irrevocably
assume and be solely liable and responsible for any and all liabilities and
obligations of any kind or nature, whether foreseen or unforeseen, known or
unknown, existing or which may arise in the future, fixed or contingent,
matured or unmatured, to the extent primarily related to the Business or the
Assets prior to, on, or following the Closing Date (the "Assumed Liabilities")
including, but not limited to:
(a) obligations to fill purchase orders of customers
of the Business to the extent such orders are unfilled on the Closing Date;
(b) obligations incurred through the Closing Date to
purchase or pay for goods and services for the Business to be received on or
after the Closing Date;
(c) obligations and liabilities under the Contracts; provided
that any Contract as to which consent to assignment is required but has not
been obtained shall not be deemed an Assumed Liability until Purchaser has
obtained the benefits of such Contract;
(d) obligations and liabilities under licenses and permits of
the Business that are transferred or assigned to Purchaser (but only to the
extent so transferred or to the extent Purchaser receives the benefits
thereunder pursuant to Section 1.2); and
(e) obligations and liabilities specifically assumed or
undertaken by Purchaser hereunder.
3.2 Excluded Liabilities. Notwithstanding anything to the
contrary contained in this Agreement, the liabilities and obligations of
Sellers which are not to be assumed or retained by Purchaser hereunder (the
"Excluded Liabilities") include, but are not limited to, the following:
(a) obligations and liabilities for all Taxes relating to
the Business for all periods prior to the Effective Date;
(b) obligations and liabilities arising out of or related to
past, present or future actions, suits, claims, disputes, investigations and
other proceedings relating to the ownership or operation of the Assets or the
Business on or prior to the Effective Date, including, but not limited to, the
items referred to in Schedule 4.9;
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(c) obligations and liabilities related to employees,
including former employees, not expressly assumed by Purchaser pursuant to
Article 6 hereof;
(d) all obligations and liabilities (whether or not the
subject of any claim by a third party), fixed or contingent, known or unknown,
under any Environmental Laws as have been, are or may in the future be in
effect arising out of or relating to (i) the operation of the Business on or
prior to the Effective Date or the use or ownership of any real property
(including, without limitation, the Facility) used in the Business on or prior
to the Effective Date, including without limitation, the disposal or
arrangement for the disposal of Materials of Environmental Concern prior to the
Effective Date and (ii) the presence of contamination by Materials of
Environmental Concern at or emanating from any real property (whether leased or
owned) used in the Business prior to the Effective Date ("Environmental
Liabilities");
(e) all obligations and liabilities for non-trade accounts
payable to Sellers and their Affiliates (other than the Intercompany Note);
(f) all obligations, liabilities, expenses or charges to
earnings or reserves taken in connection with any restructuring program of
AlliedSignal;
(g) all debts, obligations or liabilities whatsoever to the
extent not primarily related to the Business or the Assets; and
(h) all other obligations and liabilities for which Sellers
have expressly assumed responsibility pursuant to this Agreement.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Purchaser as
follows:
4.1 Corporate Status. AlliedSignal is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, and has full
power and authority and all governmental licenses, authorizations, material
consents and approvals required to carry on the Business as now conducted and
own all of its properties and assets. ASTI is a corporation duly organized,
validly existing and in good standing under the laws of Arizona. AS Deutschland
and ELAC are corporations duly organized, validly existing and in good standing
under the laws of the Federal Republic of Germany. Each Seller has all
requisite corporate and other power and authority to enter into, execute and
deliver this Agreement and any other agreements contemplated hereby (the "Other
Agreements") and to perform its respective obligations and consummate the
transactions contemplated hereunder and thereunder in accordance with the terms
of this Agreement. Each Seller is duly qualified to do business in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the Sellers' conduct of the Business.
4.2 Authorization. All corporate and other proceedings required to be
taken by or on the part of each of the Sellers to authorize Sellers to enter
into and carry out this Agreement have been, or prior to the Closing will be,
duly and properly taken. This
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Agreement has been, and on the Closing Date each of the Other Agreements will
be, duly authorized, executed and delivered by each Seller and this Agreement
constitutes, and each Other Agreement will upon execution and delivery thereof
constitute, a legal and binding obligation of Sellers, valid and enforceable
against each Seller in accordance with their respective terms, subject to laws
of general application relating to bankruptcy, insolvency and the relief of
debtors and the rules of law governing specific performance, injunctive relief
and other equitable remedies.
4.3 Compliance. Except for (i) the expiration or termination of all
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act") and under any similar German national
or European Union law and (ii) any novations pursuant to Section 7.12 and any
consents listed on Schedule 4.15, the execution, delivery and performance of
this Agreement and Other Agreements by Sellers and the consummation of the
transactions contemplated hereby and thereby (a) will not violate (with or
without giving of notice or the lapse of time or both), or require any consent,
approval, filing or notice under any provision of any licenses, permits,
approvals, consents, certificates of public convenience, orders, franchises and
other authorizations of any federal, state, local or foreign governmental
authority (collectively, "Licenses"), law, rule or regulation, court or
administrative order, writ, judgement or decree applicable to Sellers, the
Business or any of the Assets or the Assumed Liabilities other than the
facilities clearance requirements of the Defense Investigative Services of the
United States Department of Defense ("DIS"), as set forth in the DIS Industrial
Security Regulation and the DIS Industrial Security Manual, as each may be
amended from time to time and (b) will not (with or without the giving of
notice or the lapse of time or both) (I) violate or conflict with, or result in
the breach, suspension or termination of any provision of, or constitute a
default under, or result in the acceleration of the performance of the
obligations of Sellers under, or (II) result in the creation of any lien,
mortgage, pledge, security interest, claim, charge or encumbrance or other
material restriction of any kind or nature (collectively, "Liens") upon the
Business or the Assets pursuant to, as the case may be, the articles of
incorporation, by-laws or other organization documents of any Seller or any
material agreement, lease, mortgage, note, deed of trust, lease, bond,
indenture, license or other document or undertaking, oral or written, to which
any Seller is a party or by which any Seller is bound and by which any of the
Assets or the Business may be affected.
4.4 [Intentionally left blank]
4.5 Personal Property. In all material respects, the Personal Property
and the machinery and equipment, fixtures, furniture, office equipment,
vehicles, boats or ships, tools and other tangible personal property of ELAC
have been maintained in accordance with standard industry practices, are in
reasonable working condition (normal wear and tear excepted) and are sufficient
for the conduct of the Business as it is currently being conducted.
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4.6 Intellectual Property.
(a) Schedule 4.6(a) lists all Intellectual Property owned or
used by the Business that is issued or registered by or filed with any
governmental agency, and all licenses of Intellectual Property used by the
Business to or from third parties.
(b) The Sellers own or have the right to use all Intellectual
Property necessary to conduct the Business substantially as it is currently
conducted and consistent with past practice.
(c) Schedule 4.6(c) lists all Intellectual Property not
included in the Assets, the use of which is necessary for the Business as it is
currently conducted. AlliedSignal and ASTI will grant to Purchaser a license to
such Intellectual Property pursuant to the license agreement referred to in
Section 1.6 of this Agreement.
(d) Except as set forth on Schedule 4.6(d): (i) all material
Intellectual Property owned or used by the Business is unexpired, has not been
abandoned and, to the Knowledge of Sellers, does not infringe or otherwise
impair the intellectual property rights of any third party; (ii) no material
Intellectual Property owned or used by the Business is the subject of any
license, security interest, Lien or other agreement granting rights therein to
any third party other than licenses listed on Schedule 4.6(d); (iii) no
judgment, decree, injunction, rule or order has been rendered by any
governmental entity, no action, suit or proceeding is currently pending and
Sellers have not received written notice, and to the Knowledge of Sellers there
are no threatened suits, actions or proceedings, which would limit, cancel or
question the validity of, or Sellers' rights in and to any material
Intellectual Property; and (iv) the Company and its subsidiaries have taken
reasonable steps to protect, maintain and safeguard their material Intellectual
Property, including any Intellectual Property for which improper or
unauthorized disclosure would impair its value or validity, and have executed
appropriate nondisclosure and confidentiality agreements and made appropriate
filings and registrations in connection with the foregoing.
4.7 Contracts and Binding Commitments. Schedule 4.7 lists the
Contracts and the contracts, agreements and/or commitments of ELAC that are
material to the operation of the Business taken as a whole (the "Agreements").
Except as set forth on Schedule 4.7, each of the Agreements is a valid and
binding agreement of the Seller which is a party thereto or ELAC and is in full
force and effect. True and complete copies of all the Agreements have been
delivered to Purchaser or otherwise made available for inspection by Purchaser.
All the Agreements are in full force and effect. Except as set forth on
Schedule 4.7, to the Knowledge of Sellers neither AlliedSignal nor ELAC, as the
case may be, is in default in any material respect under any of the Agreements
and to the Knowledge of Sellers there has been no material default under any of
the Agreements by any other party thereto. AlliedSignal is not obligated to
list in Schedule 4.7 any agreement, contract or commitment identified elsewhere
in this Agreement or any Schedule hereto, or if such agreements, individually
and together with all such other agreements which are not listed on Schedule
4.7 pursuant to this sentence, are not material to the Business taken as a
whole and (a) such agreement, contract or commitment, is related to the sale or
furnishing of products or services by AlliedSignal or ELAC and has a price of
less than $75,000 in the case of AlliedSignal or DM 100,000 in the
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case of ELAC; (b) such agreement, contract or commitment, if related to the
purchase of materials, supplies, equipment, merchandise or services, imposes a
payment obligation on AlliedSignal or ELAC of less than $75,000; or (c) the
disclosure of such agreement, contract or commitment is proscribed by the terms
of such document or by the provisions of a governmental security agreement or
regulation; provided that if such agreements, individually or in the aggregate,
are material to the Business, a summary of the material terms of such agreement
have been delivered to a properly authorized officer or employee of Purchaser
in accordance with Applicable Law.
4.8 Title. Except as set forth in Schedule 4.8, each Seller and ELAC
holds the entire legal, equitable and beneficial title in and will transfer to
Purchaser good (and, in the case of real property, marketable) title to, or a
valid and binding leasehold interest in, its property included in the Assets
free and clear of all Liens other than (i) Liens for taxes not yet due and
payable or being contested in good faith for which adequate reserves are being
maintained in accordance with United States generally accepted accounting
principles ("GAAP"), and (ii) encumbrances that do not, and are not reasonably
expected to, individually or in the aggregate, materially adversely affect the
value of the Assets subject thereto or the ability of AlliedSignal, ELAC or
Purchaser to conduct the Business as it is now being conducted (collectively,
"Permitted Liens").
4.9 Litigation. Except as disclosed in Schedule 4.9, there is not any
action, suit, proceeding, arbitration or litigation, pending or to the
Knowledge of Sellers threatened against Sellers or to the Knowledge of Sellers
any investigation pending or threatened, relating to the Business, the Assets,
the Assumed Liabilities or the transactions contemplated by this Agreement that
could reasonably be expected to result in any material judgment against,
material liability of, or have a material adverse effect on the Business taken
as a whole. Sellers are not in violation of any term of any judgment, writ,
decree, injunction or order entered by any court or governmental authority
(domestic or foreign) and outstanding against Sellers or with respect to the
Business or any of Sellers' assets (including the Assets) or properties, except
for such violations which could not, individually or in the aggregate, have a
material adverse effect on the Sellers or the Business. An action, suit,
proceeding, investigation, arbitration or litigation shall be considered
"threatened" for purposes of this Section 4.9 if any of the persons referred to
in Section 13.15 shall have received a written notice or communication
reasonably indicating to a business person that an action, suit, investigation,
or proceeding will be commenced.
4.10 Environmental Matters. (a) Except as set forth on Schedule 4.10
to the Knowledge of Sellers: (i) the Business complies and has complied in all
material respects with all applicable Environmental Laws, and possesses and
complies and has possessed and complied in all material respects with all
Environmental Permits (all of which are identified accordingly on Schedule 4.10
and are transferrable as a routine matter to Purchaser); (ii) there are and
have been no Materials of Environmental Concern, or other conditions, at any
property owned, operated, or otherwise used by the Business now or in the past,
or at any other location, that could give rise to any material liability to the
Business under any Environmental Law or result in material costs to the
Business arising out of any Environmental Law; (iii) no judicial,
administrative, or arbitral proceeding (including any notice of violation or
alleged violation) under any Environmental Law is pending or
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threatened in writing with respect to the Business, nor is the Business the
subject of any investigation or the recipient of any request for information in
connection with any such proceeding; (iv) there are no past or present
conditions, circumstances, practices, plans, or legal requirements that could
be expected to prevent the Business from, or materially increase the burden on
the Business of, complying in all material respects with applicable
Environmental Laws or obtaining, renewing, or complying in all material
respects with all Environmental Permits required under such laws.
(b) The Sellers have provided or made available to Purchaser
true and complete copies of all Environmental Reports in their possession or
control.
(c) Any costs, estimates, projections or other predictions
contained or referred to in Schedule 4.10 are not, and shall not be deemed to
be, representations or warranties of Allied Signal.
(d) For purposes of this Agreement, the following terms
shall have the following meaning:
"Environmental Laws" shall mean any and all laws, rules,
orders, regulations, statutes, ordinances, guidelines, codes, decrees,
or other legally enforceable requirement (including, without
limitation, common law) of the United States or any other national
government, or any state, local, municipal or other governmental
authority, regulating, relating to or imposing liability or standards
of conduct concerning protection of the environment or of human
health, or employee health and safety as of the Closing Date.
"Environmental Permits" shall mean any and all permits,
licenses, approvals, registrations, notifications, exemptions and any
other authorization required of the Business under any Environmental
Law.
"Environmental Report" shall mean any report, study,
assessment, audit, or other similar document that addresses any issue
of actual or potential noncompliance with, or actual or potential
liability under or cost arising out of, any Environmental Law that may
in any way materially adversely affect the Business.
"Materials of Environmental Concern" shall mean any gasoline
or petroleum (including crude oil or any fraction thereof) or
petroleum products, polychlorinated biphenyls, urea-formaldehyde
insulation, asbestos, pollutants, contaminants, radioactivity, and any
other substances or forces of any kind, whether or not any such
substance or force is defined as hazardous or toxic under any
Environmental Law, that is regulated pursuant to or could give rise to
liability under any Environmental Law.
4.11 Employee Benefit Plans and Policies. Schedule 4.11 lists all of
the employment, severance, change-of-control, stock purchase, stock option,
fringe benefits, incentive, bonus, pension, welfare, shop agreements or other
employee benefit plans and policies maintained or contributed to by Sellers or
ELAC for the Business or in which employees of the Business or managing
directors of ELAC, including employees or managing
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directors of ELAC on short-term disability, medical, sick or other leave of
absence (the "Employees"), are entitled to participate (collectively the
"Benefit Plans") and copies of all such written Benefit Plans have been made
available to Purchaser. Except as listed on Schedule 4.11, (a) such Benefit
Plans that cover U.S. Employees ("U.S. Benefit Plans") comply in all material
respects, to the extent applicable, with the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal
Revenue Code of 1986, as amended (the "Code") and all other applicable laws,
rules and regulations; (b) none of the U.S. Benefit Plans subject to Part 3
Subtitle B of Title I of ERISA has incurred any "accumulated funding
deficiency" within the meaning of Section 302 of ERISA or Section 412 of the
Code; (c) no material liability, other than required premium payments, to the
Pension Benefit Guaranty Corporation has been incurred with respect to any of
the U.S. Benefit Plans subject to Title IV of ERISA; (d) AlliedSignal has not
incurred any material liability for any tax imposed under Section 4975 of the
Code or Part 4 Subtitle B of Title I of ERISA with respect to any of the U.S.
Benefit Plans; (e) none of the U.S. Benefit Plans is a multiemployer plan
within the meaning of Section 3(37)(A) of ERISA. Except as otherwise is
provided in this Agreement, all contributions to the U.S. Benefit Plans that
were required to be made under such U.S. Benefit Plans as of the date hereof
have been paid, accrued or otherwise adequately reserved or disclosed in
accordance with GAAP as of such date; and (f) each Benefit Plan covering
non-U.S. Employees complies in all material respects with all Applicable Laws,
rules and regulations.
4.12 Material Changes. Except as set forth on Schedule 4.12 or as
communicated to Steven Schorer or any individual who directly reports to Mr.
Schorer or Purchaser, since December 31, 1997, there has been no:
(a) Lien created on any Asset or ELAC Asset, except
Permitted Liens;
(b) capital expenditures or commitment to make any such
expenditures with respect to the Assets or the ELAC Assets, except with respect
to any such expenditures or commitments incurred prior to the date hereof, to
the extent such expenditures and commitments do not exceed, when combined with
any expenditures permitted under Section 4.7(d) of the Facility Sale Agreement,
$2,100,000 in the aggregate;
(c) rights of substantial value knowingly waived with
respect to the Assets or the Business; or
(d) sale or transfer of any Assets or ELAC Assets other than
dispositions of inventory and obsolete or worn out equipment in the ordinary
course of business.
(e) (i) (x) contract, agreement, proposal or other commitment
entered into for the purchase of goods or services which is not terminable by
the parties upon 30 days' notice or less without penalty or which involves
aggregate consideration in excess of $250,000 or (y) agreement, bid, proposal
or other commitment entered into for the sale of goods or services which is not
terminable by the parties upon 30 days' notice or less without penalty or which
involves aggregate consideration in excess of $5 million or which would result
in a loss in excess of $100,000 for any individual contract or $250,000 in the
aggregate, (ii) amendment, supplement, waiver or modification of any contract
or agreement included in
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the Assets or the ELAC Assets, other than in the ordinary course of business
consistent with past practice and (iii) Affiliate that has been permitted to
do, or agree, in writing or otherwise, to do, any of the foregoing;
(f) except as required by Applicable Law or to the extent
required under existing employee and director benefit plans, agreements or
arrangements as in effect on the date of this Agreement, (i) increase in the
compensation or fringe benefits of any of the President of Ocean Systems and
his direct reports or other employees (including any such increase pursuant to
any deferred compensation, severance, bonus, pension, profit-sharing or other
plan or commitment), except for increases, in the ordinary course of business
consistent with past practice, in salary or wages of employees who are not
senior managers of the Business, (ii) grant of any severance or termination
pay, (iii) hire, except in the ordinary course of business, of any new
employees or consultants or (iv) amendment or termination, or any agreement to
amend or terminate, any collective bargaining, bonus, profit sharing, thrift,
compensation, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of the President of Ocean Systems and his past or
present direct reports or any other past or present employees of the Business
(except for changes in AlliedSignal benefit plans generally);
(g) (i) transaction with or for the benefit of any other
division or business of Seller or any Affiliate of Seller except as is set
forth in Schedule 4.26 and (ii) Affiliate has been permitted to do, or agree,
in writing or otherwise, to do, any of the foregoing;
(h) (i) waiver of any material claims or rights relating to
the Business or the Assets or (ii) Affiliate has been permitted to do, or
agree, in writing or otherwise, to do, any of the foregoing;
(i) acquisition of or agreement to acquire, by merging or
consolidating with, or by purchasing a substantial portion of the stock or
assets of, or by any other manner, any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof;
(j) except for performance guarantees issued in the ordinary
course of business consistent with past practice, incurrence of any
indebtedness for borrowed money, or guarantee of any such indebtedness of
another person, issuance or sale of any debt securities or warrants or other
rights to acquire any debt securities of the Sellers, guarantee of any debt
securities of another person, entrance into any "keep well" or other agreement
to maintain any financial statement condition of another person or entrance
into any arrangement having the economic effect of any of the foregoing, or
loans, advances or capital contributions to, or investments in, any other
person; or
(k) license or agreement entered into with respect to the
Intellectual Property.
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4.13 [Intentionally left blank]
4.14 Compliance with Law. Except as set forth on Schedule 4.14,
Sellers and ELAC are not in violation of any Applicable Law which, individually
or in the aggregate, would have a material adverse effect on the operation of
the Business, and Sellers and ELAC have not received any notice in writing
alleging any such defaults or violations or potential defaults or violations.
4.15 Consents. Except as set forth in Schedule 4.15, no action,
approval, consent or authorization, including but not limited to any action,
approval, consent or authorization by any third party, financial institution,
governmental or quasi-governmental agency, commission, board, bureau or
instrumentality, is necessary to make this Agreement or any of the Other
Agreements or instruments to be executed and delivered pursuant hereto a legal,
valid and binding obligation of Sellers or ELAC or to consummate the
transactions contemplated hereunder.
4.16 Taxes. All Taxes (as hereinafter defined) with respect to the
Business that are due and payable or which relate to tax periods ending on or
prior to the Closing Date have been or will be duly and properly computed,
reported, fully paid and discharged by Sellers. There are no unpaid Taxes with
respect to any period, or a portion thereof, ending on or before the Closing
Date which are or could become a Lien on the Assets or the ELAC Assets, except
for current Taxes not yet due and payable or reserved for in the Financial
Statements. Except as set forth on Schedule 4.16, there has been filed by or on
behalf of ELAC all material returns, declarations, statements, reports,
schedules, forms and information returns and any amended tax returns relating
to any Taxes (the "Tax Returns"). All such material Tax Returns are true,
complete and correct in all material respects and all Taxes shown as due on
such Tax Returns have been or will be paid in a timely fashion by Sellers prior
to Closing or have been accrued for on ELAC's financial statements. Except as
set forth on Schedule 4.16, no audit or other proceeding by any Governmental
Authority, or similar person is pending, or to the Knowledge of Sellers, is
threatened with respect to any material Taxes due from or with respect to ELAC.
No material issues relating to Taxes were raised in writing by the relevant
taxing authority during any audit or examination. Except as set forth in
Schedule 4.16, ELAC is not a party to or bound by (nor will it become a party
to or bound by prior to the Closing Date) any tax indemnity, tax sharing, or
tax allocation agreement. There is no material agreement or other document
extending, or having the effect of extending, the period of assessment or
collection of any Taxes and no power of attorney with respect to any material
Taxes of ELAC has been executed or filed with any Governmental Authority. ELAC
is not, nor has it ever been, a member of a U.S. consolidated, combined unitary
tax group. As used herein, the term "Taxes" shall include all federal, state,
local and foreign taxes, assessments or other governmental charges (including,
without limitation, net income, gross income, excise, franchise, sales and
value added taxes, taxes withheld from employees' salaries and other
withholding taxes and obligations and all deposits required to be made with
respect thereto), levies, assessments, deficiencies, import duties, licenses
and registration fees and charges of any nature whatsoever, including any
interest, penalties, additions to tax or additional amounts with respect
thereto, imposed by any government or taxing authority, provided, however, that
the term "Taxes" does not include the taxes, duties and levies referred to at
Section 2.6.
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4.17 Permits and Licenses. Schedule 4.17 attached hereto lists all
material governmental or other permits, licenses, approvals, certificates of
inspection, filings, franchises and other authorizations, other than those
relating to the environment, that are issued to, or held or used by Sellers or
ELAC, or for which Sellers or ELAC have applied, in connection with the current
operation of the Business, and any limitations thereto. Except as listed in
Schedule 4.17, Sellers and ELAC have all material governmental or other
permits, licenses, approvals, certificates of inspection, filings, franchises
and other authorizations, other than those relating to the environment, that
are necessary to own and operate the Assets and the ELAC Assets and to conduct
the Business as it is currently being conducted, and Sellers and ELAC have not
received notice alleging that any other material governmental or other permits,
licenses, approvals, certificates of inspection, filings, franchises and other
authorizations, other than those relating to the environment, are required.
"Material" for purposes of this Section 4.17 shall include but not be limited
to permits, licenses and other authorizations which are required to own or
operate the Assets or ELAC Assets owned or operated by Sellers and used for the
production of products in the Business.
4.18 Ownership of ELAC Shares. The ELAC Shares constitute all of the
issued and outstanding shares of capital stock of ELAC. The ELAC Shares have
been duly authorized and validly issued and are fully paid and nonassessable.
There are no securities convertible into or exchangeable or exercisable for
ELAC Shares or any options, warrants or other rights to acquire ELAC Shares. AS
Deutschland is the sole legal and beneficial owner of the ELAC Shares and owns
the ELAC Shares free and clear of any Liens, restrictions, options or rights in
others, encumbrances or other claims, rights of first offer or first refusal,
or voting agreements, and AS Deutschland has full legal right, power and
authority to enter into this Agreement and to transfer and deliver good and
valid title to the ELAC Shares hereunder. At the Closing, Purchaser shall
receive good and valid title to the ELAC Shares free and clear of any Liens
other than as created by Purchaser. ELAC does not constitute a material part of
the assets of AS Deutschland.
4.19 Labor Relations. Except as set forth on Schedule 4.19, (i) there
is no employment agreement, collective bargaining agreement, shop agreement or
written personnel policy applicable to Employees of the Business nor are any
such agreements or policies presently negotiated; (ii) there is no current
labor strike, slowdown or work stoppage or pending lockout, dispute or other
labor controversy in effect, or to the Knowledge of Sellers threatened against
or otherwise affecting the Business, and the Business has not experienced such
labor controversy in the past five years; (iii) there is no unfair labor
practice charge or complaint pending or, to the Knowledge of Sellers,
threatened against or otherwise affecting the Business; (iv) no representation
question exists or has been raised respecting any of the Employees of the
Business within the past five years, nor to the Knowledge of Sellers are there
any campaigns being conducted to solicit cards from Employees of the Business
to authorize representation by any labor organization; (v) no action, suit,
complaint, charge, arbitration, grievance, inquiry, proceeding or investigation
by or before any court, governmental agency, administrative agency or
commission brought by or on behalf of any Employee, prospective employee,
former employee, retiree, labor organization or other representative of the
Business's Employees is pending or, to the Knowledge of Sellers, threatened
against the Business; (vi) the Sellers and ELAC are not party to, or otherwise
bound by, any consent decree with, or citation by, any Government agency
relating to
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Employees or employment practices; (vii) the Sellers and ELAC are in compliance
in all material respects with all Applicable Laws, agreements, contracts, and
policies relating to employment, employment practices, wages, hours, and terms
and conditions of employment; (viii) other than to the extent accrued in the
financial statements of the Business in accordance with GAAP, the Sellers and
ELAC have paid in full to all Employees of the Business all wages, salaries,
commissions, bonuses, benefits and other compensation due to such employees or
otherwise arising under any policy, practice, agreement, plan, program, statute
or other law; (ix) the Sellers and ELAC are not liable for any severance pay or
other payments to any Employee, or former employee arising from the termination
of employment, nor will the Business have any liability under any benefit or
severance policy, practice, agreement, plan, or program which exists or arises,
or may be deemed to exist or arise, under any Applicable Law or otherwise, as a
result of or in connection with the transactions contemplated hereunder or as a
result of the termination by the Business of any persons employed by the
Sellers on or prior to the Closing Date except to the extent accrued on the
Closing Balance Sheet; (x) except as set forth in Schedule 4.19(x), the Sellers
and ELAC have not closed any Business plant or facility, effectuated any layoff
of Employees or implemented any early retirement, separation or window program
which within the past five years, nor have the Sellers or ELAC planned or
announced any such action or program for the future; (xi) the Sellers and ELAC
are in compliance with their obligations pursuant to the Worker Adjustment and
Retraining Notification Act of 1988, and Sellers and ELAC are in compliance
with all other notification and bargaining obligations arising under any
collective bargaining agreement, statute or otherwise.
4.20 Brokerage Fees. No person is entitled to any brokerage or
finder's fee or other commission from Sellers in respect of this Agreement
or the transactions contemplated hereby except Bear, Stearns & Co. Inc. (whose
fee shall be paid by Sellers).
4.21 Government Contracts. (a) With respect to each and every
Government Contract or bid to obtain a Government Contract to which Sellers or
ELAC are a party, and which relates to the Business, and except as set forth in
Schedule 4.21(a): (i) Sellers and ELAC have fully complied with all material
terms and conditions of such Government Contract or bid for a Government
Contract as required as of the date hereof and as of the Closing Date; (ii)
Sellers and ELAC have fully complied with all material requirements of statute,
rule or regulation pertaining to such Government Contract or bid for a
Government Contract; (iii) all representations and certifications executed with
respect to such Government Contract were to the Knowledge of Sellers accurate
in every material respect as of their effective date and Sellers and ELAC to
the Knowledge of Sellers have fully complied with all such representations and
certifications in every material respect; and (iv) no termination for default,
cure notice or show cause notice has been issued or, to the Knowledge of
Sellers will be issued, (v) neither the U.S. Government nor any non-U.S.
government nor any prime contractor, subcontractor or other entity person has
notified in writing any of the Sellers or ELAC that any of the Sellers or ELAC
has breached or violated any Applicable Law, certification, representation,
clause provision or requirement pertaining to such Government Contract or bid;
(vi) no cost incurred by the Sellers or ELAC pertaining to such Government
Contract or bid has been questioned or challenged, is the subject of any
investigation or has been disallowed by the U.S. Government or any non-U.S.
government; (vii) no money due to the Sellers or ELAC pertaining to such
Government Contract or bid has been withheld or set
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off and the Sellers or ELAC are entitled to all progress payments with respect
thereto and (viii) each Government Contract is valid and in full force and
effect. As used herein, "Government Contract" means any open contract relating
to the Business between any of Sellers or ELAC and (x) the U.S. Government or
any non-U.S. government, (y) any prime contractor of the U.S. Government or any
non-U.S. government or (z) any subcontractor at any tier with respect to any
contract described in clauses (x) and (y) above.
(b) To the Knowledge of Sellers, except as set forth in
Schedule 4.21(b), with respect to the Business; (i) none of its respective
employees, consultants or agents is (or during the last three years has been)
under administrative, civil or criminal investigation, indictment or
information by any foreign, domestic, federal, territorial, state or local
governmental authority, quasi-governmental authority, instrumentality, court,
government or self-regulatory organization, commission, tribunal or
organization or any regulatory, administrative or other agency, or any
political or other subdivision, department or branch of any of the foregoing
("Governmental Authority"), (ii) there is not any pending audit or
investigation by Sellers or ELAC nor within the last three years has there been
any audit or investigation by Sellers or ELAC resulting in a material adverse
finding with respect to any alleged irregularity, misstatement or omission
arising under or relating to any Government Contract or bid; and (iii) during
the last three years, the Sellers and ELAC have not made a voluntary disclosure
to the U.S. Government or any non-U.S. government, with respect to any alleged
irregularity, misstatement or omission arising under or relating to a
Government Contract or bid. Except as set forth in Schedule 4.21(b), to the
Knowledge of Sellers there are no irregularities, misstatements or omissions
arising under or relating to any Government Contract or bid that has led or is
expected to lead, either before or after the Closing Date, to any of the
consequences set forth in clause (i) or (ii) of the immediately preceding
sentence or any other material damage, penalty assessment, recoupment of
payment or disallowance of cost.
(c) Except as set forth in Schedule 4.21(c), with respect to
the Business, there exist (i) no outstanding claims against the Sellers or
ELAC, either by the U.S. Government or by any non-U.S. government or by any
prime contractor, subcontractor, vendor or other third party, arising under or
relating to any Government Contract or bid referred to in Section 4.21(a) and
(ii) no disputes between the Sellers or ELAC and the U.S. Government or any
non-U.S. government under the Contract Disputes Act or any other Federal
statute or between the Sellers or ELAC and any prime contractor, subcontractor
or vendor arising under or relating to any such Government Contract or bid.
Except as set forth in Schedule 4.21(c), to the Knowledge of Sellers there are
no facts that could reasonably be expected to result in a claim or a dispute
under clause (i) or (ii) of the immediately preceding sentence.
(d) Except as set forth in Schedule 4.21(d), neither the
Sellers nor ELAC nor any of their employees, consultants or agents is (or
during the last three years has been) suspended or debarred from doing
business with the U.S. Government or any non-U.S. government or is (or during
such period was) the subject of a finding of nonresponsibility or ineligibility
for U.S. Government or non-U.S. government contracting. Except as set forth
in Schedule 4.21(d), the Sellers, ELAC and their Affiliates have operated the
Business in
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compliance with all requirements of all material laws pertaining to all
Government Contracts and bids.
(e) Except as set forth in Schedule 4.21(e), no statement,
representation or warranty made by the Sellers or ELAC in any Government
Contract, any exhibit thereto or in any certificate, statement, list, schedule
or other document submitted or furnished to the U.S. Government or any non-U.S.
government in connection with any Government Contract or bid (i) contained on
the date so furnished or submitted any untrue statement of a material fact, or
failed to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading
or (ii) contains on the date hereof any untrue statement of a material fact, or
fails to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they are made, not misleading,
except in the case of both clauses (i) and (ii) any untrue statement or failure
to state a material fact that would not result in any material liability to the
Business as a result of such untrue statement or failure to state a material
fact.
4.22 Government Furnished Equipment. Schedule 4.22 incorporates the
most recent schedule delivered to the U.S. Government or any non-U.S.
Government which identifies by description or inventory number certain
equipment and fixtures loaned, bailed or otherwise furnished to or held by the
Business by or on behalf of the United States or any foreign country. To the
Knowledge of Sellers, such schedule was accurate and complete on its date and,
if dated as of the Closing Date, would contain only those additions and omit
only those deletions of equipment and fixtures that have occurred in the
ordinary course of business, except for such inaccuracies that could not
reasonably be expected to have a material adverse effect on the Business.
4.23 Entire Business. Except for the Excluded Assets, and except as
set forth on Schedule 4.23, the Assets, together with the License Agreement,
constitute all of the assets, properties and rights necessary to conduct the
Business in all material respects as currently conducted. Other than ELAC,
Sellers have no subsidiaries primarily engaged in the Business.
4.24 Real Estate. Schedule 4.24 accurately lists all real property
of the Business owned or leased, indirectly or directly, by the Sellers or
ELAC (other than the Facility, the "Real Property"):
(a) The Sellers and ELAC have good and marketable title to
all such owned Real Property and good and valid leasehold interest in all such
leased Real Property, in each case, free and clear of all Liens except for
Permitted Liens;
(b) There are no condemnation proceedings or eminent domain
proceedings of any kind pending or, to the Knowledge of Sellers no written
notice of any threatened action has been received against any Real Property;
(c) All of the Real Property is occupied under a valid and
current certificate of occupation or similar permit, the sale of the Assets
hereunder will not require the issuance or any new or amended certificate of
occupancy and to the Knowledge of Sellers the Real
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Property may be occupied and used by Purchaser or ELAC after the Closing Date
in the same manner as used by Sellers or ELAC on or before the Closing Date;
(d) All improvements on the Real Property constructed by or
on behalf of Sellers or any other person were at the time installed constructed
in compliance with all applicable federal, state, local or foreign statutes,
laws, ordinances, regulations, rules, codes, orders or requirements (including,
but not limited to, any building, zoning or environmental laws or codes)
affecting the Real Property;
(e) All improvements on the Real Property and the present use
and conditions thereof do not violate any applicable deed restrictions or
applicable covenants, restrictions, agreements, existing site plan approvals,
zoning or subdivision regulations or urban redevelopment plans as modified by
any duly issued variances, and no permits, licenses or certificates pertaining
to the ownership or operation of all improvements on the Real Property, other
than those that are transferable with the Real Property, are required by any
governmental agency having jurisdiction over the Real Property. Such
improvements on the Real Property are wholly within the lot limits of such Real
Property and do not encroach on any adjoining premises and there are no
encroachments on any Real Property by any improvements located on any adjoining
premises;
(f) Sellers and ELAC enjoy peaceful and quiet possession of
each parcel of Real Property, and there is not under any lease of any of the
leased Real Property (a "Lease") any default by any of Sellers or ELAC
thereunder or any condition that with notice or the passage of time or both
would constitute such a default, and Sellers and ELAC have not received notice
asserting the existence of any such default or condition. To the Knowledge of
Sellers there are no defaults under any Lease by the landlord thereunder.
Sellers have heretofore furnished the Purchaser a true and complete copy of
each Lease and all amendments thereto pertaining to any leased Real Property.
Each Lease is valid and binding and in full force and effect;
(g) The rental set forth in each Lease is the actual rental
being paid, and there are not separate agreements or understandings with
respect to the same; and
(h) Neither the execution of this Agreement nor the sale of
the Assets hereunder shall cause a default under any Lease or require prior
written consent of any landlord under any Lease.
4.25 Insurance. Schedule 4.25 lists insurance maintained by Sellers
and ELAC with respect to the Assets and the ELAC Assets and with respect to the
employees and representatives of the Business and the operations of the
Business. The coverage under each such policy and binder is in full force and
effect, and no notice of cancellation or nonrenewal with respect to any such
policy or binder has been received by any of the Sellers or ELAC.
4.26 Affiliate Transactions. Except as set forth in Schedule 4.26,
there are no agreements, arrangements, undertakings or other transactions
between the Business and any other division or business of Sellers or any
person that directly, or indirectly through one or
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more intermediaries, controls or is controlled by or is under common control
with any of Sellers (including, without limitation, any owner of capital stock
of Sellers) (an "Affiliate").
4.27 No Additional Representations. NOTWITHSTANDING ANYTHING
TO THE CONTRARY CONTAINED IN THIS ARTICLE 4 OR ANY OTHER PROVISION OF THIS
AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT
ALLIEDSIGNAL IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR
IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, INCLUDING BUT NOT
LIMITED TO ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION,
MERCHANTABILITY OR SUITABILITY AS TO ANY OF THE PROPERTIES OR ASSETS OF THE
SELLERS. EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS AGREEMENT, THE
ASSETS ARE BEING SOLD ON AN "AS IS, WHERE IS" BASIS.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to AlliedSignal as follows:
5.1 Corporate Status. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has full power and all governmental licenses, authorizations, consents and
approvals required to carry on its business and to own all of its properties
and assets. Purchaser has all requisite corporate and other power and authority
to enter into, execute and deliver this Agreement and the Other Agreements and
to perform its obligations and consummate the transactions contemplated
hereunder and thereunder in accordance with the terms of this Agreement.
5.2 Authorization. All corporate and other proceedings required to be
taken by or on the part of Purchaser to authorize Purchaser to enter into and
carry out this Agreement have been, or prior to the Closing will be, duly and
properly taken. This Agreement has been, and on the Closing Date each of the
Other Agreements will be, duly executed and delivered by Purchaser and this
Agreement constitutes, and each Other Agreement will upon execution and
delivery thereof constitute, a legal and binding obligation of Purchaser, valid
and enforceable against Purchaser in accordance with their terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and the rules of law governing specific performance, injunctive
relief and other equitable remedies.
5.3 Compliance. The execution, delivery and performance of this
Agreement and Other Agreements and the consummation of the transactions
contemplated hereby will not result in the breach of any of the terms or
conditions of, or constitute a default under, or violate, as the case may be,
the articles of incorporation, by-laws or other organization documents of
Purchaser or any material agreement, lease, mortgage, note, deed of trust,
lease, bond, indenture, license or other document or undertaking, oral or
written, to which Purchaser is a party or by which Purchaser is bound or by
which any of the Assets may be affected other than the consent required under
Purchaser's existing credit facility, which Purchaser believes will be obtained
prior to Closing.
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5.4 Due Diligence. Purchaser has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the transactions contemplated by this Agreement and the Other
Agreements. Purchaser confirms that AlliedSignal provided to Purchaser the
opportunity to ask questions of the officers and management employees of
AlliedSignal and to acquire such additional information about the business and
financial condition of the Business as Purchaser requested and all such
information has been received.
5.5 Financing. Purchaser has funds of its own, or has binding
commitments from responsible banks or other financial institutions to provide
funds, which will be sufficient and available to pay the purchase price as set
forth in Section 2.1.
5.6 Investment Representation. Purchaser is acquiring the ELAC
Shares for investment and not with a view to the public distribution thereof.
5.7 Conveyances and Restrictions. The performance by Purchaser of its
obligations hereunder, whether through the purchase of the Assets, the
obtaining of financing to fund the acquisition, and/or the obtaining of
financing for the operations of the Business after the Closing, will not
violate any provision of the Uniform Fraudulent Conveyance Act as enacted by
the United States or any state thereof, or any regulations thereunder or any
state fraudulent conveyance or similar statute in a state in which the Business
or Purchaser is doing business.
5.8 Brokerage Fees. No person is entitled to any brokerage or
finder's fee or other commission from Purchaser in respect of this Agreement
or the transactions contemplated hereby.
ARTICLE 6. EMPLOYEES AND EMPLOYEE BENEFITS
6.1 Employment.
(a) Purchaser shall offer employment effective as of the
Closing Date to all Employees (except that Employees on Long Term Disability
shall be offered employment when such Employees are medically certified to
return to work) employed as of the Closing Date. Nothing herein expressed or
implied confers upon any Employee who accepts Purchaser's offer of employment
(collectively, "Transferred Employees") any rights or remedies of any nature or
kind, including, without limitation, any rights of employment with Purchaser
for a specified period of time.
(b) Notwithstanding Section 6.1(a) above, the employment of
Employees employed by ELAC (collectively, the "German Employees") shall
continue following the Closing Date and shall remain the liability of ELAC.
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6.2 Compensation and Benefits - U.S. Employees.
(a) Generally. Purchaser shall continue or shall provide, for
a period of at least 12 months immediately subsequent to the Closing Date, for
all Transferred Employees who are employed in the United States (collectively,
"U.S. Transferred Employees") base salary or applicable rate of pay not less
than that provided by Sellers immediately prior to the Closing Date, employee
benefits and incentive compensation comparable, in the aggregate, to those in
effect as of the Closing Date, except that, with respect to those plans
providing a benefit in AlliedSignal stock, Purchaser shall have no obligation
to provide such benefits or comparable benefits or to take into account such
benefits for purposes of this Section. Purchaser shall assume liability for all
deferred compensation, supplemental and excess pension and savings benefits,
all bonus amounts, normal and enhanced severance benefits, and relocation
benefits (whether or not all such employee benefits are vested on the Closing
Date) in respect of all U.S. Transferred Employees incurred or earned, but not
paid, on or before the Closing Date, or as incurred in connection with the sale
of the Business and not paid as of the Closing Date, to the extent accrued on
the Closing Balance Sheet. Purchaser shall assume the retention agreements
listed on Schedule 6.2(a).
(b) Union Employees. Purchaser shall offer employment on or
prior to the Closing Date to each U.S. Employee covered by the Collective
Bargaining Agreements between AlliedSignal and the United Auto Workers ("UAW")
or UAW Local 179, including the Local Agreement between AlliedSignal and UAW
Local 179, the Master Agreement between AlliedSignal and the UAW, and all
associated agreements that are part of such Master Agreement, including the
letters of understanding and agreements covering pensions, insurance and
savings plans (collectively, the "Bargaining Agreements") as described in
Schedule 4.7 (such covered Employees being referred to, collectively, as "Union
Employees"), provided that such Union Employee is actively at work on the
Closing Date. Purchaser shall provide each Union Employee with compensation
(base rate of pay and incentive compensation, if any) no less than that
required by the applicable Bargaining Agreements and any applicable side
letters and schedules immediately prior to the Closing Date. A Union Employee
who is absent on the Closing Date due to illness, vacation, paid leave, holiday
or union office leave or who is otherwise subject to recall with seniority
rights shall to the extent required by the applicable Bargaining Agreement and
any applicable side letters and schedules be considered actively at work on the
Closing Date. The Union Employees who are actively at work on the Closing Date
shall hereafter be called "Union Transferred Employees". Sellers shall retain
the obligation to provide any Union Employee who does not become a Union
Transferred Employee on the Closing Date with benefits under Sellers' Pension
Plans for Union Employees, as defined herein, and all other benefits required
to be provided by the Bargaining Agreements.
(c) Purchaser agrees to credit each U.S. Transferred Employee
service credited with Sellers under the Benefit Plans for participation,
retirement eligibility and vesting under such employee benefit plans or
policies Purchaser maintains or will maintain for or on behalf of the U.S.
Transferred Employees. In addition, such service shall be credited for benefit
purposes under welfare plans (including severance plans), vacation plans and
qualified retirement plans in respect of which assets and liabilities are
transferred to
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Purchaser's Plans. Sellers shall not in any manner be responsible for any
liability, claim or obligation due under any such plan maintained by Purchaser.
6.3 Severance and WARN Act. (a) Sellers shall pay and be responsible
for all liability, cost or expense for severance, termination indemnity
payments, salary continuation, special bonuses and like costs under Sellers'
severance pay plans, policies or arrangements, with respect to any of the
Employees that arise from or relate to the transactions described in or
contemplated by this Agreement, or of any U.S. Transferred Employees that arise
under Sellers' severance plans from the subsequent termination of employment by
Purchaser after the Closing Date. Purchaser agrees to pay and be responsible
for all liability, cost, expense and sanctions resulting from the Purchaser's
failure to comply after the Closing Date with the Worker Adjustment and
Retraining Notification Act of 1988 ("WARN Act"), and the regulations
thereunder or for any action by Purchaser which causes WARN to apply.
(b) The Sellers shall not, at any time within the 60-day
period prior to the Closing Date, effectuate a "plant closing" or "mass
layoff", as those terms are defined in the WARN Act or any State law, affecting
in whole or in part any Ocean Systems site of employment, facility, operating
unit or employee.
(c) The Sellers shall indemnify, defend and hold Purchaser
harmless from and against any and all claims, actions, suits, demands,
proceedings, losses, expenses, damages, obligations and liabilities (including
costs of collection, attorney's fees and other costs of defense) ("Damages")
arising out of or otherwise in respect of (i) termination by the Sellers of any
employee of the Business on or prior to the Closing Date; (ii) any claim made
by any employee of the Business for severance pay arising prior to, or upon the
Closing Date; or (iii) any suit or claim of violation brought against the
Purchaser under the WARN Act or any State law for any actions taken by the
Sellers in connection with, on or prior to the Closing Date with regard to any
site of employment, facility, operating unit or employee affected by this
Agreement which action by itself causes WARN to apply.
6.4 Health Care Continuation Liability. With respect to Sellers'
plans, Seller agrees to pay and be responsible for all liability, cost,
expense, taxes and sanctions under Section 4980B of the Internal Revenue Code
(the "Code"), interest and penalties imposed upon, incurred by, or assessed
against Purchaser or Sellers that arise by reason of or relate to any failure
to comply with the health care continuation coverage requirements of Section
4980B of the Code and Sections 601 through 608 of ERISA, as amended, which
failure occurs as a result of the transactions described in or contemplated by
this Agreement or which failure occurs on or after the Closing Date with
respect to any Employee or any qualified beneficiary (as defined in Section
4980B(g)(1)) of such Employee.
6.5 Pension Plan.
(a) AlliedSignal shall amend the Salaried Employees Pension
Program for AlliedSignal Inc., the AlliedSignal Inc. Pension Plan for Hourly
Employees (provisions relating to UAW Local 179) and the AlliedSignal Inc.
Retirement Program (collectively, the "Pension Plans") to fully vest all
Employees employed by the Business as of the Closing Date participating in the
Pension Plan in their accrued benefit as of the Closing Date. Purchaser
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shall assume the liabilities and obligations as of the Closing Date of Sellers
for the accrued benefits of all U.S. Transferred Employees under the Pension
Plans. Purchaser shall have established as of the Closing Date, or shall
establish as soon as practicable after the Closing Date, a tax-qualified
defined benefit pension plan or plans which shall discharge the pension
obligations of Purchaser set forth in this Section ("Purchaser's Plan"). As
soon as practicable after the Closing Date, AlliedSignal shall cause a transfer
of the pension liabilities and obligations being assumed by Purchaser and of
the assets, as calculated below, to Purchaser's Plan.
(b) The assets to be transferred from the Pension Plans to
Purchaser's Plan shall be an amount equal to the "projected benefit
obligation," within the meaning of Financial Accounting Standard No. 87, as of
the Closing Date attributable to the U.S. Transferred Employees under Sellers'
Pension Plans ("PBO") with adjustments described below. Sellers' actuary shall
calculate the transfer amount (the "Transfer Amount") by applying the
assumptions, methods and methodologies listed on Schedule 6.5(b) and other
actuarial assumptions and methodologies used in the ordinary course in the
preparation of the actuarial valuation not inconsistent with those listed in
Schedule 6.5(b). Notwithstanding any provision herein to the contrary, the
transfer amount shall be subject to the applicable requirements of Sections
414(l) and 401(a)(12) of the Code. The amount as so determined shall be
adjusted for investment earnings at the short term investment fund rate earned
by Sellers' Pension Plans (the "Earnings") for the period between the Closing
Date and the actual dates of transfer (see below) and reduced by the amount of
any benefit payments to U.S. Transferred Employees and a proportional share of
investment and administrative expenses relative to asset values for such
period. The amount of assets caused to be transferred pursuant to this Section
shall be calculated by Sellers' actuary, and the actuarial calculations shall
be subject to review and approval by Purchaser's actuary. In the event that
Purchaser's actuary does not agree with the calculation determined by Sellers'
actuary, the determination of the amount to be transferred pursuant to this
Section shall be made by a third, nationally recognized actuarial firm selected
by Sellers' and Purchaser's actuaries (the cost of which shall be borne equally
between Sellers and Purchaser), and the determination of such third actuary as
to the amount to be transferred shall be binding and conclusive upon all
parties hereto. The transfer of assets from Sellers' Pension Plan to
Purchaser's Plan shall be made in cash pursuant to Section 6.5(c). The parties
shall file any necessary IRS Forms 5310-A with respect to such transfer.
(c) All transfers from the Pension Plans to the Purchaser's
Plan shall be made in accordance with the provisions of this Section 6.5(c). As
soon as is administratively practical, but in no event later than 30 days
following the Closing Date, and conditioned upon AlliedSignal having been
provided evidence reasonably satisfactory to it that Purchaser has established
a trust (or trusts) to hold the assets of the Purchaser's Plan and that
Purchaser's Plan is qualified under Section 401(a) of the Code and the trusts
holding assets of the Purchaser's Plan are tax exempt under Section 501(a) of
the Code ("Initial Transfer Date"), AlliedSignal shall cause its trusts to make
an initial transfer of assets in cash equal to 85% of the amount reasonably
estimated by AlliedSignal in good faith to be equal to the Transfer Amount (the
"Initial Transfer Amount"). In addition, prior to the Initial Transfer Date
AlliedSignal shall provide Purchaser with evidence reasonably satisfactory to
Purchaser that the Pension Plans remain qualified under Section 401(a) of the
Code. As soon as practicable
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after the final determination of the amounts to be transferred ("True-Up
Date"), AlliedSignal shall cause a second transfer to be made in cash of the
"True-Up Amount." The True-Up Amount shall be equal to the following amount:
(Transfer Amount minus Initial Transfer Amount), minus benefit
payments made to U.S. Transferred Employees since the Closing Date
from the Pension Plans, adjusted for Earnings on the excess of the
Transfer Amount over the Initial Transfer Amount from the Initial
Transfer Date to the True-Up Date,
If the Initial Transfer Amount exceeds the Transfer Amount, as soon as
practicable following such determination Purchaser shall cause a transfer to be
made to the respective Pension Plan equal to the excess of the Initial Transfer
Amount over the Transfer Amount, adjusted to reflect earnings at the short term
investment fund rate earned by Purchaser's Plan from the Initial Transfer Date
until the date of transfer.
6.6 Savings Plan. AlliedSignal shall provide that those Employees
participating in the AlliedSignal Savings Plan and AlliedSignal Thrift Plan
("Savings Plans") immediately prior to the Closing Date shall fully vest on the
Closing Date in their respective Savings Plans accounts (the "Accounts"). As
promptly as practicable following the Closing Date, Sellers and Purchaser shall
arrange for the transfer of the Accounts and the corresponding liabilities with
respect to the U.S. Transferred Employees, from the Savings Plans to one or
more tax-qualified plans established or to be established by Purchaser which
provides benefits substantially equivalent to the benefits available under the
applicable Savings Plans. With respect to the plan or plans receiving assets
from the Savings Plans, to the extent permitted by Applicable Law, such plan or
plans shall also (a) provide for tax-deferred contributions and (b) meet all
requirements for a qualified cash or deferred arrangement under Section 401(k)
of the Code. The transfer of assets from the Savings Plans shall be made in
cash, marketable securities, promissory notes presenting participant loans, or
a combination thereof, as determined by AlliedSignal and consented to by
Purchaser. Without limiting the generality of the foregoing, if AlliedSignal
should determine to transfer assets held in Accounts which, immediately prior
to the Closing Date, provide for holding AlliedSignal common stock in such
form, Purchaser agrees to accept transfer of such Accounts in AlliedSignal's
common stock, and, to the extent permitted by law for such reasonable period of
time as Purchaser may determine, to provide U.S. Transferred Employees with an
election to retain AlliedSignal's common stock in their respective plan
accounts or to dispose of such stock and have the proceeds reinvested in other
investment alternatives offered under each such plan. Prior to the transfer
date, Purchaser shall, to the reasonable satisfaction of AlliedSignal's
counsel, present AlliedSignal with such evidence and information (which may
include or be provided by an opinion of Purchaser's counsel satisfactory to
AlliedSignal) as is reasonably necessary to establish that the tax-qualified
plan or plans established or to be established by Purchaser to which the
transfer or transfers described in this Section are to be made are in full
force and effect and meet all the requirements for qualification under Sections
401 and 411(d)(6) of the Code and Sellers shall, to the reasonable satisfaction
of Purchaser's counsel, present Purchaser with such evidence and information as
is reasonably necessary to establish that the Savings Plan meets the
requirements of Section 401(a) of the Code.
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6.7 Labor Agreements. Purchaser shall assume Sellers' obligations
under the Bargaining Agreements and any applicable side letters and schedules
according to their terms as in effect of and as of the Closing Date, and shall
honor such Bargaining Agreements for the remainder of the effective term
thereof following the Closing Date.
ARTICLE 7. PRE-CLOSING COVENANTS
7.1 [Intentionally left blank].
7.2 [Intentionally left blank].
7.3 [Intentionally left blank].
7.4 [Intentionally left blank].
7.5 Workers' Compensation. The Seller shall retain responsibility for
all workers' compensation events which relate to incidents occurring on or
before the Closing Date. The Purchaser shall have responsibility for all
workers' compensation events which relate to incidents occurring after the
Closing Date.
7.6 Insurance-Primary Casualty Program. Sellers maintain at present a
series of insurance programs pursuant to which various insurance carriers have
provided and are providing insurance coverage in respect of the Business
relating to automobile liability, general liability, employers liability and
non-aircraft products liability (the "Primary Casualty Program") and Sellers
and Purchaser understand and agree that Sellers are not transferring to
Purchaser pursuant hereto any rights or interests in such Primary Casualty
Program, nor, except as otherwise set forth herein, shall Sellers be required
to maintain any of such coverages or limit in any manner Sellers' right to
change deductible levels or other terms or conditions thereof. As between
Purchaser and Sellers, however, it is agreed that the following shall apply to
claims with a date of occurrence prior to the Closing Date that are covered by
the Primary Casualty Program:
7.6.1 Claims Responsibility and Procedures. Purchaser shall
promptly notify in writing Sellers of any claims against the Business,
Purchaser, Sellers or any of their Affiliates arising from occurrences which
took place prior to the Closing Date relating to the Business or its prior
assets, business or operations. To the extent coverage is available under the
Primary Casualty Program, Purchaser shall handle such claims through the
applicable insurance carrier and to the limited extent required therefor is
hereby appointed as Sellers' agent in dealing with any such applicable
insurance carriers, such agency, however, being subject to revocation at any
time if Purchaser fails to comply with the provisions of this Section 7.6.
Purchaser through the applicable insurance carrier may settle any such claim on
a basis which in its judgment is reasonable provided, however, that Purchaser
agrees not to settle any such claims for an amount in excess of $50,000 without
prior consultation with AlliedSignal. Sellers and Purchasers shall cooperate
with each other in the defense of any such claims and will keep each other
informed of significant developments with respect
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thereto. Neither Purchaser nor Sellers will knowingly take any action that
prejudices the other party in the collection of any applicable insurance
proceeds.
7.7 No Inconsistent Action. Subject to Sections 9.1 and 9.2, the
parties hereto shall not take any action inconsistent with their obligations
under this Agreement or which could materially hinder or delay the consummation
of the transactions contemplated by this Agreement. None of the parties hereto
shall take or omit to take any action that could result in any of their
respective representations and warranties not being true in all material
respects on the Closing Date.
7.8 [Intentionally left blank].
7.9 Non-Solicitation. Sellers agree that until December 22, 1999, they
shall not, and they shall cause each of their respective Affiliates not to,
without the prior consent of Purchaser, employ or solicit for employment any
person currently employed by the Business (other than a person solicited or
hired as a result of a general solicitation (such as an advertisement) not
specifically directed to employees of the Business).
7.10 Refunds and Remittances. In the event that Sellers or their
Affiliates receive any amount that is properly due and owing to Purchaser in
accordance with the terms of this Agreement, Sellers shall cause same to be
promptly remitted to Purchaser at the address specified in Section 13.2.
7.11 Enforcement of Confidentiality Provisions. Sellers agree to use
reasonable best efforts to enforce, at the written request of Purchaser, (i)
the confidentiality provisions of any agreements related to the sale of the
Business (excluding any employee solicitation provisions) and (ii) all
confidentiality agreements, if any, entered into between Sellers or any of
their Affiliates and any of their employees, in each case to the extent such
provisions pertain to the Business as of the Closing Date.
7.12 Novation of Government Contracts. As soon as reasonably
practicable following the Closing, AlliedSignal shall, in accordance with
Federal Acquisition Regulations Part 42, Section 42.12, submit in writing to
each responsible Contracting Officer (as such term is defined in Federal
Acquisition Regulations Part 42, Section 42.102(a)), a request for the U.S.
Government to (i) recognize Purchaser in accordance with this Agreement and
(ii) enter into a novation agreement (the "Novation Agreement") substantially
in the form contemplated by such regulations. AlliedSignal shall thereby
reasonably assist Purchaser in obtaining all consents, approvals and waivers
required for the purpose of processing, entering into and completing the
Novation Agreement with regard to any of the Government Contracts, including
responding to any reasonable requests for information by the U.S. Government
with regard to such Novation Agreement.
7.13 Further Actions. Subject to the terms and conditions hereof,
Sellers and Purchaser agree to use their reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement, including without limitation,
taking all necessary or advisable action (i) in respect of the works council of
ELAC and (ii)
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to terminate the profit/loss pooling arrangement (the "Pooling Arrangement")
between AS Deutschland and ELAC not later than December 31, 1998.
7.14 Letters of Credit. Schedule 7.14 identifies letters of credit and
other similar obligations in respect of which AlliedSignal will remain as
account party ("Retained L/Cs") and other letters of credit and similar
obligations ("Assumed L/Cs") in respect of which Purchaser shall, not later
than May 31, 1998, either (a) become account party or (b) issue replacement
letters of credit, with Purchaser as account party, and obtain the cancellation
of the Assumed L/Cs and release Sellers from any obligations under any related
credit agreements. In the event that, after using its reasonable best efforts,
Purchaser cannot perform its obligations under Section 7.14(a) or (b) with
respect to the Assumed L/Cs, Purchaser shall provide back-up letters of credit
with respect to such Assumed L/Cs. Any Assumed L/C in respect of which
Purchaser has not issued a replacement or back-up letter of credit as aforesaid
by May 31, 1998 may be cancelled by AlliedSignal and Purchaser shall reimburse
AlliedSignal forthwith for all amounts drawn by the beneficiary under any such
cancelled letter of credit; provided, however, that prior to May 31, 1998,
AlliedSignal shall not waive any requirements of or agree to amend any such
Retained L/C without the prior written consent of Purchaser. The parties
acknowledge that the identity of the account party under any Retained L/C and
any Assumed L/C and other similar obligations does not alter the terms of this
Agreement, meaning, specifically and without limitation, that the provisions of
Section 3.1 (Assumed Liabilities), 3.2 (Excluded Liabilities) and Article 12
(Indemnification) are unaffected by the identity of the account party, and if a
demand for payment is made under a Retained L/C or an Assumed L/C, the
financial responsibility for the circumstances underlying such demand shall be
determined by this Agreement and not by the identity of the account party under
the letter of credit in question.
7.15 1985 Capitalization of ELAC. AlliedSignal shall ensure that the
1985 capitalization of ELAC is confirmed by German counsel to have been lawful
and proper. The parties shall cooperate in any steps that may be necessary to
correct the capitalization, at AlliedSignal's expense.
7.16 MCDV Subcontract. Following the Closing, AlliedSignal and
Purchaser shall use their reasonable best efforts to prepare a subcontract (the
"MCDV Subcontract") to be entered into between AlliedSignal Canada Inc. ("ASC")
and Purchaser relating to the contract between ASC and MacDonald, Dettwiler and
Associates Ltd. for the maritime coastal defense vessel, as amended (the "MCDV
Contract"). The MCDV Subcontract shall be reasonably acceptable to AlliedSignal
and Purchaser and shall transfer to Purchaser in U.S. dollars the full economic
benefit of the MCDV Contract (based on the exchange rate for U.S. and Canadian
dollars as reported in the Wall Street Journal on the date of any payment).
Purchaser shall, and AlliedSignal shall cause ASC to, enter into the MCDV
Subcontract promptly following the finalization thereof to the reasonable
satisfaction of AlliedSignal and Purchaser. In the event that (i) ASC shall be
prohibited from making any payment to Purchaser under the MCDV Subcontract,
(ii) any Canadian withholding tax would be applicable to any payment to
Purchaser by ASC under the MCDV Subcontract or (iii) ASC would lose Canadian
content credit as a result of any payment to Purchaser by ASC under the MCDV
Subcontract, AlliedSignal shall, on the date any such payment is due and in
lieu of such payment from ASC under the MCDV Subcontract, make a payment to
Purchaser in an
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amount equal to the amount of the payment due under the MCDV Subcontract,
without regard to any Canadian withholding tax. Purchaser shall not have any
liability under the MCDV Subcontract for any obligation or liability relating
to the ownership or operation of the Assets or the Business on or prior to the
Closing Date relating to (a) the provision of Canadian content, (b) any penalty
or excise tax for failure to meet Canadian content obligations or (c) any
obligation for liquidated damages for failure to timely deliver.
ARTICLE 8. CONDITIONS TO CLOSING
8.1 Conditions to the Obligations of Purchaser. The obligations of
Purchaser to consummate the transactions contemplated by this Agreement are
subject to the fulfillment prior to or at the Closing of each of the following
conditions, any one or more of which may be waived by Purchaser in its sole
discretion:
(a) On the Closing Date, there shall be no injunction,
restraining order or decree of any nature of any court or governmental agency
or body of competent jurisdiction that is in effect that restrains or prohibits
the consummation of the transactions contemplated by this Agreement or any such
injunction, restraining order or decree or any pending lawsuit, claim or legal
action relating to the transactions contemplated by this Agreement which would
materially adversely affect such transactions or Purchaser's ownership, use or
enjoyment of the Business or any part thereof.
(b)(i) All of the representations and warranties of Sellers,
including those set forth in Section 8.1(b)(ii) and (iii) below, contained in
this Agreement or in any certificate, instrument or other document delivered to
Purchaser pursuant hereto shall be complete, true and correct in all respects
on and as of the Effective Date, with the same force and effect as though such
representations and warranties had been made on and as of the Effective Date,
except to the extent that any such representation and warranty is made as of a
specified date, in which case, such representation and warranty shall have been
true and correct as of such date;
(ii) The representations and warranties of Sellers contained
in Sections 4.1, 4.2, 4.3, 4.8, 4.10, 4.11, 4.12, 4.15, 4.16, 4.17, 4.18, 4.20,
4.21, 4.22, 4.23, 4.25, 4.26 and 4.27 of this Agreement or in any certificate,
instrument or other document delivered to Purchaser pursuant hereto shall be
complete, true and correct in all respects on the Closing Date, with the same
force and effect as though such representations and warranties had been made on
and as of the Closing Date, except to the extent that any such representation
and warranty is made as of a specified date, in which case, such representation
and warranty shall have been true and correct as of such date; and
(iii) To the Knowledge of Sellers, the representations and
warranties contained in Section 4.9 of this Agreement or in any certificate,
instrument or other document delivered to Purchaser pursuant hereto shall be
complete, true and correct in all respects on the Closing Date, with the same
force and effect as though such representations and warranties had been made on
and as of the Closing Date, except to the extent that any such
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representation and warranty is made as of a specified date, in which case, such
representation and warranty shall have been true and correct as of such date.
(c) Sellers shall have performed in all material respects all
obligations and agreements and complied in all material respects with all
covenants contained in this Agreement to be performed and complied with by them
prior to or on the Closing Date.
(d) Purchaser shall have received a certificate, dated the
Closing Date, from an authorized officer of each of the Sellers to the effect
that the conditions specified in (b) and (c) above have been fulfilled.
(e) The Transition Services Agreement, attached as Exhibit B
hereto, shall have been executed and delivered by the parties thereto.
8.2 Conditions to the Obligations of Sellers. The obligations of
Sellers under this Agreement are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions, any one or more of which may be
waived by Sellers in their sole discretion:
(a) On the Closing Date, there shall be no injunction,
restraining order or decree of any nature of any court or governmental agency
or body of competent jurisdiction that is in effect that restrains or prohibits
the consummation of the transactions contemplated by this Agreement.
(b) The representations and warranties of Purchaser contained
in this Agreement or in any certificates, instruments or other documents
delivered to AlliedSignal pursuant hereto shall be complete, true and correct
on the Closing Date, with the same force and effect as though such
representations and warranties, as updated, had been made on and as of the
Closing Date, except to the extent that any such representation and warranty is
made as of a specified date, in which case, such representation and warranty
shall have been true and correct as of such date.
(c) Purchaser shall have performed in all material respects
all obligations and agreements and complied in all material respects with all
covenants contained in this Agreement to be performed and complied with by the
Closing Date.
(d) AlliedSignal shall have received a certificate, dated the
Closing Date, from an authorized officer of the Purchaser to the effect that
the conditions specified in (b) and (c) above have been fulfilled.
ARTICLE 9. TERMINATION AND SURVIVAL
9.1 Termination. Notwithstanding anything to the contrary set forth
herein, this Agreement may be terminated and the transactions contemplated
hereby abandoned at any time prior to the Closing:
(a) by mutual written consent of Purchaser and Sellers; or
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(b) by Purchaser, on the one hand, or Sellers, on the other
hand, upon written notice to the other, if such other party or its Affiliate
has breached any representation, warranty or covenant contained in this
Agreement in any respect, if the non-breaching party has notified the breaching
party of the breach in writing and the breach has continued without cure for a
period of thirty (30) days after notice of the breach; or
(c) by the Purchaser, on the one hand, or Sellers, on the
other hand, if there shall be in effect any law or regulation that prohibits
the consummation of the Closing or if the consummation of the Closing would
violate any non-appealable final order, decree or judgment of any court or
governmental body having jurisdiction over the transactions contemplated
hereby; or
(d) by either party if the Closing shall not have occurred by
April 1, 1998; provided that the terminating party is not in material breach of
its obligations under this Agreement.
9.2 Effect of Termination. If this Agreement is terminated pursuant to
Section 9.1, this Agreement shall become void and of no further force and
effect, and none of the parties hereto (nor their respective Affiliates,
directors, shareholders, officers, employees, agents, consultants,
attorneys-in-fact or other representatives) shall have any liability in respect
of such termination except that the obligations contained in Sections 9.2,
13.1, 13.3 and 13.9 shall survive; provided, however, that if such termination
is effected pursuant to Section 9.1(b) or (d) and the failure to consummate the
transactions contemplated hereby was the result of any of the conditions to
Closing having not been fulfilled by reason of the breach by either Purchaser,
on the one hand, or Sellers, on the other hand, of their respective covenants,
representations and/or warranties set forth in this Agreement or in any
agreement, document or instrument ancillary hereto, the party having so
breached shall remain liable to the other party for such breach.
ARTICLE 10. CLOSING DOCUMENTS
10.1 Documents to be Delivered by Sellers. At the Closing, Sellers
shall deliver to Purchaser the following documents:
(i) Copies of resolutions of each of the Sellers
certified by a Secretary, Assistant Secretary or other appropriate
officer of such entity, authorizing the execution, delivery and
performance of this Agreement and the transactions contemplated
hereby;
(ii) Executed deeds, bills of sale or other appropriate
instruments of transfer with respect to all of the Real Property,
Personal Property, Inventory, Accounts Receivable and any other Assets
not transferred or assigned by any other documents or instruments
described in this Section;
(iii) Executed and acknowledged Assignments by ASTI
sufficient to transfer title to the Intellectual Property;
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(iv) Executed assignment and assumption agreements
with respect to the Contracts;
(v) Executed documents of assignment or transfer with
respect to each of the permits, licenses and authorizations listed in Schedule
4.17;
(vi) One executed assumption of liability agreement by
which Purchaser will assume the Assumed Liabilities pursuant to Section 3.1
(the "Assumption of Liability Agreement");
(vii) One executed copy of the License Agreement;
(viii) A certificate of an appropriate officer of
AlliedSignal relating to the representations, warranties and covenants of
AlliedSignal made herein as provided in Section 8.1(b) and (c);
(ix) A share transfer agreement in customary form and
a certificate in the name of Purchaser representing the ELAC Shares;
(x) Any other document reasonably necessary to
effectuate the transactions contemplated hereby;
(xi) Sellers shall have delivered to Purchaser
certificate(s) in form and substance reasonably satisfactory to Purchaser, duly
executed and acknowledged, certifying any facts that would exempt the
transactions contemplated hereby from withholding pursuant to the provisions of
the Foreign Investment Real Property Tax Act (e.g., a certificate of
non-foreign status as provided in Treasury Regulation section
1.1445-2(b)(2)(iii)(B)); and
(xii) One executed Transition Services Agreement.
10.2 Documents to be Delivered by Purchaser. At the Closing, Purchaser
shall pay the Purchase Price to AlliedSignal and shall execute where applicable
and deliver to AlliedSignal the following documents:
(i) Copies of resolutions of the Purchaser, certified
by the Secretary or Assistant Secretary of Purchaser, authorizing the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby;
(ii) Executed assignment and assumption agreement with
respect to the Contracts;
(iii) One executed Assumption of Liability Agreement;
(iv) A certificate of an appropriate officer of
Purchaser relating to the representations, warranties and covenants
made herein by Purchaser, as provided in Sections 8.2(b) and (c);
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(v) One executed copy of the License Agreement;
(vi) Any other document reasonably necessary to
effectuate the transactions contemplated hereby;
(vii) One resale certificate regarding inventory; and
(viii) One executed copy of the Transition Services
Agreement.
ARTICLE 11. POST CLOSING OBLIGATIONS
11.1 Further Assurances. From time to time after the Closing, without
further consideration, the parties shall cooperate with each other and shall
execute and deliver instruments of transfer or assignment, or such other
documents to the other party as such other party reasonably may request to
evidence or perfect Purchaser's right, title and interest to the Assets, and
otherwise carry out the transactions contemplated by this Agreement, including
providing that Purchaser will be able to utilize the AlliedSignal sales office
in Canada previously used by the Business. Any cash received by the Sellers
after the Closing in respect of any Asset shall be immediately remitted by
Sellers to Purchaser.
11.2 Access to Books and Records. After the Closing, Purchaser shall
permit AlliedSignal to have reasonable access to and the right to make copies
of such of Sellers' books, records and files as constitute part of the Assets
or the ELAC Assets for any reasonable purpose at any time during regular
business hours, such as for use in litigation or financial reporting, tax
return preparation, or tax compliance matters.
11.3 Cooperation in Litigation. The parties shall reasonably cooperate
with each other at the requesting party's expense in the prosecution or defense
of any dispute or litigation or other proceeding arising from their respective
operation of the Business, including but not limited to affording reasonable
access to and providing information regarding amounts in dispute, information
regarding former employees of the Business and documentation created in the
running of the Business relating to such dispute or litigation. Purchaser and
Sellers shall cooperate fully, as and to the extent reasonably requested by the
other party, and at their own cost and expense, in connection with the filing
of Tax Returns, the retention of records and the forwarding of any relevant
notices or other information received from any Taxing authority and any audit,
litigation or other proceeding with respect to Taxes, and shall fully and
accurately submit any tax data packages reasonably requested by Sellers within
the time periods established by the Sellers Tax department consistent with past
practices.
11.4 Proprietary Information. Prior to the Closing Date, the Business
was routinely supplied copies of proprietary and confidential information
relating to strategic, technical, and/or marketing plans of AlliedSignal and
its Affiliates and their various operations unrelated to the Business. Although
AlliedSignal has attempted to recover such information from the Business, some
may still be present within the Business. Purchaser therefore agrees that it
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will not use such information for any purpose whatsoever, and shall destroy
any remaining copies.
11.5 Covenant Not to Compete. AlliedSignal and each of its Affiliates
agrees that for a period of five years after the Closing Date, neither it nor
any of its Affiliates will, directly or indirectly, own, manage, operate, join,
control or participate in the ownership, management, operation or control of,
any business whether in corporate, proprietorship or partnership form or
otherwise competitive with the Business as currently conducted, except for (i)
any business, service or product line acquired by AlliedSignal, directly or
indirectly, after the Closing Date to the extent the revenues attributable to
the competing business do not account for in excess of 20% of the revenues of
the business acquired or (ii) any investment by the Savings Plans or the
Pension Plans of AlliedSignal.
11.6 Change of Name. To the extent AS Deutschland has not done so
prior to Closing, Purchaser covenants that promptly after Closing it will
change the legal name of ELAC and its wholly owned pension fund subsidiary in
accordance with German law to eliminate the reference therein to
"AlliedSignal."
11.7 Tax Election. The Purchaser may at its option make a section 338
election with respect to the ELAC Shares or in the alternative, the Purchaser
may purchase the ELAC Shares through a German acquisition vehicle; provided
that, in either case, the Seller consents to the making of such election or
purchase which such consent shall not be unreasonably withheld.
11.8 Research and Experimental Expenses. Sellers will furnish to the
Purchaser as soon as reasonably practicable, but in no event more than 180 days
after Closing, at Seller's cost and expense, all information reasonably
requested relating to the base period research expenses and any other
information to allow Purchaser to claim research and experimental credits in
accordance with the relevant sections of the Code and Treasury Regulations
promulgated thereunder.
11.9 Pooling Arrangement. As described in Section 7.13, the Pooling
Arrangement is to be terminated not later than December 31, 1998.
Notwithstanding the existence of the Pooling Arrangement, any net earnings of
ELAC during the period from the Effective Date until the date the Pooling
Arrangement is terminated (the "Pooling Period") shall be treated as an Asset,
and all losses and the consequences thereof shall be treated as an Assumed
Liability, for purposes of this Agreement.
ARTICLE 12. INDEMNIFICATION
12.1 Indemnification by Sellers. Sellers shall defend, indemnify and
hold harmless Purchaser and Purchaser's directors, shareholders, officers,
employees, agents, Affiliates, successors and each of the heirs, executors and
successors and assigns of any of the foregoing (collectively, the "Purchaser
Indemnified Parties") from and against any and all claims, liabilities,
obligations, losses, costs, expenses (including, without limitation, reasonable
legal,
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accounting and similar fees and expenses), fines, damages (individually a
"Loss" and collectively "Losses"), arising out of:
(a) any breach or violation of any of the covenants or
agreements made by Sellers in this Agreement or the Other Agreements;
(b) any breach of, or any inaccuracy or misrepresentation in,
any of the representation or warranties made by Sellers in this Agreement or in
any Schedule, agreement, instrument, certificate or similar document required
to be delivered pursuant to the terms hereof; or
(c) any of the Excluded Liabilities or Excluded Assets.
12.2 Tax Indemnification. The Sellers shall, jointly and severally, be
responsible for, shall pay or cause to be paid, and shall indemnify and hold
harmless the Purchaser Indemnified Parties from and against any and all Taxes
for or in respect of each of the following:
(a) any and all Taxes with respect to any taxable period or a
portion thereof, of ELAC (or any predecessor) ending on or before the Closing
Date;
(b) with respect to any and all Taxes of any member of a
consolidated, combined or unitary group of which ELAC (or any predecessor) is
or was a member on or prior to the Closing Date by reason of the liability of
ELAC pursuant to Treasury Regulation Section 1.1502-6(a) (or any analogous or
similar state, local or foreign law or regulation), as a transferee or
successor, by contract, or otherwise;
(c) any Taxes arising out of a breach of the representations
and warranties contained in Section 4.16; and
(d) any payments required to be made after the Closing Date
under any Tax sharing, Tax indemnity, Tax allocation or similar contracts
(whether or not written), including but not limited to the profit/loss pooling
arrangement with AS Deutschland set forth on Schedule 4.16, to which ELAC was
obligated, or was a party, on or prior to the Closing Date.
12.3 Indemnification by Purchaser. Purchaser shall indemnify and hold
harmless AlliedSignal and AlliedSignal's directors, shareholders, officers,
employees, agents, consultants, representatives, Affiliates, successors and
assigns (the "AlliedSignal Indemnified Parties") from and against any and all
Losses arising out of:
(a) any breach or violation by Purchaser of any of the
covenants or agreements made by Purchaser in this Agreement or the Other
Agreements;
(b) any breach of, or any inaccuracy in any of the
representations or warranties made by Purchaser in this Agreement, or in any
Schedule, agreement, certificate, instrument or similar documents required to
be delivered pursuant to the terms hereof; or
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(c) any Assumed Liability.
12.4 Indemnification Procedure. (a) Any party seeking indemnification
hereunder (the "Indemnitee") shall notify the party liable for such
indemnification (the "Indemnitor") in writing of any event, omission or
occurrence which the Indemnitee believes has given or could give rise to Losses
which are indemnifiable hereunder (such written notice being hereinafter
referred to as a "Notice of Claim"). Any Notice of Claim shall be given
promptly after the Indemnitee becomes aware of such event, omission or
occurrence; provided, that the failure of any Indemnitee to give notice as
provided in this Section 12.4 shall not relieve the Indemnitor of its
obligations under this Section 12.4, except to the extent that the Indemnitor
is actually prejudiced by such failure to give notice. A Notice of Claim shall
specify in reasonable detail the nature and the particulars of the event,
omission or occurrence giving rise to a right of indemnification to the extent
known by or available to Indemnitee. The Indemnitor shall satisfy its
obligations hereunder within thirty (30) days of its receipt of a Notice of
Claim.
(b) All costs and expenses incurred by the Indemnitor in
defending any claim or demand shall be a liability of, and shall be paid by,
the Indemnitor. Except as hereinafter provided, in the event that the
Indemnitor notifies the Indemnitee within the 30 day period that it desires to
defend the Indemnitee against such claim or demand, the Indemnitor shall be
deemed to waive its right to contest such Indemnitee's right to indemnification
hereunder and shall have the right to defend the Indemnitee by appropriate
proceedings and shall have the sole power to direct and control such defense.
If any Indemnitee desires to participate in any such defense, it may do so at
its sole cost and expense; provided, that such Indemnitee shall have the right
to employ separate counsel to represent such Indemnitee in such defense, at the
Indemnitor's expense, if (i) in such Indemnitee's reasonable judgement and on
the advice of counsel, a conflict of interest between such Indemnitor and such
Indemnitee exists with respect to such claim or demand or (ii) the Indemnitor
agrees to the retention of such counsel. So long as the Indemnitor is
reasonably contesting any such claim or demand in good faith, the Indemnitee
shall not pay or settle a claim or demand without the consent of the Indemnitor
(unless the Indemnitee waives in writing any right to indemnity therefor). The
Indemnitor may settle any claim or demand without the consent of the Indemnitee
provided that such settlement includes a full, unconditional and complete
release of the Indemnitee, and provided also that no such settlement will,
without the prior written consent of the Indemnitee, impose any obligation or
restriction on the Indemnitee or any of its assets or businesses. So long as
the Indemnitor is defending in good faith any such third party claim, demand,
suit, action or proceeding, the Indemnitee shall at all times cooperate in all
reasonable ways with, make its relevant files and records available for
inspection and copying by, and make its employees available or otherwise render
reasonable assistance to, the Indemnitor and shall be reimbursed for its
reasonable out-of-pocket expenses related thereto. In the event that the
Indemnitor fails to timely defend, contest or otherwise protect against any
such third party claim, demand, suit, action or proceeding, the Indemnitee at
the Indemnitor's expense shall have the right, but not the obligation, to
defend, contest, assert crossclaims or counterclaims, or otherwise protect
against, the same and may make any compromise or settlement thereof and be
entitled to all amounts paid as a result of such third party claim, demand,
suit or action or any compromise or settlement thereof.
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(c) The Indemnitor, following receipt of any notice from any
Indemnitee requesting reimbursement for a Loss (which notice documents in
reasonable detail the Loss or portion thereof by the Indemnitee) shall promptly
and in any case within thirty days of receipt provide such reimbursement,
unless and only to the extent that the Indemnitor disputes in good faith its
indemnity obligation with respect to such Loss.
(d) Each Indemnitee shall reasonably cooperate in complying
with any applicable foreign, federal, state or local laws, rules or regulations
or any discovery or testimony necessary to effectively carry out the
Indemnitor's obligations hereunder. Such Indemnitee shall be reimbursed for any
reasonable out-of-pocket expenses incurred in connection with such compliance.
12.5 Survival and Limitations. Except as otherwise provided herein,
the warranties and representations of the parties contained in this Agreement
or in any instrument delivered pursuant hereto, as deemed to have been given as
of the Effective Date or the Closing Date, as the case may be, pursuant to
Section 8.1(b), will survive the Closing Date and will remain in full force and
effect thereafter for a period of two years from the Closing Date; provided
that the representations and warranties contained in (i) Sections 4.8 and 4.18
shall survive the Closing Date indefinitely and (ii) Sections 4.3, 4.10, 4.11,
4.16 and 4.21 which shall survive the Closing Date until 90 days following the
expiration of any statute of limitations (or extensions thereof) applicable to
the matters described therein; and provided further that in the event notice of
any claim for indemnification is given within the applicable survival period,
the representations and warranties that are the subject of such indemnification
claim shall survive until such time as such claim is finally resolved. Anything
to the contrary contained herein notwithstanding, (a) neither party shall
assert any claim against the other for indemnification (not including
indemnification for Taxes) hereunder with respect to any inaccuracy or breach
of such warranties or representations unless and until the amount of such claim
or claims, including any claims deemed made pursuant to Section 12.8, shall
exceed $750,000 calculated on a cumulative basis and not a per item basis, and
then only in respect to the excess over said $750,000; and (b) neither party
shall be entitled to recover from the other more than 50% of the sum of (I) the
Purchase Price hereunder and (II) the Purchase Price under the Facility Sale
Agreement with respect to all claims for indemnity with respect to any
inaccuracy or breach of such warranties or representations.
12.6 Adjustment for Insurance and Taxes. The amount (an "Indemnity
Payment") which an Indemnitor is required to pay on behalf of any Indemnitee
pursuant to this Article 12 shall be reduced by the amount of any insurance
proceeds theretofore or thereafter actually received by or on behalf of the
Indemnitee in reduction of the related indemnifiable loss. An Indemnitee which
shall have received or on behalf of which there shall be paid an Indemnity
Payment and which shall subsequently receive, directly or indirectly, insurance
proceeds in respect of the related indemnifiable loss, shall pay to the
Indemnitor the amount of such insurance proceeds or, if lesser, the amount of
the Indemnity Payment. Where any tax benefit is available to the Indemnitee
with respect to an indemnifiable event, the indemnity payment shall be reduced
dollar for dollar by the amount of such tax benefit and where any net Tax cost
is incurred by the Indemnitee arising from the receipt of indemnity payments
hereunder, the indemnity payment shall be increased dollar for dollar by the
amount of such Tax cost (grossed up for such increase), provided that such Tax
benefit or Tax cost shall be computed
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at the highest federal, state, local and foreign corporate income tax rate of
the jurisdiction in which such Tax benefit or Tax cost so relates.
12.7 Environmental Liabilities. (a) To the fullest extent permitted
under (i) the Stock Purchase Agreement pursuant to which AlliedSignal acquired
ELAC from Honeywell and (ii) Applicable Law, AlliedSignal agrees to assign its
indemnification rights if any in respect of the ELAC facility to Purchaser and
to the extent not assignable to enforce such provisions for the benefit of
Purchaser and to provide any amounts it receives in connection therewith to
Purchaser.
(b) Notwithstanding Section 3.2(d), (i) Purchaser shall
indemnify the AlliedSignal Indemnified Parties from and against the first $3
million of Losses, in aggregate, in respect of the combined Environmental
Liabilities hereunder and under the Facility Sale Agreement and 50% of the next
$2 million of such Losses and (ii) AlliedSignal shall indemnify the Purchaser
Indemnified Parties from and against any other Losses relating to Environmental
Liabilities.
12.8 Facility Sale Agreement. Purchaser agrees to indemnify the Allied
Signal Indemnified Parties from and against amounts up to $750,000, calculated
on a cumulative basis and not a per item basis, paid by Sellers under Article
11 of the Facility Sale Agreement for claims under the Facility Sale Agreement
for indemnification (not including indemnification for Taxes) thereunder with
respect to any inaccuracy or breach of the warranties or representations
thereunder. If AlliedSignal shall be liable to any party pursuant to the
Facility Sale Agreement (a "Facility Sale Liability"), Purchaser shall
indemnify AlliedSignal to the extent the amount of such Facility Sale Liability
exceeds the amount for which Sellers would have been liable under this
Agreement had the Real Estate Assets (as defined in the Facility Sale
Agreement) been included in the Assets. Any payments made pursuant to this
Section 12.8 shall be deemed "claims" for purposes of the $750,000 threshold
set forth in Section 12.5. Sellers shall not be required to pay more than once
in respect of any Loss.
ARTICLE 13. MISCELLANEOUS
13.1 Expenses. Except as specifically set forth elsewhere herein and
except that a party not in breach of this Agreement shall be entitled to
recover from a breaching party all expenses and costs incurred by the
non-breaching party by reason of such breach (including, without limitation all
legal expenses and costs), each of the parties hereto shall pay its own
expenses and costs incurred or to be incurred by it in negotiating, closing and
carrying out this Agreement, and, in no event, shall any such fees and expenses
of the Sellers constitute "Assumed Liabilities" under this Agreement.
13.2 Notices. Any notice or communication given pursuant to this
Agreement by a party hereto to the other party shall be in writing and hand
delivered, or mailed by registered or certified mail, postage prepaid, return
receipt requested (notices so mailed shall be deemed given when mailed), or
sent via facsimile, with an original mailed as follows:
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If to AlliedSignal or Sellers:
AlliedSignal Inc.
101 Columbia Road
Morristown, New Jersey 07962
Attention: Vice President and Chief Financial Officer
Telecopier: 973-455-6039
If to Purchaser:
L-3 Communications Corporation
600 Third Avenue
New York, New York 10016
Attention: Christopher C. Cambria, Esq.
Telecopier: 212-805-5494
with a required copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: David B. Chapnick, Esq.
Telecopier: 212-455-2502
13.3 Confidentiality. AlliedSignal and Purchaser have entered into a
Confidentiality Agreement dated September 23, 1997 which notwithstanding any
provision herein to the contrary shall survive the execution and delivery of
this Agreement and the Closing hereunder.
13.4 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
13.5 Entire Agreement/Termination of December Agreement. Except for
the Confidentiality Agreement referred to in Section 13.3, this Agreement and
the Other Agreements are the entire agreement between the parties hereto with
respect to the subject matter hereof and supersede all prior communications,
representations, agreements and understandings between the parties hereto,
whether oral or written, including any prior version of this Agreement executed
and delivered by the parties hereto. On December 22, 1997, the parties hereto
entered into that certain Purchase Agreement (the "December Agreement")
regarding the purchase and sale of the Assets. Since the date of the December
Agreement, Purchaser has conducted an audit and other examinations of the
Business and has asserted certain claims with respect to the December
Agreement, relating, inter alia, to the financial position and business
prospects of the Business. The parties have resolved all such claims and, for
good and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, have restated their agreement with respect to the purchase and
sale of the Business, as set forth in this Agreement. The December Agreement is
hereby terminated, is
40
<PAGE>
of no further force or effect, and no party shall have any right or obligation,
whether as a matter of the law of contract or otherwise, under, arising out of
or relating to, the December Agreement or any matter appearing in the December
Agreement that does not appear in this Agreement (including, without
limitation, the representations and warranties of Sellers that do not appear in
this Agreement). The agreement between the parties as to the purchase and sale
of the Business is expressed in its entirety in this Agreement.
13.6 Construction. When the context so requires, references herein to
the singular number include the plural and vice versa and pronouns in the
masculine or neuter gender include the feminine. The headings contained in this
Agreement and the tables of contents, exhibits and schedules are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
13.7 Assignment. This Agreement may not be assigned, in whole or in
part, by any party hereto without the prior written consent of the other
parties hereto, which consent shall not unreasonably be withheld; provided that
Purchaser may, without the consent of Sellers, assign its rights and
obligations, in whole or in part, to any wholly-owned subsidiary of Purchaser
so long as Purchaser remains bound by all the terms of this Agreement.
13.8 Amendment. This Agreement may be amended, supplemented or
otherwise modified only by written agreement duly executed by the parties
hereto.
13.9 Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of New York, disregarding its conflicts of laws
principles which may require the application of the laws of another
jurisdiction.
13.10 No Third Party Rights. This Agreement is not intended and shall
not be construed to create any rights in any parties other than Sellers and
Purchaser and no other person shall assert any rights as a third party
beneficiary hereunder.
13.11 Exhibits and Schedules. The Exhibits and Schedules attached
hereto are incorporated into this Agreement and shall be deemed a part hereof
as if set forth herein in full. References herein to "this Agreement" and the
words "herein," "hereof" and words of similar import refer to this Agreement
(including Exhibits and Schedules) as an entirety. In the event of any conflict
between the provisions of this Agreement and any such Exhibit or Schedule, the
provisions of this Agreement shall control.
13.12 Waivers. Any waiver of rights hereunder must be set forth in
writing. Except as provided in the preceding sentence, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained herein, or in any documents delivered or to be delivered
pursuant to this Agreement or in connection with the Closing hereunder. A
waiver of any breach or failure to enforce any of the terms or conditions of
this Agreement shall not
41
<PAGE>
in any way affect, limit or waive any party's rights at any time to enforce
strict compliance thereafter with every term or condition of this Agreement.
13.13 Severability. If and to the extent that any court of competent
jurisdiction holds any provisions (or any part thereof) of this Agreement to be
illegal, invalid or unenforceable, such holding shall in no way affect the
validity of the remainder of this Agreement.
13.14 Bulk Sales Law. The parties hereto agree to waive compliance
with the provisions of the bulk sales law of any jurisdiction. The Sellers
agree to indemnify and hold harmless Purchaser from and against any and all
liabilities which may be asserted by third parties against Purchaser as a
result of such noncompliance.
13.15 Knowledge of Sellers. For purposes of this Agreement, Knowledge
of Sellers or any similar expression shall mean the knowledge, after due
inquiry, of (i) the executive officers of Sellers; (ii) Robert Johnson; or
(iii) Steven Schorer and all individuals who directly report to Mr. Schorer.
13.16 Personal Liability. The directors, officers, stockholders,
employees, agents, consultants, representatives and affiliates of each of the
parties hereto acting in such capacity shall not in such capacity have any
personal liability or obligation arising under this Agreement (including any
claims that the other parties may assert).
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<PAGE>
IN WITNESS WHEREOF, Sellers and Purchaser have duly executed
and delivered this Agreement as of the day and year first above written.
AlliedSignal Inc.
By: /s/ Terrance Carlson
__________________________
AlliedSignal Technologies, Inc.
By: __________________________
AlliedSignal Deutschland GmbH
By: __________________________
L-3 Communications Corporation
By: /s/ Christopher C. Cambria
__________________________
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<PAGE>
L-3 COMMUNICATIONS CORPORATION
PENSION PLAN
Effective April 30, 1997
1457780
July 24, 1997
<PAGE>
L-3 COMMUNICATIONS CORPORATION
PENSION PLAN
Effective April 30, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
INTRODUCTION........................................................................................... 1
GENERAL DESCRIPTION ................................................................................... 1
ARTICLE I. DEFINITIONS ................................................................................ 2
Accrual Service .............................................................................. 2
Accumulated Contributions .................................................................... 2
Actuarial Equivalent ......................................................................... 2
Affiliate .................................................................................... 2
Alternate Payee .............................................................................. 2
Annuity Starting Date ........................................................................ 3
Basic Benefit ................................................................................ 3
Beneficiary .................................................................................. 3
Board ........................................................................................ 4
Break in Service ............................................................................. 4
Code ......................................................................................... 4
Committee .................................................................................... 4
Company ...................................................................................... 4
Contributing Participant ..................................................................... 4
Contributory Benefit ......................................................................... 4
Deferred Vested Termination Benefit .......................................................... 4
Deferred Vested Termination Date ............................................................. 4
Early Commencement Factor .................................................................... 5
Early Retirement Benefit ..................................................................... 5
Early Retirement Date ........................................................................ 5
Earnings ..................................................................................... 5
Effective Date ............................................................................... 6
Election Period .............................................................................. 6
Eligibility Service .......................................................................... 6
Eligible Spouse .............................................................................. 7
Employee ..................................................................................... 7
Employer ..................................................................................... 7
Employment Date .............................................................................. 7
ERISA ........................................................................................ 7
Forfeitures .................................................................................. 8
Former Participant ........................................................................... 8
Highly Compensated Employee .................................................................. 8
Hour of Service .............................................................................. 8
Late Retirement Benefit ...................................................................... 8
Late Retirement Date ......................................................................... 8
Minimum Basic Benefit ........................................................................ 8
Monthly Accrued Benefit ...................................................................... 8
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Normal Retirement Benefit .................................................................... 8
Normal Retirement Date ....................................................................... 8
Participant .................................................................................. 8
Period of Severance .......................................................................... 8
Plan ......................................................................................... 8
Plan Year .................................................................................... 9
Prior Employer ............................................................................... 9
Prior Plan ................................................................................... 9
Proper Application ........................................................................... 9
QDRO ......................................................................................... 9
Qualified Joint and Survivor Annuity ......................................................... 9
Qualified Pre-Retirement Survivor Annuity .................................................... 9
Retirement Date .............................................................................. 9
Service ...................................................................................... 10
Severance From Service Date .................................................................. 10
Social Security Wage Base .................................................................... 10
Trust Agreement .............................................................................. 10
Trust ........................................................................................ 11
Trustee ...................................................................................... 11
Vested Participant ........................................................................... 11
Vested Percentage ............................................................................ 11
Vesting Service .............................................................................. 11
ARTICLE II. ADMINISTRATION....................................................................... 12
2.1 Committee 's Discretionary Power to Interpret and
Administer the Plan.................................................................. 12
2.2 Rules of the Committee .............................................................. 13
2.3 Claims Procedure .................................................................... 13
2.4 QDRO Claim .......................................................................... 15
2.5 Indemnification of Committee Members ................................................ 15
2.6 Power to Execute Plan and Other Documents ........................................... 15
2.7 Conclusiveness of Records ........................................................... 15
ARTICLE III. ELIGIBILITY AND HOW TO CALCULATE
SERVICE ............................................................................. 16
3.1 When Participation Starts and Ends .................................................. 16
3.2 General Restrictions on Participation ............................................... 17
3.3 How to Calculate Eligibility Service ................................................ 17
3.4 . Rule of Parity o Disregarding Prior Service ......................................... 19
3.5 How to Calculate Accrual Service .................................................... 19
3.6 How to Calculate Vesting Service .................................................... 20
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ARTICLE IV. VESTING AND FORFEITURES.............................................................. 21
4.1 Vesting ............................................................................ 21
4.2 Changes in Vesting Schedule ......................................................... 22
4.3 Forfeitures ......................................................................... 22
4.4 Restoring Forfeitures ............................................................... 22
ARTICLE V. AMOUNT OF RETIREMENT BENEFIT......................................................... 23
5.1 General Rules for Calculating Amount of Plan Benefits................................ 23
5.2 The Different Plan Benefits ......................................................... 23
5.3 Monthly Accrued Benefit ............................................................. 24
5.4 Special Section 401(a)(17) Provision Regarding Plan Benefits......................... 25
5.5 Minimum Basic Benefit for Certain Participants ...................................... 26
5.6 Normal Retirement Benefit ........................................................... 27
5.7 Late Retirement Benefit ............................................................. 27
5.8 Early Retirement Benefit ............................................................ 28
5.9 Deferred Vested Termination Benefit ................................................. 29
5.10 Co-ordination with Prior Plan ....................................................... 29
5.11 Effect of, Deferred Payment ......................................................... 30
5.12 Effect of Reemployment After Receipt of Plan Benefits ............................... 30
ARTICLE VI. PAYMENT OF RETIREMENT AND DEATH BENEFITS............................................. 32
6.1 How to Retire........................................................................ 32
6.2 Timing of Participant's Benefits .................................................... 32
6.3 Normal Form of Benefits ............................................................. 35
6.4 Notice and Election Period .......................................................... 35
6.5 Waiver and Spousal Consent Necessary for Optional Forms of
Benefit ............................................................................. 36
6.6 Optional Forms of Benefit ........................................................... 38
6.7 Suspending Plan Payments Upon Reemployment .......................................... 39
6.8 Qualified Pre-Retirement Survivor Annuity ........................................... 39
6.9 Form of Benefit Fixed as of Annuity Starting Date ................................... 41
ARTICLE VII. IN-SERVICE WITHDRAWAL AND RETURN OF
CONTRIBUTIONS ....................................................................... 43
7.1 In-Service Withdrawal of Pre-1970 Employee Contributions............................. 43
ARTICLE VIII. THE TRUST, FUNDING AND CONTRIBUTIONS ................................................ 44
8.1 Contributions to the Trust Fund ..................................................... 44
8.2 The Trust ........................................................................... 44
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ARTICLE IX. AMENDMENT AND TERMINATION............................................................ 45
9.1 Power to Amend Plan ................................................................. 45
9.2 Power to Terminate Plan ............................................................. 45
9.3 Allocation of Assets Upon Termination ............................................... 45
9.4 Reversion of Assets Upon Termination ................................................ 45
ARTICLE X. LIMITATION OF BENEFITS............................................................... 47
10.1 Construction ........................................................................ 47
10.2 Definitions ......................................................................... 47
10.3 Limitation on Annual Benefits ....................................................... 48
10.4 Adjustments for Early or Late Payment ............................................... 48
10.5 Conditional Exemption for Pensions Under $10,000 .................................... 49
10.6 Participants with Fewer Than Ten Years of Service ................................... 49
10.7 Participants with Fewer Than Ten Years of Participation ............................. 50
10.8 Benefits Payable under More Than One Defined Benefit Plan . . .....................50
10.9 Participation in Defined Contribution Plan .......................................... 50
10.10 Limitation Year ..................................................................... 53
10.11 Protection of Current Accrued Benefit ............................................... 53
10.12 Rules Regarding 25 Top-Paid Employees ............................................... 53
ARTICLE XI. GENERAL PROVISIONS .................................................................. 55
11.1 No Contract of Employment ........................................................... 55
11.2 Employer Not Liable for Plan Benefits ............................................... 55
11.3 Exclusive Benefit and Return of Employer Contributions .............................. 55
11.4 Tax Withholding ..................................................................... 56
11.5 Incompetency or Minority of Payee ................................................... 56
11.6 Missing Payees ...................................................................... 57
11.7 Alienation and QDROs ................................................................ 57
11.8 Notice to Committee, Elections ...................................................... 58
11.9 Merger or Transfer With Other Plans ................................................. 58
11.10 Fiduciaries ......................................................................... 59
11.11 Plans Shall Comply with Law; and Choice of Law ...................................... 59
11.12 Deemed Distribution of Unvested Amounts ............................................. 59
11.13 Gender and Number ................................................................... 59
11.14 Headings ............................................................................ 59
11.15 Illegality of Particular Provisions ................................................. 60
11.16 Receipt and Release for Payments .................................................... 60
11.17 Action by the ....................................................................... 60
11.18 Mistaken Payments ................................................................... 60
11.19 Participants and Beneficiaries Bound by the Plan .................................... 60
11.20 Direct Rollover Distributions to Other Plans or IRAs ................................ 60
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11.21 Transfers Among Affiliates .......................................................... 62
ARTICLE XII. TOP-HEAVY PROVISIONS................................................................. 64
12.1 Applicable Plans Included in Determination of "Top Heavy"
Status ............................................................................ 64
12.2 "Key Employee" ...................................................................... 64
12.3 "Top Heavy" Test .................................................................... 65
12.4 Determination Dates ................................................................. 65
12.5 Add-Back of Prior Distributions ..................................................... 66
12.6 Former Employees Disregarded after Five Plan Years .................................. 66
12.7 Compliance with Section 416 of the Code ............................................. 66
12.8 Beneficiaries ....................................................................... 66
12.9 Provisions Applicable in "Top Heavy" Plan Years ..................................... 66
EXHIBIT A. ACTUARIAL EQUIVALENT FACTORS......................................................... - 1-
EXHIBIT B. CONTRIBUTORY BENEFITS ............................................................... -3-
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</TABLE>
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<PAGE>
L-3 COMMUNICATIONS CORPORATION PENSION PLAN
-------------------------------------------
INTRODUCTION
------------
On April 30, 1997, Lockheed Martin Corporation ("Lockheed Martin")
sold certain of its businesses (the "Business") to L-3 Communications Holdings,
Inc. ("Holdings"). In connection with the sale, certain employees in the
information display systems operations of the Lockheed Martin currently located
in Alpharetta, Georgia, and certain headquarters employees became employees of
L-3 Communications Corporation, a wholly owned subsidiary of Holdings. Lockheed
Martin agreed to transfer, and Holdings agreed to accept, the assets under the
Lockheed Martin Tactical Defense Systems Pension Plan (Corp. & LMSD) (the
"Pension Plan") attributable to the Accrued Benefits of the employees and
former employees (the "Transferred Individuals") of the transferred operations.
The Transferred Individuals shall be entitled to their Accrued Benefit
under the Pension Plan (or a predecessor plan) as of April 30, 1997, provided
that the assets are transferred, and future benefits, if any, under the terms
of this Plan.
A Participant under this Plan, including a Transferred Individual, is
entitled to benefits under the terms of the Plan in effect, including the terms
of the Pension Plan or any other predecessor plan, when the Participant
terminates (or terminated) employment with the Employer.
The Plan is intended to be qualified under Internal Revenue Code
Section 401 and its Trust is intended to be tax-exempt under Code Section 501.
GENERAL DESCRIPTION
-------------------
Benefits attributable to Employer contributions are integrated with
Social Security, under Code Section 401(l). Such benefits are termed the "Basic
Benefit" under the Plan. The Plan also provides for a" Minimum Basic Benefit"
for certain Participants.
The plan does not charge for QPSA coverage, and does provide for a
subsidized early retirement benefit.
L-3 Communications Corporation
Pension Plan
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ARTICLE I. DEFINITIONS
As used in this Plan, the following terms shall have the following
meanings, unless a different meaning is required by the context:
"Accrual Service" shall have the meaning set forth in Section 3.5.
"Accumulated Contributions" means the after-tax, voluntary employee
contributions made by a Participant under the Prior Plan prior to April 1,
1970. These contributions, plus the accrued interest described in this
paragraph, constitute a Contributing Participant's Contributory Benefit. The
accrued interest shall be computed up to April 1, 1970 as provided under the
Prior Plan plus interest thereon at the rate of 4% per year for the period from
April 1, 1970 through December 31, 1973, at the rate of 5% per year for the
period from January 1, 1974 through December 31, 1987, and at the rate of 120%
of the Federal mid-term rate (as in effect under Code Section 1274 for the
first month of each Plan Year) for the period beginning January 1, 1988
compounded annually from the last day of the calendar year in which such
contributions were made to the first day of the month in which occurs the
earliest of (a) withdrawal of such contributions by the Participant prior to or
termination of employment, (b) the Participant's Annuity Starting Date, (c) the
Participant's death, or (d) the date the Participant becomes a Former
Participant.
"Actuarial Equivalent" means an amount of equal value as determined in
accordance with EXHIBIT A hereto.
"Affiliate" means the Company and any corporation, trade or business during any
period when it is, along with the Company, a member of a controlled group of
corporations or a controlled group of trades or businesses, as described in
Code Section 414(b), the common control rules of Code Section 414(c), the
affiliated service group rules of Code Section 414(m), or the rules of 414(o),
subject to the rules of Code Section 415(h).
"Alternate Payee" means any spouse, former spouse, child or other dependent of
a Participant who is recognized by a "qualified" court domestic relations order
as having a right to receive all, or a portion of, the benefits payable under
the Plan with respect to such Participant, as described in Code Section 414(p).
The determination of whether a court order is "qualified" shall be made in the
sole discretion of the Committee.
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"Annuity Starting Date" shall mean:
(a) with respect to any lump sum or installment payment, first
day of the month coincident with or next following the date
that the Participant is both entitled to and has completed
his Proper Application for a Plan distribution,
(b) with respect to any one of a series of payments over the life
or life expectancy of one or more distributees, the first
date for which the benefit is paid, even if this date is not
the date of actual payment.
(c) The term "Annuity Starting Date" shall be determined with
respect to payments made to the Participant, rather than with
respect to any survivor benefit payments (excepting only the
QPSA).
(d) The term "Annuity Starting Date" shall, in all events, be
defined by Treasury Regulation Section 1.401(a)-20.
"Basic Benefit" for a Participant shall have the meaning set forth in
Section 5.3.
"Beneficiary" means a Participant's designated beneficiary, under Plan
procedures. As required by the context of the Plan, "Beneficiaries" may also
include Alternate Payees.
(a) The Beneficiary of any married Participant shall normally be
his legally married spouse, at the time of death (whether or
not she or he is an Eligible Spouse). Married Participants
may designate someone other than a spouse as Beneficiary,
only if the designation includes the written consent of the
Participant's spouse, as set out in Plan Section 6.5. If
these requirements are not met, then the designation of a
non- spouse Beneficiary is invalid. However, the Committee
may not require the spouse's written consent if it is
established to the satisfaction of a Plan representative that
such consent cannot be obtained because (1) there is no
spouse, (2) the spouse cannot be located, or (3) such other
circumstances exist as may be prescribed by applicable
regulation.
Any such written spousal consent or establishment
that consent cannot be obtained shall be effective
only with respect to that spouse.
(b) Beneficiary designations may be changed at any time before
the Annuity Starting Date. If no proper Beneficiary is
designated or survives, the Participant's Beneficiary shall
be, in the following order
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Pension Plan
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<PAGE>
of priority: (1) his spouse, if living at the time of such
payment; (2) his children (including adopted children but
excluding stepchildren) per stirpes; (3) his estate.
(c) If the Committee is in doubt as to the right of any person to
receive a Plan benefit, the Committee may direct the Trustee
to retain such amount, without liability for any interest
thereon, until the rights thereto are determined, or the
Committee may direct the Trustee to pay such amount into any
court of appropriate jurisdiction and such payment shall be a
complete discharge of the liability of the Plan and the Trust
therefor.
"Board" means either the Board of Directors of the Company, or the Executive
Committee of the Board of Directors.
"Break in Service" is defined in Section 3.3.
"Code" means the Internal Revenue Code of 1986, as amended from time to time,
and all appropriate regulations and administrative guidance.
"Committee" means the committee which administers the Plan in accordance with
Article II. As context requires, the term "Committee" shall refer to the
Committee or its delegates.
"Company" means L-3 Communications Corporation, a Delaware corporation, and any
successor thereto which adopts this Plan. The Company shall act by resolution
of its Board of Directors.
"Contributing Participant" means a Participant who made voluntary after-tax
contributions to the Prior Plan prior to April 1, 1970 and has not withdrawn
such contributions.
"Contributory Benefit" is defined in Section 5.3, and shall equal the amounts
set out in Exhibit B.
"Deferred Vested Termination Benefit" is defined in Section 5.9.
"Deferred Vested Termination Date" means:
(a) the first day of the month coincident with or next following
the date that a Participant terminates active employment. A
Vested Terminated Date will always precede any date that
might have been the Participant's Retirement Date.
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(b) Generally, a Deferred Vested Termination Date will arise only
with respect to a Participant whose Vested Percentage is more
than 0%. However, a Contributing Participant who retains a
Contributory Benefit may incur a Deferred Vested Termination
Date even if he has no Vested Percentage.
(c) A Deferred Vested Termination Date will be the date as of
which a Participant's Deferred Vested Termination Benefit
is calculated, under Article V.
(d) A Deferred Vested Termination Date is not a "Retirement Date"
per se. Accordingly, if any benefit under any welfare plan is
dependent upon "retirement," then such a benefit may not be
available to a Participant who terminates employment as of
his Deferred Vested Termination Date.
"Early Commencement Factor" is defined in Section 5.8.
"Early Retirement Benefit" is defined in Section 5.8.
"Early Retirement Date" means the first day of the month (a) coincident with or
next following the date a Participant retires under the terms of the Plan, (b)
on or after his 55th birthday and completion of ten years of Eligibility
Service, and (c) prior to his Normal Retirement Date. For purposes of this
definition only, Accrual Service includes any period during which the Employee
was an active participant of (1) a qualified defined benefit plan sponsored by
an Affiliate (provided that such a plan was in effect and sponsored by the
Affiliate during the relevant period) or (2) the Prior Plan.
"Earnings" for any Plan Year shall mean:
(a) the total cash remuneration actually paid by the Employer,
including regular earnings; commissions; overtime pay;
bonuses; incentive compensation; fringe benefits; elective
employee deferrals or contributions made under any qualified
retirement plan; and Code Section 125 elective, payroll
deduction contributions.
(b) Any compensation that is accrued but not paid during the
relevant Plan Year shall not be accounted. The following
items shall also be excluded: distributions from any employer
qualified retirement or welfare plan; the disposition or
granting of stock options; imputed income from life
insurance; employer contributions made to any welfare plan,
or to any qualified retirement plan; any reimbursed
L-3 Communications Corporation
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<PAGE>
expenses such as relocation expenses; all severance pay;
and lump sum vacation allowances.
(c) In addition to other applicable limits set out in this Plan,
and notwithstanding any contrary Plan provisions, Earnings
accounted under this Plan shall be capped at $150,000
(adjusted for cost of living, as provided by Code Section
401(a)(17)).
(1) If a cost of living adjustment is declared
under the Code with respect to any calendar
year, it shall affect the Earnings
accounted for the Plan Year that begins on
the January 1st of that same calendar year.
(2) Generally, if Earnings paid for any prior
Plan Year are taken into account in
determining benefit accruals for the
current Plan Year, then the Earnings limit
for the prior year will be subject to the
Code Section 401(a)(17) limit applicable
(adjusted for the cost of living) for that
prior year.
(3) If a Participant is not actively employed
for a full Plan Year, then his credited
Earnings under Code Section 401(a)(17)
shall not be reduced, prorated, or limited
because of his incomplete year of service.
(4) However, if this Plan should be amended to
base its benefit allocation or accrual
formula on compensation paid for a period
of less than a Plan Year, then Earnings
taken into account under this Plan shall be
prorated, to correspond to the period of
time used in the Plan formula. For example,
if the Plan formula is based on
compensation paid each quarter, then the
401(a)(17) limit for that Plan Year shall
be divided by four, when applying the Plan
benefit formula.
(d) To the extent that any Participant's Earnings exceeded
$150,000 prior to January 1, 1994, Section 5.4 shall apply to
his accrued Plan benefit.
"Effective Date" of this Plan means April 30, 1997. Unless specified within the
Plan, all Plan provisions are effective as of the Effective Date. However, the
terms of the Prior Plan, or any earlier restatement of this Plan, shall apply
with respect to periods before the Effective Date.
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"Election Period" refers to a period during which certain elections must be
made concerning the form of benefit paid under the Plan. It is described in
Section 6.4.
"Eligibility Service" is defined in Section 3.3.
"Eligible Spouse" means:
(a) A participant's legally married spouse. Further, with respect
to a spouse's eligibility to receive a QPSA benefit, an
Eligible Spouse must have been married to the Participant for
at least 12 continuous months before the Participant's date
of death.
(b) Whether or not an individual is an Eligible Spouse shall in
all events be determined under Treasury Regulation
Section 1.401(a)-20.
"Employee" shall mean:
(a) any common-law employee in the service of the Employer,
(b) Employees shall, as prescribed by the Code, also include
employees of Affiliates, for the limited purposes of
determining eligibility to participate, and vesting.
(c) Leased employees as described by Code Section 414(n), shall
be considered Employees for the sole purpose of Code Section
414(n)(3).
Notwithstanding, the preceding provisions, the following shall not be
an Employee:
(d) any person whose terms of employment is subject to a
collective bargaining agreement, to which the Company is a
party, unless the agreement specifically provides for the
person's participation in this Plan,
(e) any common-law employee of an Employer or Affiliate who is
employed at a site, unit, or subsidiary whose employees,
under Employer or Affiliate policy, are not eligible to
participate in a qualified defined benefit.
"Employer" means the New York Corporate office of the Company and the L-3
Communications Corporation - Display Systems Division currently located in
Alpharetta, Georgia.
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Pension Plan
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<PAGE>
"Employment Date" means the first day of employment with an Employer or Prior
Employer, as determined by the Employer's procedures, and within its
discretion.
"ERISA" means the Employee Retirement Income Security Act of 1974, as enacted
or as amended from time to time, and all appropriate regulations and
administrative guidance.
"Forfeitures" are defined in Section 4.3.
"Former Participant"
(a) Means an individual who has ceased to be a Participant for
any of the reasons set out in Section 3.1, and a former
participant in the Prior Plan if the Prior Plan transferred
to this Plan assets attributable to his accrued benefit under
the Prior Plan.
(b) A Former Participant is ineligible to accrue further benefits
under the Plan, because he is no longer an active
Participant.
"Highly Compensated Employee" means any Employee or former Employee who is a
highly compensated employee as defined in Code Section 414(q).
"Hour of Service" means any hour for which an Employee is paid or is entitled
to payment, for the performance of duties for the Employer or Prior Employer.
"Late Retirement Benefit" is defined in Section 5.7.
"Late Retirement Date" means the first day of the month coincident with or next
following the date on which a Participant retires, under the terms of the Plan,
after his Normal Retirement Date.
"Minimum Basic Benefit" is defined in Section 5.5.
"Monthly Accrued Benefit" is defined in Section 5.3.
"Normal Retirement Benefit" is defined in Section 5.6.
"Normal Retirement Date" means the first day of the month coincident with or
next following the later of (i) a Participant's 65th birthday, or (ii) the date
a Participant completes five years of Eligibility Service.
"Participant" means any Employee who is participating in the Plan, under the
terms of the Plan, after meeting the eligibility requirements of Article III.
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"Period of Severance" is defined in Section 3.3.
"Plan" means the L-3 Communications Corporation Pension Plan, as amended from
time to time, which includes EXHIBITS A and B which are attached, as well as
the Trust Agreement.
"Plan Year" means the calendar year, except that the first Plan Year shall be
the period beginning on April 30, 1997 and ending on December 31, 1997.
"Prior Employer" means Lockheed Martin Corporation prior to April 30, 1997, and
Loral Corporation.
"Prior Plan" means the Lockheed Martin Tactical Systems Inc. Pension Plan
(Corp. & LMDS), as in effect from time to time prior to the Effective Date, and
the predecessors to that plan, which are the Loral Corporation Pension Plan,
established effective April 1, 1970, and restated effective January 1, 1976,
January 1, 1984, January 1, 1989 and restated, reflecting amendments made
through December 20, 1994, effective January 1, 1989. It was preceded by the
Retirement Plan for Non-Union Employees of Loral Corporation established
effective January 1, 1963.
"Proper Application" is defined in Section 6.1.
"QDRO" is an abbreviation for "qualified domestic relations order," defined in
Section 11.7.
"QJSA" or "Qualified Joint and Survivor Annuity" means an annuity for the life
of a Participant with a survivor annuity for the life of his Eligible Spouse,
if there is an Eligible Spouse as of his Annuity Starting Date. The amount of
the survivor annuity shall be 50% of the amount payable during the lifetime of
the Participant. The QJSA shall be calculated to be the Actuarial Equivalent of
a single life annuity for the life of the Participant, as of his Normal
Retirement Date. In all events, a QJSA shall be as defined by Treasury
Regulation Section 1.401(a)-20.
"QPSA" or "Qualified Pre-Retirement Survivor Annuity" means an annuity for the
life of an Eligible Spouse who survives a Participant, under the circumstances
and in the amount described in Section 6.8. In all events a QPSA shall be
defined by Treasury Regulation Section 1.401(a)-20.
"Retirement Date" means a Participant's Normal, Early or Late Retirement Date,
whichever is applicable. A Vested Terminated Participant shall not have a
Retirement Date, per se. Accordingly, if any benefit under any welfare plan is
conditioned upon "retirement," then such a benefit may not be available to a
Vested Terminated Participant.
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"Service"
(a) Different Meanings. Service under the Plan has different
meanings for different purposes. The Plan accounts three
different types of Service: Eligibility Service, Accrual
Service, and Vesting Service. The definition of "Service" set
out in this Article I applies to all of these different types
of Service.
(b) General Rule. Service shall generally mean the period for
which the Employee is paid or is entitled to payment
(including any back pay, irrespective of mitigation of
damages), subject to the rules and restrictions of Article
III, for the performance of duties for the Employer. For the
purposes of calculating Eligibility Service and Vesting
Service, "Service" shall also include Service performed for
an Affiliate or service credited under a Prior Plan. However,
with respect to crediting Service during any period during
which the Prior Plan was in effect, then the provisions of
the Prior Plan shall control. Service shall never be
double-credited.
(c) Military Service
(1) An employee or Participant shall be
credited with Service for any period of
military service to the extent required by
any Federal veteran reemployment laws.
(2) Notwithstanding the foregoing, if a
Participant who leaves employment with the
Employer for the sole purpose of entering
the armed forces of the United States
returns to active employment with the
Employer within the period his
re-employment rights are protected by
applicable law, his Service shall include
the period of such absence and solely for
the purpose of the Plan during such period
he shall be deemed to have received
Earnings from the Employer equal to his
basic remuneration rate immediately prior
to the commencement of such absence
(subject to escalation to the extent
required under applicable laws and
regulations).
"Severance From Service Date" is defined in Section 3.3.
"Social Security Wage Base" means, for any Plan Year, the maximum amount of a
Participant's annual remuneration which may be treated as wages under Section
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3121(a) of the Federal Insurance Contributions Act for such year, indexed to
the extent required by Code Section 401(l).
"Trust Agreement" The agreement between the Company and Trustee concerning the
assets of this Plan. The Trust Agreement is fully a part of the Plan.
"Trust" or Trust Fund" means the fund held by the Trustee into which
contributions under the Plan will be paid by the Employer and Employees and out
of which benefits under the Plan will be paid as herein provided.
"Trustee" means the trustee appointed under the Trust Agreement.
"Vested Participant" means a Participant who terminates employment with the
Employer on a Deferred Vested Termination Date.
"Vested Percentage" is defined in Section 4.1.
"Vesting Service" is defined in Section 3.6.
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ARTICLE II. ADMINISTRATION
2.1 Committee's Discretionary Power to Interpret and Administer the Plan
(a) Appointment. The Committee shall be appointed from time to
time by the Board to serve at its pleasure. Any member of the
Committee may resign by delivering his written resignation to
the Board.
(b) Role under ERISA. The Committee is the "named fiduciary" for
operation and administration of the Plan, and the
"administrator" under ERISA. The Committee is designated as
agent for service of legal process.
(c) Committee establishes Plan procedures. The Committee and its
delegates shall from time to time establish rules and
procedures for the administration and interpretation of the
Plan and the transaction of its business.
(d) Role of Human Resource and Benefits Personnel. Employees of
the Employer who are human resources personnel, or benefits
representatives are the Committee's delegates and shall,
under the authority of the Committee, perform the routine
administration of the Plan, such as distributing and
collecting forms and providing information about Plan
procedures. They shall also establish Plan rules and
procedures.
(e) Discretionary Power to Interpret Plan
(1) The Committee has complete discretionary and final
authority to (i) determine all questions concerning
eligibility, elections, contributions, and benefits
under the Plan, (ii) construe all terms under the
Plan, including any uncertain terms, and (iii)
determine all questions concerning Plan
administration. All administrative decisions made by
the Committee, and all its interpretations of the
Plan documents, shall be given full deference by any
court of law.
(2) Information that concerns an interpretation of the
Plan or a discretionary determination, can be
properly provided only by the Committee, and not by
any delegate (except legal counsel).
(3) Should any individual receive oral or written
information concerning the Plan, which is
contradicted by a subsequent
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determination by the Committee, then the Committee's
final determination shall control.
2.2 Rules of the Committee
(a) Any act which the Plan authorizes or requires the Committee
to do may be done by a majority of its members. The action of
such majority, shall constitute the action of the Committee
and shall have the same effect for all purposes as if made by
all members of the Committee at the time in office. The
Committee may act without any writing that records its
decisions, and need not document its meetings or
teleconferences. The Committee may also act through any
authorized representative.
(b) The members of the Committee may authorize one or more of
their number to execute or deliver any instrument, make any
payment or perform any other act which the Plan authorizes or
requires the Committee to do.
(c) The Committee may employ counsel and other agents and may
procure such clerical, accounting, actuarial and other
services as they may require in carrying out the provisions
of the Plan. Legal counsel are authorized as the Committee's
delegates.
(d) No member of the Committee shall receive any compensation for
his services as such. All expenses of administering the Plan,
including, but not limited to, fees of accountants, counsel
and actuaries shall be paid from the Trust Fund, except to
the extent paid by an Company.
(e) Each member of the Committee may delegate Committee
responsibilities among the Company directors, officers, or
employees, and may consult with or hire outside experts. The
expenses of such experts shall be paid by the Trust Fund, to
the extent that they are not paid by an Company.
2.3 Claims Procedure
(a) The Committee shall determine Participants and Beneficiaries'
rights to benefits under the Plan. In the event that a
Participant or Beneficiary disputes an initial determination
made by the Committee, then he may dispute the determination
only by filing a written claim for benefits.
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(b) If a claim is wholly or partially denied, the Committee shall
provide the claimant with a notice of denial, written in a
manner calculated to be understood by the claimant and
setting forth:
(1) The specific reasons for such denial;
(2) Specific references to the pertinent Plan
provisions on which the denial is based;
(3) A description of any additional material or
information necessary for the claimant to perfect
the claim with an explanation of why such material
or information is necessary (if applicable); and
(4) Appropriate information as to the steps to be taken
if the claimant wishes the Committee to revise its
initial denial. The notice of denial shall be given
within a reasonable time period but no later than 90
days after the claim is received, unless special
circumstances require an extension of time for
processing the claim. If such extension is required,
written notice shall be furnished to the claimant
within 90 days of the date the claim was received
stating that an extension of time and the date by
which a decision on the claim can be expected, which
shall be no more than 180 days from the date the
claim was filed.
(5) If no written notice of denial is provided by the
Committee, then the claim shall be deemed to be
denied, and the claimant may appeal the claim as
though the claim had been denied.
(c) The claimant and/or his representative may appeal the
denied claim and may:
(1) Request a review by making a written request to the
Committee provided that such a request is made
within 60 days of the date of the notification of
the denied claim;
(2) Review pertinent documents.
(d) Upon receipt of a request for review, the Committee shall
within a reasonable time period but not later than 60 days
after receiving the request, provide written notification of
its decision to the claimant stating the specific reasons and
referencing specific plan provisions on which its decision is
based, unless special circumstances require an
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extension for processing the review. If such an extension is
required, the Committee shall notify the claimant of the
date, no later than 120 days after the original date the
request for review was received, on which the Committee will
notify the claimant of its decision.
(e) In the event of any dispute over benefits under this Plan,
all remedies available to the disputing individual under this
Article must be exhausted, within the specified deadlines,
before legal recourse of any type is sought.
2.4 QDRO Claim
Claims relating to or affected by a domestic relations order (as
defined by Code Section 414(p)) or draft order shall be determined under the
Committee's procedures concerning domestic relations orders. The claims
procedure described in the preceding section shall not apply to any such
domestic relations order claim.
2.5 Indemnification of Committee Members
To the fullest extent permitted by law, the Company agrees to
indemnify, to defend, and hold harmless the members of the Committee and its
delegates, individually and collectively, against any liability whatsoever for
any action taken or omitted by them in good faith in connection with this Plan
or their duties hereunder and for any expenses or losses for which they may
become liable as a result of any such actions or non-actions unless resultant
from their own willful misconduct; and the Company will purchase insurance for
the Committee and its delegates to cover any of their potential liabilities
with regard to the Plan and Trust.
2.6 Power to Execute Plan and Other Documents
Any appointed Vice President of the Company shall have the authority
to execute governmental filings or other documents including the plan document
relating to the Plan, or the Company may delegate this authority to another
officer or employee of the Company.
2.7 Conclusiveness of Records
In administering the Plan, the Committee may conclusively rely upon
the Employer's payroll and personnel records maintained in the ordinary course
of business.
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ARTICLE III. ELIGIBILITY AND HOW TO CALCULATE SERVICE
3.1 When Participation Starts and Ends
(a) Participants in Prior Plan. Each Employee who was a
Participant in the Prior Plan immediately before the
Effective Date shall be a Participant in this Plan on the
Effective Date, provided he is an Employee on the Effective
Date.
(b) General Rule of Participation. Each Employee, other than an
Employee described in subsection (a) shall become a
Participant on the first day of the month coincident with or
next following the later of (1) the completion of one year of
Eligibility Service or (2) his 21st birthday.
(c) End of participation. A Participant ceases to be a
Participant when he terminates his employment (as determined
within the sole discretion of the Employer), dies, ceases to
be an Employee, incurs a Severance from Service Date, or
loses his eligibility to participate under the following
Section. Any Participant who ceases to be a Participant
becomes a Former Participant.
(d) Becoming an Employee through change in status. Should any
individual who was a common-law employee of the Employer or
an Affiliate but not an Employee under the terms of this
Plan, subsequently become an Employee, then he shall be
eligible to become a Participant as set out in Subsection
3.1(b). For the purposes of the preceding sentence only, his
prior period of employment shall be credited as "Service,"
under the rules of Articles I and III.
(e) Re-entry into the Plan. Similarly, a Former Participant who
again becomes an Employee of the Employer shall be eligible
to become a Participant, subject to the Rule of Parity
provisions of Section 3.4, as of the first day of the month
coincident with or next following the date he again becomes
an eligible Employee under this Article. However, a Former
Participant who is fully vested in his Plan benefit who again
becomes an Employee of the Employer shall again become a
Participant as of his new Employment Date.
(f) Plan benefit of Former Participants.
(1) With respect to any individual who becomes a Former
Participant because of any provision of this
Article, his Monthly Accrued Benefit, under the Plan
up to the date he became a
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Former Participant, shall be suspended. This benefit
shall not be increased through any further accruals
while he continues as a Former Participant.
3.2 General Restrictions on Participation
Notwithstanding the provisions of Section 3.1:
(a) Individuals may be Participants only during those periods
that they are eligible Employees, under this Article and
Article I.
(b) Further, an eligible Employee will be able to actively
participate in this Plan only during those periods during
which he is (1) in service with the Employer (rather than
with any Affiliate), and (2) the Plan is in effect.
(c) Leased employees, as described in Code Section 414(n), are
not eligible to be Participants.
3.3 How to Calculate Eligibility Service
(a) General Rule. Eligibility Service shall be credited only for
the purpose of determining an Employee's eligibility to
participate in the Plan, unless another use is specifically
expressed in this Plan (such as determining a Participant's
Normal Retirement Date.) As used in this Section, "Service"
shall mean "Eligibility Service," and shall also reflect the
definition set out in Article I, and the Rule of Parity set
out in the next Section.
(b) Fractional Periods. Subject to the Rule of Parity, stated in
the next Section, fractional periods of a year of Service
will be credited only if they include completed months.
(c) Service. Service begins on the date of hire, or the first day
of reemployment with the Employer or an Affiliate. Service
includes periods of lay-off, vacation, or an Employer or
Affiliate-approved leave of absence, provided that such
periods of vacation, lay-off or leave do not exceed 12
consecutive months. (Should such periods of vacation, lay-off
or leave occur simultaneously or consecutively, they shall be
aggregated in determining the maximum period of 12 months of
credited Service.) If a period of vacation, lay-off, and/or
leave exceeds 12 continuous months, then the portion that is
more than 12 months shall not be credited as Service.
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(d) Severance From Service. Service will not be credited on or
after any Severance from Service Date. As of a Severance from
Service Date, the Participant becomes a Former Participant. A
Severance from Service Date is the date of any quit,
retirement, death, or termination of employment, as
determined within the sole discretion of the Employer or
Affiliate. A Severance from Service Date also occurs if an
Employee completes a Break in Service (described in the next
paragraph). If an Employee has incurred two possible
Severance from Service Dates, then the earlier date shall
control. However, notwithstanding the preceding provisions,
if an Employee quits, retires, or terminates, and returns to
active employment within 12 months of his initial Severance
from Service Date (without incurring a Break in Service),
then his entire Period of Severance will be credited as
Eligibility and Vesting Service, although not as Accrual
Service.
(e) Break in Service. A Break in Service occurs when a Period of
Severance continues for twelve or more consecutive months,
during which the individual does not perform an hour of
Service.
(f) Period of Severance. A Period of Severance is any continuous
period, during which the individual has had a separation from
active employment with the Employer or any Affiliate, on
account of lay-off, Employer or Affiliate-approved leave,
vacation, retirement, quit, discharge, any other reason, or
any combination of the preceding reasons. A Period of
Severance dates from the first date of absence.
(g) Quit, Retirement, Death or Termination. If a quit,
retirement, death, or termination occurs following an absence
for any other reason (such as leave or lay-off), but before a
Break in Service has occurred, then a Severance from Service
Date will occur as of the quit, retirement, death or
termination. However, in this situation, if the former
Employee returns to active employment within twelve months of
his initial date of absence, so that a Break in Service has
not occurred, then his entire Period of Severance shall be
credited as Eligibility and Vesting Service. However, a
Period of Severance following a quit, retirement or
termination, shall not be treated as Accrual Service.
(h) Approved Leave. A special rule applies to an Employer or
Affiliate- approved leave on account of maternity or
paternity, meaning on account of pregnancy, the birth of a
child, the placement of a child in connection with an
adoption, or the caring for such a child immediately
following the birth or placement. Any period of Employer or
Affiliate-approved leave on account of maternity or paternity
shall be credited as Service, through the first anniversary
of the first date of
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such an absence. Any one-year period of such an
Employer-approved leave that continues past the first
anniversary, that is, the second year of any such leave,
shall not be credited as Service, nor shall it count as any
Period of Severance. A Break in Service on account of such
leave therefore shall not occur until the end of the second
year of such a leave.
(i) Crediting Service. Subject to the Rule of Parity, no Service
that preceded a Break in Service shall be credited until the
Employee has completed 12 continuous months of Service,
following the Break.
3.4 Rule of Parity - Disregarding Prior Service
(a) Definition of Service. As used in this Section, "Service"
shall mean Eligibility, Vesting and Accrual Service, and
shall also reflect the definition set out in Article I.
(b) General Rule. Should an Employee who is not fully vested in
all his accrued Plan benefits incur a Break in Service, then
the following rules will apply, once he resumes active
service and again becomes an Employee. The Service earned
before the Break in Service shall be disregarded, only if the
number of his consecutive one-year Breaks in Service either
equals or exceeds (1) five years or (2) his pre-Break
Service, whichever is greater.
(c) Lost Service. If a Former Participant or Employee has lost
Service under the preceding paragraph, then such an
individual will be treated as a newly hired Employee, fully
subject to the requirements of this Article.
3.5 How to Calculate Accrual Service
(a) Purpose of Accrual Service. Accrual Service shall be
accounted only for the following purposes:
(1) determining the amount of a Participant's Monthly
Accrued Benefit under Section 5.3
(2) determining whether a Participant who is eligible
for a Deferred Vested Termination Benefit may
receive such a benefit before his Normal Retirement
Date under Article VI.
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(b) Definition of Accrual Service.
(1) Accrual Service includes only the portion of an
individual's Eligibility Service performed while he
was a Participant in this Plan or the Prior Plan.
(2) Accrual Service shall not include any period during
which the individual waived participation in the
Prior Plan, prior to January 1, 1982.
(3) Accrual Service shall also reflect the definition
of "Service" in Article I.
3.6 How to Calculate Vesting Service
(a) Purpose of Vesting Service. Vesting Service shall be
accounted only for the purpose of determining whether a
Participant is vested in his Plan benefit, under Article IV.
(b) General Definition of Vesting Service. Except as set out in
the next subsection, Vesting Service shall include all
Eligibility Service accounted under this Plan. Vesting
Service shall also reflect the definition of "Service" in
Article I.
(c) Exceptions. Notwithstanding the general rule of the
preceding paragraph, Vesting Service shall be calculated as
follows:
(1) In the case of a Participant who was an Employee of
Loral & Communication Ltd, his Vesting Service shall
be measured from the later of his Employment Date or
January 1, 1963.
(2) In the case of a Participant who was an Employee of
Lermer Packaging Corporation, his Vesting Service
shall be measured from the later of his Employment
Date or April 1, 1970.
(3) In the case of a Participant who is not described in
paragraphs (1) or (2), above, his Vesting Service
shall be measured from the later of his Employment
Date or the date the Plan or Prior Plan was adopted,
or such earlier date as shall be determined by the
Board on a uniform and non-discriminatory basis.
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ARTICLE IV. VESTING AND FORFEITURES
4.1 Vesting
(a) Full vesting at Normal Retirement Date. Upon attainment of
his Normal Retirement Date, (while in active Service) a
Participant's rights in his Basic Benefit shall be
non-forfeitable.
(b) Full Vesting in Contributory Benefit.
(1) A Contributing Participant's rights in his
Contributory Benefit shall be non-forfeitable at all
times, provided his employee contributions to the
Prior Plan were not withdrawn under Section 7.1.
(2) However, if the Contributing Participant's accrued
benefit attributable to his employee contributions
(as determined in Code Section 411(c)(2)) is less
than his Contributory Benefit, then, his
Contributory Benefit shall be reduced but not
eliminated by any withdrawal under Section 7.1,
under Plan procedures.
(c) General Vesting Schedule
(1) A Participant's nonforfeitable interest in his Basic
Benefit is his Vested Percentage. A Participant's
Vested Percentage is based on his completed years of
Vesting Service, as of his Separation from Service
Date. The general vesting schedule is:
Completed Years of
Vesting Service Vested Percentage
--------------- -----------------
Less than 5 0%
5 or more 100%
(2) For Employees who terminated employment prior to
January 1, 1989, the gradual vesting schedule in
effect under the Prior Plan at the date of their
termination shall control.
4.2 Changes in Vesting Schedule
If the Individual Plan's vesting schedule is amended or if the Plan is
determined to be top-heavy, then any Participant with (a) at least one hour of
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Service during the Plan Year for which the change is made and (b) three years
of Service with the Employer may within 60 days after receiving written notice
of such amendment (or such later date prescribed by regulations under Code
Section 411), make a Proper Application to have his Vested Percentage computed
under the Plan's prior vesting provisions.
4.3 Forfeitures
Forfeitures shall arise if any Participant whose Vested Percentage is
not 100% incurs a Severance from Service Date. Such unvested accrued Plan
benefits shall then be forfeited, and these Forfeitures shall be applied to
reduce future Employer contributions and to pay Plan expenses. Forfeitures
shall not be used to increase Plan benefits.
4.4 Restoring Forfeitures
If a Participant's nonvested interest in his accrued Plan benefit is
forfeited, and the-Participant subsequently resumes employment with the
Employer or an Affiliate, then the forfeited amount shall be restored to him to
the extent that his pre-Break Service is recognized, under Sections 3.3 and
3.4.
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ARTICLE V. AMOUNT OF RETIREMENT BENEFIT
5.1 General Rules for Calculating Amount of Plan Benefits
(a) Only Service with Employer will be accounted for accrued
benefit. Notwithstanding any other contrary provision of this
Article or the Plan, only Accrual Service performed (1) with
the Employer (rather than with any Affiliate), (2) while the
Employee is actively participating in the Plan or the Prior
Plan, and (3) while the Plan or the Prior Plan is in effect,
will be credited for the purpose of determining a
Participant's accrued benefit under the Plan.
(b) Must be vested. A Participant shall be paid only those
accrued Plan benefits in which he is vested.
(c) This Article limited by Article X. The provisions of this
Article shall be subject to the limitations of Article X.
(d) All terms of this Article apply. Any Plan benefit
calculation shall be subject to all the terms of this
Article, and the Plan.
5.2 The Different Plan Benefits
A Participant's Monthly Accrued Benefit shall be paid as one of the
following:
(a)
Normal Retirement Benefit. A Participant will be eligible to
receive his Normal Retirement Benefit ff he retires under the
Plan as of his Normal Retirement Date.
(b) Late Retirement Benefit. A Participant will be eligible to
receive his Late Retirement Benefit if he retires under the
Plan as of his Late Retirement Date (and continues to accrue
Accrual Service after his Normal Retirement Date).
(c) Early Retirement Benefit. A Participant will be eligible to
receive his Early Retirement Benefit if he retires under the
Plan as of his Early Retirement Date.
(d) Deferred Vested Termination Benefit. A Participant will be
eligible to receive his Deferred Vested Termination Benefit
if he terminates employment under the Plan as of his
Deferred Vested Termination Date.
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5.3 Monthly Accrued Benefit
(a) Formula for Monthly Accrued Benefit. Subject to the
provisions of this Article, the amount of a Participant's
"Monthly Accrued Benefit" shall equal his Basic Benefit and,
if he is a Contributing Participant, his Contributory Benefit.
(b) Formula for Basic Benefit. The amount of a Participant's
"Basic Benefit" under the Plan shall equal 1/12th of the sum
of Subsections (c) and (d).
(c) Basic Benefit with respect to Accrual Service after 1988. For
each Plan Year (and completed months) of Accrual Service on
and after January 1, 1989, the sum of (1) and (2).
(1) If such year is prior to the year in which he
completes 15 years of Eligibility Service, 1.20% of
his Earnings not in excess of the Social Security
Wage Base for such year, plus 1.45% of his Earnings
for such year in excess of the Social Security Wage
Base for such year.
(2) If such year is the year in which he completes 15
years of Eligibility Service or any subsequent year,
1.50% of his Earnings for such year not in excess of
the Social Security Wage Base for such year, plus
1.75% of his Earnings for such year in excess of the
Social Security Wage Base for such year.
(d) Basic Benefit with respect to Accrual Service before 1989.
For Accrual Service prior to January 1, 1989, the greater of
(1) the sum of (A) and (B), multiplied by (C), or (2).
(1) (A) 0.8% of (C) or (D), whichever is applicable,
not in excess of $16,800.
(B) 1.2% of (C) or (D), whichever is applicable, in
excess of $16,800.
(C) His years (and completed months) of Accrual
Service prior to January 1, 1989.
(D) For a Participant who has completed at least
five years of Accrual Service as of January 1,
1989, his average Earnings for the five Plan
Years 1984 through 1988.
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(E) For a Participant who has not completed five
years of Accrual Service as of January 1, 1989,
his average Earnings for his entire period
(years and completed months) of such Accrual
Service.
(2) The Basic Benefit under the Prior Plan as in effect
immediately prior to January 1, 1989 calculated
through December 31, 1988.
(e) Formula for Contributory Benefit
(1) A Contributing Participant's "Contributory Benefit"
under the Plan shall equal the amount set forth in
Exhibit B hereto, provided his contributions to the
Prior Plan were not withdrawn. A Participant's
Contributory Benefit is based on the Accumulated
Contributions he had made under the Prior Plan.
(2) However, if a Participant has withdrawn his
Contributory Benefit under Section 7.1 and the amount
of a Participant's accrued benefit attributable to his
employee contributions (as determined by Code Section
411(c)(2)) is less than his Contributory Benefit, then
his Contributory Benefit shall be reduced but not
eliminated by the withdrawal, under Plan procedures.
(f) Formula for Participants covered by Prior Plan.
Notwithstanding the preceding provisions of this Section, for
a Participant who was participating in the Prior Plan
immediately prior to January 1, 1989, his Basic Benefit shall
not be less than (1) his Basic Benefit under the Prior Plan
as in effect immediately prior to January 1, 1989, calculated
as of December 31, 1988 for any Participant who is a
Highly-Compensated Employee, or (2) his Basic Benefit under
the Prior Plan as in effect immediately prior to January, 1
1989 calculated as of December 31, 1989 or the date of his
separation from service with the Prior Employer, if earlier,
for any Participant who is not highly compensated.
5.4 Special Section 401(a)(17) Provision Regarding Plan Benefits
(a) Application. This Section shall apply only to those
Participants whose current accrued Plan benefit as of or
after January 1, 1994 is based on Earnings (1) incurred
during at any time prior to January 1, 1994, (2) in excess of
$150,000.
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(b) Calculation of accrued Plan benefit. Unless otherwise
provided under the Plan, each such Participant's accrued Plan
benefit shall be the greater of (1) or (2):
(1) the Participant's accrued Plan benefit determined
under the Plan, as amended effective on or after
January 1, 1994, as applied with respect to his total
Accrual Service performed as of such a date, or
(2) The sum of:
(A) the Participants's accrued Plan benefit as of
December 31, 1993, frozen as provided in Code
Regulation Section 1.401(a)(4)-13, and
(B) the Participant's accrued Plan benefit
determined under the Plan, as amended effective
on or after January 1, 1994, as applied with
respect to his Accrual Service performed on or
after January 1, 1994.
5.5 Minimum Basic Benefit for Certain Participants
(a) 1978 Rule Participants. Paragraph (b) of this Section shall
apply only to an Employee (i) who was a Participant on and
immediately prior to January 1, 1978, and (ii) who (x) had
reached his Normal Retirement Date prior to January 1, 1978
or (y) remained in the employment of the Employer until his
Normal Retirement Date which occurs on or after January 1,
1978 ("1978 Rule Participant").
(b) Formula for 1978 Minimum Benefit. Notwithstanding the
provisions of Section 5.2(b) or the applicable provisions of
the Prior Plan as in effect immediately prior to January 1,
1978, a 1978 Rule Participant's Minimum Basic Benefit (or for
a 1978 Rule Participant who had reached his Normal Retirement
Date prior to January 1, 1978, his minimum Plan benefit
attributable to Employer contributions) shall equal 1/12th of
.75% of his Earnings for the Plan Year preceding his Late
Retirement Date (or, if he was compensated for less than ten
full months during such year, his Earnings for the last full
prior calendar year during which he was compensated, if
greater), multiplied by his years (and completed months) of
Eligibility Service (not in excess of 20).
(c) 1984 Rule Participants. Paragraph (d) of this Section shall
apply only to an Employee (i) who is a Participant on and
immediately prior to
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January 1, 1984, and (ii) who has not reached his Normal
Retirement Date on January 1, 1984 and remains in the
employment of the Employer until his Normal Retirement Date
("1984 Rule Participant.")
(d) Formula for 1984 Minimum Benefit. Notwithstanding the
provisions of Section 5.2(b) or the applicable provisions of
the Prior Plan as in effect immediately prior to January 1,
1984, a 1984 Rule Participant's Minimum Basic Benefit shall
equal 1/12th of 0.75% of his Earnings for the Plan Year 1983
(or, if he was compensated for less than ten full months
during such year, his Earnings for the last full prior
calendar year during which he was compensated, if greater),
multiplied by his years (and completed months) of Eligibility
Service on and after the first day of the month coincident
with or next following the later of (i) his 25th birthday or
(ii) the first anniversary of his Employment Date, and prior
to January 1, 1984.
(e) Formula for those who are subject to both 1978 and 1984
Rules. For an Employee who is both a 1978 Rule Participant
and a 1984 Rule Participant, his Minimum Basic Benefit shall
be the amount determined under paragraph (b) or paragraph (d)
of this Section, whichever is greater.
5.6 Normal Retirement Benefit.
The amount of a Participant's Normal Retirement Benefit under the Plan
shall equal his vested Monthly Accrued Benefit, payable at his Normal
Retirement Date.
5.7 Late Retirement Benefit.
(a) General rule. A Participant's Late Retirement Benefit under
the Plan shall generally equal his Monthly Accrued Benefit
payable at his Late Retirement Date.
(b) Special rule for those who reached age 65 before 1988.
(1) This Subsection applies only to those Participants who
reached age 65 before calendar year 1988.
(2) The Late Retirement Benefit of such a Participant
shall equal the greater of (i) his Monthly Accrued
Benefit at his Late Retirement Date, or (ii) his
Monthly Accrued Benefit at his Normal Retirement Date
multiplied by his Late Commencement Factor as
determined in accordance with the following Subsection
(c).
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(3) Further, if the Minimum Basic Benefit rules of Section
5.4 are applicable to such a Participant, then clause
(ii) of the preceding paragraph shall not apply to his
Minimum Basic Benefit (or his minimum Plan benefit).
(c) Late Commencement Factors defined
(1) For the purpose of this Section, a Participant's "Late
Commencement Factor" means for age 70 and under a
factor determined in accordance with the schedule
below based on his age at his Annuity Starting Date
(with interpolations for actual age).
Age Late Commencement Factor
--- ------------------------
66 1.10
67 1.20
68 1.30
69 1.40
70 1.50
(2) Over age 70, "Late Commencement Factor" means a factor
equal to the Actuarial Equivalent.
5.8 Early Retirement Benefit
(a) Timing affects amount of benefit.
(1) A Participant's Early Retirement Benefit will be
affected by the exact date of his Annuity Starting
Date.
(2) Generally, the earlier that his Annuity Starting Date
precedes his Normal Retirement Date, the lower a
Participant's monthly Early Retirement Benefit payment
will be.
(b) Formula for Early Retirement Benefit.
(1) A Participant's Early Retirement Benefit shall equal
his Normal Retirement Benefit at his Early Retirement
Date multiplied by his Early Commencement Factor, as
defined in this Section.
(2) The "Early Commencement Factor" is a factor equal to
(A) minus (B). (A) and (B) shall mean:
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(A) 1.
(B) 1/180 for each of the first 60 months plus 1/360
for each of the next 60 months by which his
Annuity Starting Date precedes his Normal
Retirement Date.
(3) For the purposes of calculating the "Early
Commencement Factor," partial months shall be
considered to be whole months.
5.9 Deferred Vested Termination Benefit.
(a) If a Participant has any vested accrued benefit, and his
Annuity Starting Date is on or after his Normal Retirement
Date, the amount of his Deferred Vested Termination Benefit
under the Plan shall equal his Monthly Accrued Benefit at his
Deferred Vested Termination Date.
(b) If a Participant's Vested Percentage is 0%, and his Annuity
Starting Date is on or after his Normal Retirement Date, the
amount of his Deferred Vested Termination Benefit under the
Plan shall equal 100% of his Contributory Benefit at his
Deferred Vested Termination Date, if any, or, if greater, his
accrued benefit attributable to employee contributions (as
determined in Code Section 411(c)(2)).
(c) If a Participant's Annuity Starting Date is prior to his
Normal Retirement Date, the amount of his Deferred Vested
Termination Benefit shall equal the amount determined in
paragraph (a) or (b) of this Section, whichever is
applicable, multiplied by his Early Commencement Factor as
determined in the preceding Section.
(d) If any benefit under any welfare plan maintained by the
Employer or Affiliate is dependent on "retirement" under this
Plan, then the receipt of a Deferred Vested Termination
Benefit shall not constitute "retirement."
5.10 Co-ordination with Prior Plan.
(a) The monthly amount of any Plan benefit being paid to a Former
Participant or any joint annuitant or Beneficiary immediately
prior to the Effective Date under the Prior Plan shall
continue to be paid to such payee on and after the Effective
Date in accordance with the applicable provisions of the
Prior Plan.
(b) The monthly amount of any Plan benefit which had not
commenced as of the Effective Date for any terminated,
Vested Former Participant
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whose employment with the Employer had terminated prior to
the Effective Date, shall be determined under the Prior Plan
as in effect on the date of his termination of employment.
However, the provisions of Article VI of this Plan shall
apply to the payment of such Plan benefits. Further, if the
Annuity Starting Date is prior to his Normal Retirement Date,
the amount of the payment shall be calculated using the Early
Commencement Factor as determined in accordance with this
Article of this Plan.
5.11 Effect of Deferred Payment
If a Participant or Former Participant who was eligible to retire
under this Plan has failed to make a Proper Application for his Plan Benefit,
so that his benefit commencement date falls after the date he terminates
employment, he shall receive, in a lump sum, an amount equal to all payments
that would have been made (but were not made), due to the delay. Similarly, a
retroactive, lump sum payment will be made if the amount of the Plan benefit
cannot be immediately ascertained by the Committee or its delegates, or if the
payee cannot be immediately located. However, there shall be no actuarial
adjustment made, under this Section.
5.12 Effect of Reemployment After Receipt of Plan Benefits
(a) Reemployment. If a Former Participant who is receiving a Plan
benefit becomes re-employed as an Employee of the Employer or
an Affiliate, the payment of his Plan benefits shall
immediately cease.
(b) Suspension of Benefits. Generally, suspension of benefits
under this Section shall occur only if the re-employed
Employee shall be working a full-time schedule, as determined
by the Employer under ERISA.
(c) Offset for Error. Should such a suspension permitted under
this Section not take place, through administrative error or
any other reason, then the amounts which were paid but which
were also suspendable may be offset from future Plan
benefits. Offsets may also be taken against any survivor
benefits, with respect to the Participant.
(d) Proper Notice. No suspension of benefits under this Section
may take place unless proper notice is sent to the
individual during the calendar month of the suspension,
under ERISA.
(e) Recommendation of Benefits. Plan payments to the individual
shall recommence, generally within four months after his
period of
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reemployment has ended, provided he has made Proper
Application (with 90 days advance notice) for their
recommencement.
(f) Amount of Benefit. Such an individual's ultimate Plan benefit
shall be reduced by the Actuarial Equivalent of Plan benefits
he has already received, but in no event shall his monthly
benefit be reduced below the amount that he was receiving,
before his reemployment and suspension of benefits.
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ARTICLE VI. PAYMENT OF RETIREMENT AND DEATH BENEFITS
6.1 How to Retire
(a) General rules. Except as provided in the next Section, no
Plan benefit shall be paid unless Proper Application is made
to the Committee.
(b)
Eligibility for Benefits. Each Participant or Beneficiary
will be eligible to receive a Plan benefit only when:
(1) the Participant is vested in an accrued Plan benefit,
under Article IV,
(2) the Participant has terminated his employment with the
Employer and all Affiliates, under that employer's
procedures, and
(3) the payee has met all the requirements of this
Article, particularly those described in the next
paragraph.
(c) Making "Proper Application" - required forms.
(1) Retirement and death benefits will be paid only after
"Proper Application" has been made. For all purposes
under this Plan, the term "Proper Application" shall
mean making any election, granting any consent, giving
any notice or information, and making any
communication whatsoever to the Committee or its
delegates, in compliance with all Plan procedures, on
forms provided by the Committee, and providing all
information required by the Committee. A Proper
Application will be deemed to have been made only if
it is properly completed, as determined by the
Committee.
(d) Advance notice to Committee necessary. Generally, at least
four months advance notice must be made to the Committee, in
order to make a Proper Application to elect any particular
Annuity Starting Date.
6.2 Timing of Participant's Benefits
(a) General rules. Generally, a Participant's Plan benefit will
be paid, under this Article, as soon as is feasible (but no
less than 30 days) after the Retirement Date or Annuity
Starting Date that he has elected, by making a Proper
Application.
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(b) Consent to distribution. With respect to this Article, making
a Proper Application for a Plan distribution shall be
considered as giving written consent to such a distribution.
(c) Payments made only on the first of the month. All benefits
paid under the Plan will be paid only as of the first day of
any relevant month. Any Retirement Date or Annuity Starting
Date must therefore fall on the first day of a month.
(d) Deferred Vested Termination Benefit rules.
(1) Normally, the Annuity Starting Date for any
Participant receiving a Deferred Vested Termination
Benefit will be his Normal Retirement Date.
(2) However, if a Participant who is eligible to receive a
Deferred Vested Termination Benefit has also completed
ten years of Accrual Service, then the Participant may
make Proper Application (with 60 days advance notice)
to elect an Annuity Starting Date with respect to his
Deferred Vested Termination Benefit that is:
(A) before his Normal Retirement Date, and
(B) after his 55th birthday.
(e) Final monthly payment. The final monthly payment of any Plan
annuity payment shall be made with respect to the month
within which the death of the Participant or his Beneficiary
(whichever is applicable) occurs.
(f) Deferred payments. Any failure to make Proper Application (as
determined within the sole discretion of the Committee),
shall be deemed to be a Proper Application to defer payment,
provided that deferred payment is permitted under this
Section.
(g) Required payment date of small amounts. If the lump sum
Actuarial Equivalent of a Participant's vested Plan benefit
equals or is less than $5,000 (or any other figure set by the
Code), then a lump sum payment of such an amount shall be
made as soon as is feasible on or after his death or
termination of employment with the Employer and all
Affiliates, subject to this Article. Such a payment shall not
be deferred; and payment shall be made even if the
Participant or Beneficiary fails to make any Proper
Application for payment.
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(h) General rules for required payment dates. Unless the
Participant elects to defer his benefit payment, Plan
benefits will be paid under this Article no later than the
60th day after the close of the plan year in which the latest
of the following events occurs:
(1) the Participant's Normal Retirement Date
(2) the 10th anniversary of the year in which the
Participant commenced participation in the plan
(3) the Participant terminates service with the Employer.
(i) Payments following age 70 1/2. Notwithstanding any contrary
provision of this Plan, payments to each Participant must
begin no later than the April 1st of the calendar year
following the calendar year in which he attains age 70 1/2 or
separates from service, unless otherwise required by law.
With respect to any required minimum distribution prescribed
by Code Section 401(a)(9), there shall be no annual
recalculation of life expectancies.
(j) Payments on Account of Participant's Death
(1) Distribution begun before death. If the distribution
of a Participant's benefit has commenced under this
Article prior to his death, then the payment of any
remaining portion that is payable under this Article
shall be paid to the Beneficiary as soon as is
practicable. The schedule of such payments shall be at
least as rapid as the schedule used at the
Participant's death. In this event, there shall be no
permitted deferral of payment.
(2) Distribution paid after death to non-spouse
Beneficiary. If the Participant dies before
distribution under this Article has begun, then the
payment under this Article to any non-spouse
Beneficiary shall be made:
(A) As soon as is feasible, but no later than five
calendar years following the date of death, if
the Beneficiary is not the surviving, legally
married spouse of the Participant, and the
benefit is to be paid in any form except
payments over the life or life expectancy of the
Beneficiary.
(B) As soon as is feasible, if the benefit is to be
paid over the life or life expectancy of a
non-spouse Beneficiary, but no later
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than by December 31 of the calendar year
immediately following the calendar year in which
the Participant died.
(3) Distribution paid to Eligible Spouse
(A) Distributions to an Eligible Spouse under a QJSA
shall be paid as soon as is feasible.
(B) Distributions paid to an Eligible Spouse under a
QPSA shall be paid as provided in Section 6.8.
6.3 Normal Form of Benefits
(a) Normal form for married Participant. The normal form of
retirement benefit for any married Participant who has an
Eligible Spouse on his Annuity Starting Date shall be a
Qualified Joint and Survivor Annuity, or a "QJSA."
(b) Normal form for unmarried Participant. The normal form of
benefit for any Participant who does not have an Eligible
Spouse as of his Annuity Starting Date shall be a single life
annuity paid for his life.
6.4 Notice and Election Period
(a) Notice concerning benefits. The Committee shall distribute to
each Participant at least 90 days before his Annuity Starting
Date a written explanation of:
(1) the QJSA;
(2) how the Participant may waive the QJSA;
(3) the effect of the Participant's waiver of the QJSA;
(4) the need for the Participant's Eligible Spouse to
consent to such a waiver, before the waiver can be
effective, and
(5) the Participant's and the spouse's right to revoke
their waiver or consent (respectively), during the
Election Period (which is described in the next
paragraph).
(b) Election Period. For the purposes of this Article, the
Election Period shall be the 90 calendar day period
preceding any Participant's
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Annuity Starting Date. The last business day preceding the
Annuity Starting Date is the last day of the Election Period.
6.5 Waiver and Spousal Consent Necessary for Optional Forms of Benefit
(a) General rules. A married Participant may elect an optional
form of benefit, in lieu of the normal form of benefit, only
if he and his spouse meet all the requirements of this
Section.
(b) Waiver.
(1) After receiving the notice explaining the normal form
of benefit, described in the preceding Section, the
married Participant must waive his right to the normal
form of benefit, by making a Proper Application
concerning his waiver.
(2) The waiver shall specify the optional benefit, and, if
applicable, the designated nonspouse Beneficiary (or
any single or class of contingent Beneficiaries).
(c) Spousal consent.
(1) After the Participant's receipt of notice explaining
the normal form of benefit, described in the
preceding Section, the Participant's Eligible Spouse
must give written consent to the Participant's waiver
of the normal form of benefit, in order for the
waiver to be effective. (The Committee's delivery of
the explanatory notice to the Participant shall
be deemed to also be delivery to the Eligible
Spouse.) The Eligible Spouse's written consent shall
be made by Proper Application and shall:
(A) express the effect of waiving the normal form
of benefit;
(B) be notarized;
(C) consent to the optional form of benefit being
selected;
(D) consent to a designated Beneficiary other than
herself, if applicable, and
(E) state whether or not the consent is revocable.
However, if the consent form is silent as to
this issue, then it shall be considered to be
revocable, under the terms of this Section.
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(2) If the Participant has designated a Beneficiary other
than his spouse, then such a designation shall not be
effective unless the spouse gives written consent to
the Beneficiary designation, by making Proper
Application. This consent must state that the
Beneficiary cannot be changed further without further
spousal consent, unless the written consent form
explicitly states that no such further consent with
respect to another change in designated Beneficiary is
necessary.
(3) Any waiver of a QJSA or any spousal consent described
in this Section shall be binding only upon the
individual spouse who gives the consent. It shall not
be binding upon any subsequent spouse of the
Participant.
(d) Deadline for waiver and spousal consent. To be effective, the
Participant's waiver of his normal form of benefit and his
Eligible Spouse's written consent must be made by Proper
Application during the 90 day Election Period.
(e) Revocation of waiver and spousal consent. Both the
Participant's waiver of the QJSA and his Eligible Spouse's
consent to the waiver may be revoked within the Election
Period, by making Proper Application. Any such revocation
will cause the normal form of benefit to be paid to the
Participant, unless another waiver and consent is made by
Proper Application, within the Election Period.
Notwithstanding the previous provisions of this paragraph, a
revocation of the Eligible Spousal consent shall not be
permitted if the forms on which the consent were made
explicitly disallow such a spousal revocation.
6.6 Optional Forms of Benefit
(a) Procedural rules. A Participant may elect an optional form of
benefit, rather than the normal form described in Section
6.3, if he meets the requirements of the preceding Section,
and makes a Proper Application.
(b) Value of optional forms. Each optional form of benefit
described in this Section shall equal the Actuarial
Equivalent of the normal form of benefit that would be paid
with respect to the Participant as of his Normal Retirement
Date.
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(c) Optional forms available. The optional forms of benefit
offered under the Plan are:
(1) Single life annuity.
(2) Joint and survivor annuity, with any person designated
by the Participant as his joint annuitant (and
Beneficiary) and with the survivor annuity equal to a
percentage, not less than 50% and not in excess of
100%, designated by the Participant, of the annuity
payable for the life of Participant.
(3) Single life annuity with a period certain guarantee of
10, 15, or 20 years or, if less, the joint life and
last survivor life expectancy of the Participant and
his Beneficiary at his Annuity Starting Date. Upon the
death of the Participant prior to the expiration of
the period certain, monthly payments shall continue to
the Beneficiary if the Beneficiary survives the
Participant or, if the Beneficiary has predeceased the
Participant or if no proper contingent Beneficiary
designation is in effect at the Participant's death,
the Actuarial Equivalent of the remaining payments
shall be paid to the Participant's next Beneficiary in
a lump sum. Upon the death of the Participant after
expiration of the period certain, no further payments
shall be made under this option. Upon the death of the
properly designated Beneficiary who survived the
Participant prior to expiration of the period certain,
the Actuarial Equivalent of the remaining payments
shall be paid to the Beneficiary's Beneficiary in a
lump sum.
(4) For a Participant whose Annuity Starting Date is prior
to the earliest date Social Security old-age benefits
are payable, a level- income single life annuity
taking into account the estimated amount of Social
Security old-age benefits payable commencing at such
date.
(d) Restrictions as to optional forms.
(1) Notwithstanding the foregoing, no optional form of
payment shall provide only for a survivor benefit to
the Participant's Beneficiary after his death.
(2) Under any optional form of payment, the present value
of the payments to be made to the Participant while
living must exceed 50% of the present value of the
total payments to be made to the
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Participant and any joint annuitant, Beneficiary or
other survivor (other than his Eligible Spouse).
(3) Any optional form of payment shall provide for payment
(i) over the life of the Participant, (ii) over the
lives of the Participant and his Beneficiary, (iii)
over a period not exceeding the life expectancy of the
Participant, or (iv) over a period not exceeding the
life expectancies of the Participant and his
Beneficiary.
6.7 Suspending Plan Payments Upon Reemployment. Plan payment under this
Article will be suspended, if the Former Participant becomes
re-employed; as set out in Section 5.11.
6.8 Qualified Pre-Retirement Survivor Annuity
(a) Eligibility for QPSA. A Qualified Pre-Retirement Survivor
Annuity, or "QPSA," will be paid only in the event that a
Participant dies:
(1) with a surviving Eligible Spouse, as of his date of
death, and
(2) one of the following:
(A) while in active employment with the Employer, or
(B) after his termination of employment with the
Employer, but before his Annuity Starting Date.
(b) QPSA is paid to Eligible Spouse. The QPSA shall be paid,
under this Section, to the Eligible Spouse of a Participant
who meets the requirements of the preceding Subsection.
(c) Amount of QPSA.
(1) A QPSA shall be paid only with respect to the
Participant's vested, accrued Plan benefits. The
precise amount of QPSA is determined by referring to
the 50% survivor benefit that would have been payable,
with respect to the Participant's death, had he
elected a 50% QJSA and had he died at the dates
described in this Subsection. Different dates apply,
according to the Participant's age and service
history at the time of his death.
(2) If an eligible Participant dies after his Normal
Retirement Date, then the QPSA shall equal the 50%
QJSA survivor benefit that would have been payable had
he retired with a 50% QJSA on the
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day before his actual date of death, so that his QJSA
Annuity Starting Date would have been the date before
his actual date of death (or the first day of the next
month).
(3) If a Participant dies (i) with 10 years of Accrual
Service, and (ii) before his Normal Retirement Date,
but (iii) after his 55th birthday, then the QPSA
shall, as in the preceding paragraph, equal the 50%
QJSA survivor benefit that would have been payable had
he retired with a 50% QJSA on the date before his
actual date of death, so that his QJSA Annuity
Starting Date would have been the date before his
actual date of death (or the first day of the next
month).
(4) If a Participant dies (i) before his Normal Retirement
Date, and (ii) before completing 10 years of Accrual
Service, then the amount of the QPSA shall equal the
50% QJSA survivor benefit that would have been payable
had he (a) survived, (b) terminated employment as of
either his actual termination date, or his actual date
of death (whichever came first), (c) elected his
Normal Retirement Date as his Annuity Starting Date,
and (d) died the next day.
(5) If a Participant dies (i) before his 55th birthday,
and (ii) after completing 10 years of Accrual Service,
then the amount of the QPSA shall equal the 50% QJSA
survivor benefit that would have been payable had he
(a) survived, (b) terminated employment as of either
his actual termination date, or his actual date of
death (whichever came first), (c) elected the first
day of the month coincident with or next following his
55th birthday as his Annuity Starting Date, and (d)
died the next day.
(6) With respect to the four preceding paragraphs, in the
event that the Participant dies after his active
employment has ended, the four preceding paragraphs
shall not be construed to credit the Participant with
any Accrual Service or accruals that he had not
earned, as of his termination of employment.
(d) Special rule for amount of QPSA if optional benefit has been
elected. If a QPSA is payable with respect to a Participant
who had made a Proper Application for an optional form of
benefit which would have provided annuity payments to the
Participant and his Eligible Spouse, then, notwithstanding
any other provisions of this Section, the amount of the QPSA
shall equal the Actuarial Equivalent of the survivor benefit
under the elected optional form of benefit.
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(e) Form of the QPSA. The QPSA shall be paid in monthly
installments, over the life of the surviving Eligible Spouse.
(f) QPSA is subsidized. Participants are not charged, under
this Plan, for their right to a QPSA.
(g) Commencement of QPSA payments. QPSA payments shall generally
be made as soon as is feasible following the Eligible
Spouse's Proper Application. Eligible Spouses may not defer
payment later than the first day of the month coincident with
or following:
(1) the Participant's 55th birthday - with respect to a
Participant who had earned 10 years of Accrual Service
and died before age 55
(2) the date of death - with respect to Participant's who
had earned 10 years of Accrual Service and died after
age 55
(3) The Participant's Normal Retirement Date - with
respect to Participant's who died with less than 10
years of Accrual Service.
6.9 Form of Benefit Fixed as of Annuity Starting Date
(a) General Rule. The form of any Plan benefit is fixed as of the
Annuity Starting Date, and is not subject to change, except
with respect to the provision of any survivor benefit under a
QJSA or optional form of benefit.
(b) QDRO Exception. Should a QDRO become effective after a
Participant's Annuity Starting Date, the Plan payments may be
divided, as provided for under the QDRO, but the total
monthly payment that had been made monthly under Plan (before
the QDRO) shall not be changed.
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ARTICLE VII. IN-SERVICE WITHDRAWAL AND RETURN OF
CONTRIBUTIONS
7.1 In-Service Withdrawal of Pre-1970 Employee Contributions
(a) Withdrawal of Accumulated Contributions Benefit. A
Contributing Participant may at any time prior to his Annuity
Starting Date, by making Proper Application at least 30 days
in advance, withdraw all of his Accumulated Contributions
Benefit.
(b) No Partial Withdrawal. Such a withdrawal must be made of all
of the Participant's Contributory Benefit; no partial
withdrawal shall be permitted.
(c) Spouse' Consent Required. However, if the amount of a
Participant's Contributory Benefit exceeds $5,000, then a
married Participant may make such a withdrawal only if his
spouse gives her written, notarized consent, under Committee
procedures.
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ARTICLE VIII. THE TRUST, FUNDING AND CONTRIBUTIONS
8.1 Contributions to the Trust Fund
(a) General Rule. The Employer shall make contributions under
this Plan to the Trust Fund at least once each quarter during
each Plan Year. Notwithstanding the preceding sentence, the
Committee may direct that Contributions be made on a
different schedule, as permitted by the Code, without formal
Plan amendment.
(b) Amount of Contributions. The amount of such contributions
shall be the amount recommended by the Plan's enrolled
actuary, in compliance with the Code and ERISA, to fund Plan
benefits.
(c) No Contributions By Employees. Contributions by Employees
shall not be permitted.
(d) Determination of Necessary Contributions. An enrolled actuary
hired by the Committee shall make an annual actuarial
valuation to estimate the Employer contributions necessary
under this Article.
8.2 The Trust
(a)
Trust Agreement. Amounts contributed to the Trust shall be
managed and invested, according to the Trust Agreement.
(b) Funding Policy. The Company shall, to the extent allowed
under the Trust, establish a funding policy and method,
consistent with the objectives of the Plan the applicable
requirements of ERISA and the Code.
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ARTICLE IX. AMENDMENT AND TERMINATION
9.1 Power to Amend Plan
(a) General Rule. The Company, by action of the Board, may,
subject to this Section, at any time modify or amend, in
whole or in part, any or all of the provisions of the Plan.
Any such amendment shall be by an instrument in writing
executed by the Board, under its by-laws. Upon the execution
of any such instrument, the Plan shall be deemed to have been
amended in the manner therein set forth.
(b) Parties Bound. The Employer, the Trustee and each Employee,
Participant, Former Participant, Eligible Spouse, Beneficiary
or any person claiming under or through any of the foregoing
shall be bound by any such amendment. However, no such
amendment shall make it possible for any of the assets of the
Trust Fund to be used for or diverted to purposes other than
for the exclusive benefit of Participants and their
beneficiaries, increase the duties or responsibilities of the
Trustee without its consent thereto, or adversely affect any
benefits accrued by any Participant prior to such amendment,
except as provided in Article XI.
9.2 Power to Terminate Plan
Although the Company intends to maintain the Plan indefinitely, the
Company, by action of the Board, may terminate the Plan.
9.3 Allocation of Assets Upon Termination
(a) General rule. In the event of termination of the Plan, the
Plan Administrator shall, subject to the approval of the
Committee, allocate the assets of the Trust Fund that are
available among the applicable Participants, Former
Participants, and appropriate Beneficiaries in the manner set
forth in Section 4044 of ERISA.
(b) Full vesting upon termination or partial termination. Upon
termination or partial termination of the Plan as to any
Participants hereunder, all rights of such Participants to
their accrued Plan benefits theretofore accrued shall become
non-forfeitable to the extent then funded.
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9.4 Reversion of Assets Upon Termination
Any Trust Fund assets which remain by reason of actuarial error after
all liabilities of the Plan to applicable Participants, Former Participants,
and other persons have been satisfied and all expenses of terminating the Plan
as to any such persons and liquidating the Trust Fund assets have been paid,
shall upon direction of the Committee be paid to the Company, provided such
payment does not contravene any applicable provisions of law.
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ARTICLE X. LIMITATION OF BENEFITS
10.1 Construction
The purpose of this Article is to comply with the provisions of
section 415 of the Code, and all terms and provisions of this Article shall be
interpreted and construed consistently with said provisions. The provisions of
this Article shall apply notwithstanding any contrary provision of the Plan.
10.2 Definitions
Solely for the purposes of this Article:
Annual Addition. "Annual Addition" means the sum for any Limitation Year of (a)
employer contributions to a plan (or portion thereof) subject to section 415(c)
of the Code maintained by the Employer or an Affiliate, (b) forfeitures under
all such plans (or portions thereof), if any, credited to employee accounts,
(c) employee contributions under all such plans (or portions thereof), and (d)
amounts described in section 419A(d)(2) of the Code (relating to
post-retirement medical benefits of Key Employees (as defined in the Article
entitled "Top Heavy Provisions.")) or allocated to a pension plan individual
medical account described in section 415(l) of the Code to the extent
includable for purposes of section 415(c)(2) of the Code. The employee
contributions described in clause (c) shall be determined without regard to (i)
any rollover contributions, (ii) any repayments of loans, or (iii) any prior
distributions repaid to a plan upon the exercise of buyback rights. Employer
and employee contributions taken into account as Annual Additions shall include
"excess contributions" as defined in section 401(k)(8)(B) of the Code, "excess
aggregate contributions" as defined in section 401(m)(6)(B) of the Code and
"excess deferrals" as described in section 402(g) of the Code (to the extent
such deferrals are not distributed to the Participant before the April 15th
following the end of the taxable year of the Participant in which such
deferrals were made), regardless of whether such amounts are distributed or
forfeited. The Annual Additions for any year beginning before January 1, 1987
shall be determined under the law as in effect for such year and shall not be
recomputed to treat all employee contributions as Annual Additions.
Compensation Limit. "Compensation Limit" means 100% of the Participant's
average annual Earnings for the three consecutive years in which his Earnings
were highest.
Dollar Limit. "Dollar Limit" means, subject to the Section of this Article
entitled "Protection of Current Accrued Benefit," $90,000 as adjusted from
time to time (beginning in 1988) to reflect increases in the cost of living
pursuant to applicable regulations. The adjustment required pursuant to the
preceding sentence for any
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year shall be the cost of living adjustment which is effective as of the
January 1 which occurs in such year. No such adjustment shall be taken into
account before the year for which such adjustment first takes effect.
Earnings. "Earnings" for any year shall have the meaning set forth in Treas.
Reg. ss. 1.415-2(d)(11)(i).
10.3 Limitation on Annual Benefits
(a) Unadjusted Limit. If a Participant's Plan benefit is payable
as a single life annuity or a QJSA, the annual amount of
benefit payable to the Participant shall not exceed the
lesser of the Dollar Limit or the Compensation Limit.
(b) Optional Payment Forms. If a Participant's Plan benefit is
payable in any form other than a single life annuity or a
QJSA, the annual amount of benefit payable to the Participant
shall not exceed the Actuarial Equivalent of a single life
annuity which does not exceed the lesser of the Dollar Limit
or the Compensation Limit. In making such actuarial
adjustment, (a) the actuarial assumptions used shall be those
set forth in the Plan, as appropriate according to the form
and date of payment, provided that the interest assumption
used shall generally not be less than 5%, and (b) no
adjustment shall be made for any ancillary benefit provided
under the Plan (if applicable) which is not directly related
to retirement benefits, including, without limitation,
disability benefits, medical benefits, and pre-retirement
death benefits, and any death benefit coverage described in
the Plan.
(c) Multi-employer Plans. Any benefits provided under any
multi-employer plan to which the Employer or any Affiliate is
a party shall be taken into account under this Article only
to the extent that the benefits provided under such plan
exceed the benefits that would have been provided under such
plan if the Participant had no service with the Employer or
any Affiliate.
10.4 Adjustments for Early or Late Payment
(a) Payments Starting Before Social Security Retirement Age But
After Age 62. If a Participant's Plan benefit begins before
his Social Security Retirement Age but on or after the date
he attains age 62, the Dollar Limit shall be reduced: (1) if
the Participant's Social Security Retirement Age is 65, by
5/9th of 1% for each month by which the commencement of
payment of his Plan benefit precedes the month in which he
attains age 65; or (2) if the Participant's Social Security
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Retirement Age is 66 or 67, by 5/9th of 1% for each of the
first 36 months and 5/12th of 1% for each additional month by
which the commencement of payment of his Plan benefit
precedes the month in which he attains his Social Security
Retirement Age.
(b) Payments Starting Before Age 62. If a Participant's Plan
benefit begins before age 62, the Dollar Limit shall be
reduced in accordance with applicable regulations (using the
actuarial assumptions set forth in the Actuarial Equivalent,
this Plan, provided that the interest assumption used shall
be not less than 5%), so that it is equivalent to the Dollar
Limit as applied to a pension beginning at age 62.
(c) Payments Starting After Social Security Retirement Age. If a
Participant's Plan benefit begins after his Social Security
Retirement Age, the Dollar Limit shall be increased in
accordance with applicable regulations (using the actuarial
assumptions set forth in the Actuarial Equivalent, provided
that the interest assumption shall not exceed 5%) so that it
is actuarially equivalent to the Dollar Limit as applied to a
pension beginning at his Social Security Retirement Age.
10.5 Conditional Exemption for Pensions Under $10,000
The Compensation Limit shall not be applicable to any Plan benefit
with respect to a Participant for any year if (a) the annual amount of
employer-provided retirement benefits payable with respect to such Participant
under this Plan and all other defined benefit plans of the Employer and all
Affiliates does not exceed $10,000 for such year or any prior year, and (b)
such Participant never participated in any defined contribution plan maintained
by the Employer or an Affiliate.
10.6 Participants with Fewer Than Ten Years of Service
If a Participant has fewer than 10 years of Service in the aggregate
with the Employer and all Affiliates at the time his Plan benefit starts, the
Compensation Limit and the $10,000 limit described in the Section of this
Article entitled "Conditional Exemption for Pensions under $10,000" shall be
adjusted by multiplying such amounts by a fraction (a) the numerator of which
is the Participant's number of years of Service (and fraction thereof) and (b)
the denominator of which is 10. In no event shall such fraction be less than
1/10th.
10.7 Participants with Fewer Than Ten Years of Participation
If a Participant has been credited with fewer than 10 "Years of
Participation," the Dollar Limit shall be adjusted by multiplying such amount
by a fraction (a) the numerator of which is the Participant's number of Years
of
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Participation in the Plan (and fraction thereof) and (b) the denominator of
which is 10. In no event shall such fraction be less than 1/10th. "Years of
Participation" means years of Service for which the Participant is credited
with future Service benefits excluding any such year of Service credited (a)
for a Plan Year prior to the Plan Year in which the individual first became a
Participant, (b) for any period of disability during which the Participant was
not permanently and totally disabled (within the meaning of section 22(e)(3) of
the Code), and (c) for any period prior to the Effective Date.
10.8 Benefits Payable under More Than One Defined Benefit Plan
If benefits that are subject to the limitations of section 415 of the
Code are payable under any other defined benefit plan maintained by the
Employer or an Affiliate, the benefits payable under this Plan, as limited by
this Article, shall be subject to further limitation in order that the amount
of employer-provided benefits payable under all defined benefit plans
maintained by the Employer and all Affiliates shall not, in the aggregate,
exceed the benefit limitations described in this Article. If a reduction in the
benefits under such defined benefit plans in the aggregate is thus required,
such reduction shall be applied in the reverse order in which benefits
under,such plans would otherwise accrue except as any such other plan may
otherwise expressly provide, provided that benefits under any multi-employer
plan shall be reduced last.
10.9 Participation in Defined Contribution Plan
(a) Combined Limitation. Subject to the later paragraph of this
Subsection, entitled "Adjustment of Defined Contribution Plan
Fraction," if a Participant participates (or participated) in
one or more defined contribution plans maintained by the
Employer or an Affiliate (including any plan so considered as
a result of any employee contributions to a defined benefit
plan) the sum of his Defined Contribution Plan Fraction and
Defined Benefit Plan Fraction as of the close of any year
shall in no event exceed 1.0. In order to prevent such sum
from exceeding 1.0, benefits under this Plan shall be reduced
to the extent necessary for that purpose. Such reduction
shall be made prior to any reduction of allocations of Annual
Additions under such defined contribution plans which would
otherwise be made in order to prevent such sum from exceeding
1.0.
(b) Defined Contribution Plan Fraction Determination. For
purposes of this Section, a Participant's "Defined
Contribution Plan Fraction" shall be determined as follows:
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(1) Numerator. For any year, the numerator shall be the
sum of the Annual Additions to the Participant's
accounts under all such defined contribution plans
maintained by the Employer or an Affiliate in such
year and in all prior years.
(2) Denominator. For any year, the denominator shall be
the sum of the lesser of the following amounts,
determined for such year and for each prior year of
service with the Employer and all Affiliates as if the
Participant were covered by a defined contribution
plan maintained by the Employer or Affiliates for all
such years, but were not covered by any defined
benefit plan for any such year:
(A) 125% of the maximum dollar limitation applicable
to defined contribution plan allocations for
such year (as provided in section 415(c)(1)(A)
of the Code determined without regard to section
415(c)(6)), or
(B) 35% of the Participant's Earnings for such year.
(c) Notwithstanding the foregoing, in computing the denominator
of the Defined Contribution Plan Fraction for any year ending
after 1982, the Committee may elect to determine the portion
of such denominator which relates to 1982 and prior years
under the method described in section 415(e)(6) of the Code,
in lieu of the method described above. Such election may be
made at such time and in such manner as may be provided in
applicable Treasury regulations.
(d) Defined Benefit Plan Fraction Determination. For purposes of
this Section, a Participant's "Defined Benefit Plan Fraction"
shall be determined as follows for any year:
(1) Numerator. The numerator shall be the total projected
annual benefit (as defined in section 415(b)(2) of the
Code) of the Participant under all defined benefit
plans maintained by the Employer or any Affiliate as
of the close of such year, as determined for each such
plan for purposes of section 415(e)(2)(A) of the Code,
disregarding benefits derived from employee
contributions.
(2) Denominator. The denominator shall be the lesser of
the following amounts:
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(i) 125% of the Dollar Limit, deter mined after
giving effect to the Section of this Article
entitled "Protection of Current Accrued
Benefit", or
(ii) 140% of the Compensation Limit.
For purposes of computing the denominator of the Defined
Benefit Plan Fraction, (A) the Dollar Limit and the
Compensation Limit shall be determined as if years of Service
for purposes of the Section of this Article entitled
"Participants with Fewer than Ten Years of Service" included
future years before the Participant will attain age 65,
provided that the year in which the Participant will attain
age 65 shall not count as a future year unless it can be
reasonably anticipated that the Participant will receive a
year of Service for such year and (b) the Dollar Limit shall
be determined as if all years of Service (determined after
application of clause (A) above) were Years of Participation
(and fractions thereof) solely for purposes of the Section of
this Article entitled "Participants with Fewer than Ten Years
of Participation."
(e) Adjustment of Defined Contribution Plan Fraction. If the sum
of a Participant's Defined Benefit Plan Fraction and Defined
Contribution Plan Fraction determined as of December 31, 1986
would have exceeded 1.0 had the provisions of this Article as
in effect after December 31, 1986 been used to compute such
sum, an amount shall be subtracted from the numerator of the
Defined Contribution Plan Fraction (not exceeding such
numerator) so that the sum of the Defined Contribution Plan
Fraction and Defined Benefit Plan Fraction as of the first
day of the Limitation Year beginning in 1987 does not exceed
1.0. Such amount shall be equal to the product of:
(1) the sum of the Defined Contribution Plan Fraction plus
the Defined Benefit Plan Fraction as of the
determination date minus one, times
(2) the denominator of the Defined Contribution Plan
Fraction as of the determination date.
10.10 Limitation Year
All determinations under this Article shall be made by reference to
the Limitation Year, which shall be the Plan Year.
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10.11 Protection of Current Accrued Benefit
If a Participant's Plan benefit, determined as if the Participant had
terminated employment as of the close of 1986 and expressed in the form of a
Qualified Joint and Surviving Spouse Annuity or a single life annuity, as of
January 1, 1987 exceeds the limitations of this Article, then the Dollar Limit
with respect to such Participant shall be equal to his Plan benefit determined
as described in this Section. The Dollar Limit as so determined shall include
optional benefit forms and early retirement benefits or retirement subsidies
that are protected under section 411(d)(6) of the Code, whether or not the
Participant has met all the requirements to qualify for such forms or benefits
or subsidies, if and to the extent that they remain so protected as of the date
on which the limitations of this Article are applied.
10.12 Rules Regarding 25 Top-Paid Employees
(a) For purposes of this Section, the following terms shall
have the indicated meaning:
Benefits. The term "Benefits" means the sum of the
Participant's accrued benefit and all other benefits to
which he is entitled under the Plan.
Restricted Participant. The term "Restricted Participant"
means, with respect to a Plan Year, a Highly Compensated
Employee who is a Participant and who, if there are more than
25 Highly Compensated Employees, is one of the 25 Highly
Compensated Employees with the highest Total Annual Pay. An
individual who is a Restricted Participant in a Plan Year
shall be a Restricted Participant in a subsequent Plan Year
only if he satisfies the conditions of the previous sentence
in that subsequent Plan Year. If more than one individual has
the same Total Annual Pay, the younger individual shall be
deemed to have the higher Total Annual Pay.
Total Annual Pay. The term "Total Annual Pay" means, with
respect to any Plan Year, (a) in the case of a Highly
Compensated Employee who is not currently employed by the
Employer or an Affiliate, the greater of his Earnings (as
defined in this Article) for the Plan Year he ceased to be
employed by the Employer or an Affiliate or his Earnings for
the Plan Year immediately preceding such Plan Year and (b) in
the case of a Highly Compensated Employee who is currently
employed by the Employer or an Affiliate, the greater of his
Earnings for the Plan Year in question or for the prior Plan
Year.
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(b) Limitation on Distributions. Subject to the further
provisions of this Section, a Restricted Participant may not
receive his benefits under this Plan in the form of a single
sum payment, or other benefit form under which payments
during a single year would exceed the annual payments that
would be made on behalf of the Participant under a single
life annuity that is the Actuarial Equivalent of his Benefits
(other than benefits described in paragraph (c)(1) of this
Section.
(c) Application of Limitation. The limitation of this Section
shall not apply to:
(1) payment of benefits attributable to transferred
balances from defined contribution plans or to
employee contributions,
(2) any payment, if the value of Plan assets after such
payment equals or exceeds 110 percent of the value of
the Plan's "current liabilities" (within the meaning
of section 412(l)(7) of the Code), or
(3) any payment, if the value of the Restricted
Participant's benefits is less than one percent of
the value of such "current liabilities."
(d) Changes in Law. In the event that Congress should provide by
statute, or the Internal Revenue Service should provide by
regulation or ruling, that the limitations set forth in this
section are no longer necessary for the Plan to meet the
requirements of section 401(a) of the Code or other
applicable provisions of the Code then in effect, such
limitations shall become void and shall no longer apply
without the necessity of further amendment to the Plan.
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ARTICLE XI. GENERAL PROVISIONS
11.1 No Contract of Employment
Nothing contained in the Plan shall be construed as a contract of
employment between the Company, the Employer and any Employee, and the Plan
shall not afford an Employee a right of continued employment with the Company
or the Employer.
11.2 Employer Not Liable for Plan Benefits
All benefits payable under the Plan shall be paid or provided for
solely from the Trust Fund, and neither the Company nor the Employer assumes
any liability or responsibility therefor.
11.3 Exclusive Benefit and Return of Employer Contributions
(a) General Rule. Except as provided in this Section, the assets
of the Trust Fund shall be used for the exclusive purposes of
providing Plan benefits to Participants and their
Beneficiaries and defraying reasonable expenses of
administering the Plan.
(b) Tax Deductibility. Contributions are always conditioned
upon their deductibility under Code Section 404.
(c) Return of Contributions. Contributions may be returned to the
Company only:
(1) if a contribution is made to the Trust Fund by the
Company (or the Employer) by a mistake of fact, then
such contribution may be returned to the Company
within one year after the payment of the contribution;
(2) if any part or all of a contribution is disallowed as
a deduction under Section 404 of the Code, then to the
extent a contribution is disallowed as a deduction it
may be returned to the Company within one year after
the disallowance;
(3) if the Internal Revenue Service initially determines
that the Plan does not meet the requirements of
Section 401(a) of the Code, the Plan shall be null and
void from the Effective Date and any contributions
shall be returned to the Company less expenses paid
unless the Company elects to make the changes to the
Plan
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necessary to receive a determination from the
Internal Revenue Service that the requirements of
Section 401(a) are met;
(4) if the Plan has been terminated, and the rules set out
in Section 9.4 are met, then the excess Plan assets
shall revert to the Company.
11.4 Tax Withholding
The Committee hereby specifically delegates to the Trustee the
responsibility to be liable for income tax withholding, and to withhold the
appropriate amount from any payment made from the Trust to any payee under the
provisions of applicable law and regulation.
11.5 Incompetency or Minority of Payee
(a) General Rule. In the event the Committee determines in its
discretion that any Participant or Beneficiary, receiving or
entitled to receive benefits under the Plan is incompetent to
care for his affairs, and in the absence of the appointment
of a legal guardian of the property of the incompetent,
benefit payments due under the Plan (unless prior claim
thereto has been made by a duly qualified guardian, committee
or other legal representative) may be made to the spouse,
parent, brother or sister or other person, including a
hospital or other institution, deemed by the Committee to
have incurred or to be liable for expenses on behalf of such
incompetent
(b) Payment to Adult. In the absence of the appointment of a
legal guardian of the property of a minor, any minor's share
of benefits payable under the Plan may be paid to such adult
or adults as in the discretionary opinion of the Committee
have assumed the custody and principal support of such minor.
(c) Legal Guardian May Be Required. The Committee, however, in
its sole discretion, may require that a legal guardian for
the property of any such incompetent or minor be appointed,
before authorizing the payment of benefits in such
situations.
(d) Court Determination. If the Committee is in doubt as to the
right of any person to receive a Plan benefit, the Committee
may direct the Trustee to retain such amount, without
liability for any interest thereon, until the rights thereto
are determined, or the Committee may direct the Trustee to
pay such amount into any court of appropriate jurisdiction.
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(e) No Verification or Insurance Required. The Trustee shall not
be required to verify or insure that any distributions made
to any third parties under this Section are applied for the
benefit of such minor or incompetent or incapacitated
Beneficiary.
11.6 Missing Payees
If all or portion of a Participant's vested Plan benefit becomes
payable under the Plan and the Committee after a reasonable search cannot
locate the Participant (or his Beneficiary if such Beneficiary is entitled to
payment), then, five years after the Participant's benefit first became payable
under the Plan, a notice shall be mailed to the last known address of the
Participant. If the Participant does not respond within three months, the
Committee may elect, upon advice of counsel, to remove all records of the
Participant's accrued benefit from the Plan's current records and that benefit
shall be used to offset future Employer contributions. If the Participant or
his Beneficiary subsequently presents a valid claim for benefits to the
Committee, the Committee shall restore and pay the appropriate Plan benefit.
11.7 Alienation and QDROs
(a) General Rule. Except as provided in this Section, no accrued
Plan benefit whether vested or not, shall be subject to
alienation, assignment, pledging, encumbrance, attachment,
garnishment; including but not limited to execution,
sequestration, or other legal or equitable process, or
transferability by operation of law in the event of
bankruptcy, insolvency or otherwise.
(b) QDRO Exception. The provisions of the preceding paragraph
shall not prevent the creation, assignment or recognition of
any individual's right to a benefit payable with respect to a
Participant pursuant to a Qualified Domestic Relations Order
(QDRO).
(c) QDRO Definition. "Qualified Domestic Relations Order" or
"QDRO" shall mean any judgment, decree or order which (1)
meets the basic requirements of Code Section 414(p) and
further (2) meets the QDRO requirements set out in the Plan
procedures, concerning domestic relations orders, as
determined by the final, discretionary authority of the
Committee.
(d) QDRO Procedures. The Committee shall establish reasonable
procedures to determine whether a domestic relations order is
a QDRO and to administer distributions under a QDRO. If any
domestic relations order is received by the Plan, the
Committee shall
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(1) promptly notify the Participant and any Alternate Payee
that the order has been received and of the Plan's procedures
for determining whether the order is a QDRO and (2) notify
the Participant and each Alternate Payee (or their
representatives) of the Committee's determination.
(e) Definition of Alternate Payee. "Alternate Payee" shall mean
any spouse, former spouse, child or other dependent of a
Participant recognized by a proper domestic relations order
as having a right to receive all, or a portion of, a
Participant's benefits under the Plan, as prescribed under
Code Section 414(p).
(f) Court Order After Death. Should any court order be issued
after a Participant's or Alternate Payee's death, it will be
considered a QDRO only if it (1) relates to and reflects an
earlier order issued before death, and (2) meets the QDRO
requirements.
(g) Committee Authority. The Committee shall have final,
discretionary authority to administer and interpret any QDRO,
including any uncertain terms.
11.8 Notice to Committee, Elections
Any election made or notice given by a Participant pursuant to the
Plan shall be in writing to the Committee or to such representative as may be
designated by it for such purpose and shall be deemed to have been made or
given on the date received by the Committee or its representative.
11.9 Merger or Transfer With Other Plans
The Board shall have the power to fully or partially merge or
consolidate this Plan with any other plan. In the event of any merger or
consolidation of the Plan (by action of the Board) with, or a transfer of the
assets and liabilities of the Plan to, any other plan, each Participant must
(if such other plan were terminated immediately after such merger,
consolidation or transfer) receive a benefit under such other plan which is
equal to or greater than the benefit he would have been entitled to receive
under the Plan (if the Plan had been terminated immediately prior to such
merger, consolidation or transfer).
11.10 Fiduciaries
Any person or group of persons may serve in more than one fiduciary
capacity with respect to the Plan.
L-3 Communications Corporation
Pension Plan
57
<PAGE>
11.11 Plans Shall Comply with Law; and Choice of Law
It is intended that the Plan conform to and meet the applicable
requirements of ERISA and the Code. Except to the extent preempted by ERISA,
the validity of the Plan or of any of its provisions shall be determined under,
and it shall be construed and administered according to, the laws of the State
of New York (including its statute of limitations and all substantive and
procedural law, and without regard to its conflict of laws provisions).
11.12 Deemed Distribution of Unvested Amounts
Notwithstanding any contrary provision of the Plan, in the event that
(a) a Participant separates from the Service with the Company, and (b) the
Participant has not, as of the date he separates from service, met the Service
and other requirements that would enable him to be 100% vested in all his
accrued Plan benefits, then, (c) as of the date he separates from Service, he
shall be deemed to have received a distribution of his unvested accrued
benefits under the Plan. The amount of this deemed distribution shall be zero.
Following this deemed distribution, the Participant's remaining accrued Plan
benefits shall be only those benefits in which is 100% vested.
11.13 Gender and Number
Whenever any words are used herein in the masculine gender, they shall
be construed as though they were also used in the feminine gender in all cases
where they would so apply, and whenever any words are used herein in the
singular or plural form, they shall be construed as though they were also used
in the other form in all cases where they would so apply.
11.14 Headings
The headings of Sections and Articles are included solely for
convenience of reference, and if there is any conflict between such headings
and the text of the Plan, the text shall control.
11.15 Illegality of Particular Provisions
The illegality of any particular provision of this Plan shall not
affect the other provisions thereof, but the Plan shall be construed in all
respects as if such invalid provision were omitted.
L-3 Communications Corporation
Pension Plan
58
<PAGE>
11.16 Receipt and Release for Payments
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for each Participant, or Beneficiary
in accordance with the provisions of this Plan shall, to the extent thereof, be
in full satisfaction of all claims hereunder against the Trustee, the Company,
and the Employer, any of whom may require such Participant, legal
representative, Beneficiary, guardian or committee, as a condition precedent to
such payment, to execute a receipt and release thereof in such form as shall be
determined by the Trustee or the Company.
11.17 Action by the Company
Whenever the Company under the terms of this Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
11.18 Mistaken Payments
No Participant or Beneficiary shall have any right to any payment made
(a) in error, (b) in contravention to the terms of the Plan, the Code, or
ERISA, or (c) because the Committee or its delegates were not informed of any
death. The Committee shall have full rights under the law and ERISA to recover
any such mistaken payment, and the right to recover attorney's fees and other
costs incurred with respect to such recovery. Recovery shall be made from
future Plan payments, or by any other available means.
11.19 Participants and Beneficiaries Bound by the Plan
All Employees, Participants, Beneficiaries, as well as their heirs,
successors, and assigns shall be bound by the terms of this Plan.
11.20 Direct Rollover Distributions to Other Plans or IRAs
(a) General Rule. A Distributee (as defined in this Section) may
elect, under Plan procedures, to have all or any portion of
his proper Plan distribution transferred in a trust-to-trust
transfer from the Trust Fund to another qualified plan,
certain "IRAs" and certain other vehicles, subject to the
restrictions of this Section.
(b) Definition of "Distributee". For the purposes of this Section
only, a "Distributee" is a Participant, Former Participant,
surviving spouse, or Alternate Payee, who is eligible under
the Plan and Plan procedures
L-3 Communications Corporation
Pension Plan
59
<PAGE>
to receive any Plan distribution. Distributees shall not
include any other non-spouse Beneficiary.
(c) Limits on Distributions Eligible for Direct Rollover.
Generally, all or any portion of the accrued, vested Plan
benefit payment attributable to the Distributee would be
eligible for a trust-to-trust transfer under this Section,
provided that the amount is includable in gross income.
However, the following distributions are not eligible:
(1) periodic payments paid out over the life or life
expectancy of the Distributee (or joint lives of the
Distributee and his Beneficiary);
(2) equal installment payments scheduled to be made over
10 or more years;
(3) the portion of any distribution that is required to be
paid under Code Section 401(a)(9).
(d) Limits on recipient plans and IRAs. A trust-to-trust transfer
from the Trust Fund under this Section can be made only to
the trustee or custodian of one of the following "eligible
retirement plans" listed below, provided that the transfer is
made under Plan procedures, and that the trustee or custodian
accepts the trust-to-trust transfer. However, only one
trust-to-trust transfer can be made with respect to any
single distribution. Such "eligible retirement plans" are:
(1) a qualified defined contribution plan;
(2) an individual retirement account or "IRA," which holds
or which will hold only amounts attributable to
qualified employer plans, as described by Code Section
408(d)(3);
(3) an individual retirement annuity described in Code
Section 408(b); and
(4) an annuity plan described in Code Section 403(a).
(e) Limits on direct rollovers made by surviving spouses.
Distributees who are surviving spouses, but who are not
alternate payees as described by Code Section 414(p), will be
able to elect a trust-to-trust transfer only to an IRA or an
individual retirement annuity, subject to all of the
preceding rules of this Section.
L-3 Communications Corporation
Pension Plan
60
<PAGE>
11.21 Transfers Among Affiliates
(a) Service among Affiliates credited for eligibility and
vesting. Generally, Service performed for the Employer or any
Affiliate will be credited among all Affiliates for the
purposes of eligibility and vesting. Should a Plan
Participant be transferred and become an Employee of an
Affiliate, then he may be eligible to immediately become a
participant in the new employer's plan, provided that (i) he
has sufficient Service under the new plan's eligibility
provisions and (2) he has submitted to the new plan all the
proper forms by the appropriate deadline.
(b) Vesting continues after transfer. Any Participant who
transfers employment to an Affiliate shall not be treated as
having terminated employment for vesting and distribution
purposes. That is, his vesting under the Plan shall continue
during his Service with the Affiliate, and he may not receive
a distribution of Plan benefits until his Service with the
Employer and any Affiliate ceases (or until the April 1,
following the year he reaches age 70 1/2 or retires).
However, no Accrual Service shall accrue under this Plan,
upon his transfer to the Affiliate.
(c) Transfer following a Break in Service. This Subsection (c)
concerns the situation of an individual who has worked for
the Employer or an Affiliate, terminates employment from that
employer, but does not immediately transfer to the Employer
or an Affiliate. Instead, this Subsection (c) concerns those
individuals who incur a period during which they are not
employed by the Employer or an Affiliate, and then,
subsequently, become reemployed by the Employer or an
Affiliate.
(1) If such an individual (described in the introductory
paragraph of this Subsection (c) does not incur a
Break in Service prior to his subsequent reemployment
with the Employer or an Affiliate (determined under
the sole discretion of the administrator of the new
employer's plan under the terms of that plan), then
the period of time preceding his employment with the
Employer or an Affiliate (following his termination
with the Employer or Affiliate) shall be credited for
the purpose of eligibility and vesting.
(2) If such an individual has incurred a Break in Service
(determined under the sole discretion of the
administrator of the new employer's plan, under the
terms of that plan) then the terms of the new
employer's plan shall govern how the individual's
total
L-3 Communications Corporation
Pension Plan
61
<PAGE>
service among the Employer and all Affiliates shall
be credited, for the purposes of the new employer's
plan.
(3) If an individual described in this Subsection (c) has
incurred one or more Breaks in Service under the terms
of his first employer's plan, and has consequently
lost the recognition of pre-Break in Service under the
first employer's plan, then any provisions in the
first employer's plan regarding (i) repayment of
distributed amounts back into the first employer's
plan, within five years of "rehire" by the Employer or
an Affiliate in order to have forfeited amounts
restored by the first employer's plan and pre-Break
Service recognized by both plans and (ii) completing
one year of Service with the new employer in order to
have forfeited amounts restored under the former
employer's plan and pre-Break Service recognized by
both plans must be acknowledged and effected by the
administrator of the new employer's plan, as if these
provisions in the first employer's plan were fully a
part of the new employer's plan. It will therefore be
necessary for the administrators of the two plans to
share information concerning the individual.
L-3 Communications Corporation
Pension Plan
62
<PAGE>
ARTICLE XII. TOP-HEAVY PROVISIONS
12.1 Applicable Plans Included in Determination of "Top Heavy" Status
For purposes of this Article, "Applicable Plans" shall include (a)
each plan of the Employer or an Affiliate in which a Key Employee (as defined
in the next Section for this Plan, and as defined in section 416(i) of the Code
for each other Applicable Plan) participates and (b) each other plan of the
Employer or an Affiliate which enables any plan described in clause (a) of this
sentence to meet the requirements of section 401(a)(4) or 410 of the Code. Any
plan not required to be included under the preceding sentence may also be
included, at the option of the Committee, provided that the requirements of
sections 401(a)(4) and 410 of the Code continue to be satisfied for the group
of Applicable Plans after such inclusion. Applicable Plans may include
terminated plans, frozen plans and, to the extent that benefits are provided
with respect to Service with the Employer or an Affiliate, multi-employer plans
(described in section 414(f) of the Code) and multiple employer plans
(described in section 413(c) of the Code) to which the Employer or an Affiliate
makes contributions.
12.2 "Key Employee"
For purposes of this Article, "Key Employee" shall mean an employee
(including a former employee, whether or not deceased) of the Employer or an
Affiliate who, at any time during a given Plan Year or any of the four
preceding Plan Years, is one or more of the following:
(a) An officer of the Employer or an Affiliate having
"compensation" (as defined in section 414(q)(7) of Code)
("Top-Heavy Compensation") greater than fifty percent (50%)
of the maximum dollar limitation described in the Article
entitled "Limitation of Benefits" for any such Plan Year;
provided, that the number of employees treated as officers
shall be no more than 50 or, if fewer, the greater of three
employees or 10% of the employees (including leased employees
as described in Code Section 414), exclusive of employees
described in section 414(q)(8) of the Code.
(b) One of the 1) employees (a) having Top-Heavy Compensation of
more than the maximum dollar limitation for defined
contribution plans in effect under section 415(c)(1)(A) of
the Code and (b) owning (or considered as owning, within the
meaning of section 416(i) the Code), the largest percentage
interests in value of the Employer or an Affiliate, provided
that such percentage interest exceeds 0.5% in value. If two
employees have the same interest in the Employer or an
L-3 Communications Corporation
Pension Plan
63
<PAGE>
Affiliate, the employee having the greater Top-Heavy
Compensation shall be treated as having the larger interest.
(c) A person owning or considered as owning, within the meaning
of section 416(i) of the Code, more than 5% of the
outstanding stock of the Employer or an Affiliate, or stock
possessing more than 5% of the total combined voting power of
all stock of the corporation (or having more than 5%) of the
capital or profits interest in the Employer or an Affiliate
that is not a corporation, determined under similar
principles).
(d) A 1% owner of the Employer or an Affiliate having Top-Heavy
Compensation of more than $150,000. "One-percent owner" means
any person who would be described in the preceding paragraph
if "1%" were substituted for "5%" in each place where it
appears therein.
12.3 "Top Heavy" Test
In any Plan Year during which the sum, for all Key Employees (as
defined in this Section and as defined in section 416(i) of the Code for each
other Applicable Plan) (and their beneficiaries) of the present value of the
cumulative accrued benefits under all Applicable Plans which are defined
benefit plans (determined based on an interest assumption of 5% and the UP-1984
mortality table) and the aggregate of the accounts under all Applicable Plans
which are defined contribution plans, exceeds 60% of a similar sum determined
for all participants in such plans (but excluding participants who are former
Key Employees), the Plan shall be deemed "Top Heavy". Solely for purposes of
determining whether this Plan or any other Applicable Plan is "Top Heavy" for a
given Plan Year, the accrued benefit of a participant other than a Key Employee
shall be determined under (a) the method, if any, that uniformly applies for
accrual purposes under all Applicable Plans that are defined benefit plans
maintained by the Employer or an Affiliate, or (b) if there is no method, as if
such benefit accrued not more rapidly than the slowest accrual rate permitted
under the fractional rule of section 411(b)(1)(C) of the Code.
12.4 Determination Dates
The determination as to whether this Plan is "Top Heavy" for a given
Plan Year shall be made as of the last day of the preceding Plan Year (the
"Determination Date"); and other Applicable Plans shall be included in
determining whether this Plan is "Top Heavy" based on the determination date
(as defined in section 414(g)(4)(C) of the Code) for each such plan which
occurs in the same calendar year as such Determination Date for this Plan. The
date on which plan benefits are valued for the purpose of determining the
topheaviness of any Applicable Plan
L-3 Communications Corporation
Pension Plan
64
<PAGE>
which is a defined benefit plan shall be the most recent valuation date used
for determining such plan's minimum funding requirements that occurs during the
12- month period ending on the Determination Date. The date on which plan
assets are valued for the purpose of determining the topheaviness of an
Applicable Plan which is a defined contribution plan is the most recent
valuation date used for valuing plan assets that occurs during the 12-month
period ending on the Determination Date.
12.5 Add-Back of Prior Distributions
Subject to the next Section, distributions from the Plan or any other
Applicable Plan during the five-year period ending on the applicable
determination date shall be taken into account in determining whether the Plan
is "Top Heavy."
12.6 Former Employees Disregarded after Five Plan Years
Benefits and distributions under this Plan or any other Applicable
Plan shall not be taken into account with respect to any individual who has not
performed any services as an employee for the Employer or an Affiliate at any
time during the five-year period ending on the applicable determination date.
12.7 Compliance with Section 416 of the Code
The calculation of the Top-Heavy ratio, and the extent to which
distributions, amounts attributable to rollovers or similar transfers to and
from this Plan or any other Applicable Plan shall be taken into account in
accordance with section 416 of the Code and applicable regulations.
12.8 Beneficiaries
The terms "Key Employee" and, for purposes of this Article
"participant" include their beneficiaries.
12.9 Provisions Applicable in "Top Heavy" Plan Years
For any Plan Year in which the Plan is deemed to be "Top Heavy", the
following provisions shall apply:
(a) Minimum Accrued Benefit. The accrued benefit derived from
Employer contributions under the Plan of each Participant who
is not a Key Employee, expressed as an annual benefit in
single life annuity form beginning at Normal Retirement Date,
shall be at least (a) 2% of the average of such Participant's
Top-Heavy Compensation not in excess of the limits under
section 401(a)(17) of the Code, for the five
L-3 Communications Corporation
Pension Plan
65
<PAGE>
calendar years in which such average is highest (excluding
any such year after the Plan ceased to be "Top Heavy" or
during which the Participant had less than 1,000 Hours of
Service) multiplied by (b) the number of Plan Years beginning
on or after January 1, 1984 during which the Plan is "Top
Heavy" and he has at least 1,000 Hours of Service, but not
more than 10 years. The foregoing provisions of this
paragraph shall apply before the corresponding provision of
any Applicable Plan that is a defined contribution plan, and
shall, to the extent necessary or appropriate, be deemed
satisfied in whole or in part by benefits to the Participant
provided under any other Applicable Plan, including without
limitation, the actuarial equivalent of accumulated account
balances derived from employer contributions under any
defined contribution plan (other than employer contributions
described in section 401(k) of the Code). A Participant's
accrued benefit, determined as of the last day of any Plan
Year in which the Plan ceases to be "Top Heavy", shall not be
reduced because the Plan ceased to be "Top Heavy".
(b) Adjustment of Combined Limits. Except as otherwise provided
by law, "125%" in the Article entitled Limitation of Benefits
shall become "100%" unless the following conditions are met:
(a) the percentage described in the Top-Heavy Test in
this Article does not exceed 90%, and
(b) the Company amends paragraph (a) of this Section to
substitute "3%" for "2%" therein.
Notwithstanding any other provision of this Plan, if the sum
of the combined limitation fractions described in the Article
entitled Limitation of Benefits, calculated by substituting
"100%" for "125%" therein, for any Participant exceeds 100%
for the last Plan Year before the Plan becomes "Top Heavy",
such fractions shall be adjusted, in accordance with
applicable regulations, so that their sum does not exceed
100% for such Plan Year.
(c) Vesting. Any Participant shall be vested in his accrued
benefit derived from employer contributions on a basis at
least as favorable as is provided under the following
schedule:
L-3 Communications Corporation
Pension Plan
66
<PAGE>
Completed
Years of Vesting Service Nonforfeitable Interest
------------------------ -----------------------
2 20%
3 40
4 60
5 100
In any Plan Year in which the Plan is not deemed to be "Top Heavy",
the minimum vested percentage shall be no less than that which was
determined as of the last day of the last Plan Year in which the Plan
was deemed to be "Top Heavy".
IN WITNESS WHEREOF, this L-3 Communications Corporation Pension Plan
is hereby adopted effective April 30, 1997.
L-3 COMMUNICATIONS CORPORATION
By:_____________________________________
Title:__________________________________
L-3 Communications Corporation
Pension Plan
67
<PAGE>
EXHIBIT A. ACTUARIAL EQUIVALENT FACTORS
1. Conversion of life annuity into 50% joint and survivor annuity --
multiply life annuity benefit by 86% minus (or plus) 0.6% for each full year
the Participant is older (or younger) than age 65, minus (or plus) 0.5% for
each full year the Participant is older (or younger) than the Eligible Spouse.
2. Conversion of life annuity into 100% joint and survivor annuity --
multiply life annuity benefit by 75% minus (or plus) 0.6% for each full year
the Participant is older (or younger) than age 65, minus (or plus) 1.0% for
each full year the Participant is older (or younger) than the Eligible Spouse.
3. Conversion of life annuity into life annuity with 10-year period
certain guarantee -- multiply life annuity benefit by 91% plus 0.7% for each
full year the Participant is younger than age 65, or minus 0.7% for each full
year the participant is older than age 65.
4. Conversion of life annuity into life annuity with 15-year period
certain guarantee -- multiply life annuity benefit by 82.5% plus 1.3% for each
full year the Participant is younger than age 65, or minus 1.3% for each full
year the Participant is older than age 65.
5. Conversion of life annuity into life annuity with 20-year period
certain guarantee -- multiply life annuity benefit by 74% plus 1.6% for each
full year the Participant is younger than age 65, or minus 1.6% for each full
year the Participant is older than age 65.
6. All other conversions -- use 1971 Group Annuity Mortality Table
assuming an 80% male mix and 7% annual interest (5% annual interest for
purposes of Article X); provided, however, that for purposes of converting a
retirement benefit or spouse's benefit into a lump sum, the lump sum will be
determined on the basis of the Pension Benefit Guaranty Corporation interest
rate for immediate and deferred annuities on plan terminations in effect on the
January 1 of the calendar year in which such lump sum is paid.
NOTE: All ages are to be determined as age at nearest
birthday; and all conversion factors are not to exceed
99%.
7. In determining the present value of any vested accrued benefit
under this Plan, the interest rate used shall be no greater than the rate that
would be used, as of the distribution date, by the Pension Benefit Guaranty
Corporation for the purposes of determining the present value of a distribution
(immediate or deferred, as is applicable) on plan termination (the "Applicable
Interest Rate").
L-3 Communications Corporation
Pension Plan
1
<PAGE>
The Applicable Interest Rate used shall be the rate in effect by the PBGC on
the first day of the calendar year that contains the relevant Annuity Starting
Date. The Applicable Interest Rate shall be used only if the present value of
the vested accrued benefit is $25,000 or less, (as a result of using the
Applicable Interest Rate).
8. However, if after using the Applicable Interest Rate, the present
value of the vested accrued benefit exceeds $25,000, then the present value
shall be recalculated, using an interest rate that is no greater than 120% of
the Applicable Interest Rate. However, in this event, the distributed amount
shall not be reduced to any amount below $25,000.
L-3 Communications Corporation
Pension Plan
2
<PAGE>
EXHIBIT B. CONTRIBUTORY BENEFITS
<TABLE>
<CAPTION>
Monthly Amount of Contributory
Name of Contributory Benefit Payable as a Life
Participant Annuity Commencing at Age 55
- ---------------------- ------------------------------
<S> <C>
BENENSON, C. 187.77
CARROLL, MELVIN 69.84
CIPRIANI, PHILIP 63.69
DAVIS, ALLEN H. 47.92
GLEIMER, LEON 35.29
HISCHE, EDWARD H. 16.11
IERVOLINO, NICK 45.24
IRIZARRY, REYNALDO 3.92
MARCIANO, JOHN 9.99
OWSICK, ALEXANDER 37.54
PENN, HAROLD 144.67
PLOTKIN, MURRAY 55.07
SACKS, MARVIN 69.97
SCHWARTZ, WALTER 30.30
SOLOMON, MURRAY 161.58
TURF, HAROLD 32.99
WONG, KENNETH L. 74.37
</TABLE>
L-3 Communications Corporation
Pension Plan
3
<PAGE>
L-3 COMMUNICATIONS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT FOR RATIO DATA)
<TABLE>
<CAPTION>
PRO FORMA COMPANY PREDECESSOR COMPANY
------- -------------------
YEAR FOR THE NINE FOR THE THREE YEARS ENDED DECEMBER 31, FOR THE NINE FOR THE THREE
ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1997 1997 1997 1996 1995 1994 1993 1993
------------ ------------- ------------- --------- ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before
income taxes $14,400 $27,402 ($505) $19,494 $174 $2,929 $8,300 $5,100
Add:
Interest expense 43,800 29,884 8,441 24,197 4,475 5,450 4,100 -
Interest
component of
rent expense 5,133 3,445 851 2,832 1,591 1,866 1,400 467
------------ ------------- ------------- --------- ------- ------- ------------- ------------
Earnings $63,333 $60,731 $8,787 $46,523 $6,240 $10,245 $13,800 $5,567
============ ============= ============= ========= ======= ======= ============= ============
Fixed Charges:
Interest expense $43,800 $29,884 $8,441 $24,197 $4,475 $5,450 $4,100 -
Interest
component of
rent expense 5,133 3,445 851 2,832 1,591 1,866 1,400 467
------------ ------------- ------------- --------- ------- ------- ------------- ------------
Fixed Charges $48,933 $33,329 $9,292 $27,029 $6,066 $7,316 $5,500 $467
============ ============= ============= ========= ======= ======= ============= ============
Ratio of earnings
to fixed charges 1.3x 1.8x N/A (a) 1.7x 1.0x 1.4x 2.5x N/A (b)
============ ============= ============= ========= ======= ======= ============= ============
</TABLE>
(a) For the three months ended March 31, 1997, earnings were insufficient to
cover fixed charges by $0.5 million.
(b) For the three months ended March 31, 1993, no interest expense was
incurred.
<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 and the Offerings (collectively,
the "Transactions"). The Offerings include the Notes Offering and the
contribution by Holdings to the Company of the proceeds of the Common Stock
Offering. 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.
1
<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)
-------------- -------------- ----------------
<S> <C> <C> <C>
($ in millions)
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
------------- --------------- -------------- ------------ ----------- -----------
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
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
2
<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
3
<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, 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", (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 allocated interest expense reduction related to the Hycor
business 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.
4
<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.
5
<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, reflecting the
Company before the Offerings, 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 portion of the Revolving Credit
Facility (0.5% on $128.5 million and $200.0 million, respectively) .... 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, the pro forma statement of operations
does not reflect interest income on the $50.0 million cash balance in the
pro forma balance sheet resulting from the Offerings.
The Offerings include the Notes Offering and the contribution to the
Company by Holdings of the proceeds of the Common Stock Offering. 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 $50.0 million. The pro forma balance sheet includes the following
adjustments:
<PAGE>
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
-----------------
($ 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 by Holdings of proceeds of Common Stock Offering, less
expenses................................................................. $ 92.0
=================
</TABLE>
6
<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.
7
<PAGE>
EXHIBIT 99.2
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Six months ended December 31, 1996 and 1997
1
<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.
2
<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.
3
<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.
4
<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.
5
<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.
6
<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.
7
<PAGE>
EXHIBIT 99.3
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
8
<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
9
<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.
10
<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.
11
<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.
12
<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
13
<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).
14
<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>
15
<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.
16
<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.
17
<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.
18
<PAGE>
EXHIBIT 99.4
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1
<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
2
<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.
3
<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.
4
<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.
5
<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.
6
<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.
7
<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>
8
<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.
9
<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.
10
<PAGE>
EXHIBIT 99.5
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
1
<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
2
<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
3
<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
4
<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) $16,208
============== ======== ========== ============= =========
</TABLE>
See accompanying notes to the combined financial statements
5
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss ..................................................................... ($ 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
6
<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
7
<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
8
<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.
9
<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>
10
<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
11
<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.
12
<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.
13
<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.
14
<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.
15
