<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999
REGISTRATION NO. 333-31649
333-46983
333-70199
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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L-3 COMMUNICATIONS HYGIENETICS ENVIRONMENTAL L-3 COMMUNICATIONS
CORPORATION SERVICES, INC. ILEX SYSTEMS, INC.
(Exact name of registrant (Exact name of registrant (Exact name of registrant
as specified in its charter) as specified in its charter) as specified in its charter)
DELAWARE DELAWARE DELAWARE
(State of incorporation) (State of Incorporation) (State of Incorporation)
3812, 3663, 3679 3812, 3663, 3679 3812, 3663, 3679
(Primary Standard Industrial (Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number) Classification Code Number)
13-3937436 13-3992505 13-3992952
(I.R.S. Employer (I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number) Identification Number)
600 THIRD AVENUE 600 THIRD AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016
(212) 697-1111 (212) 697-1111 (212) 697-1111
(Address, including zip code, (Address, including zip code, (Address, including zip code,
and telephone number, and telephone number, and telephone number,
including area code, of registrant's including area code, of registrant's including area code, of registrant's
principal executive offices) principal executive offices) principal executive offices)
SOUTHERN CALIFORNIA L-3 COMMUNICATIONS L-3 COMMUNICATIONS
MICROWAVE, INC. SPD TECHNOLOGIES, INC. ESSCO, INC.
(Exact name of registrant (Exact name of registrant (Exact name of registrant
as specified in its charter) as specified in its charter) as specified in its charter)
CALIFORNIA DELAWARE DELAWARE
(State of incorporation) (State of Incorporation) (State of Incorporation)
3812, 3663, 3679 3812, 3663, 3679 3812, 3663, 3679
(Primary Standard Industrial (Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number) Classification Code Number)
13-0478540 23-2457758 04-2281486
(I.R.S. Employer (I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number) Identification Number)
600 THIRD AVENUE 600 THIRD AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016
(212) 697-1111 (212) 697-1111 (212) 697-1111
(Address, including zip code, (Address, including zip code, (Address, including zip code,
and telephone number, and telephone number, and telephone number,
including area code, of registrant's including area code, of registrant's including area code, of registrant's
principal executive offices) principal executive offices) principal executive offices)
L-3 COMMUNICATIONS L-3 COMMUNICATIONS
STORM CONTROL SYSTEMS, INC. DBS MICROWAVE, INC. SPD ELECTRICAL SYSTEMS, INC.
(Exact name of registrant (Exact name of registrant (Exact name of registrant
as specified in its charter) as specified in its charter) as specified in its charter)
CALIFORNIA CALIFORNIA DELAWARE
(State of Incorporation) (State of Incorporation) (State of Incorporation)
3812, 3663, 3679 3812, 3663, 3679 3812, 3663, 3679
(Primary Standard Industrial (Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number) Classification Code Number)
77-0268547 68-0281617 23-2457758
(I.R.S. Employer (I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number) Identification Number)
600 THIRD AVENUE 600 THIRD AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016
(212) 697-1111 (212) 697-1111 (212) 697-1111
(Address, including zip code, (Address, including zip code, (Address, including zip code,
and telephone number, and telephone number, and telephone number,
including area code, of registrant's including area code, of registrant's including area code, of registrant's
principal executive offices) principal executive offices) principal executive offices)
</TABLE>
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SPD SWITCHGEAR INC. PAC ORD INC. HENSCHEL INC.
(Exact name of registrant (Exact name of registrant (Exact name of registrant
as specified in its charter) as specified in its charter) as specified in its charter)
DELAWARE DELAWARE DELAWARE
(State of Incorporation) (State of Incorporation) (State of Incorporation)
3812, 3663, 3679 3812, 3663, 3679 3812, 3663, 3679
(Primary Standard Industrial (Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number) Classification Code Number)
23-2510039 23-2523436 23-2554418
(I.R.S. Employer (I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number) Identification Number)
600 THIRD AVENUE 600 THIRD AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016
(212) 697-1111 (212) 697-1111 (212) 697-1111
(Address, including zip code, (Address, including zip code, (Address, including zip code,
and telephone number, and telephone number, and telephone number,
including area code, of registrant's including area code, of registrant's including area code, of registrant's
principal executive offices) principal executive offices) principal executive offices)
POWER PARAGON, INC. SPD HOLDINGS, INC.
(Exact name of registrant (Exact name of registrant
as specified in its charter) as specified in its charter)
DELAWARE DELAWARE
(State of Incorporation) (State of Incorporation)
3812, 3663, 3679 3812, 3663, 3679
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
33-0638510 23-2977238
(I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number)
600 THIRD AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK, 10016 NEW YORK, NEW YORK, 10016
(212) 697-1111 (212) 697-1111
(Address, including zip code, (Address, including zip code,
and telephone number, and telephone number,
including area code, of registrant's including area code, of registrant's
principal executive offices) principal executive offices)
</TABLE>
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CHRISTOPHER C. CAMBRIA
L-3 COMMUNICATIONS CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-----------------
COPIES TO:
VINCENT PAGANO JR. KIRK A. DAVENPORT
SIMPSON THACHER & BARTLETT LATHAM & WATKINS
425 LEXINGTON AVENUE 885 THIRD AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 455-2000 (212) 906-1200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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PROSPECTUS
[L-3 COMMUNICATIONS CORPORATION LOGO]
L-3 COMMUNICATIONS CORPORATION
10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
8 1/2% SENIOR SUBORDINATED NOTES DUE 2008
8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
TERMS OF THE NOTES
o The Notes are unsecured senior subordinated obligations of L-3
Communications Corporation.
10 3/8% NOTES DUE MAY 1, 2007
o Interest is payable on May 1 and November 1 of each year.
o The Notes Due May 2007 are or will be guaranteed by all of
our current and will be guaranteed by all of our future
domestic restricted subsidiaries on a senior subordinated
basis.
8 1/2% NOTES DUE MAY 15, 2008
o Interest is payable on May 15 and November 15 of each year.
o The Notes Due May 2008 are or will be guaranteed by all of
our current and will be guaranteed by all of our future
domestic restricted subsidiaries on a senior subordinated
basis.
8% NOTES DUE AUGUST 1, 2008
o Interest is payable on February 1 and August 1 of each year.
o The Notes Due August 2008 are or will be guaranteed by all
of our current and will be guaranteed by all of our future
domestic restricted subsidiaries on a senior subordinated
basis.
FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER BEFORE
PARTICIPATING IN THIS EXCHANGE OFFER, SEE "RISK FACTORS" COMMENCING ON PAGE 14.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES NOR HAVE ANY OF THESE ORGANIZATIONS
DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus has been prepared for and is to be used by Lehman Brothers
Inc. in connection with offers and sales in market-making transactions of the
Notes. L-3 will not receive any of the proceeds of such sales. Lehman Brothers
Inc. may act as principal or agent in such transactions. The Notes may be
offered in negotiated transactions or otherwise.
THE DATE OF THIS PROSPECTUS IS MAY , 1999.
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TABLE OF CONTENTS
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PAGE
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Where You Can Find More Information ......... i
Prospectus Summary .......................... 1
Risk Factors ................................ 14
Use of Proceeds ............................. 21
Capitalization .............................. 22
Unaudited Pro Forma Condensed
Consolidated Financial Information ....... 23
Selected Financial Information .............. 30
Management's Discussion and Analysis of
Results of Operations and Financial
Condition ................................ 32
Business .................................... 42
Certain Relationships and Related
Transactions ............................. 64
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Management .................................. 66
Ownership of Capital Stock .................. 75
Description of the 1997 Notes ............... 77
Description of the May 1998 Notes ........... 108
Description of the December 1998 Notes ...... 140
Certain Information About the Notes ......... 173
Description of Certain Indebtedness ......... 177
Certain United States Federal Tax
Considerations ........................... 179
Plan of Distribution ........................ 182
Legal Matters ............................... 182
Experts ..................................... 182
Index to Financial Statements ............... F-1
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Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock,
including stabilizing bids, syndicate covering transactions or the imposition
of penalty bids. For a discussion of these activities, see "Underwriting".
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC" or
the "Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Notes. This prospectus, which is a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement. For further information about us and the Notes, you
should refer to the Registration Statement. This prospectus summarizes material
provisions of contracts and other documents to which we refer you. Since this
prospectus may not contain all of the information that you may find important,
you should review the full text of these documents. We have included copies of
these documents as exhibits to our Registration Statement.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as a consequence we
file reports and other information with the Commission. The Registration
Statement and our other SEC filings can be inspected and copied at the Public
Reference Section of the Commission located at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549 and at regional public reference
facilities maintained by the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials,
including copies of all or any portion of the Registration Statement, can be
obtained from the Public Reference Section of the Commission at prescribed
rates. Such materials are also available on the Commission's home page on the
Internet (http://www.sec.gov).
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PROSPECTUS SUMMARY
This summary highlights selected information from this document and does
not contain all of the information you need to consider before investing in the
Notes. You should carefully read this entire prospectus. In this prospectus,
"Notes" refers to, collectively, the 103/8% Notes due May 1, 2007 (the "1997
Notes"), the 81/2% Notes due May 15, 2008 (the "May 1998 Notes") and the 8%
Notes due August 1, 2008 (the "December 1998 Notes"), "Holdings" refers to L-3
Communications Holdings, Inc. and "the Company", "L-3", "L-3 Communications",
"we", "us" and "our" refer to L-3 Communications Corporation and its
subsidiaries. The Company is a wholly owned subsidiary of Holdings. Holdings has
no other assets or liabilities and conducts no other operations other than
through the Company. References to pro forma statement of operations data
reflect: (1) our acquisition of Aydin Corporation ("Aydin") in April 1999; (2)
our acquisitions of the Ocean Systems business of AlliedSignal Inc., the
business of ILEX Systems, Inc., the Satellite Transmission Systems division of
California Microwave, Inc. and SPD Technologies, Inc. (collectively, the "1998
Acquisitions"); (3) our December 1998 debt offering and May 1998 debt offering,
the contribution by Holdings to the Company of the net proceeds from Holdings'
initial public offering (the "IPO") of common stock and the amendment of our
bank credit facilities to increase available borrowings, the contribution by
Holdings to the Company of the net proceeds from Holdings' offering of common
stock in February 1999 (the "February 1999 Common Stock Offering"), and the
application of the net proceeds from these financing transactions (collectively,
the "Financing Transactions"), as if they had occurred on January 1, 1998. The
pro forma balance sheet data reflect the February 1999 Common Stock Offering and
Aydin acquisition as if they had occurred on December 31, 1998. The pro forma
data do not give effect to any of our other acquisitions, including the
acquisition of Microdyne Corporation.
THE COMPANY
L-3 Communications is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. We produce
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.
Our systems and specialized products are used to connect a variety of airborne,
space, ground-and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our customers include the U.S. department of
defense ("DoD"), certain U.S. government intelligence agencies, major aerospace
and defense contractors, foreign governments and commercial customers.
Our business areas employ proprietary technologies and capabilities and
have leading positions in their respective primary markets. We have two
reportable segments, Secure Communication Systems and Specialized Communication
Products. In addition, we are seeking to expand the products and technologies
of our reportable segments in commercial markets as we discuss under "--
Emerging Commercial Products" below.
SECURE COMMUNICATION SYSTEMS. We are the established leader in secure,
high data rate communications for military and other U.S. government
reconnaissance and surveillance applications. Our 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.
Our major secure communication programs and systems include:
o secure data links for airborne, satellite, ground- and sea-based
remote platforms for information collection, command and control and
dissemination to users in real time;
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o strategic and tactical signal intelligence systems that detect,
collect, identify, analyze and disseminate information and related
support contracts for military and intelligence efforts;
o secure telephone, fax and network equipment and encryption management;
o communication software support services to military and related
government intelligence markets; and
o communications systems for surface and undersea platforms and manned
space flights.
We believe that we have developed virtually every high bandwidth data link
that is currently used by the military for surveillance and reconnaissance. We
are also a leading supplier of communication software support services to
military and related government intelligence markets. In addition to these core
government programs, we are capitalizing on our technology base by expanding
into related commercial communication equipment markets. For instance, we are
applying our high data rate communications and archiving technology to the
medical image archiving market and our wireless communication expertise to
develop local wireless loop telecommunications equipment for the last mile
interconnect.
SPECIALIZED COMMUNICATION PRODUCTS. This reportable segment includes three
product categories:
Microwave Components. We are the preeminent worldwide supplier of
commercial off-the-shelf, high-performance microwave components and frequency
monitoring equipment. Our microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. We also provide
state-of-the-art, space-qualified communication components including channel
amplifiers and frequency filters for the commercial communications satellite
market serving major military and commercial frequencies, including Ka band.
Approximately 76% of Microwave Components sales for 1998 were made to
commercial customers, including Loral Space & Communications, Ltd., Motorola,
Inc., Lucent Technologies Inc., AT&T Corp. and Lockheed Martin.
Avionics and Ocean Products. Avionics and Ocean Products include our
aviation recorders, display systems, antenna systems, acoustic undersea warfare
systems and naval power distribution, conditioning, switching and protection
equipment for naval ships and submarines. We are the world's leading
manufacturer of commercial cockpit voice and flight data recorders (known as
"black boxes"). These recorders are sold under the Fairchild brand name both to
aircraft manufacturers and to the world's major airlines for their existing
fleets of aircraft. Our aviation recorders are also installed on military
transport aircraft throughout the world. We provide military and high-end
commercial displays for use in military aircraft. We also manufacture high
performance surveillance and precision millimeter wave antennas and related
equipment for U.S. Air Force, U.S. Army and U.S. Navy aircraft and are the
leading supplier of ground-based radomes. We are 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. We are the only fully
integrated, full-line provider of qualified turnkey electrical power delivery
and management systems for U.S. Navy surface ships and submarines.
Telemetry, Instrumentation and Space Products. Our 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 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.
We are a leading global satellite communications systems provider offering
systems and services used in the satellite transmission of voice, video and
data through earth stations for uplink and downlink terminals. We provide
global satellite communications systems and services to customers that include
foreign post, telephone and telegraph administrations, domestic and
international prime communications infrastructure contractors,
telecommunications and satellite
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service providers, broadcasters and media-related companies, government
agencies and large corporations. We also provide commercial, off-the-shelf
satellite control software, telemetry, tracking and control ("TT&C"), mission
processors and software engineering services to the worldwide military,
civilian and commercial satellite markets.
EMERGING COMMERCIAL PRODUCTS. Building upon our core technical expertise
and capabilities, we are seeking to expand into several closely aligned
commercial business areas and applications. Emerging Commercial Products
currently include the following four niche markets:
o medical archiving and simulation systems;
o local wireless loop telecommunications equipment;
o airport security equipment; and
o information network security.
A majority of these commercial products were developed based on technology
used in our military businesses with relatively small additional expense. We
are applying our technical capabilities in high data rate communications and
archiving technology developed in our Secure Communication Systems business
area to the medical image archiving market together with the General Electric
Company's medical systems business. Based on secure, high data rate
communication technology also developed in our Secure Communication Systems
business area, we have 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 does
not exist. We have completed the development phase for the local wireless loop
telecommunications equipment and have begun deliveries. In addition, the
Federal Aviation Administration ("FAA") awarded us a development contract for
next generation airport security equipment for explosive detection. On November
23, 1998, we received FAA certification for our eXaminer 3DX (Trade Mark) 6000
system which is the only second-generation system to receive certification and
the only system to generate full, three-dimensional images of all objects in a
piece of baggage. To capitalize on commercial opportunities for the information
security technologies we developed in our Secure Communication Systems business
area, we have also created a new subsidiary focusing on developing and
marketing secure information and communication systems for commercial clients.
This subsidiary acquired a network security software product through a
majority-owned joint venture. Taken together, revenues generated from our
Emerging Commercial Products have not yet been material to us.
BUSINESS STRATEGY
We have successfully integrated the business units we acquired from
Lockheed Martin and enhanced our operating efficiency by reducing overhead
expenses and reorganizing our facilities. These efforts resulted in
improvements in sales, profitability and obtaining competitive contracts. We
have used and intend to continue to use our market position, diverse program
base and favorable mix of cost plus to fixed price contracts to enhance our
profitability and to establish L-3 as the premier merchant supplier of
communication systems and products to the major prime contractors in the
aerospace/defense industry as well as the U.S. government. Our strategy to
continue to achieve our objectives includes:
o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. Due to our strong
relationships with prime contractors and our independent status, we intend to
grow by expanding our share of current programs, by participating in new
programs and by positioning L-3 Communications as the desired merchant supplier
to more than one bidder on prime contract bids.
o SUPPORT CUSTOMER REQUIREMENTS. We will continue to align our research
and development, manufacturing and new business efforts to complement our
customers' requirements, and we will provide state-of-the-art products in order
to maintain and expand current customer relationships as well as to create new
ones.
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o ENHANCE OPERATING MARGINS. We intend to continue to enhance our
operating margins by reducing overhead expenses and increasing productivity.
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. Our proprietary
technical capabilities have placed us at or near the top market position in
most of our key business areas. We intend to use these capabilities and make
substantial investments in research and development, technical and
manufacturing resources to strengthen our market positions as well as to pursue
commercial opportunities in other areas.
o MAINTAIN DIVERSIFIED BUSINESS MIX. We will maintain our favorable mix
of predictable profitability (typical of cost plus contracts) and higher margin
(typical of fixed price contracts) businesses together with our significant
sole source follow-on business and attractive customer profile.
o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. We intend to
continue to selectively acquire businesses which (1) have significant market
position in their business areas, (2) offer products that complement and/or
extend our existing products, (3) demonstrate positive future growth prospects
and (4) are accretive to our earnings in the first year of our ownership.
ACQUISITION STRATEGY
Since our formation in April 1997, we have actively pursued our
acquisition strategy. Since completing the acquisition of our ten initial
business units (the "Predecessor Company") from Lockheed Martin Corporation
("Lockheed Martin") in April 1997 (the "L-3 Acquisition"), we have purchased
additional businesses for an aggregate cash purchase price including assumed
debt and expenses, net of cash acquired, of approximately $603.0 million, in
certain cases subject to certain post-closing adjustments and additional
consideration based on post-closing performance. We consider and execute
strategic acquisitions on an ongoing basis and may be evaluating acquisitions or
engaged in acquisition negotiations at any given time. We have reached agreement
on or are in discussions regarding a number of potential acquisition
opportunities and expect to use our bank credit facilities to fund these
transactions if we proceed with them. If all of these potential acquisitions
were consummated, they would require us to use all or substantially all of our
currently available borrowing capacity in 1999 and perhaps seek additional
borrowing capacity. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources".
RECENT DEVELOPMENTS
Microdyne Corporation. On December 3, 1998, we signed an agreement to
acquire all of the outstanding common stock of Microdyne Corporation
("Microdyne") for approximately $90.0 million in cash, including the repayment
of Microdyne's debt. The Company completed the acquisition of Microdyne in
February 1999. Microdyne is a leading global developer and manufacturer of
aerospace telemetry receivers, secure communications and technical support
services, including specialized telemetry high-frequency radios used in
aerospace and satellite communications for data gathering and analysis.
Microdyne also provides products for the government and commercial signal
intelligence markets and support and repair services for electronic products
companies. Microdyne's aerospace telemetry products will enable us to provide
integrated solutions to our space customers' requirements for command, control,
telemetry and tracking. The purchase of Microdyne was financed using our
available cash and borrowings under our bank credit facilities. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources".
Aydin Corporation. On March 1, 1999, we signed an agreement to acquire all
of the outstanding common stock of Aydin Corporation ("Aydin") for
approximately $73.8 million in cash including expenses before taking into
account Aydin's cash on hand, which amounted to approximately $15.1 million at
the end of March 1999. Pursuant to the acquisition agreement, a tender offer
was launched on March 5, 1999 for all the issued and outstanding common stock
of Aydin by a wholly owned subsidiary of L-3 Communications. The Company
completed the acquisition of Aydin on
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April 16, 1999. Aydin is a leader in telemetry, communications and other
electronic products and systems. Aydin's products and systems are used in
military and space operations by its government and commercial customers. The
acquisition was financed using available cash on hand.
Interstate Electronics Corporation. On April 18, 1999, we signed an
agreement to acquire all of the outstanding common stock of Interstate
Electronics Corporation ("IEC") for approximately $60.0 million in cash,
including certain real estate with an estimated fair value in excess of $10.0
million. The Company expects to complete the acquisition in the second quarter
of 1999. IEC has been a long-term supplier of critical test instrumentation and
missile tracking systems for the U.S. Navy's Fleet Ballistic Missile weapons
systems, including the Trident submarine and is also a leader in global
positioning systems currently in use on multiple aircraft, cruise missiles and
precision guided bombs. In addition, IEC produces ruggedized displays for
military and industrial applications, and provides secure communications
equipment and services on a quick reaction basis for deployed forces in Eastern
Europe. The purchase of IEC is expected to be financed using our available cash
and borrowings under our bank credit facilities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
On April 27, 1999, we reported our results of operations for the three
months ended March 31, 1999. For the three months ended March 31, 1999,
Holdings reported sales, operating income and net income of $275.6 million,
$26.2 million, and $7.2 million, respectively. Holdings also reported EBITDA of
$38.9 million for the three months ended March 31, 1999. Funded backlog at
March 31, 1999 was $875.3 million reflecting funded orders of $276.3 for the
three months ended March 31, 1999. Such results and other data did not include
those of Aydin, for which the effective date of the acquisition was April 1,
1999.
HISTORY
Holdings was 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,
Lehman Brothers Capital Partners III, L.P. and its affiliates (the "Lehman
Partnership") and Lockheed Martin to acquire (1) nine business units previously
purchased by Lockheed Martin as part of its acquisition of Loral in April 1996
and (2) one business unit, Communication Systems -- East (formerly known as
Communication Systems -- Camden), purchased by Lockheed Martin as part of its
acquisition of the aerospace business of General Electric Company in April
1993. In May 1998, Holdings successfully completed its IPO, raising net
proceeds of $139.5 million and contributed them to us. We raised net proceeds
of $173.8 million in a concurrent debt offering. In December 1998, we raised
net proceeds of $192.8 million in the December 1998 Notes offering. Holdings
raised net proceeds of $201.5 million in the February 1999 Common Stock
Offering and contributed them to us.
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.
5
<PAGE>
SUMMARY OF TERMS OF THE 1997 NOTES
Capitalized terms used under this heading "Summary of Terms of the 1997
Notes" have been defined under the heading "Description of the 1997 Notes --
Certain Definitions".
Securities Sold............. $225,000,000 in principal amount of 103/8%
Senior Subordinated Notes due 2007.
Maturity.................... May 1, 2007.
Interest Payment Dates...... Annual rate--103/8%.
Payment frequency--every six months on May 1 and
November 1.
First payment--November 1, 1997.
Subsidiary Guarantors....... Each guarantor is our wholly owned subsidiary.
Substantially all of our wholly owned
subsidiaries are guarantors of the 1997 Notes. If
we cannot make payment on the 1997 Notes, when
they are due the guarantee subsidiaries must make
payment on them instead.
Optional Redemption......... On or after May 1, 2002, we may redeem some or
all of the 1997 Notes at any time at the
redemption prices listed in the section
"Description of the 1997 Notes" under the heading
"Optional Redemption".
Before May 1, 2002, we may redeem up to 35% of
the 1997 Notes with the proceeds of certain
offerings of equity in our Company or Holdings
at the price listed in the "Description of the
1997 Notes" section under the heading "Optional
Redemption".
Mandatory Offer
to Repurchase............... If we sell certain assets or experience specific
kinds of changes of control, we must offer to
repurchase the 1997 Notes at the prices listed in
the section "Description of the 1997 Notes".
Ranking..................... The 1997 Notes are senior subordinated debts.
They rank behind all of our and our guarantor
subsidiaries' current and future indebtedness
(other than trade payables), except indebtedness
that expressly provides that it is not senior to
these notes and the subsidiary guarantees.
On December 31, 1998, the 1997 Notes:
o were not subordinated to any senior debt
(excluding outstanding letters of credit);
and
o ranked equally with $380 million of other
senior subordinated debt.
6
<PAGE>
Basic Covenants of
1997 Indenture.............. The 1997 Notes are issued under an indenture
between us and The Bank of New York, as trustee.
The indenture, among other things, restricts our
ability and the ability of our restricted
subsidiaries to:
o borrow money;
o pay dividends on or purchase our stock or
our restricted subsidiaries' stock;
o make investments;
o use assets as security in other
transactions;
o sell certain assets or merge with or into
other companies; and
o enter into transactions with affiliates.
Certain of our subsidiaries are not subject to
the covenants in the indenture. For more
details, see the section "Description of the
1997 Notes" under the heading "Certain
Covenants".
Taxation.................... For a discussion of the tax consequences of an
investment in the 1997 Notes, see "Certain United
States Federal Tax Considerations".
Use of Proceeds............. There will be no proceeds to us from the sale
of the 1997 Notes by Lehman Brothers in
market-making transactions.
You should read "Risk Factors" for a discussion of the risk factors that
you should consider before investing in the Notes.
7
<PAGE>
SUMMARY OF TERMS OF THE MAY 1998 NOTES
Capitalized terms used under this heading "Summary of Terms of the May
1998 Notes" have been defined under the heading "Description of the May 1998
Notes -- Certain Definitions".
Securities Sold............. $180,000,000 in principal amount of 81/2%
Senior Subordinated Notes due 2008.
Maturity.................... May 15, 2008.
Interest Payment Dates...... Annual rate--81/2%.
Payment frequency--every six months on May 15
and November 15.
First payment--November 15, 1998.
Subsidiary Guarantors....... Each guarantor is our wholly owned subsidiary.
Substantially all of our wholly owned
subsidiaries are guarantors of the May 1998
Notes. If we cannot make payments on the May 1998
Notes when they are due, the guarantor
subsidiaries must make payment on them instead.
Optional Redemption......... On or after May 15, 2003, we may redeem some or
all of the May 1998 Notes at any time at the
redemption prices listed in the section
"Description of the May 1998 Notes" under the
heading "Optional Redemption".
Before May 15, 2001, we may redeem up to 35% of
the May 1998 Notes with the proceeds of certain
offerings of equity in our Company or Holdings
at the price listed in the "Description of the
May 1998 Notes" section under the heading
"Optional Redemption".
Mandatory Offer
to Repurchase............... If we sell certain assets or experience specific
kinds of changes of control, we must offer to
repurchase the May 1998 Notes at the prices
listed in the section "Description of the May
1998 Notes".
Ranking..................... The May 1998 Notes and the subsidiary
guarantees are senior subordinated debts.
They rank behind all of our and our guarantor
subsidiaries' current and future indebtedness
(other than trade payables), except indebtedness
that expressly provides that it is not senior to
these notes and the subsidiary guarantees.
On December 31, 1998, the May 1998 Notes and the
subsidiary guarantees:
o were not subordinated to any senior debt
(excluding outstanding letters of credit);
and
o ranked equally with $425 million of other
senior subordinated debt.
8
<PAGE>
Basic Covenants of May 1998
Indenture.................. The May 1998 Notes are issued under an
indenture among us, the subsidiary guarantors and
The Bank of New York, as trustee. The indenture,
among other things, restricts our ability and the
ability of our restricted subsidiaries to:
o borrow money;
o pay dividends on or purchase our stock or our
restricted subsidiaries' stock;
o make investments;
o use assets as security in other transactions;
o sell certain assets or merge with or into
other companies; and
o enter into transactions with affiliates.
Certain of our subsidiaries are not subject to
the covenants in the indenture. For more
details, see the section "Description of the May
1998 Notes" under the heading "Certain
Covenants".
Taxation.................... For a discussion of the tax consequences of an
investment in the May 1998 Notes, see "Certain
United States Federal Tax Considerations".
Use of Proceeds............. There will be no proceeds to us from the sale
of the May 1998 Notes by Lehman Brothers in
market-making transactions.
You should read "Risk Factors" for a discussion of the risk factors that
you should consider before investing in the Notes.
9
<PAGE>
SUMMARY OF TERMS OF THE DECEMBER 1998 NOTES
Capitalized terms used under this heading "Summary of Terms of the
December 1998 Notes" have been defined under the heading "Description of the
December 1998 Notes -- Certain Definitions".
Securities Sold............. $200,000,000 in principal amount of 8% Senior
Subordinated Notes due 2008.
Maturity.................... August 1, 2008.
Interest Payment Dates...... Annual rate--8%.
Payment frequency--every six months on February
1 and August 1.
First payment--February 1, 1999.
Subsidiary Guarantors....... Each guarantor is our wholly owned subsidiary.
Substantially all of our wholly owned
subsidiaries are guarantors of the December 1998
Notes. If we cannot make payments on the December
1998 Notes when they are due, the guarantor
subsidiaries must make payment on them instead.
Optional Redemption......... On or after August 1, 2003, we may redeem some
or all of the December 1998 Notes at any time at
the redemption prices listed in the section
"Description of the December 1998 Notes" under
the heading "Optional Redemption".
Before August 1, 2001, we may redeem up to 35%
of the December 1998 Notes with the proceeds of
certain offerings of equity in our Company or
Holdings at the price listed in the "Description
of the December 1998 Notes" section under the
heading "Optional Redemption".
Mandatory Offer
to Repurchase............... If we sell certain assets or experience specific
kinds of changes of control, we must offer to
repurchase the December 1998 Notes at the prices
listed in the section "Description of the
December 1998 Notes".
Ranking..................... The December 1998 Notes and the subsidiary
guarantees are senior subordinated debts.
They rank behind all of our and our guarantor
subsidiaries' current and future indebtedness
(other than trade payables), except indebtedness
that expressly provides that it is not senior to
these notes and the subsidiary guarantees.
On December 31, 1998, the December 1998 Notes
and the subsidiary guarantees:
o were not subordinated to any senior debt
(excluding outstanding letters of credit); and
o ranked equally with $405 million of other
senior subordinated debt.
10
<PAGE>
Basic Covenants of December
1998 Indenture............ The December 1998 Notes are issued under an
indenture among us, the subsidiary guarantors and
The Bank of New York, as trustee. The indenture,
among other things, restricts our ability and the
ability of our restricted subsidiaries to:
o borrow money;
o pay dividends on or purchase our stock or our
restricted subsidiaries' stock;
o make investments;
o use assets as security in other transactions;
o sell certain assets or merge with or into
other companies; and
o enter into transactions with affiliates.
Certain of our subsidiaries are not subject to
the covenants in the indenture. For more
details, see the section "Description of the
December 1998 Notes" under the heading "Certain
Covenants".
Taxation.................... For a discussion of the tax consequences of an
investment in the December 1998 Notes, see
"Certain United States Federal Tax
Considerations".
Use of Proceeds............. There will be no proceeds to us from the sale
of the December 1998 Notes by Lehman Brothers in
market- making transactions.
You should read "Risk Factors" for a discussion of the risk factors that
you should consider before investing in the Notes.
11
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA AND HISTORICAL FINANCIAL DATA
The summary unaudited pro forma data as of December 31, 1998 and for the
year ended December 31, 1998 have been derived from, and should be read in
conjunction with, the unaudited pro forma condensed consolidated financial
statements included elsewhere in this prospectus. The unaudited pro forma
condensed statement of operations and other data reflect the 1998 Acquisitions,
the Financing Transactions and the Aydin acquisition as if such transactions
had occurred on January 1, 1998. The unaudited pro forma condensed balance
sheet data reflect the February 1999 Common Stock Offering and the Aydin
acquisition as if they had occurred on December 31, 1998.
The summary historical consolidated (combined) financial data as of and
for the year ended December 31, 1998, the nine months ended December 31, 1997,
the three months ended March 31, 1997 and the years ended December 31, 1996,
1995 and 1994 have been derived from the audited financial statements for the
respective periods. 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 (as defined
later in this prospectus) been in effect on the dates indicated or the
financial position and results of operations that may be obtained in the
future.
The summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated (Combined) Financial Statements of the Company
(Predecessor Company (as defined later in this prospectus)) and the unaudited
pro forma condensed consolidated financial information included elsewhere
herein.
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------------------------
ADJUSTED
PRO FORMA PRO FORMA NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998(1) 1997(2)
------------------ -------------- -------------- ----------------
(in millions)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales .............................. $ 1,236.5 $ 1,236.5 $ 1,037.0 $ 546.5
Operating income ................... 99.1 (5) 79.3 100.3 51.5 (6)
Interest expense, net(7) ........... 57.4 57.4 46.9 28.5
Provision (benefit) for income
taxes(7) .......................... 16.4 (5) 18.1 20.9 10.7
Net income (loss) .................. 25.3 (5) 3.8 32.6 12.3 (6)
BALANCE SHEET DATA
(AT PERIOD END):
Working capital .................... $ 336.6 $ 157.8 $ 143.2
Total assets ....................... 1,505.4 1,285.4 697.0
Long-term debt ..................... 605.0 605.0 392.0
Invested equity ....................
Shareholders' equity ............... 501.5 300.0 113.7
OTHER DATA:
EBITDA(8) .......................... $ 147.6(5) $ 127.8 $ 140.7 $ 78.1
Net cash from (used in)
operating activities .............. 85.1 73.9
Net cash (used in) investing
activities ........................ (472.9) (457.8)
Net cash from (used in)
financing activities .............. 336.4 461.4
Depreciation expense ............... 26.4 26.4 22.5 13.3
Amortization expense ............... 22.1 22.1 17.9 8.9
Capital expenditures ............... 28.0 23.4 11.9
Ratio of:
Earnings to fixed charges(9)....... 1.6x 1.3x 2.0x 1.7x
EBITDA to cash interest
expense(8)(11) .................. 2.6x 2.2x 3.0x
Net debt to EBITDA(8)(12) ......... 3.0x 3.5x 4.1x
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------------
1997 1996(3) 1995(4) 1994(4)
---------- ----------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales .............................. $ 158.9 $ 543.1 $ 166.8 $ 218.9
Operating income ................... 7.9 43.7 4.7 8.4
Interest expense, net(7) ........... 8.4 24.2 4.5 5.5
Provision (benefit) for income
taxes(7) .......................... (0.2) 7.8 1.2 2.3
Net income (loss) .................. (0.3) 11.7 (1.0) 0.6
BALANCE SHEET DATA
(AT PERIOD END):
Working capital .................... $ 98.8 $ 21.1 $ 19.3
Total assets ....................... 590.6 228.5 233.3
Long-term debt .....................
Invested equity .................... 473.6 194.7 199.5
Shareholders' equity ...............
OTHER DATA:
EBITDA(8) .......................... $ 15.7 $ 71.8 $ 16.3 $ 19.9
Net cash from (used in)
operating activities .............. (16.3) 30.7 9.3 21.8
Net cash (used in) investing
activities ........................ (4.3) (298.0) (5.5) (3.7)
Net cash from (used in)
financing activities .............. 20.6 267.3 (3.8) (18.1)
Depreciation expense ............... 4.5 14.9 5.5 5.4
Amortization expense ............... 3.3 13.2 6.1 6.1
Capital expenditures ............... 4.3 13.5 5.5 3.7
Ratio of:
Earnings to fixed charges(9)....... --(10) 1.7x 1.0x 1.4x
EBITDA to cash interest
expense(8)(9) ...................
Net debt to EBITDA(8)(10) .........
</TABLE>
(Footnotes on the following page)
12
<PAGE>
- ---------
(1) Includes the results of operations of the 1998 Acquisitions from their
respective effective dates.
(2) Reflects the Company's acquisition of the Predecessor Company (the "L-3
Acquisition") effective April 1, 1997.
(3) Reflects the Predecessor Company's ownership of nine business units
acquired by Lockheed Martin from Loral effective April 1, 1996.
(4) Reflects operations of Communication Systems -- East. Prior to April 1,
1996, the Predecessor Company was only comprised of Communication Systems
-- East.
(5) Represents the pro forma statement of operations and other data for the
year ended December 31, 1998, adjusted to exclude the $19.8 million
non-recurring charge to operating income included in Aydin's historical
statement of operations for the year ended December 31, 1998 related to a
contract arbitration settlement (See Note B to Aydin's financial statements
included herein on page F-38). The benefit for income taxes of Aydin for
the year ended December 31, 1998 was also adjusted to a statutory (federal,
state and foreign) tax rate of 39.1% to reflect a tax provision related to
recurring operations.
(6) Includes a nonrecurring, noncash compensation charge of $4.4 million
related to the initial capitalization of the Company, which was recorded
effective April 1, 1997.
(7) For periods prior to April 1, 1997, interest expense and income tax
(benefit) provision were allocated to the Predecessor Company from Lockheed
Martin.
(8) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt issuance
costs) and for the nine months ended December 31, 1997 also excludes the
nonrecurring, noncash compensation charge of $4.4 million recorded
effective April 1, 1997. 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.
(9) For purposes of this computation, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of interest on indebtedness
plus the amortization of deferred debt issuance costs and that portion of
lease rental expense representative of the interest element.
(10) Earnings were insufficient to cover fixed charges by $0.5 million for the
three months ended March 31, 1997.
(11) For purposes of this computation, cash interest expense consists of pro
forma interest expense less amortization of deferred debt issuance costs.
(12) Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
13
<PAGE>
RISK FACTORS
You should carefully consider the following risks as well as the other
information contained in this prospectus before investing in shares of common
stock.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT
We incurred substantial indebtedness in connection with our acquisitions.
On December 31, 1998, we had $605.0 million of indebtedness outstanding, none
of which would have been senior debt (excluding outstanding letters of credit),
and our ratio of pro forma earnings to pro forma fixed charges for the year
ended December 31, 1998 would have been 1.3 to 1.0. In the future we may borrow
more money, subject to limitations imposed by our debt agreements.
Based upon our current level of operations and anticipated improvements,
we believe that our cash flow from operations, together with proceeds from this
offering and amounts we are able to borrow under our bank credit facilities,
will be adequate to meet our anticipated requirements for working capital,
capital expenditures, research and development expenditures, program and other
discretionary investments, interest payments and scheduled principal payments
for the foreseeable future, at least for the next three years. Our ability to
make scheduled payments of principal and interest on our indebtedness and to
refinance our indebtedness depends on our future performance. We do not have
complete control over our future performance because it is subject to economic,
financial, competitive, regulatory and other factors affecting the defense
industry. It is possible that in the future our business may not generate
sufficient cash flow from operations to allow us to service our debt and make
necessary capital expenditures. If this situation occurs, we may have to sell
assets, restructure debt or obtain additional equity capital. We cannot be sure
that we would be able to do so or do so without additional expense. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition".
Our level of indebtedness may have important consequences on your
investment in the common stock. These consequences include:
o requiring a substantial portion of our cash flow from operations to be
used to pay interest and principal on our debt and therefore be
unavailable for other purposes including capital expenditures, research
and development and other investments;
o limiting our ability to obtain additional financing in the future;
o incurring higher interest expense in the event of increases in interest
rates on our borrowings which have variable interest rates;
o heightening our vulnerability to downturns in our business or in the
general economy and restricting us from making acquisitions, introducing
new technologies and products or exploiting business opportunities; and
o limiting our ability to borrow additional funds, dispose of assets or
pay cash dividends. Failure to comply with such covenants could result in
an event of default which, if not cured or waived, could have a material
adverse effect on our financial position and results of operations due to
financial and restrictive covenants.
See "Description of Certain Indebtedness".
OUR ACQUISITION STRATEGY INVOLVES CERTAIN RISKS
We intend to acquire companies which complement our business. We cannot
assure you, however, that we will be able to identify acquisition candidates on
commercially reasonable terms or at all. If we make additional acquisitions, we
also cannot be sure that any anticipated benefits will actually be realized.
Likewise, we cannot be sure that we will be able to obtain additional financing
for acquisitions. Such additional financing could be restricted by the terms of
our debt agreements.
The process of integrating acquired operations, including our recent
acquisitions, into our existing operations may result in unforeseen operating
difficulties and may require significant financial and
14
<PAGE>
managerial resources that would otherwise be available for the ongoing
development or expansion of our existing operations. Possible future
acquisitions by L-3 could result in the incurrence of additional debt,
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, all of which could materially adversely affect our financial
condition and operating results. We consider and execute strategic acquisitions
on an ongoing basis and may be evaluating acquisitions or engaged in
acquisition negotiations at any given time. We have reached agreement or are in
discussions regarding a number of potential acquisition opportunities and
expect to use borrowings under our bank credit facilities to fund these
transactions if we proceed with them. If all of these potential acquisitions
were consummated, they would require us to use all or substantially all of our
currently available borrowing capacity in 1999 and perhaps seek additional
borrowing capacity. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources".
WE RELY ON A SMALL NUMBER OF SIGNIFICANT CUSTOMERS
Our sales are predominantly derived from contracts with agencies of, and
prime contractors to, the U.S. government. Approximately 69% of our 1998 sales
of $1,037.0 million were made to agencies of the U.S. government or to prime
contractors or subcontractors of the U.S. government. For 1998 we had
approximately 345 contracts with a value exceeding $1.0 million. Sales to the
U.S. government for 1998, including sales through prime contractors, were
$716.2 million. Our largest program is a long-term, sole source cost plus
support contract for the U-2 program which contributed approximately 8% of 1998
sales. No other program represented more than 5% of 1998 sales. The loss of all
or a substantial portion of sales to the U.S. government would have a material
adverse effect on our income and cash flow. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business --
Contracts".
Our sales to Lockheed Martin for 1998 were $70.4 million or approximately
7% of total sales. The loss of all or a substantial portion of such sales to
Lockheed Martin would have a material adverse effect on our income and cash
flow.
OUR GOVERNMENT CONTRACTS ENTAIL CERTAIN RISKS
The reduction in the U.S. defense budget in the early 1990s has caused
most defense-related government contractors to experience declining revenues,
increased pressure on operating margins and, in certain cases, net losses. Our
businesses taken as a whole have experienced a substantial decline in sales
during this period. A significant decline in U.S. military expenditures in the
future could materially adversely affect our sales and earnings. The loss or
significant cutback of a large program in which we participate could also
materially adversely affect our future sales and earnings and thus our ability
to meet our financial obligations.
Companies engaged primarily in supplying defense-related equipment and
services to government agencies are subject to certain business risks peculiar
to the defense industry. These risks include the ability of the U.S. government
to:
o suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
o terminate existing contracts;
o audit our contract-related costs and fees, including allocated
indirect costs; and
o control and potentially prohibit the export of our products.
15
<PAGE>
All of our U.S. government contracts can be terminated by the U.S.
government either for its convenience or if the contractor defaults.
Termination for convenience provisions provide only for our recovery of costs
incurred or committed, settlement expenses and profit on work completed prior
to termination. Termination for default provisions provide for the contractor
to be liable for excess costs incurred by the U.S. government in procuring
undelivered items from another source. In addition to the right of the U.S.
government to terminate, U.S. government contracts are conditioned upon the
continuing approval by Congress of the necessary spending. Congress usually
appropriates funds for a given program on a fiscal-year basis even though
contract performance may take more than one year. Consequently, at the
beginning of a major program, the contract is usually partially funded, and
additional monies are normally committed to the contract only if, as and when
appropriations are made by Congress for future fiscal years. Foreign defense
contracts generally contain similar provisions relating to termination at the
convenience of the government.
The U.S. government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. government may adjust our contract-related
costs and fees, including allocated indirect costs. In addition, under U.S.
government purchasing regulations, some of our costs, including certain
financing costs, goodwill, portions of research and development costs, and
certain marketing expenses may not be reimbursable under U.S. government
contracts. Further, as a government contractor, we are subject to
investigation, legal action and/or liability that would not apply to a
commercial company.
We are also subject to risks associated with the following:
o the frequent need to bid on programs in advance of the completion of
their design (which may result in unforeseen technological difficulties
and/or cost overruns);
o the substantial time and effort required for relatively unproductive
design and development;
o design complexity and rapid obsolescence; and
o the constant need for design improvement.
We obtain many of our U.S. government contracts through a competitive bidding
process. We cannot assure you that we will continue to win competitively
awarded contracts or that awarded contracts will generate sufficient sales to
result in profitability for L-3. See "Business -- Customers" and "--
Contracts".
In addition to these U.S. government contract risks, many of our products
and systems require licenses from U.S. government agencies for export from the
United States, and some of our products are not permitted to be exported. We
cannot be sure of our ability to gain any licenses required to export our
products, and failure to receive required licenses could materially reduce our
ability to sell our products outside the United States.
OUR FIXED PRICE CONTRACTS ENTAIL CERTAIN RISKS
We provide our products and services primarily through fixed price or cost
plus contracts. Fixed price contracts constituted approximately 70% of our
sales for 1998. We record sales and profits on our long-term fixed price
contracts by using the percentage-of-completion methods of accounting. As a
result, revisions made to our estimates of revenues and profits are reflected
in the period in which the conditions that require such revisions become known
and can be estimated. The risks of long-term fixed price contracts include the
difficulty of forecasting costs and schedules, contract revenues that are
related to performance in accordance with contract specifications and the
possibility of obsolescence in connection with long-term procurements. Failure
to anticipate technical problems, estimate costs accurately or control costs
during performance of a fixed price contract may reduce our profitability or
cause a loss. Although we believe that adequate provisions for losses for our
fixed price contracts are reflected in our financial statements, as required
under U.S. generally accepted accounting principles, we cannot assure you that
these estimates and provisions are adequate or that losses on fixed price
contracts will not occur in the future.
16
<PAGE>
OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE
The rapid change of technology is a key feature of the communication
equipment industry for defense applications and in general. To succeed in the
future, we will need to design, develop, manufacture, assemble, test, market
and support new products and enhancements on a timely and cost-effective basis.
Historically, our technology has been developed through customer-sponsored
research and development as well as from internally-funded research and
development. We cannot guarantee that we will continue to maintain comparable
levels of research and development. See "Business -- Research and Development".
In the past we have allocated substantial funds to capital expenditures and
programs and other investments. This practice will continue to be required in
the future. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition". Even so, we cannot assure you that we will
successfully identify new opportunities and continue to have the needed
financial resources to develop new products in a timely or cost-effective
manner. At the same time, products and technologies developed by others may
render our products and systems obsolete or non-competitive.
OUR ENTRY INTO COMMERCIAL BUSINESS IS RISKY
Our revenues mainly have come from business with the U.S. DoD and other
government agencies. In addition to continuing to pursue this major market
area, we will continue applying our technical capabilities and expertise to
related commercial markets. Some of our commercial products, such as local
wireless loop telecommunications equipment, medical image archiving equipment,
airport security equipment and commercial information security products, have
only recently been introduced. As such, these new products are subject to
certain risks and may require us to:
o develop and maintain marketing, sales and customer support
capabilities;
o secure sales and customer support capabilities;
o obtain certification;
o respond to rapid technological advances; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in the commercial market may require
significant resources including capital and management time. In addition, our
efforts to sell certain commercial products, particularly our wireless
telecommunications equipment products, may depend to a significant degree on
the efforts of independent distributors or satellite communication service
providers, in some of whom we have made an equity investment. We can give no
assurance that these distributors or service providers will be able to market
successfully our equipment or their services or that we will be able to realize
a return of our investment in them. We cannot assure our success in addressing
these risks or in developing these commercial business opportunities.
WE OPERATE IN A COMPETITIVE INDUSTRY
The communications equipment industry for defense applications and as a
whole is highly competitive. The defense industry has experienced substantial
consolidation due to declining defense budgets and increasing pressures for
cost reductions. We expect that the U.S. DoD's increased use of commercial
off-the-shelf products and components in military equipment will encourage new
competitors to enter the market. In addition, the consolidation of the industry
has resulted in delays in contract funding and awards and significant pricing
pressures. We also expect that competition for original equipment manufacturer
business will increase due to the emergence of merchant suppliers. Our ability
to compete for defense contracts largely depends on the following factors:
o the effectiveness and innovations of our research and development
programs;
o our ability to offer better performance than our competitors at a
lower cost to the U.S. government; and
17
<PAGE>
o the readiness of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, programs are sole source or work directed by the U.S.
government to a single supplier. In such cases, other suppliers who may be able
to compete for the programs involved can only enter or reenter the market if
the U.S. government chooses to reopen the particular program to competition.
Many of our competitors are larger than us and have substantially greater
financial and other resources than we have. See "Business -- Competition".
WE DEPEND ON KEY PERSONNEL
Our future success depends to a significant degree upon the continued
contributions of our management, including Messrs. Lanza and LaPenta, and our
ability to attract and retain other highly qualified management and technical
personnel. We do not maintain any key person life insurance policies for
members of our management. Messrs. Lanza and LaPenta have invested
approximately $18.0 million and immediately following the February 1999 Common
Stock Offering they owned in the aggregate 10.5% of the common stock of
Holdings. We have entered into employment agreements with Messrs. Lanza and
LaPenta. See "Management -- Employment Agreements". We face competition for
management and technical personnel from other companies and organizations.
Failure to attract and retain such personnel would damage our prospects. See
"Management -- Directors and Executive Officers".
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION
Our 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 our operations. We continually assess our obligations and
compliance with these requirements. We believe that our operations are in
substantial compliance with all applicable environmental laws and permits. We
do not expect any material unbudgeted expenditures to remain in compliance with
applicable environmental laws and regulations.
In connection with the purchase of the Company from Lockheed Martin, we
assumed certain environmental liabilities related to events or activities
occurring prior to the purchase. Lockheed Martin has agreed to retain all
environmental liabilities for all facilities no longer used by us and to
indemnify us fully for such liabilities. Lockheed Martin has also agreed, for
the first eight years following April 1997, to pay 50% of all costs incurred by
us above those reserved for our balance sheet at April 1997 relating to certain
environmental liabilities assumed by us. For the seven years thereafter,
Lockheed Martin has agreed to pay 40% of certain reasonable operation and
maintenance costs relating to any environmental remediation projects undertaken
in the first eight years. Two of the facilities acquired from Lockheed Martin
will require ongoing remediation due to environmental contamination. In
November 1997, we sold one such facility located in Sarasota, Florida, while
retaining a leasehold interest in a portion of that facility, to Dames &
Moore/Brookhill LLC, which agreed to assume responsibility for further
remediation of the Sarasota site. We believe that we have established adequate
reserves for the potential costs associated with the assumed environmental
liabilities. However, we cannot assure you that any costs incurred will be
reimbursable from the U.S. government or covered by Lockheed Martin under the
terms of the acquisition agreement or that our environmental reserves will be
sufficient.
OUR BACKLOG OF ORDERS COULD BE TERMINATED
We currently have a backlog of orders, mainly under contracts with the
U.S. government. The U.S. government may unilaterally modify or terminate these
contracts. Accordingly, most of our backlog could be modified or terminated by
the U.S. government. We cannot assure you that our backlog will result in
revenues. Further, we cannot be sure that the margins on any contract included
in backlog that does become revenue will be profitable.
18
<PAGE>
WE HAVE PENSION PLAN LIABILITIES
We have assumed certain liabilities relating to defined benefit pension
plans for present and former employees and retirees of certain businesses which
we acquired. Prior to the L-3 Acquisition, Lockheed Martin received a letter
from the Pension Benefit Guaranty Corporation (the "PBGC"), which requested
information regarding the transfer of these pension plans and indicated that
the PBGC believed certain of these pension plans were underfunded using the
PBGC's actuarial assumptions. These assumptions resulted in a larger liability
for accrued benefits than the assumptions used for financial reporting under
Statement of Financial Accounting Standards No. 87 ("FASB 87"). The PBGC
underfunding is related to the Communication Systems -- West and Aviation
Recorders pension plans (the "Subject Plans").
With respect to the Subject Plans, Lockheed Martin entered into an
agreement (the "Lockheed Martin Commitment") with L-3 Communications and the
PBGC dated as of April 30, 1997. The material terms and conditions of the
Lockheed Martin Commitment include a commitment by Lockheed Martin to the PBGC
to, under certain circumstances, assume sponsorship of the Subject Plans or to
provide another form of financial support for the Subject Plans. L-3
Communications has funded and acted in accordance with the terms of our
agreement with Lockheed Martin. As a result of a decrease in the PBGC-mandated
discount rate in 1998 and the resulting increase in the underlying liability, a
triggering event has occurred. L-3 Communications has notified Lockheed Martin
of this fact. On February 4, 1999, Lockheed Martin informed us that it has no
present intention to exercise its right to cause L-3 Communications to transfer
sponsorship of the Subject Plans. If Lockheed Martin did assume sponsorship of
the Subject Plans, it would be primarily liable for the costs associated with
funding these plans or any costs associated with the termination of the Subject
Plans, but L-3 Communications would be required to reimburse Lockheed Martin
for these costs. See "Business -- Pension Plans". To date, the impact on
pension expense and funding requirements resulting from this arrangement has
not been significant. However, should Lockheed Martin assume sponsorship of the
Subject Plans or if these plans were terminated, the impact of any increased
pension expenses or funding requirements could be material to us.
OUR DEBT AGREEMENTS CONTAIN RESTRICTIONS
Our debt agreements contain a number of significant provisions that, among
other things, restrict our ability to:
o sell assets;
o incur more indebtedness;
o repay certain indebtedness;
o pay dividends;
o make certain investments or acquisitions;
o repurchase or redeem capital stock;
o engage in mergers or consolidations; and
o engage in certain transactions with subsidiaries and affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or engage in other business activities that may be in our
interest. In addition, certain of our debt agreements also require us to
maintain compliance with certain financial ratios, including total consolidated
earnings before interest, taxes, depreciation and amortization to total
consolidated cash interest expense and net debt to total consolidated earnings
before interest, taxes, depreciation and amortization, and to limit our capital
expenditures. Our ability to comply with these ratios and limits may be
affected by events beyond our control. A breach of any of these agreements or
our inability to comply with the required financial ratios or limits could
result in a default under those debt agreements. In the event of any such
default, the lenders under those debt agreements could elect to:
19
<PAGE>
o declare all debt outstanding, accrued interest and fees to be due and
payable;
o require us to apply all of our available cash to repay the debt; and
o prevent us from making debt service payments on other debt.
If we were unable to repay any such borrowings when due, the lenders under
our bank credit facilities could proceed against their collateral, which
includes a first priority lien on substantially all of our assets and a first
priority security interest in all of our capital stock and the capital stock of
our subsidiaries. If the indebtedness under the existing debt agreements were
to be accelerated, we cannot assure you that our assets would be sufficient to
repay such indebtedness in full. See "Description of Certain Indebtedness".
NOT ALL OF OUR SUBSIDIARIES ARE GUARANTORS FOR THE NOTES
Most but not all of our subsidiaries have guaranteed the Notes. In the
event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors will generally be entitled to payment of their claims from the assets
of those subsidiaries before any assets are made available for distribution to
us. As of December 31, 1998, the Notes were effectively junior to $23.1 million
of indebtedness and other liabilities (including trade payables) of these
non-guarantor subsidiaries. The non-guarantor subsidiaries generated less than
one percent of each of our historical consolidated revenues, net income and
cash from operating activities for the year ended December 31, 1998, and held
2.9% of our consolidated assets as of December 31, 1998.
THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS
Certain of the matters discussed concerning our operations, economic
performance and financial condition, including in particular, the likelihood of
our success in developing and expanding our business and the realization of
sales from backlog, include forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates" and similar expressions are
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, we can give no assurance that their goals will be
achieved.
OUR YEAR 2000 COMPLIANCE EFFORTS WILL REQUIRE SUBSTANTIAL RESOURCES AND FAILURE
BY US OR CERTAIN THIRD PARTIES TO BE YEAR 2000 COMPLIANT POSES CERTAIN RISKS
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Because our business units operate
autonomously, each business unit has undertaken an effort to identify and
mitigate Year 2000 issues in their information systems, products, facilities,
suppliers and customers. Our Year 2000 compliance efforts are a composite of
our business units' individual Year 2000 compliance efforts coordinated through
a company-wide program instituted to oversee, guide and track our business
units' individual Year 2000 compliance efforts and to facilitate communications
between business units regarding Year 2000 compliance methods. Our business
operations are also dependent on the Year 2000 readiness of our customers and
infrastructure suppliers in areas such as utilities, communications,
transportation and other services.
Each business unit has appointed a Year 2000 project manager who oversees
a team responsible for performing its Year 2000 efforts in four phases:
o first, to define, identify and list possible sources of Year 2000
issues, including internal systems and products and services sold to
customers;
o second, to analyze and determine the nature and extent of Year 2000
issues and to develop project plans to address those issues;
20
<PAGE>
o third, to implement and execute project plans to fix or replace
non-compliant items, as appropriate, based upon the anticipated risk
and its importance; and
o fourth, to commence and complete testing, continue monitoring
readiness and prepare necessary contingency plans.
The progress of this program is monitored at each business unit with
oversight by management. This oversight includes periodic reviews as well as
visits to each business unit to monitor progress
with the plans. We have completed the first three phases of the program for a
substantial majority of mission-critical systems within the Company and plan to
have nearly all significant information systems, products and facilities in the
final phase of the program by mid-1999.
The business units of the Company's recently completed acquisitions have
been integrated into the Company's Year 2000 compliance efforts and these
acquired business units are currently performing their respective Year 2000
efforts at various stages within the four phases enumerated above. We plan to
have nearly all significant information systems, products and facilities of
these acquired businesses in the final phase of the program by the end of third
quarter of 1999.
Our total costs associated with our internal Year 2000 compliance efforts
are estimated to be approximately $20.1 million, including $7.6 million of
costs which may be capitalized with the remaining costs expensed as incurred.
We have incurred approximately $12.2 million of such costs to date.
Substantially all of the remaining estimated costs are expected to be incurred
during the remainder of 1999. We cannot assure you that our Year 2000
compliance efforts will be successful or that we will not incur substantial
costs as a result of failure of our customers or suppliers to be Year 2000
compliant or as a result of failures of installed products produced by us or
for any other reason.
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the Notes by
Lehman Brothers Inc. in market-making transactions. The Company will not
receive any of the proceeds from such transactions.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1998, and as adjusted on a pro forma basis to give effect to the
February 1999 Common Stock Offering and the Aydin acquisition, as if they had
occurred on December 31, 1998 ("Pro Forma"). See "Unaudited Pro Forma Condensed
Consolidated Financial Information".
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
ACTUAL PRO FORMA
---------- ------------
(in millions)
<S> <C> <C>
Cash and cash equivalents ................................ $ 26.1 $ 163.3
======= ========
Current portion of long-term debt ........................ $ -- $ --
Senior Credit Facilities(1) .............................. -- --
103/8% Senior Subordinated Notes due May 1, 2007 ......... 225.0 225.0
81/2% Senior Subordinated Notes due May 15, 2008 ......... 180.0 180.0
8% Senior Subordinated Notes due August 1, 2008 .......... 200.0 200.0
------- --------
Total debt ............................................. $ 605.0 $ 605.0
------- --------
Shareholders' equity
Common stock ............................................ $ -- $ --
Additional paid-in-capital .............................. 264.8 466.3
Retained earnings ....................................... 44.9 44.9
Accumulated other comprehensive loss .................... (9.7) (9.7)
------- --------
Total shareholders' equity ............................. 300.0 501.5
------- --------
Total capitalization ................................... $ 905.0 $1,106.5
======= ========
</TABLE>
- ----------
(1) There were no borrowings under the Senior Credit Facilities outstanding
as of May 3, 1999. Availability under the Senior Credit Facilities at any
given time is $400.0 million (subject to compliance with covenants), less
the amount of outstanding borrowings and outstanding letters of credit
(which amounted to $103.2 million at May 3, 1999).
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma statement of operations data gives
effect to the following transactions (collectively, the "Transactions") as if
they had occurred on January 1, 1998: (i) the Company's acquisition of all of
the outstanding common stock of Aydin which was completed in April 1999; (ii)
the Company's purchase of all of the outstanding stock of SPD Technologies,
Inc. ("SPD") and the acquisitions by the Company of the assets of the Ocean
Systems business ("Ocean Systems") of Allied Signal, Inc., the assets of ILEX
Systems, Inc. ("ILEX") and the assets of the Satellite Transmission Systems
division ("STS") of Southern California Microwave, Inc. (collectively, the
"1998 Acquisitions"); (iii) the contribution by Holdings to the Company of the
net proceeds from its common stock offering completed in February 1999 which
amounted to $201.5 million (the "February 1999 Common Stock Offering"), the
contribution by Holdings to the Company of the net proceeds from Holdings'
common stock initial public offering (the "IPO") completed in May 1998 which
amounted to $139.5 million, the sale by the Company of $200.0 million of 8%
Senior Subordinated Notes due August 1, 2008 (the "December 1998 Notes"), the
sale by the Company of $180.0 million of 81/2% Senior Subordinated Notes due
May 15, 2008 (the "May 1998 Notes"), the amendments of the Company's Senior
Credit Facilities to increase the available borrowings under the bank credit
facilities to 400.0 million, and the application of the net proceeds of these
financing transactions (collectively, the "Financing Transactions"). The pro
forma balance sheet data gives effect to the February 1999 Common Stock
Offering and the Aydin acquisition as if they had occurred on December 31,
1998. The pro forma financial information is based on (i) the audited
consolidated financial statements of the Company as of December 31, 1998 and
for the year then ended, (ii) the audited consolidated financial statements of
Aydin as of December 31, 1998 and for the year then ended, and (iii) the
statements of operations of the 1998 Acquisitions for the periods from January
1, 1998 to each of their respective dates of acquisition, 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 results do not give effect to any of the Company's other
acquisitions, including the acquisition of Microdyne.
The pro forma adjustments are based upon preliminary estimates of purchase
prices and the related purchase price allocations for the acquisitions of Aydin
and SPD. Actual adjustments will be based on final appraisals and other
analyses of fair values which are in process. Management does not expect that
differences between the preliminary and final allocations will have a material
impact on the Company's pro forma financial position or results of operations.
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, 1998. The pro forma financial information should be read
in conjunction with (i) the audited consolidated financial statements of the
Company as of December 31, 1998 and for the year then ended (ii) the audited
consolidated financial statements of Aydin as of December 31, 1998 and for the
year then ended, and (iii) the unaudited condensed consolidated statements of
operations of SPD for the six months ended June 30, 1998, all of which are
included elsewhere herein in this prospectus. 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.
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
AYDIN
FEBRUARY 1999 ACQUISITION
COMMON STOCK PRO FORMA
COMPANY OFFERING(8) AYDIN ADJUSTMENTS(6) PRO FORMA
----------- --------------- ------- ---------------- ----------
(in millions)
<S> <C> <C> <C> <C> <C>
ASSETS
Currents assets:
Cash and cash equivalents ................. $ 26.1 $201.5 $ 9.5 $ (73.8) $ 163.3
Contracts in process ...................... 351.0 -- 58.1 (1.5) 407.6
Other current assets ...................... 28.2 -- 1.4 -- 29.6
-------- ------ ----- ------- --------
Total current assets .................... 405.3 201.5 69.0 (75.3) 600.5
-------- ------ ----- ------- --------
Property, plant and equipment, net ......... 123.1 -- 12.6 -- 135.7
Intangibles, primarily cost in excess of
net assets acquired, net of
amortization .............................. 669.4 -- -- 6.7 676.1
Other assets ............................... 87.6 -- 0.5 5.0 93.1
-------- ------ ----- ------- --------
Total assets ............................. $1,285.4 $201.5 $82.1 $ (63.6) $1,505.4
======== ====== ===== ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ......... $ -- $ -- $ 0.1 $ (0.1) $ --
Accounts payable and accrued
expenses ................................ 165.1 -- 13.7 -- 178.8
Customer advances ......................... 45.9 -- 2.3 -- 48.2
-------
Other current liabilities ................. 36.5 -- 0.4 -- 36.9
-------- ------ ----- ------- --------
Total current liabilities ............... 247.5 -- 16.5 (0.1) 263.9
-------- ------ ----- ------- --------
Pension, postretirement benefits and
other liabilities ....................... 132.9 -- 2.1 -- 135.0
Long-term debt ............................ 605.0 -- -- -- 605.0
Shareholders' equity ...................... 300.0 201.5 63.5 (63.5) 501.5
-------- ------ ----- ------- --------
Total liabilities and shareholders'
equity ................................. $1,285.4 $201.5 $82.1 $ (63.6) $1,505.4
======== ====== ===== ======= ========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMPANY
YEAR 1998
ENDED ACQUISITIONS
DECEMBER 31, 1998 PRO FORMA
1998 ACQUISITIONS(2) ADJUSTMENTS(1)(3)
-------------- ----------------- -------------------
(in millions)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $1,037.0 $126.2 $ --
Costs and expenses .............. 936.7 117.6 2.5
-------- ------ --------
Operating income (loss)........ 100.3 8.6 (2.5)
Interest and investment
income (expense) ............... 2.7 -- --
Interest expense ................ 49.5 5.1 --
-------- ------ --------
Income (loss) before
income taxes ................ 53.5 3.5 (2.5)
Income tax expense (benefit)..... 20.9 1.6 (1.0)(9)
-------- ------ --------
Net income (loss) ............. $ 32.6 $ 1.9 $ (1.5)
======== ====== ========
<CAPTION>
AYDIN
ACQUISITION
FINANCING PRO FORMA PRO
TRANSACTIONS(4) AYDIN(5) ADJUSTMENTS(6)(7) FORMA(10)
----------------- --------------- ------------------- ----------
(in millions)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $ -- $ 77.9 $ (4.6) $1,236.5
Costs and expenses .............. -- 99.0 1.4 1,157.2
-------- -------- ------ --------
Operating income (loss)........ -- (21.1) (6.0) 79.3
Interest and investment
income (expense) ............... -- 0.7 -- 3.4
Interest expense ................ 6.2 -- -- 60.8
-------- -------- ------ --------
Income (loss) before
income taxes ................ (6.2) (20.4) (6.0) 21.9
Income tax expense (benefit)..... (2.4)(9) (0.8)(9) (0.2) 18.1
-------- -------- ------ --------
Net income (loss) ............. $ (3.8) $ (19.6) $ (5.8) $ 3.8
======== ======== ====== ========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
25
<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. On August 13, 1998, the Company acquired 100% of the stock of SPD for $241.4
million of cash, including expenses net of cash acquired. On February 5,
1998, March 4, 1998 and March 31, 1998, the Company purchased the assets
of STS, ILEX and Ocean Systems for $27.0 million, $51.9 million and $68.8
million, respectively, of cash including expenses net of cash acquired.
The aggregate purchase prices including expenses, net of cash acquired,
for the 1998 Acquisitions of $388.6 million were financed with the net
proceeds from the Financing Transactions (see Note 4 below). The 1998
Acquisitions are all included in the Company's historical balance sheet as
of December 31, 1998.
2. The pro forma statement of operations for the year ended December 31, 1998
includes the following historical data for the 1998 Acquisitions.
<TABLE>
<CAPTION>
OCEAN 1998
SPD(a) STS(b) ILEX(b) SYSTEMS(c) ACQUISITIONS
-------- ---------- --------- ------------ -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales ........................................ $105.5 $ 2.3 $4.5 $13.9 $126.2
Costs and expenses ........................... 94.4 5.9 4.4 12.9 117.6
------ ------ ---- ----- ------
Operating income (loss) ..................... 11.1 (3.6) 0.1 1.0 8.6
Interest and investment income ............... -- -- -- -- --
Interest expense ............................. 5.0 -- -- 0.1 5.1
------ ------ ---- ----- ------
Income (loss) before income taxes . ......... 6.1 (3.6) 0.1 0.9 3.5
Income tax (benefit) provision . ............. 2.2 (1.0) -- 0.4 1.6
------ ------ ---- ----- ------
Net income (loss) ........................... $ 3.9 $ (2.6) $0.1 $ 0.5 $ 1.9
====== ====== ==== ===== ======
</TABLE>
- ----------
(a) Represents historical results of operations for the six-month
period ended June 30, 1998. These results of operations exclude a
pre-tax nonrecurring noncash compensation charge of approximately
$22.1 million related to the acceleration of the vesting date for
all outstanding stock options of SPD caused by the Company's
acquistion of SPD.
(b) Represents historical results of operations for the one-month
period ended January 31, 1998.
(c) Represents historical results of operations for the three-month
period ended March 31, 1998.
3. The aggregate estimated excess of purchase price, including expenses, over
the estimated fair value of net assets acquired related to the 1998
Acquisitions of $339.3 million is comprised of $215.3 million, $5.5
million, $44.3 million and $74.2 million, respectively, for SPD, STS, ILEX
and Ocean Systems, and is being amortized over 40 years for SPD, ILEX and
Ocean Systems and 15 years for STS resulting in amortization expense of
$8.7 million per annum. The preliminary purchase price allocation for SPD
also includes an adjustment of $5.0 million to intangible assets to
reflect the estimated value of acquired identifiable intangibles which are
being amortized over 15 years resulting in amortization expense of $0.3
million per annum.
Adjustments to costs and expenses in the pro forma statements of operations
relating to the 1998 Acquisitions were comprised of the following:
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
--------------
(in millions)
<S> <C>
(a) Amortization expense of estimated intangibles, primarily purchase cost in
excess of net assets acquired ................................................. $ 3.7
(b) Elimination of goodwill amortization expense included in the historical
financial statements for the 1998 Acquisitions ................................ (1.4)
(c) Estimated rent expense on the Sylmar facility of Ocean Systems which was not
acquired by L-3 Communications ................................................ 0.3
(d) Elimination of depreciation expense on buildings and improvements on the
Sylmar facility of Ocean Systems which was not acquired by L-3
Communications ................................................................ (0.1)
------
Total increase to costs and expenses .............................................. $ 2.5
======
</TABLE>
4. The Financing Transactions included (i) the contribution by Holdings to the
Company of the net proceeds from the sale by Holdings of 5.0 million
shares of its common stock in the February 1999 Common Stock Offering for
$42 per share, whose net proceeds amounted to $201.5 million, after
underwriting discounts and commissions and other expenses of $8.5 million,
(ii) the sale by the Company of the December 1998 Notes, which net
proceeds amounted to $192.8 million after the bond discount of $0.6
million and underwriting discounts and commissions and other expenses of
$6.6 million (iii) the contribution by Holdings to the Company of the net
proceeds from the sale by Holdings of 6.9 million shares of its common
stock in the IPO for $22 per share, which net proceeds amounted to $139.5
million, after underwriting discounts and commissions and other expenses
of $12.3 million, (iv) the sale by the Company of the May 1998 Notes,
which net proceeds amounted to $173.8 million after underwriting discounts
and commissions and other expenses of $6.2 million and (v) the amendments
of the Company's Senior Credit Facilities to increase the borrowings
available thereunder to $400.0 million from $200.0 million.
The aggregate net proceeds from the Financing Transactions of $707.6
million have been assumed to be used to (i) prepay all $171.0 million of
borrowings outstanding under the term loan facilities, under the Company's
Senior Credit Facilities prior to the amendments thereto (ii) finance all
of the aggregate purchase prices of the 1998 Acquisitions of $388.6 million
(see Note 1) and Aydin acquisition of $64.3 million (see Note 7) and (iii)
increase cash and cash equivalents by $83.7 million. The February 1999
Common Stock Offering was completed on February 10, 1999. The sale of the
December 1998 Notes was completed on December 11, 1998, and in February
1999, the Company exchanged all of the December 1998 Notes for notes
identical in all material respects to the December 1998 Notes, except that
the notes are registered under the Securities Exchange Act of 1933. The IPO
and the sale of the May 1998 Notes were completed on May 22, 1998 and the
amendments to the Senior Credit Facilities were completed on August 19,
1998 and March 3, 1999. Except for the February 1999 Common Stock Offering,
the effects of the Financing Transactions are included in the Company's
historical balance sheet as of December 31, 1998.
27
<PAGE>
Assuming the Financing Transactions were completed on January 1, 1998, pro
forma interest expense for the year ended December 31, 1998 would have
increased by $11.3 million to $60.8 million. The details of interest
expense after the Financing Transactions follow:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Interest on the 1997 Notes (10.375% on
$225.0 million)............................................... $23.4
Interest on the May 1998 Notes (8.50% on
$180.0 million)............................................... 15.3
Interest on the December 1998 Notes (8.0% on
$200.0 million)............................................... 16.0
Commitment fee of 0.4% on unused portion of the Senior Credit
Facilities (0.4% on $298.4 million)........................... 1.2
Letter of credit fees ......................................... 1.0
Amortization of deferred debt issuance costs .................. 3.9
-----
Total pro forma interest expense .............................. $60.8
=====
</TABLE>
The pro forma statements of operations do not reflect interest income on
(i) the pro forma amount of net proceeds of $83.7 million that were assumed
to be invested in cash and cash equivalents, remaining after applying the
aggregate net proceeds from the Financing Transactions to finance the
purchase of the 1998 Acquisitions and Aydin acquisition and prepay the term
loan facilities or (ii) the $163.3 million cash balance on the pro forma
balance sheet as of December 31, 1998 after the February 1999 Common Stock
Offering and Aydin acquisition.
5. The pro forma statement of operations for the year ended December 31, 1998
includes the following historical data for the Aydin acquisition.
<TABLE>
<CAPTION>
AYDIN
--------------
(in millions)
<S> <C>
Sales ...................................... $ 77.9
Costs and expenses ......................... 99.0
-------
Operating income (loss) ................... (21.1)
Interest and investment income ............. 0.7
Interest expense ........................... --
-------
Income (loss) before income taxes ......... (20.4)
Income tax (benefit) provision ............. (0.8)
-------
Net income (loss) ......................... $ (19.6)
=======
</TABLE>
6. On April 16, 1999, the Company completed its acquisition of 100% of the
common stock of Aydin. The purchase price of $64.3 million including
estimated expenses net of cash acquired of $9.5 million (based on Aydin's
historical balance sheet as of December 31, 1998) was financed with a
portion of the net proceeds from the Financing Transactions (see Note 4).
The estimated purchase price in excess of the net assets acquired for
Aydin of $6.7 million is being amortized over 40 years resulting in a
charge of $0.2 million per annum. In addition, the pro forma balance sheet
as of December 31, 1998 includes the elimination of (i) $0.1 million of
Aydin debt which was repaid in connection with the acquisition and (ii)
$63.5 million of Aydin's historical shareholders' equity. The pro forma
balance sheet also reflects these adjustments related to preliminary
purchase price allocation:
(a) an estimated $1.8 million reduction to contracts in process resulting
from valuing 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, and an estimated
increase to contracts in process of $0.3 million related to valuing
work-in-process and finished goods inventory at their fair values. The
non-recurring charges to income resulting from these adjustments are not
material to the pro forma statement of operations; and
28
<PAGE>
(b) an increase in deferred tax assets of $5.0 million to reflect the
elimination of a valuation allowance of $5.0 million included in Aydin's
historical financial statements to reflect the Company's ability to
realize the acquired Aydin deferred tax assets on a consolidated basis.
7. The adjustments made to the pro forma statement of operations for the year
ended December 31, 1998 relating to the Aydin acquisition include (i) the
elimination of $4.6 million of sales and $4.4 million of costs and
expenses for the Microwave division included in Aydin's historical results
of operations which Aydin sold in October 1998 and is not part of the
continuining operations of Aydin that the Company acquired, (ii) the
elimination of the gain of $5.6 million (pre-tax and after tax) resulting
from Aydin's sale of its Microwave division and (iii) an increase to costs
and expenses of $0.2 million for the amortization expense for the Aydin
acquisition purchase cost in excess of net assets acquired (see Note 7
below). A statutory (federal, state and foreign) tax rate of 39.1% was
assumed on these pro forma adjustments, except for adjustment (b) because
Aydin recognized no income tax expense on that gain as a result of its tax
net operating losses.
8. The pro forma adjustments for the February 1999 Common Stock Offering to the
balance sheet as of December 31, 1998, include (i) an increase to cash and
cash equivalents of $201.5 million representing the net proceeds
therefrom, and (ii) a corresponding increase to common stock and
additional paid-in capital within shareholders' equity of $201.5 million
for those net proceeds.
9. The pro forma adjustments were tax-effected, as appropriate, using a
statutory (federal, state and foreign) tax rate of 39.1%.
10. Aydin's historical statement of operations for the year ended December 31,
1998 include a non-recurring charge of $19.8 million in costs and expenses
related to a contract arbitration settlement. The pro forma statement of
operations for the year ended December 31, 1998 adjusted to exclude this
non-recurring charge and to adjust Aydin's benefit for income taxes to a
statutory (federal, state and foreign) tax rate of 39.1% that reflects a
tax provision related to recurring operations, would have been as follows:
<TABLE>
<CAPTION>
ADJUSTED
PRO FORMA
YEAR ENDED
DECEMBER 31, 1998
-----------------
($ MILLIONS)
<S> <C>
Sales .................................. $1,236.5
Costs and expenses ..................... 1,137.4
--------
Operating income ...................... 99.1
Interest and investment income ......... 3.4
Interest expense ....................... 60.8
--------
Income before income taxes ............ 41.7
Income tax provision ................... 16.4
--------
Net income ............................ $ 25.3
========
</TABLE>
29
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected unaudited pro forma data as of December 31, 1998 and for the
year ended December 31, 1998 have been derived from, and should be read in
conjunction with, the unaudited pro forma condensed consolidated financial
statements included elsewhere in this prospectus. The unaudited pro forma
condensed statement of operations and other data reflect the 1998 Acquisitions,
the Financing Transactions and the Aydin acquisition as if such transactions
had occurred on January 1, 1998. The unaudited pro forma condensed balance
sheet data reflect the February 1999 Common Stock Offering and the Aydin
acquisition as if they had occurred on December 31, 1998.
The selected consolidated (combined) financial data as of December 31,
1997, 1996 and 1995 and for the year ended December 31, 1998, the nine months
ended December 31, 1997, the three months ended March 31, 1997 and the years
ended December 31, 1996, 1995 and 1994 have been derived from the audited
financial statements for the respective periods. 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.
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated (Combined) Financial Statements of the Company
(Predecessor Company) and the unaudited pro forma condensed consolidated
financial information included elsewhere herein.
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------------------
ADJUSTED
PRO FORMA PRO FORMA NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998(1) 1997(2)
-------------- -------------- -------------- --------------
(in millions)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales .............................. $1,236.5 $ 1,236.5 $ 1,037.0 $ 546.5
Operating income ................... 99.1(5) 79.3 100.3 51.5(6)
Interest expense, net(7) ........... 57.4 57.4 46.9 28.5
Provision (benefit) for income
taxes(7) .......................... 16.4(5) 18.1 20.9 10.7
Net income (loss) .................. 25.3(5) 3.8 32.6 12.3(6)
BALANCE SHEET DATA
(AT PERIOD END):
Working capital .................... $ 336.6 $ 157.8 $ 143.2
Total assets ....................... 1,505.4 1,285.4 697.0
Long-term debt ..................... 605.0 605.0 392.0
Invested equity ....................
Shareholders' equity ............... 501.5 300.0 113.7
OTHER DATA:
EBITDA(8) .......................... $ 147.6(5) $ 127.8 $ 140.7 $ 78.1
Net cash from (used in)
operating activities .............. 85.1 73.9
Net cash (used in) investing
activities ........................ (472.9) (457.8)
Net cash from (used in) financing
activities ........................ 336.4 461.4
Depreciation expense ............... 26.4 26.4 22.5 13.3
Amortization expense ............... 22.1 22.1 17.9 8.9
Capital expenditures ............... 28.0 23.4 11.9
Ratio of:
Earnings to fixed charges(9) ...... 1.6x 1.3x 2.0x 1.7x
EBITDA to cash interest
expense(8)(11) ................... 2.6x 2.2x 3.0x
Net debt to EBITDA(8)(12) ......... 3.0x 3.5x 4.1x
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------------
1997 1996(3) 1995(4) 1994(4)
---------- ----------- --------- ----------
(in millions)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales .............................. $ 158.9 $ 543.1 $166.8 $ 218.9
Operating income ................... 7.9 43.7 4.7 8.4
Interest expense, net(7) ........... 8.4 24.2 4.5 5.5
Provision (benefit) for income
taxes(7) .......................... (0.2) 7.8 1.2 2.3
Net income (loss) .................. (0.3) 11.7 (1.0) 0.6
BALANCE SHEET DATA
(AT PERIOD END):
Working capital .................... $ 98.8 $ 21.1 $ 19.3
Total assets ....................... 590.6 228.5 233.3
Long-term debt .....................
Invested equity .................... 473.6 194.7 199.5
Shareholders' equity ...............
OTHER DATA:
EBITDA(8) .......................... $ 15.7 $ 71.8 $ 16.3 $ 19.9
Net cash from (used in)
operating activities .............. (16.3) 30.7 9.3 21.8
Net cash (used in) investing
activities ........................ (4.3) (298.0) (5.5) (3.7)
Net cash from (used in) financing
activities ........................ 20.6 267.3 (3.8) (18.1)
Depreciation expense ............... 4.5 14.9 5.5 5.4
Amortization expense ............... 3.3 13.2 6.1 6.1
Capital expenditures ............... 4.3 13.5 5.5 3.7
Ratio of:
Earnings to fixed charges(9) ...... --(10) 1.7x 1.0x 1.4x
EBITDA to cash interest
expense(8)(9) ....................
Net debt to EBITDA(8)(10) .........
</TABLE>
- ----------
(1) Includes the results of operations of the 1998 Acquisitions from their
respective effective dates.
(2) Reflects the Company's acquisition of the Predecessor Company (the "L-3
Acquisition") effective April 1, 1997.
(3) Reflects the Predecessor Company's ownership of nine business units
acquired by Lockheed Martin from Loral effective April 1, 1996.
(4) Reflects operations of Communication Systems -- East. Prior to April 1,
1996, the Predecessor Company was only comprised of Communication Systems
-- East.
30
<PAGE>
(5) Represents the pro forma statement of operations and other data for the
year ended December 31, 1998, adjusted to exclude the $19.8 million
non-recurring charge to operating income included in Aydin's historical
statement of operations for the year ended December 31, 1998 related to a
contract arbitration settlement (See Note B to Aydin's financial
statements included herein on page F-38). The benefit for income taxes of
Aydin for the year ended December 31, 1998 was also adjusted to a
statutory (federal, state and foreign) tax rate of 39.1% to reflect a tax
provision related to recurring operations.
(6) Includes a nonrecurring, noncash compensation charge of $4.4 million
related to the initial capitalization of the Company, which was recorded
effective April 1, 1997.
(7) For periods prior to April 1, 1997, interest expense and income tax
(benefit) provision were allocated to the Predecessor Company from
Lockheed Martin.
(8) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt
issuance costs) and for the nine months ended December 31, 1997, also
excludes the nonrecurring, noncash compensation charge of $4.4 million
recorded effective April 1, 1997. 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.
(9) For purpose of this computation, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of interest on indebtedness
plus the amortization of deferred debt issuance costs and that portion of
lease rental expense representative of the interest element.
(10) Earnings were insufficient to cover fixed charges by $0.5 million for the
three months ended March 31, 1997.
(11) For purposes of this computation, cash interest expense consists of pro
forma interest expense less amortization of deferred debt issuance costs.
(12) Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. The Company's customers
include the DoD, certain U.S. government intelligence agencies, major aerospace
and defense contractors, foreign governments and commercial customers. The
Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products.
The Secure Communication Systems segment provides secure, high data rate
communications systems for military and other U.S. government reconnaissance
and surveillance applications. These operations are principally performed under
cost plus, sole source contracts supporting long-term programs for the U.S.
armed forces and classified customers. The Secure Communication Systems segment
also supplies communication software support services to military and related
government intelligence markets. The Specialized Communication Products segment
includes three product categories: microwave components, avionics and ocean
products, and telemetry, instrumentation and space products.
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 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 relevant foreign government.
The defense industry has undergone significant changes precipitated by
ongoing U.S. 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 the
value-added capability of digital command and control communications by
incorporating advanced electronics to improve the performance, reduce operating
costs 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.
ACQUISITION HISTORY
In April 1997 pursuant to the L-3 Acquisition the Company acquired
substantially all of the assets of ten business units, comprising the
Predecessor Company, from Lockheed Martin. The Predecessor Company was
comprised of (i) nine business units that Lockheed Martin acquired from Loral
in April 1996 (the "Loral Acquired Businesses"), which included eight business
units (that initially comprised the Specialized Communication Products segment)
and Communication Systems -- West, and (ii) one business unit purchased by
Lockheed Martin as part of its acquisition of the aerospace business of General
Electric in April 1993 ("Communication Systems -- East"). Communication Systems
- -- West and Communication Systems -- East initially comprised the Secure
Communication Systems segment.
1998 Acquisitions. On August 13, 1998, the Company purchased all of the
outstanding stock of SPD. On March 30, 1998, March 4, 1998 and February 5,
1998, respectively, the Company acquired the assets of the Ocean Systems, ILEX
and STS. Collectively, the acquisitions of SPD, Ocean Systems, ILEX and STS
comprise the 1998 Acquisitions. Additionally, during 1998, the Company
purchased several other operations and product lines, which individually and in
the aggregate were not material to the results of operations or financial
position of the Company.
Microdyne Corporation. On December 3, 1998, the Company signed an
agreement to acquire all of the outstanding common stock of Microdyne for
approximately $90.0 million in cash, including the repayment of Microdyne's
debt. The Company completed the acquisition of Microdyne in February 1999.
32
<PAGE>
Aydin Corporation. On March 1, 1999, the Company signed an agreement to
acquire all of the outstanding common stock of Aydin for approximately $73.8
million in cash including expenses before taking into account Aydin's cash on
hand which amounted to approximately $15.1 million at the end of March 1999.
The Company completed this acquisition in April 1999.
Interstate Electronics Corporation. On April 18, 1999, the Company signed
an agreement to acquire all of the outstanding common stock of IEC for
approximately $60.0 million in cash, including certain real estate with an
estimated fair value in excess of $10.0 million. The Company expects to
complete the acquisition in the second quarter of 1999.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated (Combined) Financial Statements, which reflect the Company's
results of operations from the effective date of the L-3 Acquisition, April 1,
1997, and include the results of operations of the 1998 Acquisitions from the
respective effective dates of each of those acquisitions. The financial
statements also reflect the results of operations of the Predecessor Company
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 the
Predecessor Company. Accordingly, the results of operations for the years ended
December 31, 1998, 1997 and 1996 are significantly affected by the timing of
those acquisitions.
The results of operations of the Predecessor Company include certain costs
and expenses allocated to it by Lockheed Martin for corporate office and
certain other expenses primarily using an allocation methodology prescribed by
U.S. government regulations for government contractors. Pension and
postretirement benefit costs were allocated based on employee headcount.
Interest expense was allocated to the Predecessor Company 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 prepared on a separate taxpayer
basis, calculated by applying statutory rates to reported pre-tax income after
considering items that do not enter into the determination of taxable income
and tax credits related to the Predecessor Company. Accordingly, the results of
operations the Predecessor Company may not be the same as would have occurred
had the Predecessor Company been an independent entity.
The following table provides selected income statement data for the
Company for the year ended December 31, 1998 ("1998") and the nine-month period
ended December 31, 1997 and for the Predecessor Company for the three-month
period ended March 31, 1997 and the year ended December 31, 1996 ("1996"). For
purposes of the discussion of the results of operations, results for the year
ended December 31, 1997 ("1997") were prepared by combining, without
adjustment, the results of operations of the Company for the nine-month period
ended December 31, 1997 with those of the Predecessor Company for the
three-month period ended March 31, 1997.
33
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
-------------- -------------- -------------- -------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, 1997 DECEMBER 31,
1998 1997 1997 COMBINED 1996
-------------- -------------- -------------- ---------- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales(1):
Secure Communication Systems ............... $ 483.9 $307.6 $ 84.9 $392.5 $322.4
Specialized Communication Products ......... 553.1 238.9 74.0 312.9 220.7
-------- ------ ------ ------ ------
Total .................................... $1,037.0 $546.5 $158.9 $705.4 $543.1
======== ====== ====== ====== ======
Operating income before noncash
compensation charge:
Secure Communication Systems ............... $ 38.5 $ 25.8 $ 0.1 $ 25.9 $ 18.9
Specialized Communication Products ......... 61.8 30.0 7.8 37.8 24.8
-------- ------ ------ ------ ------
Total .................................... 100.3 55.8 7.9 63.7 $ 43.7
Noncash compensation charge(2) .............. -- (4.4) -- (4.4) --
-------- ------ ------ ------ ------
Operating income ............................ $ 100.3 $ 51.4 $ 7.9 $ 59.3 $ 43.7
======== ====== ====== ====== ======
Depreciation and amortization expenses
included in operating income:
Secure Communication Systems ............... $ 17.8 $ 12.9 $ 5.2 $ 18.1 $ 21.1
Specialized Communication Products ......... 22.6 9.3 2.6 11.9 7.0
Noncash compensation charge (2) ............ -- 4.4 -- 4.4 --
-------- ------ ------ ------ ------
Total .................................... $ 40.4 $ 26.6 $ 7.8 $ 34.4 $ 28.1
======== ====== ====== ====== ======
EBITDA(3)
Secure Communication Systems ............... $ 56.3 $ 38.7 $ 5.3 $ 44.0 $ 40.0
Specialized Communication Products ......... 84.4 39.3 10.4 49.7 31.8
-------- ------ ------ ------ ------
Total .................................... $ 140.7 $ 78.0 $ 15.7 $ 93.7 $ 71.8
======== ====== ====== ====== ======
</TABLE>
- ----------
(1) Sales are after intersegment eliminations. See Note 20 to the
Consolidated (Combined) Financial Statements.
(2) The Company did not include the 1997 noncash compensation charge of $4.4
million in its internal measure of reportable segment profitability
because that charge was not related to the operations of the segments.
(3) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs)
and the 1997 nonrecurring, noncash compensation charge of $4.4 million.
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 the
Company believes it to be a useful indicator of the Company's ability to
meet debt service and capital expenditure requirements.
1998 COMPARED TO 1997. Sales increased $331.6 million to $1,037.0 million
in 1998. Operating income increased $41.0 million to $100.3 million in 1998.
The 1998 Acquisitions contributed $287.2 million and $23.2 million,
respectively, to 1998 sales and operating income. On a pro forma basis to
reflect the 1998 Acquisitions as if they had occurred on January 1, 1997, sales
for 1998 would have been $1,163.2 million, an increase of 9.3% compared to pro
forma sales of $1,063.9 million for 1997. See Note 2 to the Consolidated
(Combined) Financial Statements. Operating income as a percentage of sales
("operating margin") improved to 9.7% from 8.4%. Operating income for 1997
includes a non-recurring noncash compensation charge of $4.4 million recorded
effective April 1, 1997 related to the initial capitalization of the Company.
Excluding this charge, operating margin for 1997 would have been 9.0%.
Excluding the 1997 noncash compensation charge, 1998 depreciation and
34
<PAGE>
amortization expenses increased $10.4 million to $40.4 million in 1998,
reflecting increased goodwill amortization associated with acquisitions and
additional depreciation related to capital expenditures. EBITDA for 1998
increased $47.0 million to $140.7 million. EBITDA as a percentage of sales
("EBITDA margin") improved to 13.6% from 13.3%.
Sales of the Secure Communication Systems segment increased $91.4 million
or 23.3% to $483.9 million in 1998. Operating income increased $12.6 million to
$38.5 million. Operating margin improved to 8.0% from 6.6%. The increase in
sales was primarily attributable to acquisitions and increased production and
shipments of the CHBDL and Raptor high data rate communications systems, UAV
programs, and secure telephone equipment (STE), partially offset by a decline
in sales on the International Space Station (ISS) program. The increase in
operating income was principally attributable to acquisitions and improved
margins on space communication systems, military communication systems and
space control systems, the 1998 sales growth and the negative impact on 1997
operating income resulting from $3.3 million of costs related to certification
efforts for the explosive detection system ("EDS"). EBITDA increased $12.3
million to $56.3 million in 1998 and EBITDA margin improved to 11.6% from
11.2%. The increases in EBITDA and EBITDA margin were attributable to the items
affecting the trends in operating income.
Sales of the Specialized Communication Products segment increased $240.2
million or 76.8% to $553.1 million in 1998. Operating income increased $24.0
million to $61.8 million in 1998, while operating margin decreased to 11.2%
from 12.1%. The increase in sales was principally attributable to acquisitions
and volume increases in aviation recorders, display products on the E2C and
V-22 platforms and microwave components for RF safety and monitoring, partially
offset by lower sales volume on commercial telecommunications products. Sales
for 1997 also included $1.8 million from a business which was sold in 1997. The
decrease in operating margin for 1998 is principally attributable to the lower
margins from the STS acquired business, partially offset by improved margins on
aviation recorders, display products and microwave monitoring components.
EBITDA increased $34.7 million to $84.4 million in 1998, while EBITDA margin
declined to 15.3% from 15.9%. The changes in EBITDA and EBITDA margin were
primarily attributable to the items affecting the trends in operating income.
Interest expense, net increased $10.0 million to $46.9 million in 1998 and
was primarily attributable to higher average outstanding debt balances during
1998. See "Liquidity and Capital Resources." The effective income tax rate for
1998 was 39.1% compared with 46.4% for 1997, which reflected the Company's $4.4
million non-recurring, noncash compensation charge and the Predecessor
Company's amortization expense for costs in excess of net assets acquired, both
of which were not deductible for income tax purposes.
1997 COMPARED TO 1996. Sales increased $162.3 million to $705.4 in 1997.
Operating income increased $15.6 million to $59.3 million in 1997. Operating
margin before the 1997 noncash charge of $4.4 million improved to 9.0% from
8.0%. The timing of the Loral Acquired Businesses acquisition by the
Predecessor Company which occurred on April 1, 1996 accounted for $132.2
million and $7.8 million, respectively, of the increases in sales and operating
income. The 1997 results of operations include the Loral Acquired Businesses
for twelve months, whereas the 1996 results only includes them for nine months.
The remaining increases in sales and operating income were driven by internal
growth. EBITDA increased by $21.9 million to $93.7 million in 1997. EBITDA
margin improved to 13.3% from 13.2%.
Sales of the Secure Communication Systems segment increased $70.1 million
to $392.5 million in 1997. Operating income increased $7.0 million to $25.9
million in 1997 and operating margin improved to 6.6% from 5.9%. The increase
in sales was principally attributable to the timing of the Loral Acquired
Business acquisition and increased production and shipments for the CHBDL and
UAV programs, STE and other information security systems, and increased P3-C
repair depot and power supplies sales. The improvement in operating margin was
primarily attributable to volume increases and margin improvements on high data
rate communications systems, partially offset by the $3.3 million of EDS
certification costs. Operating income for 1997 also benefited from less
goodwill
35
<PAGE>
amortization expense as a result of the purchase price allocation for the L-3
Acquisition. EBITDA increased $4.0 million to $44.0 million in 1997 primarily
because of the items affecting the trends in operating income. EBITDA margin
declined to 11.2% from 12.4% and was primarily attributable to the impact of
EDS certification costs.
Sales of the Specialized Communication Products segment increased $92.2
million to $312.9 million in 1997. Operating income increased $13.0 million to
$37.8 million in 1997 and operating margin improved to 12.1% from 11.2%. The
increase in sales was principally attributable to the timing of the Loral
Acquired Business acquisition and growth in display products for the F-14 and
E-2C platforms, antenna products for the TRAC-A platform and spares, and
telemetry products, partially offset by declines from certain military-related
product lines which were exited in 1996, and $5.6 million less sales from the
Hycor business which was sold in 1997. The improvement in operating income and
operating margin was attributable to higher sales of display products and
antenna products, margin improvements on aviation recorders, and the benefit
from discontinuing certain military-related product lines in 1996 which
generated losses. EBITDA increased $17.9 million to $49.7 million in 1997, and
EBITDA margin increased to 15.9% from 14.4%. The 1997 increases in EBITDA and
EBITDA margin were attributable to the trends affecting operating income.
Interest expense, net for 1997 was $36.9 million compared to $24.2 million
for 1996, reflecting the Company's higher interest rates on its debt compared
to the interest rate used to allocate interest expense to the Predecessor
Company by Lockheed Martin. The effective income tax rate for 1997 increased to
46.4% compared with 40.0% for 1996, primarily as a result of the Company's 1997
noncash compensation charge and additional Predecessor Company amortization
expense for costs in excess of net assets acquired both of which were not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $186.3 million in 1998, of which $146.2
million was related to the acquired businesses, $23.4 million was from
increases in unbilled receivables arising from an increase in programs entering
the production phase wherein unbilled costs and profits generally exceed
progress payments received from the customers until contract shipments are
completed, and the remaining increase was primarily from increases in other
billed receivables because of higher sales to affiliates and commercial
customers. The increase in other assets was primarily attributable to debt
issuance costs incurred in connection with the increase in debt during 1998.
The increases in other current assets, net property, plant and equipment,
intangibles, customer advances, other current liabilities and pension and
postretirement benefits were principally related to the acquired businesses.
Working capital, adjusted to exclude cash, deferred income taxes and the
current portion of long-term debt, increased to $115.1 million at the end of
1998 from $57.5 million at the end of 1997 and was primarily attributable to
the working capital of the acquired businesses, as well as the other factors
discussed above.
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STATEMENT OF CASH FLOWS
The following table provides cash flow statement data for the Company and
the Predecessor Company for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
-------------- -------------- ------------- -------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, 1997 DECEMBER 31,
1998 1997 1997 COMBINED 1996
-------------- -------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Net cash from (used in)
operating activities ......... $ 85.1 $ 73.9 $ (16.3) $ 57.6 $ 30.7
Net cash (used in) investing
activities ................... (472.9) (457.8) (4.3) (462.1) (298.0)
Net cash from financing
activities ................... 336.4 461.4 20.6 482.0 267.3
</TABLE>
OPERATING ACTIVITIES
During 1998, L-3 generated $85.1 million in cash from operating
activities, an increase of $27.5 million over 1997, principally as a result of
improvements in earnings and increases in deferred income tax provisions,
partially offset by a net increase in operating assets and liabilities of $11.1
million. Cash from operating activities in 1998 included interest payments on
debt of $42.9 million. The annual cash interest payments on the Company's debt
outstanding at the end of 1998 is about $54.6 million. See "Financing
Activities". The 1998 cash generated from operating activities provided the
resources to invest $23.4 million in new plant and equipment and to partially
fund the purchase of the 1998 Acquisitions. Operating activities are a
principal source of L-3's cash flows. Over the past three years, operating
activities generated approximately $173.4 million in cash. This cash was used
for new plant and equipment investments of $53.2 million and to partially fund
the acquisitions made by the Company and Predecessor Company over the past
three years.
INVESTING ACTIVITIES
Since L-3's formation in April 1997, the Company has actively pursued its
acquisition strategy. In 1998, the Company purchased additional businesses for
an aggregate cash purchase price, including assumed debt and expenses, net of
cash acquired, of $448.0 million, subject to certain post-closing adjustments,
and in certain cases additional consideration based on post-closing
performance. The cash invested for the 1998 Acquisitions was $389.7 million,
comprised of $27.6 million, $51.9 million, $68.8 million and $241.4 million,
respectively, for STS, ILEX, Ocean Systems and SPD. The remaining $58.3 million
was invested to acquire other operations and product lines.
The Company typically makes capital expenditures related primarily to
improvement of manufacturing facilities and equipment. The Company expects that
its capital expenditures for 1999 will be approximately $35.0 million.
FINANCING ACTIVITIES
On May 19, 1998, Holdings sold 6.9 million shares of its common stock in
the IPO for $22.00 per share representing 25.2% of Holdings' outstanding common
stock immediately after the IPO. The net proceeds from the IPO amounted to
$139.5 million and were contributed by Holdings to the Company. Concurrent with
the Holdings IPO, the Company sold the May 1998 Notes whose net proceeds
amounted to $173.8 million. In December 1998, the Company sold December 1998
Notes in a private placement offering, whose net proceeds amounted to $192.8
million. The Company completed its public exchange offer for the December 1998
Notes in February 1999.
The combined net proceeds from the IPO, May 1998 Notes and December 1998
Notes aggregated $506.1 million, of which $335.1 million were used to directly
finance the acquisitions made in 1998 and
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<PAGE>
repay borrowings under the Revolving Credit Facilities. The remaining net
proceeds were used to prepay $171.0 million of the borrowings outstanding under
the Term Loan Facilities. The prepayment effectively refinanced $171.0 million
of variable-rate debt, which was scheduled to mature in escalating annual
installment through 2006, with 8 1/2% fixed-rate debt of the May 1998 Notes
that matures in 2008.
During 1998, the Senior Credit Facilities were amended to increase the
Company's revolving credit facilities by $285.0 million to $385.0 million. At
December 31, 1998, available borrowings under the revolving credit facilities
were $297.6 million after reductions for outstanding letters of credit of $87.4
million. The Senior Credit Facilities and the Notes contain financial covenants
which remain in effect so long as any amount is owed or any commitment to lend
exists thereunder by L-3 Communications. As of December 31, 1998, L-3
Communications had been in compliance with these covenants at all times. The
borrowings under the Senior Credit Facilities are guaranteed by Holdings and by
substantially all of the Company's subsidiaries. The payments of principal and
premium, if any, and interest on the Notes are unconditionally guaranteed, on
an unsecured senior subordinated basis, jointly and severally, by substantially
all of the Company's subsidiaries, all of which are wholly owned subsidiaries.
On March 3, 1999, the Senior Credit Facilities were further amended to increase
the revolving credit facility by $15.0 million to $400.0 million. See Note 8 to
Consolidated (Combined) Financial Statements for a description of the Company's
debt and related financial covenants at December 31, 1998.
On February 4, 1999, Holdings sold 5.0 million shares of common stock in
an offering for $42.00 per share in the February 1999 Common Stock Offering,
representing 15.4% of Holdings' common stock immediately after the February
1999 Common Stock Offering. In addition, 6.5 million shares were sold by the
Lehman Partnership and Lockheed Martin in the February 1999 Common Stock
Offering, after which the Lehman Partnership owned 24.7% and Lockheed Martin
owned 7.1% of the outstanding shares of Holding's common stock. The net
proceeds to Holdings from the February 1999 Common Stock Offering amounted to
$201.5 million and were contributed to the Company. The net proceeds were
partially used to repay borrowings made in January 1999 under the Senior Credit
Facilities and to finance the Microdyne and Aydin acquisitions.
Based upon the current level of operations, management believes that the
Company's cash from operating activities, together with available borrowings
under the Senior Credit Facilities, will be adequate to meet its anticipated
requirements for working capital, capital expenditures, research and
development expenditures, program and other discretionary investments, and
interest 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 conditions in or
affecting the defense industry and to general economic, political, financial,
competitive, legislative and regulatory factors beyond its control. There can
be no assurance that sufficient funds will be available to enable the Company
to service its indebtedness, or make necessary capital expenditures and program
and discretionary investments.
MARKET RISKS
All of the Company's market risk sensitive instruments are entered into
for purposes other than trading.
Interest Rate Risk. The Company's financial instruments that are sensitive
to changes in interest rates include debt obligations and interest rate cap and
floor contracts, all of which are denominated in U.S. dollars. The interest
rates on the Notes are fixed-rate and therefore, not affected by changes in
interest rates. To mitigate risks associated with changing interest rates on
borrowings under the Senior Credit Facilities which bear interest at variable
rates, the Company entered into the interest rate cap
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<PAGE>
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 between the Company and
the counterparties are made (received) at the end of each quarter to the extent
due under the terms of the interest rate agreements. Such payments (amounts
received) are recorded as adjustments to interest expense. The interest rate
agreements were not material to interest expense or cash flows for 1998 or for
the nine-month period ended December 31, 1997. Additional data on the debt
obligations and interest rate agreements are provided in Notes 8 and 10 to the
Consolidated (Combined) Financial Statements.
The weighted average interest rate on the Notes is 9.03%. The Notes mature
in 2007 and 2008 and there are no scheduled principal payments before their
maturity dates. There were no outstanding borrowings under the Senior Credit
Facilities at end of 1998. For the interest rate agreements, the table below
presents significant contract terms and fair values at December 31, 1998.
<TABLE>
<CAPTION>
CAPS FLOORS
----------------------------- -----------------------------
($ in millions)
<S> <C> <C>
Notional amount ................. $100.0 $50.0
Cap/floor interest rate ......... 7.50% 5.50%
Reference rate .................. London Interbank Offered Rate London Interbank Offered Rate
Designated maturity ............. Quarterly Quarterly
Expiration date ................. March 28, 2002 March 28, 2002
Fair value ...................... $0.2 $(1.1)
</TABLE>
Foreign Currency Exchange Risk. The Company conducts certain of its
operations outside the U.S. in functional currencies other than the U.S.
dollar, the Company's reporting currency. The Company's exposure to foreign
currency exchange risk related to these foreign operations is not material to
the Company's results of operations, cash flows or financial position.
Equity Price Risk. The Company's investments in common equities are
subject to equity price risks. The carrying values and estimated fair values of
such instruments amounted to $11.4 million and $12.3 million, respectively, at
the end of 1998.
BACKLOG
The Company's funded backlog at December 31, 1998 was $855.9 million,
compared with $516.9 million at December 31, 1997. The Predecessor Company's
funded backlog at December 31, 1996 was $542.5 million. Funded orders for the
Company for 1998 and 1997 were $1,057.0 million and $709.6 million,
respectively. The Predecessor Company's funded orders for 1996 were $619.5
million. It is expected that approximately 81% of the backlog at December 31,
1998 will be recorded as sales over the next twelve-month period. However,
there can be no assurance that the Company's backlog will become revenues in
any particular period, if at all. Approximately 72% of the total backlog at
December 31, 1998 was directly or indirectly for defense contracts for end use
by the U.S. government. Approximately $735.2 million of total backlog at
December 31, 1998 was directly or indirectly for U.S. and foreign government
defense contracts, and approximately $22.6 million of total backlog was
directly or indirectly for U.S. and foreign government non-defense contracts.
Foreign customers accounted for approximately $165.9 million of the total
backlog.
RESEARCH AND DEVELOPMENT
Research and development costs including bid and proposal costs ("R&D
costs") sponsored by the Company for 1998 were $59.9 million. R&D costs
sponsored by the Company were $28.9 million for the nine-month period ended
December 31, 1997. R&D costs sponsored by the Predecessor Company were $12.0
million and $36.5 million for the three-month period ended March 31, 1997 and
the year ended December 31, 1996, respectively. The Loral Acquired Businesses
sponsored R&D costs of $5.6 million for the three-month period ended March 31,
1996. Customer-funded research and development was $181.4 million in 1998,
$117.1 million in 1997, and $153.5 million in 1996. The
39
<PAGE>
decrease in customer-funded research and development in 1997 was primarily
attributable to the transition of research and development programs into
production.
CONTINGENCIES
See Note 16 to the Consolidated (Combined) Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"), which
provides guidance on the financial reporting of start-up and organization
costs, including precontract costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. The Company does not expect
that SOP 98-5 will have a material impact on the Company's results of
operations or financial position.
In September 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently evaluating the
impact, if any, of SFAS 133 which is effective for all quarters of fiscal years
beginning after September 15, 1999.
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.
YEAR 2000
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Because the Company's business
units operate autonomously, each business unit has undertaken an effort to
identify and mitigate Year 2000 issues related to their information systems,
products, facilities, suppliers and customers. Therefore, the Company's Year
2000 effort is a composite of its business units' Year 2000 efforts,
coordinated through a Company-wide program instituted to oversee, guide and
track business units' Year 2000 efforts and to facilitate Company-wide
communications regarding Year 2000 methods.
Each business unit has appointed a Year 2000 project manager who oversees
a team responsible for performing its Year 2000 efforts in four phases: (i)
define, identify and inventory possible sources of Year 2000 issues, including
internal systems and products and services sold to customers; (ii) analyze and
determine the nature and extent of Year 2000 issues and develop project plans
to address those issues; (iii) implement and execute project plans to remediate
or replace non-compliant items, as appropriate, based upon assessed risk and
priority; and (iv) commence and complete testing, continue monitoring readiness
and prepare necessary contingency plans. The progress of this program is
monitored at each business unit with oversight by Corporate Management. This
oversight includes periodic reviews as well as visits to each business unit to
monitor progress with the plans.
We have completed the first three phases of the program for a substantial
majority of critical systems within the Company is targeted and plan to have
substantially all significant information systems, products and facilities in
the final phase of the program by mid-1999.
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<PAGE>
The business units of the Company's recently completed acquisitions have
been integrated into the Company's Year 2000 compliance efforts and these
acquired business units are currently performing their respective Year 2000
efforts at various stages within the four phases enumerated above. We plan to
have nearly all significant information systems, products and facilities of
these acquired businesses in the final phase of the program by the end of third
quarter of 1999.
The total estimated costs associated with the Company's Year 2000 efforts
have been updated to reflect recently acquired business units and estimated
costs for calendar year 2000. The revised estimate is $20.1 million and
includes $7.6 million of capitalizable costs with the remaining costs to be
approximately expensed as incurred. The Company has incurred approximately
$12.2 million of such costs to date. Substantially all of the remaining
estimated costs are expected to be incurred during the remainder of 1999.
The Company believes that there is low risk with respect to its operations
that any internal critical system will not be Year 2000 compliant by the end of
1999. The Company's business operations are also dependent on the Year 2000
readiness of its customers and infrastructure suppliers in areas such as
utilities, communications, transportation and other services. In those
environments, there could be instances of failure that could cause disruptions
in business transaction processes of the Company. The likelihood and effects of
failures in infrastructure systems and in the customer and supply chains cannot
be estimated, but such a failure could potentially result in a material adverse
impact on results of operations, liquidity or financial position of the
Company. The Company continues to attempt to assess the Year 2000 compliance
and readiness of its material third-party suppliers and customers. Such
attempts include written inquiries as to their Year 2000 certification of
compliance. As indicated above, contingency plans for suppliers, customers and
critical systems impacted by Year 2000 issues are being developed with an
anticipated completion date of June 30, 1999. It is anticipated that the
contingency plans will be tested throughout the remainder of 1999. These
estimates and projections could change as work progresses.
41
<PAGE>
BUSINESS
COMPANY OVERVIEW
L-3 Communications is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. We produce
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.
Our systems and specialized products are used to connect a variety of airborne,
space, ground-and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our customers include the U.S. DoD, certain U.S.
government intelligence agencies, major aerospace and defense contractors,
foreign governments and commercial customers.
Our business areas employ proprietary technologies and capabilities and
have leading positions in their respective primary markets. We have two
reportable segments, Secure Communication Systems and Specialized Communication
Products. In addition, we are seeking to expand the products and technologies
of our reportable segments in commercial markets as we discuss under "--
Emerging Commercial Products" below.
SECURE COMMUNICATION SYSTEMS. We are the established leader in secure,
high data rate communications for military and other U.S. government
reconnaissance and surveillance applications. Our 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.
Our major secure communication programs and systems include:
o secure data links for airborne, satellite, ground- and sea-based
remote platforms for information collection, command and control and
dissemination to users in real time;
o strategic and tactical signal intelligence systems that detect,
collect, identify, analyze and disseminate information and related
support contracts for military and intelligence efforts;
o secure telephone, fax and network equipment and encryption management;
o communication software support services to military and related
government intelligence markets; and
o communications systems for surface and undersea platforms and manned
space flights.
We believe that we have developed virtually every high bandwidth data link
that is currently used by the military for surveillance and reconnaissance. We
are also a leading supplier of communication software support services to
military and related government intelligence markets. In addition to these core
government programs, we are capitalizing on our technology base by expanding
into related commercial communication equipment markets. For instance, we are
applying our high data rate communications and archiving technology to the
medical image archiving market and our wireless communication expertise to
develop local wireless loop telecommunications equipment for the last mile
interconnect.
SPECIALIZED COMMUNICATION PRODUCTS. This reportable segment includes three
product categories:
Microwave Components. We are the preeminent worldwide supplier of
commercial off-the-shelf, high-performance microwave components and frequency
monitoring equipment. Our microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. We also provide
state-of-the-art, space-qualified communication components including channel
amplifiers and frequency filters for the commercial communications satellite
market serving major military and commercial frequencies, including Ka band.
Approximately 76% of Microwave Components sales for 1998 were made to
commercial customers, including Loral Space & Communications, Ltd., Motorola,
Inc., Lucent Technologies Inc., AT&T Corp. and Lockheed Martin.
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<PAGE>
Avionics and Ocean Products. Avionics and Ocean Products include our
aviation recorders, display systems, antenna systems, acoustic undersea warfare
systems and naval power distribution, conditioning, switching and protection
equipment for naval ships and submarines. We are the world's leading
manufacturer of commercial cockpit voice and flight data recorders (known as
"black boxes"). These recorders are sold under the Fairchild brand name both to
aircraft manufacturers and to the world's major airlines for their existing
fleets of aircraft. Our aviation recorders are also installed on military
transport aircraft throughout the world. We provide military and high-end
commercial displays for use in military aircraft. We also manufacture high
performance surveillance and precision millimeter wave antennas and related
equipment for U.S. Air Force, U.S. Army and U.S. Navy aircraft and are the
leading supplier of ground-based radomes. We are 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. We are the only fully
integrated, full-line provider of qualified turnkey electrical power delivery
and management systems for U.S. Navy surface ships and submarines.
Telemetry, Instrumentation and Space Products. Our 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 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.
We are a leading global satellite communications systems provider offering
systems and services used in the satellite transmission of voice, video and
data through earth stations for uplink and downlink terminals. We provide
global satellite communications systems and services to customers that include
foreign post, telephone and telegraph administrations, domestic and
international prime communications infrastructure contractors,
telecommunications and satellite service providers, broadcasters and
media-related companies, government agencies and large corporations. We also
provide commercial, off-the-shelf satellite control software, TT&C, mission
processors and software engineering services to the worldwide military,
civilian and commercial satellite markets.
EMERGING COMMERCIAL PRODUCTS. Building upon our core technical expertise
and capabilities, we are seeking to expand into several closely aligned
commercial business areas and applications. Emerging Commercial Products
currently include the following four niche markets:
o medical archiving and simulation systems;
o local wireless loop telecommunications equipment;
o airport security equipment; and
o information network security.
A majority of these commercial products were developed based on technology
used in our military businesses with relatively small additional expense. We
are applying our technical capabilities in high data rate communications and
archiving technology developed in our Secure Communication Systems business
area to the medical image archiving market together with the General Electric
Company's medical systems business. Based on secure, high data rate
communication technology also developed in our Secure Communication Systems
business area, we have 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 does
not exist. We have completed the development phase for the local wireless loop
telecommunications equipment and have begun deliveries. In addition, the FAA
awarded us a development contract for next generation airport security
equipment for explosive detection. On November 23, 1998, we received FAA
certification for our eXaminer 3DX (Trade Mark) 6000 system which is the only
second-generation system to receive certification and the only system to
generate full, three-dimensional images of all objects in a piece of baggage.
To capitalize on commercial opportunities for the information security
technologies we developed in our Secure Communication Systems business area, we
have also created a new subsidiary focusing on
43
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developing and marketing secure information and communication systems for
commercial clients. This subsidiary acquired a network security software
product through a majority-owned joint venture. Taken together, revenues
generated from our Emerging Commercial Products have not yet been material to
us.
INDUSTRY OVERVIEW
The defense industry has 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 had focused its
resources on enhancing its military readiness, joint operations and digital
command and control communications capabilities 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.
The industry has also undergone dramatic consolidation resulting in the
emergence of three dominant prime system contractors (The Boeing Company
("Boeing"), Lockheed Martin and Raytheon Company ("Raytheon")). One outgrowth
of this consolidation among the remaining major prime contractors is their
desire to limit purchases of products and sub-systems from one another.
However, there are numerous essential products, components and systems that are
not economical for the major prime contractors to design, develop or
manufacture for their own internal use which creates opportunities for merchant
suppliers such as L-3. As the prime contractors continue to evaluate their core
competencies and competitive position, focusing their resources on larger
programs and platforms, the Company expects the prime contractors to continue
to exit non-strategic business areas and procure these needed elements on more
favorable terms from independent, commercially oriented merchant suppliers.
Recent examples of this trend include divestitures of certain non-core
defense-related businesses by AlliedSignal Inc. ("AlliedSignal"), 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 merchant suppliers, including the Company, with a competitive advantage
in securing new business and provide the prime contractors with significant
cost reduction opportunities through coordination of the design, development
and manufacturing processes.
BUSINESS STRATEGY
Management has successfully integrated the business units of Lockheed
Martin it acquired in the L-3 Acquisition and enhanced the Company's operating
efficiency through reduced overhead expenses and facility rationalization.
These efforts resulted in improvements in sales, profitability and competitive
contract award win rates. Going forward, L-3 intends to leverage its market
position, diverse program base and favorable mix of cost plus to fixed price
contracts to enhance its profitability and to establish itself as the premier
merchant supplier of communication systems and products to the major prime
contractors in the aerospace/defense industry as well as the Government. The
Company's strategy to continue to achieve its objectives includes:
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<PAGE>
o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. Management has developed
strong relationships with virtually all of the prime contractors, the DoD
and other major government agencies, enabling L-3 to identify business
opportunities and anticipate customer needs. As an independent merchant
supplier, the Company anticipates its growth will be driven by expanding
its share of existing programs and by participating in new programs.
Management identifies opportunities where it believes it will be able to
use its strong relationships to increase its business presence and allow
its customers to reduce their costs. The Company also expects to benefit
from increased outsourcing by prime contractors who in the past may have
limited their purchases to captive suppliers and who are now expected to
view L-3's capabilities on a more favorable basis given its status as an
independent company. L-3's independent status positions it to be the
desired merchant supplier to multiple bidders on prime contract bids. As an
example of the Company's merchant supplier strategy, L-3 equipment is
included in all three prime contractor bids for the Airborne Standoff Radar
("ASTOR") program in the United Kingdom and both prime contractor bids for
the DoD's Joint Air Surface Standoff Missile ("JASSM") program.
o SUPPORT CUSTOMER REQUIREMENTS. A significant portion of L-3's sales
are derived from high-priority, long-term programs and from programs for
which L-3 has been the incumbent supplier, and in many cases acted as the
sole provider for many years. Approximately 60% of L-3's 1998 sales of
$1,037.0 million were generated from sole source contracts. L-3's customer
satisfaction and excellent performance record are evidenced by its
performance-based award fees exceeding 90% on average over the past two
years. Management believes prime contractors will increasingly award
long-term, sole source, outsourcing contracts to the merchant supplier they
believe is most capable on the basis of quality, responsiveness, design,
engineering and program management support as well as cost. As a
consequence of L-3's strong competitive position, the Company has
experienced a contract award win rate for 1998 in excess of 63% on new
competitively bid contracts and in excess of 90% on contracts for which L-3
was the incumbent. The Company intends to continue to align its research
and development, manufacturing and new business efforts to complement its
customers' requirements and provide state-of-the-art products.
o ENHANCE OPERATING MARGINS. Since the L-3 Acquisition in April 1997,
management has reduced corporate administrative expenses and facilities
costs, increased sales and improved competitive contract award win rates.
Enhancement of operating margins was primarily due to efficient management
and elimination of significant corporate expense allocations which existed
prior to the L-3 Acquisition. Operating margin for 1998 improved to 9.7%
from 8.4% in 1997. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Results of Operations". Management
intends to continue to enhance its operating performance by reducing
overhead expenses, continuing consolidation and increasing productivity.
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. L-3 has
developed strong, proprietary technical capabilities that have enabled it
to capture a number one or two market position in most of its key business
areas, including secure, high data rate communications systems, solid state
aviation recorders, telemetry, instrumentation and space products, advanced
antenna systems and high performance microwave components. For the three
years ended December 31, 1998, the Company and the Predecessor Company,
excluding pro forma additions for the 1998 Acquisitions and the Aydin
acquisition, invested $142.9 million in Company-sponsored independent
research and development, including bid and proposal costs, in addition to
making substantial investments in its technical and manufacturing
resources. Further, as of December 31, 1998 the Company has a highly
skilled workforce including approximately 2,775 engineers. Management is
applying the Company's technical expertise and capabilities into several
closely aligned commercial business areas and applications, such as medical
imaging archive management, wireless telephony and airport security
equipment and will continue to explore other similar commercial
opportunities.
o MAINTAIN DIVERSIFIED BUSINESS MIX. The Company enjoys a diverse
business mix with a limited program exposure, a favorable balance of cost
plus and fixed price contracts, a significant sole source follow-on
business and an attractive customer profile. The Company's largest program,
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representing approximately 8% of 1998 sales is a long-term, sole
source, cost plus contract for the U-2 Program. No other program
represented more than 5% of 1998 sales. Further, the Company's sales mix of
contracts for 1998 was 30% cost plus and 70% fixed price, providing the
Company with a favorable mix of predictable profitability (cost plus) and
higher margin (fixed price) business. L-3 also enjoys an attractive
customer mix of defense and commercial business, with DoD related sales
accounting for 64% and commercial and federal (non-DoD) sales accounting
for approximately 36% of 1998 sales of $1,037.0 million. The Company
intends to leverage this favorable business profile to expand its merchant
supplier business base.
o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent industry
consolidation has essentially eliminated traditional middle-tier
aerospace/defense companies. This level of consolidation is now beginning
to draw the concern of the DoD and federal anti-trust regulators. In 1997
and 1998, a number of merchant supplier companies were sold: the Computing
Devices International division of Ceridian to General Dynamics Corp.
("General Dynamics"), Kaman Sciences Corp. ("Kaman Sciences") to ITT
Industries, Inc. ("ITT"), BDM International, Inc. ("BDM") to TRW Inc.
("TRW"), TASC Inc., a subsidiary of Primark Corporation, to Litton
Industries, Inc. ("Litton") and Tracor, Inc. to GEC Marconi, a unit of The
General Electric Company, p.l.c. As a result, the Company anticipates that
the consolidation of the smaller participants in the defense industry will
create attractive complementary acquisition candidates for L-3 in the
future as these companies continue to evaluate their core competencies and
competitive position. L-3 intends to enhance its existing product base
through internal research and development efforts as well as selective
acquisitions and add new products to its product base through acquisitions
in areas synergistic with L-3's present technology. The Company seeks to
acquire potential targets with the following criteria: (i) significant
market position in their business areas, (ii) product offerings which
complement and/or extend those of L-3 and (iii) positive future growth and
earnings prospects.
ACQUISITION STRATEGY
Since L-3's formation in April 1997, the Company has actively pursued its
acquisition strategy. Since completing the L-3 Acquisition, the Company has
purchased additional businesses for an aggregate cash purchase price including
assumed debt and expenses, net of cash acquired, of approximately $603.0
million, in certain cases subject to certain post-closing adjustments and
additional consideration based on post-closing performance. 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. The Company has reached agreement on or is in discussions regarding a
number of potential acquisition opportunities and expects to use its bank
credit facilities to fund these transactions if it proceeds with them. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources".
RECENT DEVELOPMENTS
Microdyne Corporation. On December 3, 1998, we signed an agreement to
acquire all of the outstanding common stock of Microdyne for approximately
$90.0 million in cash, including the repayment of Microdyne's debt. The Company
completed the acquisition in February 1999. Microdyne is a leading global
developer and manufacturer of aerospace telemetry receivers, secure
communications and technical support services, including specialized telemetry
high-frequency radios used in aerospace and satellite communications for data
gathering and analysis. Microdyne also provides products for the government and
commercial signal intelligence markets and support and repair services for
electronic products companies. Microdyne's aerospace telemetry products will
enable us to provide integrated solutions to our space customers' requirements
for command, control, telemetry and tracking. The purchase of Microdyne was
financed using our available cash and borrowings under our bank credit
facilities. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources".
Aydin Corporation. On March 1, 1999, we signed an agreement to acquire all
of the outstanding common stock of Aydin for approximately $73.8 million in
cash including expenses before taking into
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account Aydin's cash on hand, which amounted to approximately $15.1 million at
the end of March 1999. Pursuant to the acquisition agreement, a tender offer
was launched on March 5, 1999 for all the issued and outstanding common stock
of Aydin by a wholly owned subsidiary of L-3 Communications. The Company
completed the acquisition on April 16, 1999. Aydin is a leader in telemetry,
communications and other electronic products and systems. Aydin's products and
systems are used in military and space operations by its government and
commercial customers. The acquisition was financed using available cash on
hand.
Interstate Electronics Corporation. On April 18, 1999, we signed an
agreement to acquire all of the outstanding common stock of IEC for
approximately $60.0 million in cash, including certain real estate with an
estimated fair value in excess of $10.0 million. The Company expects to
complete the acquisition in the second quarter of 1999. IEC has been a
long-term supplier of critical test instrumentation and missile tracking
systems for the U.S. Navy's Fleet Ballistic Missile weapons systems, including
the Trident submarine and is also a leader in global positioning systems
currently in use on multiple aircraft, cruise missiles and precision guided
bombs. In addition, IEC produces ruggedized displays for miliary and industrial
applications, and provides secure communications equipment and services on a
quick reaction basis for deployed forces in Eastern Europe. The purchase of IEC
is expected to be financed using our available cash and borrowings under our
bank credit facilities.
HISTORY
Holdings was formed in April 1997 by Mr. Frank C. Lanza, the former
President and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the
former Senior Vice President and Controller of Loral (collectively, "Senior
Management"), the Lehman Partnership and Lockheed Martin to carry-out the L-3
Acquisition. In May 1998, Holdings successfully completed the IPO, raising net
proceeds of $139.5 million which it contributed to the Company. The Company
raised net proceeds of $173.8 million in a concurrent debt offering. In
December 1998, the Company raised net proceeds of $192.8 million in the
December 1998 Note offering. In February 1999, Holdings raised net proceeds of
$201.5 million in the February 1999 Common Stock Offering and contributed them
to the Company.
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PRODUCTS AND SERVICES
The systems and products of the Company's two reportable segments are
summarized in the following tables:
SECURE COMMUNICATION SYSTEMS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
- -------------------------------------- --------------------------------------- ---------------------------------------
<S> <C> <C>
HIGH DATA RATE COMMUNICATIONS
o Wideband data links and ground o High performance, wideband o Used on aircraft, naval ships,
terminals secure communication links for unmanned aerial vehicles and
interoperable tactical battlefield satellites for relaying of
data communication and intelligence and reconnaissance
reconnaissance information
SATELLITE COMMUNICATION TERMINALS
o Ground-based satellite o Interoperable, transportable o Provide remote personnel with
communication terminals and ground terminals for remote data communication links to distant
payloads links to distant segments via forces
commercial or military satellites
SPACE COMMUNICATION AND SATELLITE CONTROL
o Satellite communication and o On-board satellite external o International Space Station;
tracking systems communications, video systems, Earth Observing Satellite;
solid state recorders and ground Landsat-7; Space Shuttle; and
support equipment National Oceanic and
Atmospheric Administration
weather satellites
o Satellite command and control o Software integration, test and o Air Force satellite control
sustainment and support maintenance support for Air network and Titan IV launch
Force satellite control network; system
engineering support for satellite
launch systems
MILITARY COMMUNICATIONS
o Shipboard communication o Internal and external o Shipboard voice communications
systems communications (radio room) for systems for Aegis cruisers and
ships and submarines destroyers and fully automated
Integrated Radio Room (IRR)
for ship-to-ship communications
on Trident submarines
o Digital battlefield o Communications on the move for o Communication systems for U.S.
communications tactical battlefield Army C2V
o Communication software support o Value-added, critical software o ASAS, JSTARS, and
services support for C3I systems GUARDRAIL
INFORMATION SECURITY SYSTEMS
o Secure Telephone Unit (STU o Secure and non-secure voice, o Office and battlefield secure and
III)/Secure Terminal Equipment data and video communication non-secure communication for
(STE) utilizing ISDN and ATM armed services, intelligence and
commercial network technologies security agencies
o Local management device/key o Provides electronic key material o User authorization and
processor (LMD/KP) accounting, system management recognition and message
and audit support functions for encryption for secure
secure data communication communication
encryption
o Information processing systems o Custom designed strategic and o Classified military and national
tactical signal intelligence agency intelligence efforts
systems that detect, collect,
identify, analyze and disseminate
information and related support
contracts
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
- ------------------------------------------- -------------------------------------- ---------------------------------------
<S> <C> <C>
MICROWAVE COMPONENTS (CATALOG)
o Passive components, switches and o Radio transmission, switching o Broad-band and narrow-band
wireless assemblies and conditioning; antenna and commercial applications (PCS,
base station testing and cellular, SMR, and paging
monitoring infrastructure) sold under the
Narda brand name; and broad-
band military applications
o Safety products o Radio frequency (RF) o Monitor cellular base station and
monitoring and measurement for industrial RF emissions
safety frequency monitoring
o Semiconductors (diodes, o Radio frequency switches, o Various industrial and military
capacitors) limiters, voltage control, end uses, including commercial
oscillators, harmonic generators satellites, avionics and specialty
communication products
o Satellite and wireless components o Satellite transponder control, o China Sat, PanAmSat, Telstar,
(channel amplifiers, transceivers, channel and frequency separation Sirius, Tempo, Tiros, Milstar,
converters, filters and GPS and LandSat
multiplexers)
o Amplifiers and amplifier based o Automatic Test Equipment o LEO satellites, ground stations,
components (amplifiers, up/down (ATE), military EW, ground and LMDS, MMDS, military EW and
converters and Ka assemblies) space communications ATE
AVIONICS AND OCEAN PRODUCTS
Aviation Recorders
o Solid state crash resistant cockpit o Voice recorders continuously o Installed on business and
voice and flight data recorders record most recent 30-120 commercial aircraft and certain
minutes of voice and sounds military transport aircraft; sold to
from cockpit and aircraft both aircraft OEMs and airlines
inter-communications. Flight data under the Fairchild brand name
recorders record the last 25
hours of flight parameters
o Solid state video recorders o Reconnaissance platforms o New product
Antenna Products
o Ultra-wide frequency and o Surveillance; radar detection o F-15, F-16, F-18, E-2C, P-3,
advanced radar antenna systems C-130, B-2, AWACS, Apache,
and rotary joints Cobra, Mirage (France),
Maritime Patrol (U.K.) and
Tornado (U.K.)
o Precision antenna systems o Antennas for high frequency, o Various military and commercial
serving major military and millimeter satellite customers
commercial frequencies, communications programs and
including Ka band scientific astronomy
o Ground based radomes o Protective shields for antennas o FAA, weather radar and military
against weather applications
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
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SPECIALIZED COMMUNICATION PRODUCTS
(CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
- ---------------------------------------- ----------------------------------------- --------------------------------------
<S> <C> <C>
Display Products
o Cockpit and mission display o High performance, ruggedized o E-2C, V-22, F-14, F-117, E-6B,
systems and controls flat panel and cathode ray tube C-130, AWACS, JSTARS S-3 and
displays and processors AH-64
Ocean Products
o Airborne dipping sonar systems o Submarine detection and o SH-60, SH-2/3, AB-212, EH-101
localization and Lynx Helicopters
o Submarine and surface ship o Submarine and surface ship o SSN, SSBN, DDG-963, and
towed arrays detection and localization FFG-7
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)
o Naval and commercial power o Switching, distribution and o All naval combatants;
delivery and switching products protection, as well as frequency submarines, surface ships and
and voltage conversion aircraft carriers - Trident, 688,
NSSN, DDG51, CG49, DD963
and Nimitz - class CVN
o Commercial transfer switches, o Production and maintenance of o FAA, financial institutions and
UPS systems and power products systems and high-speed switches rail transportation
for power interruption
prevention for computer systems
o Shipboard communications and o Design, develop and manufacture o CVN, NSSN
controls of ship control and interior
communications equipment
o Ship electrical repair and o Repair, installation, overhaul and o All naval combatants
overhaul testing services for USN
shipboard electrical, electronic
and ordinance systems
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 and instrumentation measurement, processing, Nimrod (U.K.), Tactical Hellfire,
systems simulation, distribution, display Titan, EELV, A2100, ATHENA,
and storage for flight testing ARTEMIS and ICO
o Training range telemetry systems o Training ranges and test ranges o Combat simulation and tests
Space Products
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private
systems supplier video and data networks, direct to home uplinks,
satellite news gathering and
wideband applications
o Safe and arms processor o Weapons o Hellfire, Javeline
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
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SECURE COMMUNICATION SYSTEMS
L-3 is a leader in communication systems for high performance intelligence
collection, imagery processing and ground, air, sea and satellite
communications for the DoD and other government agencies. The Salt Lake City
operation provides secure, high data rate, real-time communication systems for
surveillance, reconnaissance and other intelligence collection systems. The
Camden operation designs, develops, produces and integrates communication
systems and support equipment for space, ground and naval applications. The
Shrewsbury operation provides communication software support services to
military and related government intelligence markets. Product lines of the
Secure Communication Systems business include high data rate communications
links, satellite communications ("SATCOM") terminals, Navy vessel communication
systems, space communications and satellite control systems, signal
intelligence information processing systems, information security systems,
tactical battlefield sensor systems and commercial communication systems.
o HIGH DATA RATE COMMUNICATIONS
The Company is a technology leader in high data rate, covert,
jam-resistant microwave communications in support of military and other
national agency reconnaissance and surveillance applications. L-3's product
line covers a full range of tactical and strategic secure point-to-point and
relay data transmission systems, products and support services that conform to
military and intelligence specifications. The Company's systems and products
are capable of providing battlefield commanders with real time, secure
surveillance and targeting information and were used extensively by U.S. armed
forces in the Persian Gulf war.
During the 1980s, largely based on its prior experience with command and
control guidance systems for remotely-piloted vehicles, L-3 developed its
current family of strategic and tactical data links, 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 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
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International Space Station ("ISS"). These systems will control all ISS radio
frequency ("RF") communications and external video activities. The Company also
provides solid-state recorders and memory units for data capture, storage,
transfer and retrieval for space applications. The standard NASA tape recorder,
which was developed and produced by the Company, has completed over four
million hours of service without a mission failure. Current programs include
recorders for the National Oceanic & Atmospheric Administration ("NOAA")
weather satellites, the Earth Observing Satellite ("EOS"), AM spacecraft and
Landsat-7 Earth-monitoring spacecraft. The Company also provides space and
satellite system simulation, satellite operations and computer system training,
depot support, network engineering, resource scheduling, launch system
engineering, support, software integration and test through cost-plus contracts
with the U.S. Air Force.
o MILITARY COMMUNICATIONS
The Company provides integrated, computer controlled switching systems for
the interior and exterior voice and data needs of today's Navy military
vessels. The Company's products include Integrated Voice Communication Systems
("IVCS") for Aegis cruisers and destroyers and the Integrated Radio Room
("IRR") for Trident class submarines, the first computer controlled
communications center in a submarine. These products integrate the intercom,
tactical and administrative communications network into one system accessing
various types of communication terminals throughout the ship. The Company's
MarCom 2000 secure digital switching system is in development for the Los
Angeles class attack submarine and provides an integrated approach to the
specialized voice and data communications needs of a shipboard environment for
internal and external communications, command and control and air traffic
control. The Company also offers on-board, high data rate communications
systems which provide a data link for carrier battle groups which are
interoperable with the U.S. Air Force's surveillance/ 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 capabilities 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.
SPECIALIZED COMMUNICATION PRODUCTS
MICROWAVE COMPONENTS
L-3 is the preeminent worldwide supplier of commercial off-the-shelf, high
performance RF microwave components, assemblies and instruments supplying the
wireless communications, industrial
52
<PAGE>
and military markets. The Company is also a leading provider of
state-of-the-art space-qualified commercial satellite and strategic military RF
products and millimeter amplifier based products. L-3 sells many of these
components under the well-recognized Narda brand name and through a
comprehensive catalog of standard, stocked hardware. L-3 also sells its
products through a direct sales force and an extensive network of 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 three principal sites, one in Hauppauge, New York ("Narda East")
and two in Sacramento, California, ("Narda West" and "DBS").
Narda East represents approximately 60% 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 original 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. 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,
linearizers 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 and linearizers constitute Narda West's main satellite
products. Channel amplifiers 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 as
compared to in-house alternatives. On a typical satellite, for which there are
20 to 50 channel amplifiers, Narda West's channel amplifiers offer cost savings
of up to 60% (up to $1 million per satellite) and decrease launch weight by up
to 25 kilograms. Linearizers, used either in conjunction with a channel
amplifier or by themselves, pre-distort a signal to be transmitted back to
earth before it enters a Traveling Wave Tube ("TWT") for amplification. This
pre-distortion is exactly the opposite of the distortion created at peak power
by the TWT and, consequently has a cancellation effect that keeps the signal
linear over a much larger power band of the tube. This significantly increases
the useful output power of the TWT and consequent terrestrial coverage from the
satellite.
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 involves wideband
filters used for electronic warfare applications.
DBS designs and manufactures both broad and narrow band amplifiers and
amplifier-based products in the microwave and millimeter wave frequencies.
These amplifiers are used as low-noise,
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high-gain components in defense and communications applications. These devices
can be narrow band for communication needs or broadband for electronic warfare.
DBS has an extensive offering of amplifier designs allowing it to rapidly
respond to unique requirements from its marketplace.
DBS offers standard packaged amplifiers for use in various automated test
equipment and system applications. It is also developing higher-level
assemblies for specific military applications in which the amplifier serves as
the cornerstone component. For future growth, DBS is at the forefront of
technology in both the design and manufacturing of millimeter range (-20GHz)
amplifier products for use in emerging communication applications such as back
haul radios, LMDS and ground terminals for LEOS. Further, DBS is starting to
penetrate the space qualified communications market with designs applicable to
many LEO communication satellite needs.
AVIONICS AND OCEAN PRODUCTS
o AVIATION RECORDERS
L-3 manufactures commercial solid-state crash-protected aviation recorders
("black boxes") under the Fairchild brand name, and has delivered over 40,000
flight recorders to airplane manufacturers and airlines around the world.
Recorders are mandated and regulated by various worldwide agencies for
commercial airlines and a large portion of business aviation aircraft.
Management anticipates growth opportunities in Aviation Recorders as a result
of the current high level of orders for new commercial aircraft. Expansion into
the military market shows continued growth opportunities. L-3 Recorders were
recently selected for installation on the fleet of the Royal Australian Air
Force and Royal Australian Army transport aircraft and are currently being
installed on the U.S. Navy C-9 aircraft. There are two types of recorders: (i)
the Cockpit Voice Recorder ("CVR") which records the last 30 to 120 minutes of
crew conversation and ambient sounds from the cockpit and (ii) the Flight Data
Recorder ("FDR") which records the last 25 hours of aircraft flight parameters
such as speed, altitude, acceleration, thrust from each engine and direction of
the flight in its final moments. Recorders are highly ruggedized instruments,
designed to absorb the shock equivalent to that of an object traveling at 268
knots stopping in 18 inches, fire resistant to 1,100 degrees centigrade and
pressure resistant to 20,000 feet undersea for 30 days. Management believes
that the Company has the leading worldwide market position for CVR's and FDR's.
o ANTENNA PRODUCTS
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. L-3 is a leading supplier
of ground-based radomes. Radomes are designed to enclose an antenna system as a
protective shield against the environment as well as to accentuate the
performance of an antenna system. Radomes are used to enclose antenna systems
used for air traffic control, weather radar, defense and scientific purposes.
o DISPLAY PRODUCTS
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"),
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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 PRODUCTS
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.
SPD is the world's leading provider of state-of-the-art, mission-critical
electronics and electrical power delivery products, systems and subsystems, as
well as communications and control systems for the U.S. Navy and many domestic
and international customers. In addition, SPD provides communications
subsystems and electrical products for transportation and utilities businesses.
SPD's four business units are: SPD Electrical Systems, which is the leading
U.S. manufacturer of military power delivery systems and components focused on
switching, distribution and protection providing engineering design and
development, manufacturing and overhaul and repair services; Power Paragon,
which is one of the world's leading providers of high technology electrical
power distribution, control and conversion systems focused on frequency and
voltage conversion for military and commercial applications; Henschel, which is
the leading designer, developer, and manufacturer of ship control and interior
communications equipment; and Pac Ord, which is the only combat systems
overhaul and repair contractor, which services the U.S. Naval Fleet on a
national basis with locations in San Diego, Norfolk and Jacksonville.
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
The Company is a leader in component products and systems used in
telemetry and instrumentation for airborne applications such as satellites,
aircraft, UAVs, launch vehicles, guided missiles, projectiles and targets.
Telemetry involves the collection of data from these platforms, its
transmission to ground stations for analysis, and its further dissemination or
transportation to another platform. A principal use of this telemetry data is
to measure as many as 1,000 different parameters of the platform's operation
(in much the same way as a flight data recorder on an airplane measures various
flight parameters) and transmit this data to the ground.
Additionally, for satellite platforms, the equipment also acquires the
command uplink that controls the satellite and transmits the necessary data for
ground processing. In these applications, high reliability of components is
crucial because of the high cost of satellite repair and the length of
uninterrupted service required. Telemetry also provides the data to terminate
the flight of missiles and rockets under errant conditions and/or at the end of
a mission. Telemetry and command/control products are currently provided on
missile programs such as AMRAAM, ASRAAM, AIM-9X, JASSM, JDAM, FOTT, ATACMS and
PAC-3, as well as satellite programs such as GPS BLK IIF, GLOBALSTAR,
EARTHWATCH, SBIRS, LUNAR PROSPECTOR, MTSAT, ARTEMIS and Hughes ICO.
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 and include software and software engineering services. 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
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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 markets jointly with GE Medical Systems GEMnet (Trade Mark) ,
a cardiac image management and archive system through an exclusive reseller
arrangement with GE Medical Systems. GEMnet (Trade Mark) 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. The Company
is an exclusive reseller of EchoNet (Trade Mark) pursuant to a reseller
arrangement with Heartlab, Inc. EchoNet (Trade Mark) is a digital archive
management and review system designed specifically for the echocardiology
profession. 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. EchoNet (Trade Mark) is a trademark of Heartlab, Inc. GEMnet
(Trade Mark) 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.
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.
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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 (Trade Mark) 6000, will analyze the contents of
checked baggage at airports for a wide-range of explosive material as specified
by the FAA. On November 23, 1998, L-3 received FAA certification for its
eXaminer 3DX (Trade Mark) 6000 system which is the only second- generation
system to receive certification and the only system to generate full,
three-dimensional images of all objects in a piece of baggage. The eXaminer 3DX
(Trade Mark) 6000 has been certified at 500 bags per hour but eventually will
be capable of inspecting 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.
o INFORMATION NETWORK SECURITY
The Company is applying its information security capabilites developed at
Communication Systems--East to the commercial markets through the formation of
a new subsidiary, L-3 Communications Secure Information Technology, Inc. ("L-3
Secure Information Technology"). Through a majority-owned joint venture ("L-3
Network Security"), L-3 Secure Information Technology acquired a network
security software business from Trident Data Systems, which retained a minority
interest in L-3 Network Security.
In early November 1998, L-3 Network Security announced the release of its
third-generation network security software, Expert (Trade Mark) 3.0, which
automates the sophisticated network risk analysis process. This software was
first developed for the U.S. Air Force and is now used by leading corporations,
consulting firms and government agencies. Expert (Trade Mark) 3.0 allows
network administrators and business managers to measure and manage information
risk by first automatically mapping a user's network, compiling a database of
all systems, applications and services -- including unauthorized modems. Expert
(Trade Mark) 3.0's risk algorithms then quantify the amount of risk present in
all parts of the network and analyze the likelihood of various insider and
outsider threats, linking these threats to actual vulnerabilities present on
the network. Expert (Trade Mark) 3.0's databases contain virtually all
publicly known computer vulnerabilities, researched and verified by L-3's
full-time security team. A comprehensive vulnerability report is provided by
Expert (Trade Mark) 3.0, which permits users to quantify risk measures and to
formulate a basis for information security policy.
CONTRACTS
A significant portion of L-3's sales are derived from high-priority,
long-term programs and from programs for which L-3 has been the incumbent
supplier, and in many cases acted as the sole provider for many years.
Approximately 60% of L-3's 1998 sales of $1,037.0 million were generated from
sole source contracts. L-3's customer satisfaction and excellent performance
record are evidenced by its performance-based award fees exceeding 90% on
average over the past two years. Management believes prime contractors will
increasingly award long-term, sole source, outsourcing contracts to the
merchant supplier they believe is most capable on the basis of quality,
responsiveness, design, engineering and program management support as well as
cost. As a consequence of L-3's strong competitive position, the Company has
experienced a contract award win rate for 1998 in excess of 63% on new
competitively bid contracts and in excess of 90% on contracts for which L-3 was
the incumbent.
The Company enjoys a diverse business mix with a limited program exposure,
a favorable balance of cost plus and fixed price contracts, a significant sole
source follow-on business and an attractive customer profile. See "Customers"
below. L-3's sales mix of contracts for 1998 was 30% cost plus and 70% fixed
price, providing the Company with a favorable mix of predictable profitability
(cost plus) and higher margin (fixed price) business.
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Under firm fixed price contracts the Company agrees to perform for a
predetermined contract 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 contracts. Generally, firm
fixed price contracts offer higher margin than cost plus type contracts. All
domestic defense contracts and subcontracts to which the Company is a party are
subject to audit, various profit and cost controls and standard provisions for
termination at the convenience of the U.S. government. Upon termination, other
than for a contractor's default, the contractor will normally be entitled to
reimbursement for allowable costs and 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 U.S. government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the U.S. 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 U.S. government, changes in the U.S. 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 U.S. 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 could have an adverse effect on the
Company.
BACKLOG
The Company's backlog as of December 31, 1998 amounted to $855.9 million,
of which $323.6 million was for the Secure Communication Systems segment and
$532.3 million for the Specialized Communication Products segment. 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. Overall, approximately 81% of the December 31, 1998 funded
backlog is expected to be shipped over the next twelve-month period.
CUSTOMERS
L-3 enjoys an attractive customer mix of defense and commercial business,
with DoD related sales accounting for 64% and commercial, U.S. government
(non-DOD) and foreign government sales accounting for approximately 36% of 1998
sales of $1,037.0 million. The Company intends to leverage this favorable
business profile to expand its merchant supplier business base. The Company's
sales are predominantly derived from contracts with agencies of, and prime
contractors to, the U.S. government. Approximately 69% of the Company's sales
were made to agencies of the U.S. government or to prime contractors or
subcontractors of the U.S. government. Various U.S. government agencies and
contracting entities exercise independent purchasing decisions. Therefore,
sales to the U.S. government generally are not regarded as constituting sales
to one customer. Instead, each contracting entity is considered to be a
separate customer. For 1998 the Company had approximately 345 contracts with a
value exceeding $1.0 million. Sales to the U.S. government for 1998, including
sales through prime contractors, were $716.2 million. The Company's largest
program is a long-term, sole source cost plus support contract for the U-2
program which contributed approximately 8% of 1998 sales. No other program
represented more than 5% of 1998 sales. Sales to Lockheed Martin for 1998 were
$70.4 million or approximately 7% of total sales.
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COMPETITION
The Company's ability to compete for defense contracts depends to a large
extent on the effectiveness and innovativeness of its research and development
programs, its ability to offer better program performance than its competitors
at a lower cost to the Government customer, and its readiness in facilities,
equipment and personnel to undertake the programs for which it competes. In
some instances, programs are sole source or work directed by the Government to
a single supplier. In such cases, there may be other suppliers who have the
capability to compete for the programs involved, but they can only enter or
reenter the market if the Government should choose to reopen the particular
program to competition. Approximately 40% of the Company's $1,037.0 million
sales for 1998 were related to competitive contracts.
The Company experiences competition from industrial firms and U.S.
government agencies, some of which have substantially greater resources than
the Company. These competitors include: AlliedSignal, Inc. ("AlliedSignal"),
Cubic Corporation, Eaton Corporation, Globecomm Systems Inc., Harris
Corporation, Hughes, Motorola, Scientific-Atlanta, Inc., Thomson Marconi Sonar
Ltd., Titan Corporation and TRW Inc. 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.
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, 1998, the Company employed
approximately 2,775 engineers (of whom 17.5% hold advanced degrees). The
amounts of research and development performed under customer-funded contracts
and Company-sponsored research projects including bid and proposal costs for
1998 were $241.3 million.
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.
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PROPERTIES
The table below sets forth certain information with respect to the
material manufacturing facilities and properties of the Company.
<TABLE>
<CAPTION>
LOCATION OWNED LEASED
- -------------------------------------------------- ------- -------
(thousands of
square
feet)
<S> <C> <C>
L-3 Headquarters, NY ............................. -- 29.7
L-3 Washington Operations, Arlington, VA ......... -- 4.6
SECURE COMMUNICATION SYSTEMS:
Camden, NJ ...................................... -- 580.6
Salt Lake City, UT .............................. -- 487.7
SPECIALIZED COMMUNICATION PRODUCTS:
Anaheim, CA ..................................... -- 165.3
Folsom, CA ...................................... -- 57.5
Menlo Park, CA .................................. -- 93.1
San Diego, CA ................................... 196.0 68.9
Sylmar, CA ...................................... -- 273.0
Sarasota, FL .................................... -- 143.7
Alpharetta, GA .................................. 93.0 --
Concord, MA ..................................... -- 60.0
Lowell, MA ...................................... -- 47.0
Newburyport, MA ................................. -- 81.2
Hauppauge, NY ................................... 240.1 --
Philadelphia, PA ................................ -- 230.0
Warminster, PA .................................. 40.9 --
Kiel, Germany ................................... -- 302.7
Leer, Germany ................................... -- 60.9
</TABLE>
In total, the Company owns approximately 600,000 square feet and leases
approximately 3.0 million square feet of manufacturing facilities and
properties.
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's results of operations and
financial condition.
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 currently project the need for any material unbudgeted expenditures to
remain in compliance with applicable environmental laws and regulations.
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 Predecessor Company 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%
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of all costs incurred by the Company above those reserved for on the Company's
balance sheet at April 1997 relating to certain Company-assumed environmental
liabilities and, for the seven years thereafter, to pay 40% of certain
reasonable operation and maintenance costs relating to any environmental
remediation projects undertaken in the first eight years. The Company is aware
of environmental contamination at two of the facilities acquired from Lockheed
Martin that will require ongoing remediation. In November 1997, the Company sold
one such facility located in Sarasota, Florida, while retaining a leasehold
interest in a portion of that facility, to DMB in a transaction in which DMB
contractually agreed to assume responsibility for further remediation of the
Sarasota site. In April 1999, the Company received permission to cease
operation of its remediation system at the second facility, located in Salt
Lake City, Utah. 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. In November 1998, the Company exercised its option
to purchase the ELAC property. The premises leased by ELAC at the time of the
acquisition 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 owner of the property at the
time of the acquisition, 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.
In connection with the acquisition of STS, the Company acquired certain
facilities located in Hauppauge, New York. As part of the acquisition,
California Microwave agreed to retain liability for environmental contamination
occurring prior to the closing date. Subsequent to the acquisition, the Company
performed an environmental assessment of the ground water beneath the site and
determined that the ground water contained chlorinated solvents used by STS
only prior to the closing of the STS acquisition. The Company has tendered the
defense of this matter to California Microwave, which is performing a further
investigation of the ground water contamination. Management believes that any
necessary remediation will be covered by an indemnification from California
Microwave.
In connection with the acquisition of Aydin in April 1999, the Company
acquired a liability for the remediation of certain groundwater contamination in
Palo Alto, California related to a discontinued operation of Aydin. Aydin has
installed and is currently operating a State of California-approved remediation
system. The costs of operating this system are approximately $120,000 per year.
Management believes that the Company has established adequate reserves for the
potential costs associated with this environmental remediation. However, there
can be no assurance that the Company's environmental reserves will be
sufficient.
PENSION PLANS
In connection with the L-3 Acquisition, Holdings and L-3 Communications
Corporation 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. These
assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under Statement of Financial
Accounting Standards No. 87. The PBGC underfunding is related to the Subject
Plans.
With respect to the Subject Plans, Lockheed Martin entered into the
Lockheed Martin Commitment. The material terms and conditions of the Lockheed
Martin Commitment include a commitment by Lockheed Martin to the PBGC 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 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, the PBGC agreed
that it would take no further action in connection with the L-3 Acquisition.
In return for the Lockheed Martin Commitment, L-3 Communications entered
into an agreement with Lockheed Martin, dated as of April 30, 1997, pursuant to
which L-3 Communications provided
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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 U.S. 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, has the right to decide whether to cause the
Company to transfer sponsorship of any or all of the Subject Plans to Lockheed
Martin, even if the PBGC has not sought to terminate the Subject Plans.
Lockheed Martin may exercise this right by giving 45 days prior written notice
to the Company after the occurrence of such triggering events if it has
concluded that the liabilities of the Subject Plans would increase
unreasonably. As a result of a decrease in the PBGC-mandated discount rate in
1998 and the resulting increase in the underlying liability, one of such
triggering events has occurred. The Company has notified Lockheed Martin of
this fact. On February 4, 1999, Lockheed Martin informed the Company that it
has no present intention to exercise its right to cause the Company to transfer
sponsorship of the Subject Plans. If Lockheed Martin did assume sponsorship of
these plans, it would be primarily liable for the costs associated with funding
the Subject Plans or any costs associated with the termination of the Subject
Plans but L-3 Communications would be required to reimburse Lockheed Martin for
these costs. To date, the impact on pension expense and funding requirements
resulting from this arrangement has not been significant. However, should
Lockheed Martin assume sponsorship of the Subject Plans or if these plans were
terminated, the impact of any increased pension expenses or funding
requirements could be material to the Company. 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, 1998, the Company employed approximately 8,000
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. The
collective bargaining agreements for these four unions were successfully
renegotiated in mid-1998 without any disruptions to operations. Three of the
collective bargaining agreements will expire in 2002, and the other agreement
will expire in 2001.
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. While the Company has not yet initiated discussions
with representatives of the United Auto Workers, management believes it will be
able to negotiate, without material disruption to its business, a satisfactory
new labor contract with these employees. However, there can be no assurance
that a satisfactory agreement will be reached with the covered employees or
that a material disruption to operations of Ocean Systems will not occur.
Approximately 350 of SPD's employees located in Philadelphia, Pennsylvania
are represented by the United Automobile Aerospace and Agricultural Implement
Workers of America, Local 1612 Amalgamated. The four collective bargaining
agreements covering these employees were successfully renegotiated in April
1999 without disruption to operations and will expire in 2003. Approximately 20
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of SPD's employees located in Anaheim and National City, California are
represented by the International Brotherhood of Electrical Workers, Local 569,
whose collective bargaining agreement expires in late May 2000 and
approximately 20 employees are represented by the International Association of
Machinists and Aerospace Workers, Local 389 whose collective bargaining
agreement expires in early February 2000.
Approximately 125 employees of Electrodynamics are represented by
International Brotherhood of Electrical Workers, Local 134 whose collective
bargaining agreement expires in November 2000.
Approximately 140 employees of Aydin are represented by the International
Union of Electricians, Local 123 whose collective bargaining agreement expires
in October 2001.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Immediately following the February 1999 Common Stock Offering, the Lehman
Partnership owned 24.7% of the common stock of Holdings. Certain affiliates of
the Lehman Partnership provide services to Holdings and the Company. In 1998,
Lehman Brothers Holdings, Inc. ("Lehman Brothers") provided underwriting and
investment banking services to Holdings and the Company, for which services it
received fees of $15.5 million. In addition, Lehman Brothers Commercial Paper
Inc., an affiliate of Lehman Brothers, is a lender to the Company under the
Company's bank credit facilities, for which it received fees of $0.4 million in
1998.
In connection with the acquisition by the Company of its initial ten
business units (the "Businesses") from Lockheed Martin (the "L-3 Acquisition"),
Lockheed Martin has agreed to indemnify Holdings and the Company, subject to
certain limitations, for Lockheed Martin's breach of representations and
warranties and Holdings and the Company have 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 the Company, 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) through April 30, 2005, 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 and the Company 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 the Company 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 U.S.
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.
The Company and its predecessor sell products to Lockheed Martin and its
affiliates. Such net sales amounted to $70,401 for 1998 and $60,402 for the
nine-month period ended December 31, 1997; $21,171 for the three-month period
ended March 31, 1997 and $70,658 for 1996, respectively.
Sales of products to Lockheed Martin, excluding those under intercompany
work transfer agreements existing at the time of the L-3 Acquisition, are made
on terms no less favorable than those which would be available from
non-affiliated third party customers. A significant portion of the Company's
sales to Lockheed Martin are either based on competitive bidding or catalog
prices.
STOCKHOLDERS AGREEMENT
In connection with the L-3 Acquisition, the Company, Lockheed Martin, the
Lehman Partnership and Messrs. Lanza and LaPenta entered into the Stockholders
Agreement which, except for the terms relating to (i) the registration rights,
(ii) provision of services by Lehman Brothers and (iii) the standstill
agreement by Lockheed Martin, terminated upon the completion of the IPO.
64
<PAGE>
Pursuant to the Stockholders Agreement, Messrs. Lanza and LaPenta,
Lockheed Martin and the Lehman Partnership have the right, from time to time
and subject to certain conditions, to require Holdings to register under the
Securities Act of 1933 shares of common stock held by them. Lockheed Martin,
the Lehman Partnership and each of the Messrs. Lanza and LaPenta 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 Holdings 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 Messrs. Lanza and LaPenta and (ii) any registration in which the existing
stockholders participate through piggyback registration rights granted under
such agreement. Lockheed Martin and the Lehman Partnership sold 4.5 million
shares and 2 million shares, respectively, through the exercise of their
piggyback registration rights in the February 1999 Common Stock Offering.
The Stockholders Agreement also provides that Lehman Brothers has the
exclusive right to provide investment banking services to Holdings through
April 30, 2002 (except that the exclusivity period through April 30, 2000 as to
cash acquisitions undertaken by Holdings or the Company) so long as the Lehman
Partnership owns at least 10% of the outstanding common stock of Holdings. In
the event that Lehman Brothers agrees to provide any investment banking
services to Holdings or the Company, 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%.
65
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning the directors and
executive officers of Holdings and L-3 Communications Corporation.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Frank C. Lanza .................... 67 Chairman, Chief Executive Officer and Director
Robert V. LaPenta ................. 53 President, Chief Financial Officer and Director
Michael T. Strianese .............. 43 Vice President--Finance and Controller
Christopher C. Cambria ............ 40 Vice President--General Counsel and Secretary
Robert F. Mehmel .................. 36 Vice President--Planning and Assistant Secretary
Lawrence W. O'Brien ............... 49 Vice President--Treasurer
Joseph S. Paresi .................. 43 Vice President--Product Development
Lawrence H. Schwartz .............. 61 Vice President--Business Development
Jimmie V. Adams ................... 62 Vice President--Washington D.C. Operations
Robert RisCassi ................... 62 Vice President--Washington D.C. Operations
David J. Brand(1) ................. 37 Director
Thomas A. Corcoran ................ 54 Director
Alberto M. Finali ................. 44 Director
Eliot M. Fried(1) ................. 66 Director
Frank H. Menaker, Jr.(1) .......... 58 Director
Robert B. Millard(2) .............. 48 Director
John E. Montague(2) ............... 44 Director
John M. Shalikashvili ............. 62 Director
Alan H. Washkowitz(2) ............. 58 Director
</TABLE>
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Frank C. Lanza, Chairman and Chief Executive Officer. Mr. Lanza joined the
Company in April 1997. From April 1996, when Loral was acquired by Lockheed
Martin, until April 1997, Mr. Lanza was Executive Vice President of Lockheed
Martin, a member of Lockheed Martin's Executive Council and Board of Directors
and President and Chief Operating Officer of Lockheed Martin's command,
control, communications and intelligence ("C3I") and Systems Integration
Sector, which comprised many of the businesses acquired by Lockheed Martin from
Loral. Prior to the April 1996 acquisition of Loral, 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
joined the Company in April 1997. From April 1996, when Loral was acquired by
Lockheed Martin, until April 1997, Mr. LaPenta was a Vice President of Lockheed
Martin and was Vice President and Chief Financial Officer of Lockheed Martin's
C3I and Systems Integration Sector. Prior to the April 1996 acquisition of
Loral, he was Loral's Senior Vice President and Controller, a position he held
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
joined the Company in April 1997. From April 1996, when Loral was acquired by
Lockheed Martin, until April 1997, Mr. Strianese was Vice President and
Controller of Lockheed Martin's C3I and Systems Integration Sector. From 1991
to the April 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.
66
<PAGE>
Christopher C. Cambria, Vice President-General Counsel and Secretary. Mr.
Cambria joined the Company in June 1997. From 1994 until joining the Company,
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 joined the Company in April 1997. From April 1996, when Loral was
acquired by Lockheed Martin, until April 1997, Mr. Mehmel was the Director of
Financial Planning and Capital Review for Lockheed Martin's C3I and Systems
Integration Sector. From 1984 to 1996, Mr. Mehmel held several accounting and
financial analysis positions at Loral Electronic Systems and Loral. At the time
of Lockheed Martin's acquisition of Loral, he was Corporate Manager of Business
Analysis.
Lawrence W. O'Brien, Vice President--Treasurer. Mr. O'Brien joined the
Company in June 1997. Prior to joining the Company, he was the Vice President
and Treasurer of Pechiney Corporation, the North American arm of the Pechiney
Group of France, where he held a number of financial positions since 1981.
Joseph S. Paresi, Vice President--Product Development. Mr. Paresi joined
the Company in April 1997. From April 1996 until April 1997, Mr. Paresi was
Corporate Director of Technology for Lockheed Martin's C3I and System
Integration Sector. Prior to the April 1996 acquisition of Loral, Mr. Paresi
was Corporate Director of Technology for Loral, a position he held since 1993.
From 1978 to 1993, Mr. Paresi was a Systems Engineer, Director of Marketing and
Director of International Programs at Loral Electronic Systems.
Lawrence H. Schwartz, Vice President--Business Development. Mr. Schwartz
joined the Company in May 1997. From April 1996 until May 1997, Mr. Schwartz
was Vice President of Technology for the C3I and System Integration Sector of
Lockheed Martin. Prior to the April 1996 acquisition of Loral, he was Corporate
Vice President of Technology for Loral, a position he held since 1987. 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.
Jimmie V. Adams, Vice President-Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) joined the Company in April 1997. From April
1996 until April 1997, he was Vice President of Lockheed Martin's Washington
Operations for the C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position at Loral since 1993. 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.) joined the Company in April 1997. From
April 1996 until April 1997, he was Vice President of Land Systems for Lockheed
Martin's C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position for Loral since 1993. 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 has served as a director since April
1997 and 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.
67
<PAGE>
Thomas A. Corcoran, Director. Mr. Corcoran has served as a director since
July 1997 and has been the President and Chief Operating Officer of the Space &
Strategic Missiles Sector of Lockheed Martin since August 1998. From March 1995
to August 1998 he was 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.
Alberto M. Finali, Director. Mr. Finali has served as a director since
April 1997 and 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.
Eliot M. Fried, Director. Mr. Fried has served as a director since April
1997 and 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 is currently a director of Bridgeport Machines, Inc. and Axsys
Technologies, Inc.
Frank H. Menaker, Jr., Director. Mr. Menaker has served as a director
since April 1997 and 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.
Robert B. Millard, Director. Mr. Millard has served as a director since
April 1997 and 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 Offshore, Inc. and Weatherford International, Inc.
John E. Montague, Director. Mr. Montague has served as a director since
April 1997 and has been Vice President and Chief Financial Officer of Lockheed
Martin Global Telecommunications, Inc., a wholly owned subsidiary of Lockheed
Martin, since August 1998. He served as Vice President, Financial Strategies at
Lockheed Martin responsible for mergers, acquisitions and divestiture
activities and shareholder value strategies from March 1995 until August 1998.
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.
John M. Shalikashvili, Director. General Shalikashvili (U.S. Army-ret.)
has served as a director since August 1998. Prior to his appointment, he was
the senior officer of the United States military and principal military advisor
to the President of the United States, the Secretary of Defense and National
Security Council by serving as the thirteenth Chairman of the Joint Chiefs of
Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his
tenure as Chairman of the Joint Chiefs of Staff, he served as the Commander in
Chief of all United States forces in Europe and as NATO's tenth Supreme Allied
Commander, Europe (SACEUR). He has also served in a variety of command and
staff positions in the continental United States, Alaska, Belgium, Germany,
Italy, Korea, Turkey and Vietnam. General Shalikashvili is currently a director
of United Defense Industries Inc.
68
<PAGE>
Alan H. Washkowitz, Director. Mr. Washkowitz has served as a director
since April 1997 and is a Managing Director of Lehman Brothers and head of the
Merchant Banking Group, and is responsible for the oversight of Lehman Brothers
Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman
Brothers in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr.
Washkowitz is currently a director of Illinois Central Corporation, K&F
Industries, Inc., McBride plc. and Peabody Coal Co.
The Board of Directors intends to appoint one additional director who is
not affiliated with the Company, Lehman Brothers Inc. or Lockheed Martin by May
18, 1999. The additional director has not yet been identified.
The Company's certificate of incorporation provides for a classified Board
of Directors divided into three classes. Class I will expire at the annual
meeting of the stockholders to be held in 2002; Class II will expire at the
annual meeting of the stockholders to be held in 2001; and Class III will
expire at the annual meeting of the stockholders to be held in 2000. At each
annual meeting of the stockholders, beginning with the 2000 annual meeting, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election and until their successors have been duly elected and
qualified, or until their earlier resignation or removal, if any. To the extent
there is an increase or reduction in the number of directors, increase or
decrease in directorships resulting therefrom will be distributed among the
three classes so that, as nearly as possible, each class will consist of an
equal number of directors.
Each executive officer and key employee serves at the discretion of the
Board of Directors.
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 (Chairman). 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. This committee, which met
twice during 1998, is responsible generally for recommending to the Board of
Directors the independent accountants to be nominated to audit the financial
statements of the Company; approving the compensation of the independent
accountants; meeting with the Company's independent accountants to review the
proposed scope of the annual audit of the Company's financial statements;
reviewing the findings of the independent accountants with respect to the
annual audit; and supervising the implementation of the Company's management
integrity policies and reporting annually to the Board of Directors with
respect thereto. Currently, the Compensation Committee consists of Messrs.
Millard (Chairman), Montague and Washkowitz. This Committee, which acted by
written consent three times during 1998, is responsible for administering the
Company's 1997 Stock Option Plan for Key Employees of Holdings (the "1997 Stock
Option Plan") and has limited authority to adopt amendments to that plan. This
Committee is also responsible for recommending to the Board of Directors the
salaries to be paid to the Chief Executive Officer and the President of the
Company, and reviewing and approving the Chief Executive Officer's and the
President's other annual cash compensation and long-term incentives and the
total compensation to be paid to certain other officers of the Company.
COMPENSATION OF DIRECTORS
The directors who are employees of the Company or its affiliates do not
receive compensation for their services as directors. The non-affiliated
directors receive annual compensation of $30,000 for service on the Board of
Directors, of which $25,000 is paid in cash, and $5,000 is paid in shares of
common stock of Holdings. In addition, non-affiliated directors receive an
annual stock option grant of 1,500 shares of Common Stock, which will vest in
three equal annual installments. The non-affiliated directors are entitled to
reimbursement for their reasonable out-of-pocket expenses in connection with
their travel to an attendance at meetings of the Board of Directors or
committees
69
<PAGE>
thereof. In addition, the non-affiliated directors will be compensated $1,000
per meeting attended, including committee meetings, up to a maximum of $2,000
per day.
Non-affiliated directors may defer up to 100 percent of the cash portion
of the fees (including meeting fees) otherwise payable to the director. Subject
to certain limitations, a participating director's deferred fees will be
distributed in a lump sum on, or distribution in annual installments commencing
on, the 30th day following the date he or she ceases to be a director. Deferral
elections are irrevocable during any calendar year and must be made before the
beginning the calendar year in which fees are earned. Earnings are accrued on
deferred amounts. Depending on a director's investment election, deferred
amounts earn interest at a rate based on the 90-day U.S. Government Treasury
Bill or the performance of the common stock of Holdings.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's certificate of incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL"), a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director. Under the
DGCL, liability of a director may not be limited (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) in respect of certain unlawful dividend payments or
stock redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of the provisions of
the Company's certificate of incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Company's bylaws provide that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company (the "Named Executive
Officers").
70
<PAGE>
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
----------------------------- STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) OPTIONS (#) COMPENSATION ($)(2)
- ------------------------------- ------ --------------- ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Frank C. Lanza
(Chairman and Chief Executive 1998 $750,000 -- -- $11,341
Officer) ..................... 1997 542,654 -- 1,142,857 --
Robert V. LaPenta
(President and Chief Financial 1998 500,000 -- -- 27,591
Officer) ..................... 1997 356,538 -- 1,142,857 --
Lawrence H. Schwartz
(Vice President, Business 1998 229,000 85,000 -- 22,090
Development) ................. 1997 145,327 80,000 17,000 --
Christopher C. Cambria
(Vice President, Secretary 1998 190,000 140,000 -- 7,351
and General Counsel) ......... 1997 97,596 75,000 20,000 --
Michael T. Strianese
(Vice President, Finance and 1998 165,000 140,000 -- 69,993
Controller) .................. 1997 107,386 95,000 35,000 1,956
</TABLE>
- ----------
(1) Fiscal 1997 only included the pay periods ending during the nine months
ended December 31, 1997.
(2) Amounts for 1998 include (a) Company matching contributions of $3,200
under the Company's savings plan for Messrs. LaPenta, Cambria and
Strianese; (b) the value of supplemental life insurance programs in the
amounts of $11,341 for Mr. Lanza, $24,391 for Mr. LaPenta, $22,090 for
Mr. Schwartz, $3,676 for Mr. Cambria and $6,397 for Mr. Strianese; and
(c) a special bonus of $60,000 for Mr. Strianese related to the Company's
formation, which amount is also payable to Mr. Strianese in each of 1999
and 2000.
OPTION GRANTS IN FISCAL YEAR 1998
There were no options to purchase Common Stock granted in fiscal year 1998
to the Named Executive Officers.
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<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND
F-Y END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
VALUE AT F-Y END (#) F-Y END ($)(2)
REALIZED ----------------------------- ----------------------------
NAME AND PRINCIPAL POSITION EXERCISES(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- -------------- ----------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Frank C. Lanza
(Chairman and Chief Executive
Officer) ..................... 228,571 $578,285 -- 914,286 -- $36,656,011
Robert V. LaPenta
(President and Chief Financial
Officer) ..................... 228,571 578,285 -- 914,286 -- 36,656,011
Lawrence H. Schwartz
(Vice President, Business
Development) ................. -- -- 5,950 11,050 $238,550 443,022
Christopher C. Cambria
(Vice President, Secretary and
General Counsel) ............. -- -- 7,000 13,000 280,648 521,203
Michael T. Strianese
(Vice President, Finance and
Controller) .................. -- -- 8,750 26,250 350,809 897,128
</TABLE>
- ----------
(1) Based on the estimated fair value of the Common Stock at the exercise
date.
(2) The value of unexercised in-the-money options at fiscal year end was
calculated based on the December 31, 1998 closing stock price of the
Common Stock of $46.5625 less the exercise prices of the options.
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 (65), 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, 1998, the current annual compensation and current years
of credited service (including for Messrs. LaPenta and Strianese, years of
credited service as an employee of Loral and Lockheed Martin) for each of the
following persons were: Mr. Lanza, $750,000 and 2 years; Mr. LaPenta, $500,000
and 27 years; Mr. Strianese, $305,000 and 9 years; Mr. Cambria, $330,000 and 2
years; and Mr. Schwartz, $314,000 and 2 years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the 1998 fiscal year, Messrs. Millard, Montague and Washkowitz
served as members of the Compensation Committee. None of these individuals has
served at any time as an officer or employee
72
<PAGE>
of Holdings or any subsidiary of Holdings. Messrs. Millard and Washkowitz are
affiliated with the Lehman Brothers Capital Partners III and its affiliates
(collectively the "Lehman Partnership") which in aggregate hold 24.7% of the
Common Stock outstanding as of the date of this Proxy Statement. Pursuant to
the Stockholders Agreement, the Lehman Partnership has the right, from time to
time subject to certain conditions, to require the Company to register under
the Securities Act of 1933, as amended, shares of the Common Stock held by it.
The Lehman Partnership has the right to request up to four demand registrations
and also has piggyback registration rights. The Company has agreed in the
Stockholders Agreement to pay expenses in connection with, among other things,
(i) up to three demand registrations requested by the Lehman Partnership and
(ii) any registration in which the existing stockholders participate through
piggyback registration rights granted under such agreement. In February 1999,
the Lehman Partnership sold 2 million shares of Common Stock through the
exercise of its piggyback registration right in a public offering of Common
Stock by the Company. The Stockholders Agreement also provides that Lehman
Brothers has the exclusive right to provide investment banking services to the
Company for the five-year period through April 30, 2002 (except that the
exclusivity period is through April 30, 2000 as to cash acquisitions undertaken
by Holdings or L-3 Communications Corporation) so long as the Lehman
Partnership owns at least 10% of the outstanding Common Stock. In the event
that Lehman Brothers agrees to provide any investment banking services to
Holdings or L-3 Communications Corporation, it will be paid fees that are
mutually agreed upon based on similar transactions and practices in the
investment banking industry. See "Certain Relationships and Related
Transactions".
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
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.
On March 10, 1998, the 1997 Stock Option Plan was amended to increase the
shares available for option grants to 4,255,815 shares of common stock, of
which 3,400,794 had been granted and were outstanding as of December 31, 1998.
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.
The 1997 Stock Option Plan remains in effect for 10 years following the date of
approval.
On April 30, 1997, Holdings granted each of Messrs. Lanza and LaPenta
options to purchase 1,142,857 shares of common stock. See "-- Employment
Agreements" for a description of the terms of these grants. On July 1, 1997 and
November 11, 1997, the Compensation Committee authorized grants of options to
employees of Holdings and its subsidiaries, other than Messrs. Lanza and
LaPenta, to acquire an aggregate of 689,500 shares of common stock at an
exercise price of $6.47 per share (the "Employee Options"). Each Employee
Option was granted pursuant to an individual agreement that provides (i) 20% of
shares underlying the option will become exercisable on the first anniversary
of the grant date, 50% will become exercisable on the second anniversary of the
grant date and 30% will become exercisable on the third anniversary of the
grant date; provided that, after the IPO 15% of the shares underlying the
option (which would otherwise become exercisable on the second anniversary of
the grant date) became exercisable; (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. On March 2, 1998,
each of Mr. Lanza and Mr. LaPenta exercised options to acquire 228,571 shares
of common stock. On May 1, 1998, Holdings granted options to employees of
Holdings and its subsidiaries, other than Messrs. Lanza and LaPenta, to
purchase 285,370 shares of common stock at an exercise price of $22.00 per
share and on terms substantially similar to the Employee Options. On August 13,
1998, Holdings granted options to purchase 142,200 shares of common stock at an
exercise price of $32.75 per share primarily to
73
<PAGE>
employees of recently acquired companies, and on January 19, 1999, Holdings
granted options to purchase 414,150 shares of common stock at an exercise price
of $40.50 per share to employees who received the Employee Options during 1997
and to employees of recently acquired companies. The terms of such stock
options were substantially similar to the Employee Options except that such
options vest in equal installments over a period of three years.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (the "Employment
Agreements") effective on April 30, 1997 with each of Mr. Lanza, Chairman and
Chief Executive Officer of the Company, 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 the Company, 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 or resignation for good reason, the
Company 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
the Company pays the severance described above.
The Company has granted each of Messrs. Lanza and LaPenta (together, the
"Equity Executives") nonqualified options to purchase, at $6.47 per share,
1,142,857 shares of Common Stock. In each case, half of the options were
structured as "Time Options" and half were structured initially as "Performance
Options" (collectively, the "Options"). The Time Options became exercisable
with respect to 20% of the shares subject to the Time Options on March 2, 1998
and will become exercisable with respect to an additional 20% of the shares
subject to the Time Options on each of April 30, 1999, 2000, 2001 and 2002 if
employment continues through and including such date. The Performance Options
were initially structured to become exercisable nine years after the Closing,
but became exercisable with respect to up to 20% of the shares subject to the
Performance Options on March 2, 1998 and will become exercisable with respect
to an additional 20% of the shares subject to the Performance Options on each
of April 30, 1999, 2000, 2001 and 2002, to the extent certain targets for the
Company's earnings before interest, income taxes, depreciation and amortization
are achieved. On March 2, 1998, each of Mr. Lanza and Mr. LaPenta exercised
options to acquire 228,571 shares of Common Stock. On April 5, 1999, the
Company amended the Performance Options to eliminate the performance target
acceleration provisions and to provide that the unvested portion of the
Performance Options will vest and become exercisable as of April 30, 2000, if
employment continues through and including such date. The Options will become
fully exercisable under certain circumstances, including a change in control.
The Option term is ten years through April 30, 2007; except that if (i) the
Equity Executive is fired for cause or resigns without good reason, the Options
will expire upon termination of employment or (ii) the Equity Executive is
fired without cause, resigns for good reason, dies, becomes disabled or
retires, the Options will 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.
The Company also has entered into a split-dollar life insurance agreement
with Mr. LaPenta. Under the split-dollar agreement, the Company owns and pays
the premiums on the life insurance policy, and Mr. LaPenta has the right to
designate a beneficiary to receive a fixed portion of the policy death benefit.
The balance of the death benefit will be payable to the Company as a recovery
of its investment.
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<PAGE>
OWNERSHIP OF CAPITAL STOCK
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 26, 1999, there were 32,466,643 shares of Common Stock
outstanding. The Company knows of no person who, as of March 26, 1999,
beneficially owned more than five percent of the Common Stock, except as set
forth below.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS
- ------------------------ ----------------------- -----
<S> <C> <C>
Lehman Brothers Capital Partners III, L.P.
and affiliates (1)
c/o Lehman Brothers Holdings Inc.
Three World Financial Center
New York, New York 10285 ................ 8,020,000 24.7%
Lockheed Martin Corporation
6802 Rockledge Drive
Bethesda, Maryland 20817-1877 ........... 2,300,000 7.1%
Frank C. Lanza (2)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016 ................ 1,929,142(3)(4) 5.9%
Robert V. LaPenta (2)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016 ................ 1,929,179(4) 5.9%
</TABLE>
- ----------
(1) David J. Brand, Alberto M. Finali, Eliot M. Fried, Robert B. Millard and
Alan H. Washkowitz, each of whom is director of the Company, are each
Managing Directors of Lehman Brothers. As limited partners of Lehman
Brothers Capital Partners III, L.P. or other affiliated partnerships
sponsored by Lehman Brothers, all such individuals may be deemed to have
shared beneficial ownership of shares of the Common Stock held by Lehman
Brothers Capital Partners III, L.P. and such affiliated partnerships.
Such individuals disclaim any such beneficial ownership.
(2) Excluding the number of shares exercisable within 60 days after March 26,
1999 under employee stock options, Mr. Lanza and Mr. LaPenta each hold
options to purchase an additional 685,715 shares of the Common Stock.
(3) Includes 75,000 shares held by Mr. Lanza on behalf of his sons, Anthony
Lanza, James Lanza and Louis Lanza, of which Mr. Lanza disclaims
beneficial ownership.
(4) The shares of Common Stock beneficially owned include 228,571 shares
exercisable within 60 days after March 26, 1999 under employee stock
options for each of Mr. Lanza and Mr. LaPenta and 37 shares allocated to
the account of Mr. LaPenta under the Company's savings plans.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the amount of Common Stock beneficially owned
(unless otherwise indicated) by the executive officers of the Company named in
the Summary Compensation Table below, the Company's directors, and by all
current executive officers and directors of the Company as a group. Except as
otherwise indicated, all information is as of March 26, 1999.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF
STOCK BENEFICIALLY SHARES OF COMMON
OWNED(1)(2) STOCK OUTSTANDING(3)
-------------------- ---------------------
<S> <C> <C>
Frank C. Lanza ............................ 1,929,142(2) 5.9%
Robert V. LaPenta ......................... 1,929,179 5.9%
Michael T. Strianese ...................... 36,795 --
Christopher C. Cambria .................... 26,052 --
Lawrence H. Schwartz ...................... 23,450 --
David J. Brand ............................ --(4) --
Thomas A. Corcoran ........................ -- --
Alberto M. Finali ......................... --(4) --
Eliot M. Fried ............................ --(4) --
Frank H. Menaker, Jr. ..................... -- --
Robert B. Millard ......................... --(4) --
John E. Montague .......................... -- --
John M. Shalikashvili ..................... -- --
Alan M. Washkowitz ........................ --(4) --
Directors and Executive
Officers as a Group (19 persons) ......... 4,039,456(5) 12.5%
</TABLE>
- ----------
(1) The shares of Common Stock beneficially owned include the number of
shares (i) exercisable within 60 days after March 26, 1999 under employee
stock options and (ii) allocated to the accounts of executive officers
under the Company's savings plans. Of the number of shares shown above,
(i) the following represent shares that may be acquired upon exercise of
employee stock options for the accounts of: Mr. Lanza, 228,571 shares;
Mr. LaPenta, 228,571 shares; Mr. Strianese, 10,750 shares; Mr. Cambria,
7,000 shares; and Mr. Schwartz, 5,950 shares, and (ii) the following
represent shares allocated under the Company's saving plans to the
accounts of: Mr. LaPenta, 37 shares; Mr. Strianese, 45 shares; and Mr.
Cambria, 52 shares.
(2) The number of shares shown above include shares that are individually or
jointly owned, as well as shares over which the individual has either
sole or shared investment or voting authority. Mr. Lanza's holdings of
the Common Stock includes 75,000 shares held by Mr. Lanza on behalf of
his sons, Anthony Lanza, James Lanza and Louis Lanza, of which Mr. Lanza
disclaims beneficial ownership.
(3) Share ownership does not exceed one percent of the class unless otherwise
indicated.
(4) David J. Brand, Alberto M. Finali, Eliot M. Fried, Robert B. Millard and
Alan H.Washkowitz, each of whom is director of the Company, are each
Managing Directors of Lehman Brothers. As limited partners of Lehman
Brothers Capital Partners III, L.P. or other affiliated partnerships
sponsored by Lehman Brothers, all such individuals may be deemed to share
beneficial ownership of 8,020,000 shares of common stock of the Company
held by Lehman Brothers Capital Partners III, L.P. and such affiliated
partnerships. Such individuals disclaim any such beneficial ownership.
(5) Includes 506,042 shares exercisable under employee stock options within
60 days after March 26, 1999, and 272 shares allocated to the accounts of
executive officers under the Company's savings plans.
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<PAGE>
DESCRIPTION OF THE 1997 NOTES
GENERAL
The 1997 Notes offered hereby are issued under an indenture dated as of
April 30, 1997 (the "1997 Indenture") between the Company, as issuer, and The
Bank of New York, as trustee (the "Trustee"). The terms of the 1997 Notes
include those stated in the 1997 Indenture and those made part of the 1997
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The 1997 Notes are subject to all such terms, and
holders of the 1997 Notes are referred to the 1997 Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the 1997 Indenture describes the material terms of the 1997
Indenture but does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the provisions of the 1997 Indenture,
including the definitions of certain terms contained therein and those terms
made part of the 1997 Indenture by reference to the Trust Indenture Act. For
definitions of certain capitalized terms used in the following summary, see "--
Certain Definitions". The 1997 Indenture is an exhibit to the Registration
Statement of which this prospectus is a part.
For purposes of this summary, the term "Company" refers only to L-3
Communications Corporation and not to any of its Subsidiaries.
The 1997 Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all current and future Senior Debt. At
December 31, 1998 the Company did not have any Senior Debt outstanding
(excluding letters of credit). The 1997 Indenture permits the incurrence of
Senior Debt in the future.
The 1997 Indenture provides that the Company's payment obligations under
the 1997 Notes will be jointly and severally guaranteed (the "Subsidiary
Guarantees") by all of the Company's future Restricted Subsidiaries, other than
Foreign Subsidiaries (collectively, the "Guarantors"). The Subsidiary Guarantee
of each Guarantor is subordinated to the prior payment in full of all Senior
Debt of such Guarantor, which includes the guarantees of amounts borrowed under
the Senior Credit Facilities.
As of December 31, 1998, not all of the Company's subsidiaries were
"Restricted Subsidiaries." Cardiovascular Computer Systems, Ltd., L-3 Secure
Information Technology and L-3 Network Security are currently Unrestricted
Subsidiaries. In addition, under the circumstances described below under the
subheading "-- Certain Covenants -- Restricted Payments", the Company is
permitted to designate certain of the Company's subsidiaries as "Unrestricted
Subsidiaries". Unrestricted Subsidiaries are not subject to many of the
restrictive covenants in the 1997 Indenture. Unrestricted Subsidiaries do not
guarantee these 1997 Notes.
PRINCIPAL, MATURITY AND INTEREST
The 1997 Notes are limited in aggregate principal amount to $225.0 million
and will mature on May 1, 2007. Interest on the 1997 Notes will accrue at the
rate of 103/8% per annum and will be payable semi-annually in arrears on May 1
and November 1, commencing on November 1, 1997, to Holders of record on the
immediately preceding April 15 and October 15. Interest on the 1997 Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the 1997 Notes will be payable at
the office or agency of the Company maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest may
be made by check mailed to the Holders of the 1997 Notes at their respective
addresses set forth in the register of Holders of 1997 Notes; provided that all
payments of principal, premium and interest with respect to 1997 Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof if such Holders shall be registered
Holders of at least $250,000 in principal amount of 1997 Notes. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. The 1997 Notes have been
issued in denominations of $1,000 and integral multiples thereof.
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<PAGE>
OPTIONAL REDEMPTION
The 1997 Notes will not be redeemable at the Company's option prior to May
1, 2002. Thereafter, the 1997 Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest to the
applicable redemption date, if redeemed during the twelve-month period
beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002 ......................... 105.188%
2003 ......................... 103.458%
2004 ......................... 101.729%
2005 and thereafter .......... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Issue
Date, the Company may on any one or more occasions redeem up to an aggregate of
35% of the 1997 Notes originally issued 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
the Company or the net cash proceeds of one or more Equity Offerings by
Holdings that are contributed to the Company as common equity capital; provided
that at least 65% of the 1997 Notes originally issued remain outstanding
immediately after the occurrence of each such redemption; and provided,
further, that any such redemption must occur within 120 days of the date of the
closing of such Equity Offering.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the 1997
Notes are subordinated in right of payment, as set forth in the 1997 Indenture,
to the prior payment in full of all Senior Debt, whether outstanding on the
Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt, whether or not an allowable claim in
any such proceeding) before the Holders of 1997 Notes will be entitled to
receive any payment with respect to the 1997 Notes, and until all Obligations
with respect to Senior Debt are paid in full, any distribution to which the
Holders of 1997 Notes would be entitled shall be made to the holders of Senior
Debt (except, in each case, that Holders of 1997 Notes may receive Permitted
Junior Securities and payments made from the trust described under "-- Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the 1997
Notes (except from the trust described under "-- Legal Defeasance and Covenant
Defeasance") if:
(i) a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing, or
(ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity (or that would
permit such holders to accelerate with the giving of notice or the passage
of time or both) and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt.
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<PAGE>
Payments on the 1997 Notes may and shall be resumed:
(A) in the case of a payment default, upon the date on which such
default is cured or waived, and
(B) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been
accelerated.
No new period of payment blockage may be commenced unless and until:
(i) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice, and
(ii) all scheduled payments of principal, premium, if any, and
interest on the 1997 Notes that have come due have been paid in full in
cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been waived for a period of not less than 90 days.
The 1997 Indenture further requires that the Company promptly notify
holders of Senior Debt if payment of the 1997 Notes is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of 1997 Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. At December 31,
1998 there was no Senior Debt outstanding (excluding letters of credit).
SELECTION AND NOTICE
If less than all of the 1997 Notes are to be redeemed at any time,
selection of 1997 Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the 1997 Notes are listed, or, if the 1997 Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that no 1997 Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
1997 Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any 1997 Note is to be redeemed in part only, the notice
of redemption that relates to such 1997 Note shall state the portion of the
principal amount thereof to be redeemed. A new 1997 Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original 1997 Note. 1997 Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on 1997 Notes or portions of them
called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders",
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the 1997 Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of 1997 Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's 1997 Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid
79
<PAGE>
interest to the date of purchase (the "Change of Control Payment"). Within ten
days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase 1997 Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the 1997 Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the 1997 Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(i) accept for payment all 1997 Notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(ii) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all 1997 Notes or portions thereof so
tendered; and
(iii) deliver or cause to be delivered to the Trustee the 1997 Notes
so accepted together with an Officers' Certificate stating the aggregate
principal amount of 1997 Notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of 1997 Notes so
tendered the Change of Control Payment for such 1997 Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new 1997 Note equal in principal amount to any unpurchased
portion of the 1997 Notes surrendered, if any; provided that each such new 1997
Note will be in a principal amount of $1,000 or an integral multiple thereof.
The 1997 Indenture provides that, prior to mailing a Change of Control
Offer, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or offer to repay all
Senior Debt and terminate all commitments thereunder of each lender who has
accepted such offer or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of 1997
Notes required by this covenant. The Company will publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the 1997 Indenture are applicable.
Except as described above with respect to a Change of Control, the 1997
Indenture does not contain provisions that permit the Holders of the 1997 Notes
to require that the Company repurchase or redeem the 1997 Notes in the event of
a takeover, recapitalization or similar transaction.
The Senior Credit Facilities prohibit the Company from purchasing any 1997
Notes, and also provides that certain change of control events with respect to
the Company would constitute a default thereunder. Any future credit agreements
or other agreements relating to Senior Debt to which the Company becomes a
party may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing 1997
Notes, the Company could seek the consent of its lenders to the purchase of
1997 Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing 1997 Notes. In
such case, the Company's failure to purchase tendered 1997 Notes would
constitute an Event of Default under the 1997 Indenture which would, in turn,
constitute a default under the Senior Credit Facilities. In such circumstances,
the subordination provisions in the 1997 Indenture would likely restrict
payments to the Holders of 1997 Notes. See "Risk Factors -- Change of Control".
Finally, the Company's ability to pay cash to the holders of Notes upon a
purchase may be limited by the Company's then-existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required purchases. Even if sufficient funds were
otherwise available, the terms of the Senior Credit Facilities will prohibit,
subject to certain exceptions, the Company's prepayment of 1997
80
<PAGE>
Notes prior to their scheduled maturity. Consequently, if the Company is not
able to prepay indebtedness outstanding under the Senior Credit Facilities and
any other Senior Indebtedness containing similar restrictions or obtain
requisite consents, the Company will be unable to fulfill its repurchase
obligations if holders of 1997 Notes exercise their purchase rights following a
Change of Control, thereby resulting in a default under the 1997 Indenture.
Furthermore, the Change of Control provisions may in certain circumstances make
more difficult or discourage a takeover of the Company.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the 1997 Indenture applicable to a Change of Control Offer made by the
Company and purchases all 1997 Notes validly tendered and not withdrawn under
such Change of Control Offer.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Section 13(d)(3) of the Exchange Act) other than the Principals
or their Related Parties (as defined below);
(ii) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares); or
(iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(i) was a member of such Board of Directors on the Issue Date; or
(ii) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Principals" means any Lehman Investor, Lockheed Martin, Frank C. Lanza
and Robert V. LaPenta.
"Related Party" with respect to any Principal means:
(i) any controlling stockholder, 50% (or more) owned Subsidiary, or
spouse or immediate family member (in the case of an individual) of such
Principal; or
(ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding a more than 50% controlling interest of which consist of such
Principal and/or such other Persons referred to in the immediately
preceding clause (i).
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
With respect to the disposition of assets, the phrase "all or
substantially all" as used in the 1997 Indenture varies according to the facts
and circumstances of the subject transaction and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company.
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ASSET SALES
The 1997 Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets
or Equity Interests issued or sold or otherwise disposed of; and
(ii) at least 80% of the consideration therefor received by the
Company or such Restricted Subsidiary, as the case may be, consists of
cash, Cash Equivalents and/or Marketable Securities;
provided, however, that:
(A) the amount of any Senior Debt of the Company or such
Restricted Subsidiary that is assumed by the transferee in any such
transaction; and
(B) any consideration received by the Company or such Restricted
Subsidiary, as the case may be, that consists of (1) all or
substantially all of the assets of one or more Similar Businesses, (2)
other long-term assets that are used or useful in one or more Similar
Businesses and (3) Permitted Securities shall be deemed to be cash for
purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option:
(i) to repay Indebtedness under a Credit Facility; or
(ii) to the acquisition of Permitted Securities, all or substantially
all of the assets of one or more Similar Businesses, or the making of a
capital expenditure or the acquisition of other long-term assets in a
Similar Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Indebtedness under a Credit Facility or otherwise invest
such Net Proceeds in any manner that is not prohibited by the 1997 Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an offer to all Holders of 1997 Notes (an
"Asset Sale Offer") to purchase the maximum principal amount of 1997 Notes that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase, in
accordance with the procedures set forth in the 1997 Indenture. To the extent
that the aggregate amount of 1997 Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of 1997 Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the 1997 Notes to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
The Senior Credit Facilities substantially limit the Company's ability to
purchase subordinated Indebtedness, including the 1997 Notes. Any future credit
agreements relating to Senior Debt may contain similar restrictions. See
"Description of Senior Credit Facilities".
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The 1997 Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly:
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(i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to
the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than (A)
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or (B) dividends or distributions by a
Restricted Subsidiary so long as, in the case of any dividend or
distribution payable on or in respect of any class or series of securities
issued by a Restricted Subsidiary other than a Wholly Owned Restricted
Subsidiary, the Company or a Restricted Subsidiary receives at least its
pro rata share of such dividend or distribution in accordance with its
Equity Interests in such class or series of securities);
(ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company;
(iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the 1997 Notes except a payment of interest or principal at
Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described below under caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (ii) through (vii) of the next
succeeding paragraph), is less than the sum of:
(i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after the Issue Date to the
end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus;
(ii) 100% of the aggregate net cash proceeds received by the
Company from a contribution to its common equity capital or the
issue or sale since the Issue Date of Equity Interests of the
Company (other than Disqualified Stock) or of Disqualified Stock
or debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a
Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into
Disqualified Stock), plus;
(iii) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise
liquidated or repaid for cash, the amount of cash received in
connection therewith (or from the sale of Marketable Securities
received in connection therewith); plus;
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(iv) to the extent not already included in such Consolidated
Net Income of the Company for such period and without
duplication;
(A) 100% of the aggregate amount of cash received as a
dividend from an Unrestricted Subsidiary;
(B) 100% of the cash received upon the sale of
Marketable Securities received as a dividend from an
Unrestricted Subsidiary; and
(C) 100% of the net assets of any Unrestricted
Subsidiary on the date that it becomes a Restricted
Subsidiary.
As of December 31, 1998, the amount, adjusted to include the $201.5 million of
net proceeds contributed to the Company by Holdings from the February 1999
Common Stock Offering, that would have been available to the Company for
Restricted Payments pursuant to this paragraph (c) would have been $367.2
million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the 1997 Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness (other than intercompany Indebtedness) in
exchange for, or with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(iv) the repurchase, retirement or other acquisition or retirement for
value of common Equity Interests of the Company or Holdings held by any
future, present or former employee, director or consultant of the Company
or any Subsidiary or Holdings issued pursuant to any management equity plan
or stock option plan or any other management or employee benefit plan or
agreement; provided, however, that the aggregate amount of Restricted
Payments made under this clause (iv) does not exceed $1.5 million in any
calendar year and provided further that cancellation of Indebtedness owing
to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Equity Interests
of the Company will not be deemed to constitute a Restricted Payment for
purposes of this covenant or any other provision of the 1997 Indenture;
(v) repurchases of Equity Interests deemed to occur upon exercise of
stock options upon surrender of Equity Interests to pay the exercise price
of such options;
(vi) payments to Holdings (A) in amounts equal to the amounts required
for Holdings to pay franchise taxes and other fees required to maintain its
legal existence and provide for other operating costs of up to $500,000 per
fiscal year and (B) in amounts equal to amounts required for Holdings to
pay federal, state and local income taxes to the extent such income taxes
are actually due and owing; provided that the aggregate amount paid under
this clause (B) does not exceed the amount that the Company would be
required to pay in respect of the income of the Company and its
Subsidiaries if the Company were a stand alone entity that was not owned by
Holdings; and
(vii) other Restricted Payments in an aggregate amount since the Issue
Date not to exceed $20.0 million.
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The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The 1997 Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company and any
Restricted Subsidiary may incur Indebtedness (including Acquired Debt) or issue
shares of preferred stock if the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such preferred stock is issued would
have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The forgoing limitation will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company of term Indebtedness under Credit
Facilities (and the guarantee thereof by the Guarantors); provided that the
aggregate principal amount of all term Indebtedness outstanding under all
Credit Facilities after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (i), does not
exceed an amount equal to $175.0 million less the aggregate amount of all
repayments, optional or mandatory, of the principal of any Indebtedness
under a Credit Facility (or any such Permitted Refinancing Indebtedness)
that have been made since the Issue Date;
(ii) the incurrence by the Company of revolving credit Indebtedness
and letters of credit (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and its Restricted Subsidiaries thereunder) under Credit Facilities (and
the guarantee thereof by the Guarantors); provided that the aggregate
principal amount of all revolving credit Indebtedness outstanding under all
Credit Facilities after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (ii), does not
exceed an amount
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equal to $100.0 million less the aggregate amount of all Net Proceeds
of Asset Sales applied to repay any such Indebtedness (including any such
Permitted Refinancing Indebtedness) pursuant to the covenant described
above under the caption "-- Asset Sales";
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company and the Guarantors of the 1997
Notes and the Subsidiary Guarantees;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (v), not to exceed $30.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Restricted
Subsidiaries and was not incurred in connection with, or in contemplation
of, such acquisition by the Company or one of its Restricted Subsidiaries;
and provided further that the principal amount (or accreted value, as
applicable) of such Indebtedness, together with any other outstanding
Indebtedness incurred pursuant to this clause (vi), does not exceed $10.0
million;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace,
Indebtedness that was permitted by the 1997 Indenture to be incurred;
(viii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect
to reimbursement type obligations regarding workers' compensation claims;
provided, however, that upon the drawing of such letters of credit or the
incurrence of such Indebtedness, such obligations are reimbursed within 30
days following such drawing or incurrence;
(ix) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided, however, that:
(A) such Indebtedness is not reflected on the balance sheet of
the Company or any Restricted Subsidiary (contingent obligations
referred to in a footnote to financial statements and not otherwise
reflected on the balance sheet will not be deemed to be reflected on
such balance sheet for purposes of this clause (A)); and
(B) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that:
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(A) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the 1997 Notes and
(B)(1) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other
than the Company or one of its Restricted Subsidiaries and (2) any
sale or other transfer of any such Indebtedness to a Person that is
not either the Company or one of its Restricted Subsidiaries shall be
deemed, in each case, to constitute an incurrence of such Indebtedness
by the Company or such Restricted Subsidiary, as the case may be;
(xi) the incurrence by the Company or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of:
(A) fixing, hedging or capping interest rate risk with respect to
any floating rate Indebtedness that is permitted by the terms of the
1997 Indenture to be outstanding; or
(B) protecting the Company and its Restricted Subsidiaries
against changes in currency exchange rates;
(xii) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(xiii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xiii), and
the issuance of preferred stock by Unrestricted Subsidiaries;
(xiv) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted
Subsidiaries in the ordinary course of business; and
(xv) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (xv), not to exceed
$50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xv) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant. Accrual of interest, the accretion
of accreted value and the payment of interest in the form of additional
Indebtedness will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
LIENS
The 1997 Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien securing Indebtedness on any asset now owned
or hereafter acquired, or any income or profits therefrom or assign or convey
any right to receive income therefrom, except Permitted Liens.
ANTILAYERING PROVISION
The 1997 Indenture provides that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that
is subordinate or junior in right of payment to any Senior Debt and senior in
any respect in right of payment to the 1997 Notes, and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness
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that is subordinate or junior in right of payment to any Senior Debt of a
Guarantor and senior in any respect in right of payment to any of the
Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The 1997 Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(i)(A) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (B) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries;
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(iii) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason
of:
(A) the provisions of security agreements that restrict the
transfer of assets that are subject to a Lien created by such security
agreements;
(B) the provisions of agreements governing Indebtedness incurred
pursuant to clause (v) of the second paragraph of the covenant
described above under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock;
(C) the 1997 Indenture and the 1997 Notes;
(D) applicable law;
(E) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the 1997 Indenture to be
incurred;
(F) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with
past practices;
(G) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired;
(H) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced;
(I) contracts for the sale of assets, including, without
limitation, customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Subsidiary;
(J) agreements relating to secured Indebtedness otherwise
permitted to be incurred pursuant to the covenants described under "--
Limitations on Incurrence of Indebtedness and Issuance of Preferred
Stock" and "-- Liens" that limit the right of the debtor to dispose of
the assets securing such Indebtedness;
(K) restrictions on cash or other deposits or net worth imposed
by customers under contracts entered into in the ordinary course of
business; or
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(L) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The 1997 Indenture provides that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless:
(i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the 1997 Notes and the 1997 Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of
Default exists; and
(iv) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the
entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made, after giving
pro forma effect to such transaction as if such transaction had occurred at
the beginning of the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding
such transaction either:
(A) would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; or
(B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such
transaction.
Notwithstanding the foregoing clause (iv):
(i) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company; and
(ii) the Company may merge with an Affiliate that has no significant
assets or liabilities and was incorporated solely for the purpose of
reincorporating the Company in another State of the United States so long
as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
TRANSACTIONS WITH AFFILIATES
The 1997 Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless:
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(i) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
(ii) the Company delivers to the Trustee:
(A) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $3.0 million, a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the Board of Directors; and
(B) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing.
The foregoing provisions will not prohibit:
(i) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(ii) any transaction with a Lehman Investor;
(iii) any transaction between or among the Company and/or its
Restricted Subsidiaries;
(iv) transactions between the Company or any of its Restricted
Subsidiaries, on the one hand, and Lockheed Martin or any of its
Subsidiaries, on the other hand, on terms that are not materially less
favorable to the Company or the applicable Restricted Subsidiary of the
Company than those that could have been obtained from an unaffiliated third
party; provided that (A) in the case of any such transaction or series of
related transactions pursuant to this clause (iv) involving aggregate
consideration in excess of $1.0 million but less than $25.0 million, such
transaction or series of transactions (or the agreement pursuant to which
the transactions were executed) was approved by the Company's Chief
Executive Officer or Chief Financial Officer and (B) in the case of any
such transaction or series of related transactions pursuant to this clause
(iv) involving aggregate consideration equal to or in excess of $25.0
million, such transaction or series of related transactions (or the
agreement pursuant to which the transactions were executed) was approved by
a majority of the disinterested members of the Board of Directors;
(v) any transaction pursuant to and in accordance with the provisions
of the Transaction Documents as the same are in effect on the Issue Date;
and
(vi) any Restricted Payment that is permitted by the provisions of the
1997 Indenture described above under the caption "--Restricted Payments".
PAYMENTS FOR CONSENT
The 1997 Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any 1997 Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the 1997 Indenture or the 1997 Notes unless
such consideration is offered to be paid or is paid to all Holders of the 1997
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS
The 1997 Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any 1997 Notes are outstanding, the Company will furnish to the Holders
of 1997 Notes:
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(i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Results of
Operations and Financial Condition, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separately from
the financial condition and results of operations of the Unrestricted
Subsidiaries of the Company) and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants;
and
(ii) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports,
in each case within the time periods specified in the Commission's rules
and regulations. In addition, whether or not required by the rules and
regulations of the Commission, following the consummation of the Exchange
Offer contemplated by the Registration Rights Agreement, the Company will
file a copy of all such information and reports with the Commission for
public availability within the time periods set forth in the Commission's
rules and regulations (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request.
FUTURE SUBSIDIARY GUARANTEES
The Company did not have any Subsidiaries as of the Issue Date. However,
the Company's payment obligations under the 1997 Notes are jointly and
severally guaranteed by all of the Company's future Restricted Subsidiaries,
other than Foreign Subsidiaries. The 1997 Indenture provides that if the
Company or any of its Subsidiaries shall acquire or create a Subsidiary (other
than a Foreign Subsidiary or an Unrestricted Subsidiary) after the Issue Date,
then such Subsidiary shall execute a Subsidiary Guarantee and deliver an
opinion of counsel, in accordance with the terms of the 1997 Indenture. The
Subsidiary Guarantee of each Guarantor is subordinated to the prior payment in
full of all Senior Debt of such Guarantor, which would include the guarantees
of amounts borrowed under the Senior Credit Facilities. The obligations of each
Guarantor under its Subsidiary Guarantee is limited so as not to constitute a
fraudulent conveyance under applicable law.
The 1997 Indenture provides that no Guarantor may consolidate with or
merge with or into (whether or not such Guarantor is the surviving Person)
another Person (except the Company or another Guarantor) unless:
(i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of
such Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the 1997 Notes and the 1997
Indenture;
(ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and
(iii) the Company (A) would be permitted by virtue of the Company's
pro forma Fixed Charge Coverage Ratio, immediately after giving effect to
such transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" or (B) would have a pro forma Fixed Charge
Coverage Ratio that is greater than the actual Fixed Charge Coverage Ratio
for the same four-quarter period without giving pro forma effect to such
transaction.
Notwithstanding the foregoing paragraph:
(i) any Guarantor may consolidate with, merge into or transfer all or
part of its properties and assets to the Company; and
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(ii) any Guarantor may merge with an Affiliate that has no significant
assets or liabilities and was incorporated solely for the purpose of
reincorporating such Guarantor in another State of the United States so
long as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
The 1997 Indenture provides that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
1997 Indenture. See "--Redemption or Repurchase at Option of Holders--Asset
Sales".
EVENTS OF DEFAULT AND REMEDIES
The 1997 Indenture provides that each of the following constitutes an
Event of Default:
(i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the 1997 Notes (whether or not
prohibited by the subordination provisions of the Indenture);
(ii) default in payment when due of the principal of or premium, if
any, on the 1997 Notes (whether or not prohibited by the subordination
provisions of the 1997 Indenture);
(iii) failure by the Company to comply with the provisions described
under the captions "-- Change of Control", "-- Asset Sales" or "-- Merger,
Consolidation or Sale of Assets";
(iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the 1997 Indenture or the 1997 Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee
existed before, or is created after, the Issue Date, which default results
in the acceleration of such Indebtedness prior to its express maturity and,
in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness the maturity of which
has been so accelerated, aggregates $10.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries; and
(viii) except as permitted by the 1997 Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding 1997 Notes
may declare all the 1997 Notes to be due and payable immediately; provided,
however, that so long as any Designated Senior Debt is outstanding, such
declaration shall not become effective until the earlier of:
(i) the day which is five Business Days after receipt by the
Representatives of Designated Senior Debt of such notice of acceleration;
or
(ii) the date of acceleration of any Designated Senior Debt.
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Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, with respect to the Company or
any Restricted Subsidiary, all outstanding 1997 Notes will become due and
payable without further action or notice. Holders of the 1997 Notes may not
enforce the 1997 Indenture or the 1997 Notes except as provided in the 1997
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding 1997 Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
1997 Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the 1997 Notes pursuant to
the optional redemption provisions of the 1997 Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the 1997 Notes. If an Event of Default occurs
prior to May 1, 2002 by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the 1997 Notes prior to May 1, 2002, then the
premium specified in the 1997 Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the 1997 Notes.
The Holders of a majority in aggregate principal amount of the 1997 Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the 1997 Notes waive any existing Default or Event of Default and its
consequences under the 1997 Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the 1997 Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the 1997 Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the 1997 Notes and the 1997 Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
1997 Notes by accepting a 1997 Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the 1997
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding 1997 Notes ("Legal
Defeasance") except for:
(i) the rights of Holders of outstanding 1997 Notes to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages on such 1997 Notes when such payments are due from the
trust referred to below;
(ii) the Company's obligations with respect to the 1997 Notes
concerning issuing temporary 1997 Notes, registration of 1997 Notes,
mutilated, destroyed, lost or stolen 1997 Notes and the maintenance of an
office or agency for payment and money for security payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the 1997 Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the 1997 Indenture
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("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the 1997 Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "-- Events of Default" will no longer constitute an
Event of Default with respect to the 1997 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the 1997 Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest and Liquidated Damages on the outstanding 1997 Notes
on the stated maturity or on the applicable redemption date, as the case
may be, and the Company must specify whether the 1997 Notes are being
defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that:
(A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling; or
(B) since the Issue Date, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding 1997 Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding 1997 Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance
had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the 1997 Indenture) to which the
Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of 1997 Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange 1997 Notes in accordance with the 1997
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the 1997 Indenture. The Company is not required to transfer or
exchange any 1997 Note selected for redemption. Also, the Company is not
required to transfer or exchange any 1997 Note for a period of 15 days before a
selection of 1997 Notes to be redeemed.
The registered Holder of a 1997 Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the 1997
Indenture or the 1997 Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the 1997 Notes then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for 1997 Notes), and any
existing default or compliance with any provision of the Indenture or the 1997
Notes may be waived with the consent of the Holders of a majority in principal
amount of the then outstanding 1997 Notes (including consents obtained in
connection with a tender offer or exchange offer for 1997 Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any 1997 Notes held by a non-consenting Holder):
(i) reduce the principal amount of 1997 Notes whose Holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the 1997 Notes
(other than provisions relating to the covenants described above under the
caption "-- Repurchase at the Option of Holders");
(iii) reduce the rate of or change the time for payment of interest on
any 1997 Note;
(iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the 1997 Notes (except a rescission
of acceleration of the 1997 Notes by the Holders of at least a majority in
aggregate principal amount of the 1997 Notes and a waiver of the payment
default that resulted from such acceleration)
(v) make any Note payable in money other than that stated in the 1997
Notes;
(vi) make any change in the provisions of the 1997 Indenture relating
to waivers of past Defaults or the rights of Holders of 1997 Notes to
receive payments of principal of or premium, if any, or interest on the
1997 Notes;
(vii) waive a redemption payment with respect to any 1997 Note (other
than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"); or
(viii) make any change in the foregoing amendment and waiver
provisions.
In addition, any amendment to the provisions of Article 10 of the 1997
Indenture (which relates to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the 1997 Notes then
outstanding if such amendment would adversely affect the rights of Holders of
1997 Notes.
Notwithstanding the foregoing, without the consent of any Holder of 1997
Notes, the Company and the Trustee may amend or supplement the 1997 Indenture
or the 1997 Notes to cure any ambiguity, defect or inconsistency, to provide
for uncertificated 1997 Notes in addition to or in place of certificated 1997
Notes, to provide for the assumption of the Company's obligations to Holders of
1997 Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the Holders of 1997 Notes or
that does not adversely affect the legal
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rights under the 1997 Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the 1997 Indenture under the Trust Indenture Act.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the 1997 Indenture.
Reference is made to the 1997 Indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means:
(i) the sale, lease, conveyance or other disposition of any assets or
rights (including, without limitation, by way of a sale and leaseback)
other than sales of inventory in the ordinary course of business consistent
with past practices (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "Change of
Control" and/or the provisions described above under the caption "Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant); and
(ii) the issue or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Restricted Subsidiaries, in the
case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (A) that have a fair market value in excess
of $1.0 million or (B) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing:
(i) a transfer of assets by the Company to a Restricted Subsidiary or
by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary;
(ii) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;
(iii) a Restricted Payment that is permitted by the covenant described
above under the caption " Restricted Payments" and (iv) a disposition of
Cash Equivalents in the ordinary course of business will not be deemed to
be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(i) United States dollars;
(ii) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
having maturities of not more than one year from the date of acquisition;
(iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic financial institution to the
Senior Credit Facilities or with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch
Rating of "B" or better;
(iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the
qualifications specified in clause (iii) above;
(v) commercial paper having the highest rating obtainable from Moody's
or S&P's and in each case maturing within six months after the date of
acquisition;
(vi) investment funds investing 95% of their assets in securities of
the types described in clauses (i)-(v) above; and
(vii) readily marketable direct obligations issued by any State of the
United States of America or any political subdivision thereof having
maturities of not more than one year from the date of acquisition and
having one of the two highest rating categories obtainable from either
Moody's or S&P.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus;
(ii) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net Income;
plus
(iii) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other
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fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income; plus
(iv) depreciation, amortization (including amortization of goodwill,
debt issuance costs and other intangibles but excluding amortization of
other prepaid cash expenses that were paid in a prior period) and other
non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income; minus
(v) non-cash items increasing such Consolidated Net Income for such
period, in each case, on a consolidated basis and determined in accordance
with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(i) the Net Income of any Person that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary thereof that
is a Guarantor;
(ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(iv) the cumulative effect of a change in accounting principles shall
be excluded;
(v) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Restricted
Subsidiaries; and
(vi) the Net Income of any Restricted Subsidiary shall be calculated
after deducting preferred stock dividends payable by such Restricted
Subsidiary to Persons other than the Company and its other Restricted
Subsidiaries.
"Consolidated Net Tangible Assets" means, as of any date of determination,
shareholders' equity of the Company and its Restricted Subsidiaries, determined
on a consolidated basis in accordance with GAAP, less goodwill and other
intangibles (other than patents, trademarks, licenses, copyrights and other
intellectual property and prepaid assets).
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(i) any Indebtedness outstanding under the Senior Credit Facilities;
and
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(ii) any other Senior Debt permitted under the 1997 Indenture the
principal amount of which is $25.0 million or more and that has been
designated by the Company as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the 1997 Notes mature; provided, however, that if such Capital Stock is
issued to any plan for the benefit of employees of the Company or its
Subsidiaries or by any such plan to such employees, such Capital Stock shall
not constitute Disqualified Stock solely because it may be required to be
repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company or Holdings, other than any
private sales to an Affiliate of the Company or Holdings.
"Existing Indebtedness" means any Indebtedness of the Company (other than
Indebtedness under the Senior Credit Facilities and the 1997 Notes) in
existence on the Issue Date, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations, but excluding amortization of debt
issuance costs);
(ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon); and
(iv) the product of:
(A) all dividend payments, whether or not in cash, on any series
of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company, times
(B) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person and its Restricted Subsidiaries for such
period. In the event that the Company or any of its Restricted Subsidiaries
incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues preferred stock subsequent to the commencement of
the period for which the Fixed Charge Coverage Ratio is being calculated but on
or prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the
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Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above:
(i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be deemed to have occurred on the first day of
the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii)
of the proviso set forth in the definition of Consolidated Net Income;
(ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
and
(iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary of the Company that was
not organized or existing under the laws of the United States, any state
thereof, the District of Columbia or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the 1997 Indenture,
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under:
(i) currency exchange or interest rate swap agreements, interest rate
cap agreements and currency exchange or interest rate collar agreements;
and
(ii) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange rates or interest rates.
"Holdings" means L-3 Communications Holdings, Inc.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others
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secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be:
(i) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest; and
(ii) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, moving and
similar loans or advances to officers and employees made in the ordinary course
of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the last paragraph
of the covenant described above under the caption "-- Restricted Payments".
"Issue Date" means the closing date for the sale and original issuance of
the 1997 Notes under the Indenture.
"Lehman Investor" means Lehman Brothers Holdings Inc. and any of its
Affiliates.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are:
(i) traded on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market; and
(ii) issued by a corporation having a total equity market
capitalization of not less than $250.0 million; provided that the excess
of:
(A) the aggregate amount of securities of any one such
corporation held by the Company and any Restricted Subsidiary over
(B) ten times the average daily trading volume of such securities
during the 20 immediately preceding trading days shall be deemed not
to be Marketable Securities; as determined on the date of the contract
relating to such Asset Sale.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(i) any gain or loss, together with any related provision for taxes
thereon, realized in connection with:
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(A) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions); or
(B) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness
of such Person or any of its Restricted Subsidiaries; and
(ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss; and
(iii) the cumulative effect of a change in accounting principles.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(i) as to which neither the Company nor any of its Restricted
Subsidiaries:
(A) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness);
(B) is directly or indirectly liable (as a guarantor or
otherwise); or
(C) constitutes the lender; and
(ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness (other than Indebtedness incurred under Credit
Facilities) of the Company or any of its Restricted Subsidiaries to declare
a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization, whether or not a claim for post-filing interest is allowed in
such proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages (including Liquidated Damages), guarantees
and other liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereto.
"Permitted Investments" means:
(i) any Investment in the Company or in a Restricted Subsidiary of the
Company that is a Guarantor;
(ii) any Investment in cash or Cash Equivalents;
(iii) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment:
(A) such Person becomes a Restricted Subsidiary of the Company
and a Guarantor; or
(B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the
Company that is a Guarantor;
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(iv) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders -- Asset Sales" or any disposition of
assets not constituting an Asset sale;
(v) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(vi) advances to employees not to exceed $2.5 million at any one time
outstanding;
(vii) any Investment acquired in connection with or as a result of a
workout or bankruptcy of a customer or supplier;
(viii) Hedging Obligations permitted to be incurred under the covenant
described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock";
(ix) any Investment in a Similar Business that is not a Restricted
Subsidiary; provided that the aggregate fair market value of all
Investments made pursuant to this clause (ix) (valued on the date each such
Investment was made and without giving effect to subsequent changes in
value) may not exceed 5% of the Consolidated Net Tangible Assets of the
Company; and
(x) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (x) that are at the time
outstanding, not to exceed $15.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same extent
as, or to a greater extent than, the 1997 Notes and the Subsidiary Guarantees
are subordinated to Senior Debt pursuant to Article 10 of the 1997 Indenture.
"Permitted Liens" means:
(i) Liens securing Senior Debt of the Company or any Guarantor that
was permitted by the terms of the 1997 Indenture to be incurred;
(ii) Liens in favor of the Company or any Guarantor;
(iii) Liens on property of a Person existing at the time such Person
is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company;
(iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were
in existence prior to the contemplation of such acquisition and do not
extend to any other assets of the Company or any of its Restricted
Subsidiaries;
(v) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (v) of the second paragraph of the
covenant entitled "--Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
(vii) Liens existing on the Issue Date;
(viii) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
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(ix) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $5.0 million at any one time outstanding;
(x) Liens on assets of Guarantors to secure Senior Debt of such
Guarantors that was permitted by the 1997 Indenture to be incurred;
(xi) Liens securing Permitted Refinancing Indebtedness, provided that
any such Lien does not extend to or cover any property, shares or debt
other than the property, shares or debt securing the Indebtedness so
refunded, refinanced or extended;
(xii) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature, in each case incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money);
(xiii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods in the ordinary course of business;
(xiv) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that
are within the general parameters customary in the industry, in each case
securing Indebtedness under Hedging Obligations; and
(xv) Liens encumbering deposits made in the ordinary course of
business to secure nondelinquent obligations arising from statutory or
regulatory, contractual or warranty requirements of the Company or its
Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that:
(i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses and prepayment premiums
incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity date
no earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
1997 Notes, such Permitted Refinancing Indebtedness is subordinated in
right of payment to the 1997 Notes on terms at least as favorable to the
Holders of 1997 Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Securities" means, with respect to any Asset Sale, Voting Stock
of a Person primarily engaged in one or more Similar Businesses; provided that
after giving effect to the Asset Sale such Person shall become a Restricted
Subsidiary and a Guarantor.
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"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, each Subsidiary
of such Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means the credit agreement, dated as of the
Issue Date among the Company and a syndicate of banks and other financial
institutions led by Lehman Commercial Paper Inc., as syndication agent, and any
related notes, collateral documents, letters of credit and guarantees,
including any appendices, exhibits or schedules to any of the foregoing (as the
same may be in effect from time to time), in each case, as such agreements may
be amended, modified, supplemented or restated from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid or extended from time to
time (whether with the original agents and lenders or other agents and lenders
or otherwise, and whether provided under the original credit agreement or other
credit agreements or otherwise).
"Senior Debt" means:
(i) all Indebtedness of the Company or any of its Restricted
Subsidiaries outstanding under Credit Facilities and all Hedging
Obligations with respect thereto;
(ii) any other Indebtedness permitted to be incurred by the Company or
any of its Restricted Subsidiaries under the terms of the 1997 Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to
the 1997 Notes; and
(iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt
will not include:
(i) any liability for federal, state, local or other taxes owed or
owing by the Company;
(ii) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates;
(iii) any trade payables or
(iv) any Indebtedness that is incurred in violation of the 1997
Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Similar Business" means a business, a majority of whose revenues in the
most recently ended calendar year were derived from:
(i) the sale of defense products, electronics, communications systems,
aerospace products, avionics products and/or communications products;
(ii) any services related thereto;
(iii) any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary
thereto; and
(iv) any combination of any of the foregoing.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
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(i) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(B) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"S&P" means Standard and Poor's Corporation.
"Transaction Documents" means the 1997 Indenture, the 1997 Notes, the
Purchase Agreement and the Registration Rights Agreement.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(i) has no Indebtedness other than Non-Recourse Debt;
(ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
(A) to subscribe for additional Equity Interests; or
(B) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating
results;
(iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(v) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "Certain Covenants -- Restricted
Payments". If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock", the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if:
(i) such Indebtedness is permitted under the covenant described under
the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock", calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period; and
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(ii) no Default or Event of Default would be in existence following
such designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(i) the sum of the products obtained by multiplying (A) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (B) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(ii) the then outstanding principal amount of such indebtedness.
"Wholly Owned" means, when used with respect to any Subsidiary or
Restricted Subsidiary of a Person, a Subsidiary (or Restricted Subsidiary, as
appropriate) of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Subsidiaries
(or Wholly Owned Restricted Subsidiaries, as appropriate) of such Person and
one or more Wholly Owned Subsidiaries (or Wholly Owned Restricted Subsidiaries,
as appropriate) of such Person.
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DESCRIPTION OF THE MAY 1998 NOTES
GENERAL
The May 1998 Notes were issued under an indenture dated as of May 22, 1998
(the "May 1998 Indenture") between the Company, as issuer, and The Bank of New
York, as trustee (the "Trustee"). The terms of the May 1998 Notes include those
stated in the May 1998 Indenture and those made part of the May 1998 Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The May 1998 Notes are subject to all such terms, and holders
of the May 1998 Notes are referred to the May 1998 Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the May 1998 Indenture describes the material terms of the May
1998 Indenture but does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the May 1998
Indenture, including the definitions of certain terms contained therein and
those terms made part of the May 1998 Indenture by reference to the Trust
Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "-- Certain Definitions".
For purposes of this summary, the term "Company" refers only to L-3
Communications Corporation and not to any of its Subsidiaries.
The May 1998 Notes are general unsecured obligations of the Company and
rank pari passu in right of payment with the 1997 Notes and are subordinated in
right of payment to all current and future Senior Debt. At December 31, 1998,
the Company had no Senior Debt outstanding (excluding letters of credit). The
May 1998 Indenture permits the incurrence of Senior Debt in the future. See "--
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock".
The May 1998 Indenture provides that the Company's payment obligations
under the May 1998 Notes will be jointly and severally guaranteed (the
"Subsidiary Guarantees") by all of the Company's present and future Restricted
Subsidiaries, other than Foreign Subsidiaries (collectively, the "Guarantors").
The Subsidiary Guarantee of each Guarantor will be subordinated to the prior
payment in full of all Senior Debt of such Guarantor, which would include the
guarantees of amounts borrowed under the Senior Credit Facilities.
As of December 31, 1998, not all of the Company's subsidiaries were
"Restricted Subsidiaries." Cardiovascular Computer Systems, Ltd., L-3 Secure
Information Technology and L-3 Network Security are currently Unrestricted
Subsidiaries. In addition, under the circumstances described below under the
subheading "-- Certain Covenants -- Restricted Payments", the Company is
permitted to designate certain of the Company's subsidiaries as "Unrestricted
Subsidiaries". Unrestricted Subsidiaries are not subject to many of the
restrictive covenants in the May 1998 Indenture. Unrestricted Subsidiaries do
not guarantee these May 1998 Notes.
PRINCIPAL, MATURITY AND INTEREST
The May 1998 Notes are limited in aggregate principal amount to $250.0
million, of which $180.0 million have been issued. The May 1998 Notes will
mature on May 15, 2008. Interest on the May 1998 Notes will accrue at the rate
of 81/2% per annum and will be payable semi-annually in arrears on May 15 and
November 15, commencing on November 15, 1998, to Holders of record on the
immediately preceding May 1 and November 1. Interest on the May 1998 Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the May 1998 Notes will be payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of
interest may be made by check mailed to the Holders of the May 1998 Notes at
their respective addresses set forth in the register of Holders of Notes;
provided that all payments of principal, premium and interest with respect to
May 1998 Notes the Holders of which have given wire transfer instructions to
the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof if such
Holders shall be
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registered Holders of at least $250,000 in principal amount of May 1998 Notes.
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The May
1998 Notes have been issued in denominations of $1,000 and integral multiples
thereof.
OPTIONAL REDEMPTION
The May 1998 Notes will not be redeemable at the Company's option prior to
May 15, 2003. Thereafter, the May 1998 Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest to the applicable redemption date, if redeemed during the twelve-month
period beginning on May 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003 ................................ 104.250%
2004 ................................ 102.833%
2005 ................................ 101.417%
2006 and thereafter ................. 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Issue
Date, the Company may on any one or more occasions redeem up to an aggregate of
35% of the May 1998 Notes originally issued at a redemption price of 108.500%
of the principal amount thereof, plus accrued and unpaid interest to the
redemption date, with the net cash proceeds of one or more Equity Offerings by
the Company or the net cash proceeds of one or more Equity Offerings by
Holdings that are contributed to the Company as common equity capital; provided
that at least 65% of the May 1998 Notes originally issued remain outstanding
immediately after the occurrence of each such redemption; and provided,
further, that any such redemption must occur within 120 days of the date of the
closing of such Equity Offering.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the May 1998
Notes are subordinated in right of payment, as set forth in the May 1998
Indenture, to the prior payment in full of all Senior Debt, whether outstanding
on the Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt, whether or not an allowable claim in
any such proceeding) before the Holders of May 1998 Notes will be entitled to
receive any payment with respect to the May 1998 Notes, and until all
Obligations with respect to Senior Debt are paid in full, any distribution to
which the Holders of May 1998 Notes would be entitled shall be made to the
holders of Senior Debt (except, in each case, that Holders of May 1998 Notes
may receive Permitted Junior Securities and payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the May
1998 Notes (except from the trust described under "-- Legal Defeasance and
Covenant Defeasance") if:
(i) a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing; or
(ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its
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maturity (or that would permit such holders to accelerate with the
giving of notice or the passage of time or both) and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or
the holders of any Designated Senior Debt.
Payments on the May 1998 Notes may and shall be resumed:
(A) in the case of a payment default, upon the date on which such
default is cured or waived; and
(B) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
No new period of payment blockage may be commenced unless and until:
(i) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice; and
(ii) all scheduled payments of principal, premium, if any, and
interest on the May 1998 Notes that have come due have been paid in full in
cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been waived for a period of not less than 90 days.
The May 1998 Indenture further requires that the Company promptly notify
holders of Senior Debt if payment of the May 1998 Notes is accelerated because
of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of May 1998 Notes may recover less
ratably than creditors of the Company who are holders of Senior Debt. At
December 31, 1998 we had no principal amount of Senior Debt outstanding
(excluding letters of credit).
SELECTION AND NOTICE
If less than all of the May 1998 Notes are to be redeemed at any time,
selection of May 1998 Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the May 1998 Notes are listed, or, if the May 1998 Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that no May 1998 Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of May 1998 Notes to be redeemed at its registered address. Notices
of redemption may not be conditional. If any May 1998 Note is to be redeemed in
part only, the notice of redemption that relates to such May 1998 Note shall
state the portion of the principal amount thereof to be redeemed. A new May
1998 Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original May
1998 Note. May 1998 Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
May 1998 Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders",
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the May 1998 Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of May 1998 Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof)
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of such Holder's May 1998 Notes pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest to the date
of purchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase May 1998 Notes on the date specified in such notice, which date
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed (the "Change of Control Payment Date"), pursuant to the
procedures required by the May 1998 Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
May 1998 Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(i) accept for payment all May 1998 Notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(ii) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all May 1998 Notes or portions thereof so
tendered; and
(iii) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of Notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of May 1998 Notes so
tendered the Change of Control Payment for such May 1998 Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new May 1998 Note equal in principal amount to any unpurchased
portion of the Notes surrendered, if any; provided that each such new May 1998
Note will be in a principal amount of $1,000 or an integral multiple thereof.
The May 1998 Indenture provides that, prior to mailing a Change of Control
Offer, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or offer to repay all
Senior Debt and terminate all commitments thereunder of each lender who has
accepted such offer or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the May 1998 Indenture are applicable.
Except as described above with respect to a Change of Control, the May 1998
Indenture does not contain provisions that permit the Holders of the May 1998
Notes to require that the Company repurchase or redeem the May 1998 Notes in
the event of a takeover, recapitalization or similar transaction.
The Senior Credit Facilities prohibit the Company from purchasing any May
1998 Notes, and also provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing May 1998 Notes, the Company could seek the consent of its lenders to
the purchase of May 1998 Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing May
1998 Notes. In such case, the Company's failure to purchase tendered May 1998
Notes would constitute an Event of Default under the May 1998 Indenture and
1997 Indenture which would, in turn, constitute a default under the Senior
Credit Facilities. In such circumstances, the subordination provisions in the
May 1998 Indenture would restrict payments to the Holders of May 1998 Notes.
See "Risk Factors -- Change of Control". Finally, the Company's ability to pay
cash to the holders of May 1998 Notes upon a purchase may be limited by the
Company's then-existing financial resources. There can be no
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assurance that sufficient funds will be available when necessary to make any
required purchases. Even if sufficient funds were otherwise available, the
terms of the Senior Credit Facilities prohibit, subject to certain exceptions,
the Company's prepayment of May 1998 Notes prior to their scheduled maturity.
Consequently, if the Company is not able to prepay indebtedness outstanding
under the Senior Credit Facilities and any other Senior Indebtedness containing
similar restrictions or obtain requisite consents, the Company will be unable
to fulfill its repurchase obligations if holders of May 1998 Notes exercise
their purchase rights following a Change of Control, thereby resulting in a
default under the May 1998 Indenture and 1997 Indenture. Furthermore, the
Change of Control provisions of the May 1998 Indenture and 1997 Indenture may
in certain circumstances make more difficult or discourage a takeover of the
Company.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the May 1998 Indenture applicable to a Change of Control Offer made by
the Company and purchases all May 1998 Notes validly tendered and not withdrawn
under such Change of Control Offer.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Section 13(d)(3) of the Exchange Act) other than the Principals
or their Related Parties (as defined below);
(ii) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares); or
(iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(i) was a member of such Board of Directors on the Issue Date; or
(ii) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Principals" means any Lehman Investor, Lockheed Martin Corporation, Frank
C. Lanza and Robert V. LaPenta.
"Related Party" with respect to any Principal means:
(i) any controlling stockholder, 50% (or more) owned Subsidiary, or
spouse or immediate family member (in the case of an individual) of such
Principal; or
(ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding a more than 50% controlling interest of which consist of such
Principal and/or such other Persons referred to in the immediately
preceding clause (i).
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
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With respect to the disposition of assets, the phrase "all or
substantially all" as used in the May 1998 Indenture varies according to the
facts and circumstances of the subject transaction and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear as to whether a Change of Control has occurred and
whether the holders have the right to require the Company to purchase the May
1998 Notes. In the event that the Company were to determine that a Change of
Control did not occur because not "all or substantially all" of the assets of
the Company and its Restricted Subsidiaries had been sold and the holders of
the May 1998 Notes disagreed with such determination, the holders and/or the
Trustee would need to seek a judicial determination of the issue.
ASSET SALES
The May 1998 Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value (evidenced by an Officers' Certificate delivered to the
Trustee which will include a resolution of the Board of Directors with
respect to such fair market value in the event such Asset Sale involves
aggregate consideration in excess of $5.0 million) of the assets or Equity
Interests issued or sold or otherwise disposed of; and
(ii) at least 80% of the consideration therefor received by the
Company or such Restricted Subsidiary, as the case may be, consists of
cash, Cash Equivalents and/or Marketable Securities;
provided, however, that:
(A) the amount of any Senior Debt of the Company or such Restricted
Subsidiary that is assumed by the transferee in any such transaction; and
(B) any consideration received by the Company or such Restricted
Subsidiary, as the case may be, that consists of (1) all or substantially
all of the assets of one or more Similar Businesses, (2) other long-term
assets that are used or useful in one or more Similar Businesses and (3)
Permitted Securities shall be deemed to be cash for purposes of this
provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option:
(i) to repay Indebtedness under a Credit Facility; or
(ii) to the acquisition of Permitted Securities, all or substantially
all of the assets of one or more Similar Businesses, or the making of a
capital expenditure or the acquisition of other long-term assets in a
Similar Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Indebtedness under a Credit Facility or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any
Net Proceeds from Asset Sales that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the 1997 Indenture provides that the Company will be required to make an offer
to all holders of 1997 Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of 1997 Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest to the date of purchase, in
accordance with the procedures set forth in the 1997 Indenture. To the extent
that the aggregate amount of 1997 Notes tendered pursuant to an Asset Sale
Offer is less than the remaining Excess Proceeds ("Remaining Excess Proceeds")
and the sum of:
(A) such amount of Remaining Excess Proceeds; and
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(B) the Remaining Excess Proceeds from any subsequent Asset Sale
Offers exceeds $3.0 million,
the Company will be required to make an offer to all Holders of May 1998 Notes
and any other Indebtedness that ranks pari passu with the May 1998 Notes that,
by its terms, requires the Company to offer to repurchase such Indebtedness
with such Remaining Excess Proceeds (a "Secondary Asset Sale Offer") to
purchase the maximum principal amount of Notes and pari passu Indebtedness that
may be purchased out of such Remaining Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of purchase, in accordance
with the procedures set forth in the May 1998 Indenture. To the extent that the
aggregate amount of May 1998 Notes or pari passu Indebtedness tendered pursuant
to a Secondary Asset Sale Offer is less than the Remaining Excess Proceeds, the
Company may use any Remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of May 1998 Notes or pari passu Indebtedness
surrendered by Holders thereof exceeds the amount of Remaining Excess Proceeds
in a Secondary Asset Sale Offer, the Company shall repurchase such Indebtedness
on a pro rata basis and the Trustee shall select the May 1998 Notes to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
The Senior Credit Facilities substantially limit the Company's ability to
purchase subordinated Indebtedness, including the May 1998 Notes. Any future
credit agreements relating to Senior Debt may contain similar restrictions. See
"Description of Certain Indebtedness -- Senior Credit Facilities".
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The May 1998 Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to
the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than (A)
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or (B) dividends or distributions by a
Restricted Subsidiary so long as, in the case of any dividend or
distribution payable on or in respect of any class or series of securities
issued by a Restricted Subsidiary other than a Wholly Owned Restricted
Subsidiary, the Company or a Restricted Subsidiary receives at least its
pro rata share of such dividend or distribution in accordance with its
Equity Interests in such class or series of securities);
(ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company;
(iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the May 1998 Notes except a payment of interest or
principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after
giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the
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applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by the Company and its
Restricted Subsidiaries since April 30, 1997 (excluding Restricted
Payments permitted by clauses (ii) through (vii) of the next
succeeding paragraph or of the kind contemplated by such clauses that
were made prior to the date of the May 1998 Indenture), is less than
the sum of:
(i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from July 1, 1997 to
the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit); plus
(ii) 100% of the aggregate net cash proceeds received by the
Company since April 30, 1997 from a contribution to its common
equity capital or the issue or sale of Equity Interests of the
Company (other than Disqualified Stock) or of Disqualified Stock
or debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a
Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into
Disqualified Stock); plus
(iii) to the extent that any Restricted Investment that was
made after April 30, 1997 is sold for cash or otherwise
liquidated or repaid for cash, the amount of cash received in
connection therewith (or from the sale of Marketable Securities
received in connection therewith); plus
(iv) to the extent not already included in such Consolidated
Net Income of the Company for such period and without
duplication;
(A) 100% of the aggregate amount of cash received as a
dividend from an Unrestricted Subsidiary;
(B) 100% of the cash received upon the sale of
Marketable Securities received as a dividend from an
Unrestricted Subsidiary; and
(C) 100% of the net assets of any Unrestricted
Subsidiary on the date that it becomes a Restricted
Subsidiary.
As of December 31, 1998, the amount, adjusted to include the $201.5 million of
net proceeds contributed to the Company by Holdings from the February 1999
Common Stock Offering, that would have been available to the Company for
Restricted Payments pursuant to this paragraph (c) would have been $367.2
million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the May 1998 Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph;
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(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness (other than intercompany Indebtedness) in
exchange for, or with the net cash proceeds from an incurrence of,
Permitted Refinancing Indebtedness;
(iv) the repurchase, retirement or other acquisition or retirement for
value of common Equity Interests of the Company or Holdings held by any
future, present or former employee, director or consultant of the Company
or any Subsidiary or Holdings issued pursuant to any management equity plan
or stock option plan or any other management or employee benefit plan or
agreement; provided, however, that the aggregate amount of Restricted
Payments made under this clause (iv) does not exceed $1.5 million in any
calendar year and provided further that cancellation of Indebtedness owing
to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Equity Interests
of the Company will not be deemed to constitute a Restricted Payment for
purposes of this covenant or any other provision of the May 1998 Indenture;
(v) repurchases of Equity Interests deemed to occur upon exercise of
stock options upon surrender of Equity Interests to pay the exercise price
of such options;
(vi) payments to Holdings (A) in amounts equal to the amounts required
for Holdings to pay franchise taxes and other fees required to maintain its
legal existence and provide for other operating costs of up to $500,000 per
fiscal year and (B) in amounts equal to amounts required for Holdings to
pay federal, state and local income taxes to the extent such income taxes
are actually due and owing; provided that the aggregate amount paid under
this clause (B) does not exceed the amount that the Company would be
required to pay in respect of the income of the Company and its
Subsidiaries if the Company were a stand alone entity that was not owned by
Holdings; and
(vii) other Restricted Payments in an aggregate amount since the Issue
Date not to exceed $20.0 million.
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The May 1998 Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company and any
Restricted Subsidiary may incur Indebtedness (including Acquired Debt)
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or issue shares of preferred stock if the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such preferred stock is issued would
have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The foregoing limitation will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company of additional Indebtedness under
Credit Facilities (and the guarantee thereof by the Guarantors) in an
aggregate principal amount outstanding pursuant to this clause (i) at any
one time (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its Restricted
Subsidiaries thereunder), including all Permitted Refinancing Indebtedness
then outstanding incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (i), not to exceed $375.0
million less the aggregate amount of all Net Proceeds of Asset Sales
applied to repay any such Indebtedness pursuant to the covenant described
above under the caption "-- Asset Sales";
(ii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iii) the incurrence by the Company and the Guarantors of $180.0
million in aggregate principal amount of the May 1998 Notes and the
Subsidiary Guarantees thereof;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness then
outstanding incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (iv), not to exceed $30.0 million at any
time outstanding;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Restricted
Subsidiaries and was not incurred in connection with, or in contemplation
of, such acquisition by the Company or one of its Restricted Subsidiaries;
and provided further that the principal amount (or accreted value, as
applicable) of such Indebtedness, together with any other outstanding
Indebtedness incurred pursuant to this clause (v), does not exceed $10.0
million;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace,
Indebtedness that was permitted by the Indenture to be incurred (other than
intercompany Indebtedness or Indebtedness incurred pursuant to clause (i)
above);
(vii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect
to reimbursement type obligations regarding workers' compensation claims;
provided, however, that upon the drawing of such letters of credit or the
incurrence of such Indebtedness, such obligations are reimbursed within 30
days following such drawing or incurrence;
(viii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case,
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incurred or assumed in connection with the disposition of any
business, assets or a Subsidiary, other than guarantees of Indebtedness
incurred by any Person acquiring all or any portion of such business,
assets or a Subsidiary for the purpose of financing such acquisition;
provided, however, that:
(A) such Indebtedness is not reflected on the balance sheet of
the Company or any Restricted Subsidiary (contingent obligations
referred to in a footnote to financial statements and not otherwise
reflected on the balance sheet will not be deemed to be reflected on
such balance sheet for purposes of this clause (A)); and
(B) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that:
(A) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the May 1998 Notes; and
(B)(1) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other
than the Company or one of its Restricted Subsidiaries and (2) any
sale or other transfer of any such Indebtedness to a Person that is
not either the Company or one of its Restricted Subsidiaries shall be
deemed, in each case, to constitute an incurrence of such Indebtedness
by the Company or such Restricted Subsidiary, as the case may be;
(x) the incurrence by the Company or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of:
(A) fixing, hedging or capping interest rate risk with respect to
any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; or
(B) protecting the Company and its Restricted Subsidiaries
against changes in currency exchange rates;
(xi) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(xii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xii), and
the issuance of preferred stock by Unrestricted Subsidiaries;
(xiii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted
Subsidiaries in the ordinary course of business; and
(xiv) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness then outstanding incurred to refund,
refinance or replace any other Indebtedness incurred pursuant to this
clause (xiv), not to exceed $50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in
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clauses (i) through (xiv) above or is entitled to be incurred pursuant to the
first paragraph of this covenant, the Company shall, in its sole discretion,
classify, or later reclassify, such item of Indebtedness in any manner that
complies with this covenant. Accrual of interest, the accretion of accreted
value and the payment of interest in the form of additional Indebtedness will
not be deemed to be an incurrence of Indebtedness for purposes of this
covenant.
LIENS
The May 1998 Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien securing Indebtedness on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign
or convey any right to receive income therefrom, except Permitted Liens.
ANTILAYERING PROVISION
The May 1998 Indenture provides that (i) the Company will not incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the May 1998 Notes, and
(ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of a Guarantor and senior in any respect in right of
payment to any of the Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The May 1998 Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(i)(A) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (B) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries;
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(iii) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of:
(A) the provisions of security agreements that restrict the
transfer of assets that are subject to a Lien created by such security
agreements;
(B) the provisions of agreements governing Indebtedness incurred
pursuant to clause (v) of the second paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(C) the May 1998 Indenture, the May 1998 Notes, and the 1997
Indenture and the 1997 Notes;
(D) applicable law;
(E) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be
incurred;
(F) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with
past practices;
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(G) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired;
(H) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced;
(I) contracts for the sale of assets, including, without
limitation, customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Subsidiary;
(J) agreements relating to secured Indebtedness otherwise
permitted to be incurred pursuant to the covenants described under "--
Limitations on Incurrence of Indebtedness and Issuance of Preferred
Stock" and "-- Liens" that limit the right of the debtor to dispose of
the assets securing such Indebtedness;
(K) restrictions on cash or other deposits or net worth imposed
by customers under contracts entered into in the ordinary course of
business; or
(L) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The May 1998 Indenture provides that the Company may not consolidate or
merge with or into (whether or not the Company is the surviving corporation),
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless:
(i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the May 1998 Notes and the May 1998 Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of
Default exists; and (iv) except in the case of a merger of the Company with
or into a Wholly Owned Restricted Subsidiary of the Company, the Company or
the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made,
after giving pro forma effect to such transaction as if such transaction
had occurred at the beginning of the most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding such transaction either:
(A) would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; or
(B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such
transaction.
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Notwithstanding the foregoing clause (iv):
(i) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company; and
(ii) the Company may merge with an Affiliate that has no significant
assets or liabilities and was incorporated solely for the purpose of
reincorporating the Company in another State of the United States so long
as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
TRANSACTIONS WITH AFFILIATES
The May 1998 Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless:
(i) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
(ii) the Company delivers to the Trustee:
(A) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the Board of Directors; and
(B) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $15.0 million, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing.
The foregoing provisions will not prohibit:
(i) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(ii) any transaction with a Lehman Investor;
(iii) any transaction between or among the Company and/or its
Restricted Subsidiaries;
(iv) transactions between the Company or any of its Restricted
Subsidiaries, on the one hand, and Lockheed Martin or any of its
Subsidiaries or a Permitted Joint Venture, on the other hand, on terms that
are not materially less favorable to the Company or the applicable
Restricted Subsidiary of the Company than those that could have been
obtained from an unaffiliated third party; provided that (A) in the case of
any such transaction or series of related transactions pursuant to this
clause (iv) involving aggregate consideration in excess of $5.0 million but
less than $25.0 million, such transaction or series of transactions (or the
agreement pursuant to which the transactions were executed) was approved by
the Company's Chief Executive Officer or Chief Financial Officer and (B) in
the case of any such transaction or series of related transactions pursuant
to this clause (iv) involving aggregate consideration equal to or in excess
of $25.0 million, such transaction or series of related transactions (or
the agreement pursuant to which the transactions were executed) was
approved by a majority of the disinterested members of the Board of
Directors;
(v) any transaction pursuant to and in accordance with the provisions
of the Transaction Documents as the same are in effect on the Issue Date;
and
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(vi) any Restricted Payment that is permitted by the provisions of the
May 1998 Indenture described above under the caption "-- Restricted
Payments".
PAYMENTS FOR CONSENT
The May 1998 Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any May 1998 Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the May 1998 Indenture or the May 1998
Notes unless such consideration is offered to be paid or is paid to all Holders
of the May 1998 Notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on
an annual and quarterly basis on forms provided for such annual and quarterly
reporting pursuant to rules and regulations promulgated by the Commission, the
May 1998 Indenture requires the Company to file with the Commission (and
provide the Trustee and Holders with copies thereof, without cost to each
Holder, within 15 days after it files them with the Commission):
(a) within 90 days after the end of each fiscal year, annual reports
on Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such successor
or comparable form);
(b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 10-Q (or any successor or
comparable form);
(c) promptly from time to time after the occurrence of an event
required to be therein reported, such other reports on Form 8-K (or any
successor or comparable form); and
(d) any other information, documents and other reports which the
Company would be required to file with the Commission if it were subject to
Section 13 or 15(d) of the Exchange Act;
provided, however, the Company shall not be so obligated to file such reports
with the Commission if the Commission does not permit such filing, in which
event the Company will make available such information to prospective
purchasers of Notes, in addition to providing such information to the Trustee
and the Holders, in each case within 15 days after the time the Company would
be required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
FUTURE SUBSIDIARY GUARANTEES
The Company's payment obligations under the May 1998 Notes are jointly and
severally guaranteed by all of the Company's existing and future Restricted
Subsidiaries, other than Foreign Subsidiaries. The May 1998 Indenture provides
that if the Company or any of its Subsidiaries shall acquire or create a
Subsidiary (other than a Foreign Subsidiary or an Unrestricted Subsidiary)
after the Issue Date, then such Subsidiary shall execute a Subsidiary Guarantee
and deliver an opinion of counsel, in accordance with the terms of the May 1998
Indenture. The Subsidiary Guarantee of each Guarantor ranks pari passu with the
guarantees of the 1997 Notes subordinated to the prior payment in full of all
Senior Debt of such Guarantor, which would include the guarantees of amounts
borrowed under the Senior Credit Facilities. The obligations of each Guarantor
under its Subsidiary Guarantee are limited so as not to constitute a fraudulent
conveyance under applicable law.
The May 1998 Indenture provides that no Guarantor may consolidate with or
merge with or into (whether or not such Guarantor is the surviving Person)
another Person (except the Company or another Guarantor) unless:
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(i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of
such Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the May 1998 Notes and the
May 1998 Indenture;
(ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and
(iii) the Company:
(A) would be permitted by virtue of the Company's pro forma Fixed
Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described above under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock"; or
(B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such
transaction.
Notwithstanding the foregoing paragraph:
(i) any Guarantor may consolidate with, merge into or transfer all or
part of its properties and assets to the Company; and
(ii) any Guarantor may merge with an Affiliate that has no significant
assets or liabilities and was incorporated solely for the purpose of
reincorporating such Guarantor in another State of the United States so
long as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
The May 1998 Indenture provides that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "-- Repurchase at Option of Holders -- Asset Sales".
EVENTS OF DEFAULT AND REMEDIES
The May 1998 Indenture provides that each of the following constitutes an
Event of Default:
(i) default for 30 days in the payment when due of interest on the May
1998 Notes (whether or not prohibited by the subordination provisions of
the May 1998 Indenture);
(ii) default in payment when due of the principal of or premium, if
any, on the May 1998 Notes (whether or not prohibited by the subordination
provisions of the May 1998 Indenture);
(iii) failure by the Company to comply with the provisions described
under the captions "-- Change of Control", "-- Asset Sales" or "-- Merger,
Consolidation or Sale of Assets";
(iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the May 1998 Indenture or the May 1998
Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee
existed
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before, or is created after, the Issue Date, which default results in
the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness the maturity of which has
been so accelerated, aggregates $10.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries; and
(viii) except as permitted by the May 1998 Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding May 1998
Notes may declare all the May 1998 Notes to be due and payable immediately;
provided, however, that so long as any Designated Senior Debt is outstanding,
such declaration shall not become effective until the earlier of:
(i) the day which is five Business Days after receipt by the
Representatives of Designated Senior Debt of such notice of acceleration;
or
(ii) the date of acceleration of any Designated Senior Debt.
Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, with respect to the Company or
any Restricted Subsidiary, all outstanding May 1998 Notes will become due and
payable without further action or notice. Holders of the May 1998 Notes may not
enforce the May 1998 Indenture or the May 1998 Notes except as provided in the
May 1998 Indenture. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
May 1998 Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the May 1998 Notes
pursuant to the optional redemption provisions of the May 1998 Indenture, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the May 1998 Notes. If an
Event of Default occurs prior to May 15, 2003 by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the May 1998 Notes prior
to May 15, 2003, then the premium specified in the May 1998 Indenture shall
also become immediately due and payable to the extent permitted by law upon the
acceleration of the May 1998 Notes.
The Holders of a majority in aggregate principal amount of the May 1998
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the May 1998 Notes waive any existing Default or Event of Default and
its consequences under the May 1998 Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the May
1998 Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the May 1998 Indenture, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the May 1998 Notes and the May 1998
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Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of May 1998 Notes by accepting a May
1998 Note waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the May 1998 Notes. Such waiver may
not be effective to waive liabilities under the federal securities laws and it
is the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding May 1998 Notes ("Legal
Defeasance") except for:
(i) the rights of Holders of outstanding May 1998 Notes to receive
payments in respect of the principal of, premium, if any, and interest on
such May 1998 Notes when such payments are due from the trust referred to
below;
(ii) the Company's obligations with respect to the May 1998 Notes
concerning issuing temporary May 1998 Notes, registration of May 1998
Notes, mutilated, destroyed, lost or stolen May 1998 Notes and the
maintenance of an office or agency for payment and money for security
payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the May 1998 Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the May 1998 Indenture ("Covenant Defeasance") and thereafter
any omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the May 1998 Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default" will no longer constitute an Event of Default with respect to the
May 1998 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the May 1998 Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding May 1998 Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the May 1998 Notes are being defeased to
maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that:
(A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling; or
(B) since the Issue Date, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding May 1998 Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding May 1998 Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal
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income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the May 1998 Indenture) to which the
Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of May 1998 Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange May 1998 Notes in accordance with the
May 1998 Indenture. The Registrar and the Trustee may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the May 1998 Indenture. The Company is not required to transfer or
exchange any Note selected for redemption. Also, the Company is not required to
transfer or exchange any May 1998 Note for a period of 15 days before a
selection of May 1998 Notes to be redeemed.
The registered Holder of a May 1998 Note will be treated as the owner of
it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the May 1998
Indenture or the May 1998 Notes may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount of the May 1998 Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, May 1998
Notes), and any existing default or compliance with any provision of the May
1998 Indenture or the May 1998 Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding May 1998
Notes (including consents obtained in connection with a tender offer or
exchange offer for May 1998 Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any May 1998 Notes held by a non-consenting Holder):
(i) reduce the principal amount of May 1998 Notes whose Holders must
consent to an amendment, supplement or waiver
(ii) reduce the principal of or change the fixed maturity of any May
1998 Note or alter the provisions with respect to the redemption of the May
1998 Notes (other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders");
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(iii) reduce the rate of or change the time for payment of interest on
any Note;
(iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the May 1998 Notes (except a
rescission of acceleration of the May 1998 Notes by the Holders of at least
a majority in aggregate principal amount of the May 1998 Notes and a waiver
of the payment default that resulted from such acceleration);
(v) make any May 1998 Note payable in money other than that stated in
the May 1998 Notes;
(vi) make any change in the provisions of the May 1998 Indenture
relating to waivers of past Defaults or the rights of Holders of May 1998
Notes to receive payments of principal of or premium, if any, or interest
on the May 1998 Notes;
(vii) waive a redemption payment with respect to any May 1998 Note
(other than a payment required by one of the covenants described above
under the caption "-- Repurchase at the Option of Holders"); or
(viii) make any change in the foregoing amendment and waiver
provisions.
In addition, any amendment to the provisions of Article 10 of the May 1998
Indenture (which relates to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the May 1998 Notes
then outstanding if such amendment would adversely affect the rights of Holders
of May 1998 Notes.
Notwithstanding the foregoing, without the consent of any Holder of May
1998 Notes, the Company and the Trustee may amend or supplement the May 1998
Indenture or the May 1998 Notes to cure any ambiguity, defect or inconsistency,
to provide for uncertificated May 1998 Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's obligations
to Holders of May 1998 Notes in the case of a merger or consolidation, to make
any change that would provide any additional rights or benefits to the Holders
of May 1998 Notes or that does not adversely affect the legal rights under the
May 1998 Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the May 1998
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The May 1998 Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if it acquires any conflicting interest
it must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding May
1998 Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The May 1998 Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
May 1998 Indenture at the request of any Holder of May 1998 Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the May 1998 Indenture.
Reference is made to the May 1998 Indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided.
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"1997 Indenture" means the indenture, dated as of April 30, 1997, among
The Bank of New York, as trustee, and the Company, with respect to the 1997
Notes.
"1997 Notes" means the $225,000,000 in aggregate principal amount of the
Company's 103/8% Senior Subordinated Notes due 2007, issued pursuant to the
1997 Indenture on April 30, 1997.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means:
(i) the sale, lease, conveyance or other disposition of any assets or
rights (including, without limitation, by way of a sale and leaseback)
other than sales of inventory in the ordinary course of business (provided
that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "-- Change of Control" and/or
the provisions described above under the caption "-- Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale covenant);
and
(ii) the issue or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Restricted Subsidiaries,
in the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (A) that have a fair market value in excess of
$1.0 million or (B) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing:
(i) a transfer of assets by the Company to a Restricted Subsidiary or
by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary;
(ii) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;
(iii) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Restricted Payments"; and
(iv) a disposition of Cash Equivalents in the ordinary course of
business will not be deemed to be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
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"Capital Stock" means:
(i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(i) United States dollars;
(ii) securities issued or directly and fully guaranteed or insured by
the U.S. government or any agency or instrumentality thereof having
maturities of not more than one year from the date of acquisition;
(iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic financial institution to the
Senior Credit Facilities or with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch
Rating of "B" or better;
(iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the
qualifications specified in clause (iii) above;
(v) commercial paper having the highest rating obtainable from Moody's
or S&P and in each case maturing within six months after the date of
acquisition;
(vi) investment funds investing 95% of their assets in securities of
the types described in clauses (i)-(v) above; and
(vii) readily marketable direct obligations issued by any State of the
United States of America or any political subdivision thereof having
maturities of not more than one year from the date of acquisition and
having one of the two highest rating categories obtainable from either
Moody's or S&P.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus;
(ii) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net Income;
plus
(iii) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus
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(iv) depreciation, amortization (including amortization of goodwill,
debt issuance costs and other intangibles but excluding amortization of
other prepaid cash expenses that were paid in a prior period) and other
non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income; minus
(v) non-cash items (excluding any items that were accrued in the
ordinary course of business) increasing such Consolidated Net Income for
such period, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(i) the Net Income of any Person that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary thereof that
is a Guarantor;
(ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(iv) the cumulative effect of a change in accounting principles shall
be excluded;
(v) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Restricted
Subsidiaries; and
(vi) the Net Income of any Restricted Subsidiary shall be calculated
after deducting preferred stock dividends payable by such Restricted
Subsidiary to Persons other than the Company and its other Restricted
Subsidiaries.
"Consolidated Tangible Assets" means, with respect to the Company, the
total consolidated assets of the Company and its Restricted Subsidiaries, less
the total intangible assets of the Company and its Restricted Subsidiaries, as
shown on the most recent internal consolidated balance sheet of the Company and
such Restricted Subsidiaries calculated on a consolidated basis in accordance
with GAAP.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Senior Credit Facilities and (ii) any other Senior Debt permitted under the May
1998 Indenture the principal amount of which is $25.0 million or more and that
has been designated by the Company as "Designated Senior Debt".
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the May 1998 Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments"; and provided
further, that if such Capital Stock is issued to any plan for the benefit of
employees of the Company or its Subsidiaries or by any such plan to such
employees, such Capital Stock shall not constitute Disqualified Stock solely
because it may be required to be repurchased by the Company in order to satisfy
applicable statutory or regulatory obligations.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company or Holdings, other than any
private sales to an Affiliate of the Company or Holdings.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means any Indebtedness of the Company (other than
Indebtedness under the Senior Credit Facilities and the May 1998 Notes) in
existence on the date of the May 1998 Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations, but excluding amortization of debt
issuance costs);
(ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon); and
(iv) the product of:
(A) all dividend payments, whether or not in cash, on any series
of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company, times
(B) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person and its
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Restricted Subsidiaries for such period. In the event that the Company or any
of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but on or prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above:
(i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be deemed to have occurred on the first day of
the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated; without giving effect to clause (iii)
of the proviso set forth in the definition of Consolidated Net Income;
(ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
and
(iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary of the Company that was
not organized or existing under the laws of the United States, any state
thereof, the District of Columbia or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which were in effect April 30, 1997.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the May 1998
Indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and currency exchange or interest rate collar
agreements and (ii) other agreements or arrangements designed to protect such
Person against fluctuations in currency exchange rates or interest rates.
"Holdings" means L-3 Communications Holdings, Inc.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing
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indebtedness (other than letters of credit and Hedging Obligations) would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien
on any asset of such Person (whether or not such indebtedness is assumed by
such Person) and, to the extent not otherwise included, the Guarantee by such
Person of any indebtedness of any other Person. The amount of any Indebtedness
outstanding as of any date shall be:
(i) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest; and
(ii) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, moving and
similar loans or advances to officers and employees made in the ordinary course
of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the last paragraph
of the covenant described above under the caption
"-- Restricted Payments".
"Issue Date" means the closing date for the sale and original issuance of
the May 1998 Notes under the May 1998 Indenture.
"Lehman Investor" means Lehman Brothers Holdings Inc. and any of its
Affiliates.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are:
(i) traded on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market; and
(ii) issued by a corporation having a total equity market
capitalization of not less than $250.0 million;
provided that the excess of:
(A) the aggregate amount of securities of any one such
corporation held by the Company and any Restricted Subsidiary over
(B) ten times the average daily trading volume of such securities
during the 20 immediately preceding trading days shall be deemed not
to be Marketable Securities; as determined on the date of the contract
relating to such Asset Sale.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
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(i) any gain or loss, together with any related provision for taxes
thereon, realized in connection with;
(A) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions); or
(B) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness
of such Person or any of its Restricted Subsidiaries;
(ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss; and
(iii) the cumulative effect of a change in accounting principles.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(i) as to which neither the Company nor any of its Restricted
Subsidiaries:
(A) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness);
(B) is directly or indirectly liable (as a guarantor or
otherwise); or
(C) constitutes the lender; and
(ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness (other than Indebtedness incurred under Credit
Facilities) of the Company or any of its Restricted Subsidiaries to declare
a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization, whether or not a claim for post-filing interest is allowed in
such proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages, guarantees and other liabilities or amounts
payable under the documentation governing any Indebtedness or in respect
thereto.
"Permitted Investments" means:
(i) any Investment in the Company or in a Restricted Subsidiary of the
Company that is a Guarantor;
(ii) any Investment in cash or Cash Equivalents; (iii) any Investment
by the Company or any Restricted Subsidiary of the Company in a Person, if
as a result of such Investment:
(A) such Person becomes a Restricted Subsidiary of the Company
and a Guarantor; or
(B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the
Company that is a Guarantor;
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(iv) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders -- Asset Sales" or any disposition of
assets not constituting an Asset sale;
(v) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(vi) advances to employees not to exceed $2.5 million at any one time
outstanding;
(vii) any Investment acquired in connection with or as a result of a
workout or bankruptcy of a customer or supplier;
(viii) Hedging Obligations permitted to be incurred under the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(ix) any Investment in a Similar Business that is not a Restricted
Subsidiary; provided that the aggregate fair market value of all
Investments outstanding pursuant to this clause (ix) (valued on the date
each such Investment was made and without giving effect to subsequent
changes in value) may not at any one time exceed 10% of the Consolidated
Tangible Assets of the Company; and
(x) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (x) that are at the time
outstanding, not to exceed $15.0 million.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of Directors (until designation by the Board of
Directors to the contrary); provided that:
(i) at least 25% of the Capital Stock thereof with voting power under
ordinary circumstances to elect directors (or Persons having similar or
corresponding powers and responsibilities) is at the time owned
(beneficially or directly) by the Company and/or by one or more Restricted
Subsidiaries of the Company; and
(ii) such joint venture, partnership or other Person is engaged in a
Similar Business. Any such designation or designation to the contrary shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of
the resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same extent
as, or to a greater extent than, the May 1998 Notes and the Subsidiary
Guarantees are subordinated to Senior Debt pursuant to Article 10 of the May
1998 Indenture.
"Permitted Liens" means:
(i) Liens securing Senior Debt of the Company or any Guarantor that
was permitted by the terms of the May 1998 Indenture to be incurred;
(ii) Liens in favor of the Company or any Guarantor;
(iii) Liens on property of a Person existing at the time such Person
is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company;
(iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were
in existence prior to the contemplation of such acquisition and do not
extend to any other assets of the Company or any of its Restricted
Subsidiaries;
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(v) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the
covenant entitled "-- Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
(vii) Liens existing on the Issue Date;
(viii) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(ix) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $5.0 million at any one time outstanding;
(x) Liens on assets of Guarantors to secure Senior Debt of such
Guarantors that was permitted by the Indenture to be incurred;
(xi) Liens securing Permitted Refinancing Indebtedness, provided that
any such Lien does not extend to or cover any property, shares or debt
other than the property, shares or debt securing the Indebtedness so
refunded, refinanced or extended;
(xii) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature, in each case incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money);
(xiii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods in the ordinary course of business;
(xiv) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that
are within the general parameters customary in the industry, in each case
securing Indebtedness under Hedging Obligations; and
(xv) Liens encumbering deposits made in the ordinary course of
business to secure nondelinquent obligations arising from statutory or
regulatory, contractual or warranty requirements of the Company or its
Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that:
(i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses and prepayment premiums
incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity date
no earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
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(iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
May 1998 Notes, such Permitted Refinancing Indebtedness is subordinated in
right of payment to the May 1998 Notes on terms at least as favorable to
the Holders of May 1998 Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Securities" means, with respect to any Asset Sale, Voting Stock
of a Person primarily engaged in one or more Similar Businesses; provided that
after giving effect to the Asset Sale such Person shall become a Restricted
Subsidiary and a Guarantor.
"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, each Subsidiary
of such Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means the credit agreement, as in effect on the
Issue Date among the Company and a syndicate of banks and other financial
institutions led by Lehman Commercial Paper Inc., as syndication agent, and any
related notes, collateral documents, letters of credit and guarantees,
including any appendices, exhibits or schedules to any of the foregoing (as the
same may be in effect from time to time), in each case, as such agreements may
be amended, modified, supplemented or restated from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid or extended from time to
time (whether with the original agents and lenders or other agents and lenders
or otherwise, and whether provided under the original credit agreement or other
credit agreements or otherwise).
"Senior Debt" means:
(i) all Indebtedness of the Company or any of its Restricted
Subsidiaries outstanding under Credit Facilities and all Hedging
Obligations with respect thereto;
(ii) any other Indebtedness permitted to be incurred by the Company or
any of its Restricted Subsidiaries under the terms of the May 1998
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the May 1998 Notes; and
(iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt
will not include:
(i) any liability for federal, state, local or other taxes owed or
owing by the Company,
(ii) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates;
(iii) any trade payables or;
(iv) any Indebtedness that is incurred in violation of the May 1998
Indenture. The 1997 Notes will be pari passu with the May 1998 Notes and
will not constitute Senior Debt.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Similar Business" means a business, a majority of whose revenues in the
most recently ended calendar year were derived from:
(i) the sale of defense products, electronics, communications systems,
aerospace products, avionics products and/or communications products;
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(ii) any services related thereto;
(iii) any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary
thereto; and
(iv) any combination of any of the foregoing.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
(i) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(B) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"S&P" means Standard and Poor's Corporation.
"Transaction Documents" means the May 1998 Indenture, the May 1998 Notes
and the Underwriting Agreement.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(i) has no Indebtedness other than Non-Recourse Debt;
(ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
(A) to subscribe for additional Equity Interests; or
(B) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating
results;
(iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(v) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "-- Certain Covenants --
Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
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May 1998 Indenture and any Indebtedness of such Subsidiary shall be deemed to
be incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock", the Company shall be in default
of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if:
(i) such Indebtedness is permitted under the covenant described under
the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock", calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period; and
(ii) no Default or Event of Default would be in existence following
such designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(i) the sum of the products obtained by multiplying (A) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (B) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned" means, when used with respect to any Subsidiary or
Restricted Subsidiary of a Person, a Subsidiary (or Restricted Subsidiary, as
appropriate) of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Subsidiaries
(or Wholly Owned Restricted Subsidiaries, as appropriate) of such Person and
one or more Wholly Owned Subsidiaries (or Wholly Owned Restricted Subsidiaries,
as appropriate) of such Person.
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DESCRIPTION OF THE DECEMBER 1998 NOTES
GENERAL
The Notes offered hereby are issued under an indenture dated as of
December 11, 1998 (the "December 1998 Indenture" and together with the 1997
Indendure and the May 1998 Indenture, the "Indentures") among the Company, as
issuer, the Guarantors named therein and The Bank of New York, as trustee (the
"Trustee"). The terms of the December 1998 Notes include those stated in the
December 1998 Indenture and those made part of the December 1998 Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The December 1998 Notes are subject to all such terms, and holders of
the Decemer 1998 Notes are referred to the December 1998 Indenture and the
Trust Indenture Act for a statement thereof. The following summary of the
material provisions of the December 1998 Indenture describes the material terms
of the December 1998 Indenture but does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of
the December 1998 Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to
the Trust Indenture Act. For definitions of certain capitalized terms used in
the following summary, see "-- Certain Definitions". The December 1998
Indenture is an exhibit to the Registration Statement of which this prospectus
is a part.
For purposes of this summary, the term "Company" refers only to L-3
Communications Corporation and not to any of its Subsidiaries.
The December 1998 Notes are general unsecured obligations of the Company
and rank pari passu in right of payment with the 1997 Notes and the May 1998
Notes and are subordinated in right of payment to all current and future Senior
Debt. At December 31, 1998, the Company had no Senior Debt outstanding
(excluding letters of credit). The December 1998 Indenture permits the
incurrence of Senior Debt in the future. See "-- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock".
The December 1998 Indenture provides that the Company's payment
obligations under the December 1998 Notes are jointly and severally guaranteed
(the "Subsidiary Guarantees") by all of the Company's present and future
Restricted Subsidiaries, other than Foreign Subsidiaries (collectively, the
"Guarantors"). The Subsidiary Guarantee of each Guarantor will be subordinated
to the prior payment in full of all Senior Debt of such Guarantor, which would
include the guarantees of amounts borrowed under the Senior Credit Facilities.
As of December 31, 1998, not all of the Company's subsidiaries were
"Restricted Subsidiaries." Cardiovascular Computer Systems, Ltd., L-3 Secure
Information Technology and L-3 Network Security are currently Unrestricted
Subsidiaries. In addition, under the circumstances described below under the
subheading "-- Certain Covenants -- Restricted Payments", the Company is
permitted to designate certain of the Company's subsidiaries as "Unrestricted
Subsidiaries". Unrestricted Subsidiaries are not subject to many of the
restrictive covenants in the December 1998 Indenture. Unrestricted Subsidiaries
do not guarantee these December 1998 Notes.
PRINCIPAL, MATURITY AND INTEREST
The December 1998 Notes are limited in aggregate principal amount to
$200.0 million and will mature on August 1, 2008. Interest on the December 1998
Notes will accrue at the rate of 8% per annum and will be payable semi-annually
in arrears on February 1 and August 1, commencing on February 1, 1999, to
Holders of record on the immediately preceding January 15 and July 15. The
Company may issue Additional Notes (the "Additional Notes") from time to time
after the offering of the December 1998 Notes. Any offering of Additional Notes
is subject to the covenant described below under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock". The
December 1998 Notes and any Additional Notes subsequently issued under the
December 1998 Indenture are treated as a single class for all purposes under
the December 1998 Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase.
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Interest on the December 1998 Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium and Liquidated Damages,
if any, and interest on the December 1998 Notes will be payable at the office
or agency of the Company maintained for such purpose within the City and State
of New York or, at the option of the Company, payment of interest and
liquidated damages, if any, may be made by check mailed to the Holders of the
December 1998 Notes at their respective addresses set forth in the register of
Holders of December 1998 Notes; provided that all payments of principal,
premium, interest and Liquidated Damages with respect to December 1998 Notes
the Holders of which have given wire transfer instructions to the Company will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof if such Holders shall be registered
Holders of at least $250,000 in principal amount of December 1998 Notes. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The December
1998 Notes have been issued in denominations of $1,000 and integral multiples
thereof.
OPTIONAL REDEMPTION
The December 1998 Notes will not be redeemable at the Company's option
prior to August 1, 2003. Thereafter, the December 1998 Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and liquidated damages, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on August 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003 ................................ 104.000%
2004 ................................ 102.667%
2005 ................................ 101.333%
2006 and thereafter ................. 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Issue
Date, the Company may on any one or more occasions redeem up to an aggregate of
35% of the December 1998 Notes originally issued at a redemption price of
108.000% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date, with the net cash proceeds
of one or more Equity Offerings by the Company or the net cash proceeds of one
or more Equity Offerings by Holdings that are contributed to the Company as
common equity capital; provided that at least 65% of the December 1998 Notes
originally issued remain outstanding immediately after the occurrence of each
such redemption; and provided, further, that any such redemption must occur
within 120 days of the date of the closing of such Equity Offering.
SUBORDINATION
The payment of principal of, premium and liquidated damages, if any, and
interest on the December 1998 Notes will be subordinated in right of payment,
as set forth in the December 1998 Indenture, to the prior payment in full of
all Senior Debt, whether outstanding on the Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt, whether or not an allowable claim in
any such proceeding) before the Holders of December 1998 Notes will be entitled
to receive any payment with respect to the December 1998 Notes, and until all
Obligations
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with respect to Senior Debt are paid in full, any distribution to which the
Holders of December 1998 Notes would be entitled shall be made to the holders
of Senior Debt (except, in each case, that Holders of December 1998 Notes may
receive Permitted Junior Securities and payments made from the trust described
under "-- Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
December 1998 Notes (except from the trust described under "-- Legal Defeasance
and Covenant Defeasance") if:
(i) a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing; or
(ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity (or that would
permit such holders to accelerate with the giving of notice or the passage
of time or both) and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt.
Payments on the December 1998 Notes may and shall be resumed:
(A) in the case of a payment default, upon the date on which such
default is cured or waived; and
(B) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been
accelerated.
No new period of payment blockage may be commenced unless and until:
(i) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice; and
(ii) all scheduled payments of principal, premium and Liquidated
Damages, if any, and interest on the December 1998 Notes that have come due
have been paid in full in cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been waived for a period of not less than 90 days.
The December 1998 Indenture further requires that the Company promptly
notify holders of Senior Debt if payment of the December 1998 Notes is
accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of December 1998 Notes may recover less
ratably than creditors of the Company who are holders of Senior Debt. At
December 31, 1998, there was no Senior Debt outstanding at December 31, 1998.
SELECTION AND NOTICE
If less than all of the December 1998 Notes are to be redeemed at any
time, selection of December 1998 Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the December 1998 Notes are listed, or,
if the December 1998 Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate; provided that no
December 1998 Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of December 1998 Notes to be
redeemed at its registered address. Notices of redemption may not be
conditional. If any December 1998 Note is to be redeemed in part only, the
notice of redemption that relates to such December 1998 Note shall state the
portion of the principal amount thereof to be redeemed. A new December 1998
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original December
1998 Note. December
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1998 Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on December 1998
Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders",
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the December 1998 Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of December 1998
Notes will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's December
1998 Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase (the "Change of Control Payment"). Within ten days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase December 1998 Notes on the date specified in
such notice, which date shall be no earlier than 30 days and no later than 60
days from the date such notice is mailed (the "Change of Control Payment
Date"), pursuant to the procedures required by the December 1998 Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the December 1998 Notes as a result of a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(i) accept for payment all December 1998 Notes or portions thereof
properly tendered pursuant to the Change of Control Offer;
(ii) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all December 1998 Notes or portions thereof
so tendered; and
(iii) deliver or cause to be delivered to the Trustee the December
1998 Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of December 1998 Notes or portions thereof being
purchased by the Company.
The Paying Agent will promptly mail to each Holder of December 1998 Notes
so tendered the Change of Control Payment for such December 1998 Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new December 1998 Note equal in principal amount to any
unpurchased portion of the December 1998 Notes surrendered, if any; provided
that each such new December 1998 Note will be in a principal amount of $1,000
or an integral multiple thereof.
The December 1998 Indenture provides that, prior to mailing a Change of
Control Offer, but in any event within 90 days following a Change of Control,
the Company will either repay all outstanding Senior Debt or offer to repay all
Senior Debt and terminate all commitments thereunder of each lender who has
accepted such offer or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of
December 1998 Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the December 1998 Indenture are
applicable. Except as described above with respect to
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a Change of Control, the December 1998 Indenture does not contain provisions
that permit the Holders of the December 1998 Notes to require that the Company
repurchase or redeem the December 1998 Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facilities prohibit the Company from purchasing any
December 1998 Notes, and also provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing December 1998 Notes, the Company could seek the consent of its
lenders to the purchase of December 1998 Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company will remain prohibited
from purchasing December 1998 Notes. In such case, the Company's failure to
purchase tendered December 1998 Notes would constitute an Event of Default
under the December 1998 Indenture, the May 1998 Indenture and 1997 Indenture
which would, in turn, constitute a default under the Senior Credit Facilities.
In such circumstances, the subordination provisions in the December 1998
Indenture would likely restrict payments to the Holders of December 1998 Notes.
See "Risk Factors -- We are Required to Take Certain Actions Upon a Change of
Control". Finally, the Company's ability to pay cash to the holders of December
1998 Notes upon a purchase may be limited by the Company's then-existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required purchases. Even if sufficient
funds were otherwise available, the terms of the Senior Credit Facilities will
prohibit, subject to certain exceptions, the Company's prepayment of December
1998 Notes prior to their scheduled maturity. Consequently, if the Company is
not able to prepay indebtedness outstanding under the Senior Credit Facilities
and any other Senior Debt containing similar restrictions or obtain requisite
consents, the Company will be unable to fulfill its repurchase obligations if
holders of December 1998 Notes exercise their purchase rights following a
Change of Control, thereby resulting in a default under the December 1998
Indenture, the May 1998 Indenture and 1997 Indenture. Furthermore, the Change
of Control provisions of the December 1998 Indenture, the May 1998 Indenture
and 1997 Indenture may in certain circumstances make more difficult or
discourage a takeover of the Company.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the December 1998 Indenture applicable to a Change of Control Offer
made by the Company and purchases all December 1998 Notes validly tendered and
not withdrawn under such Change of Control Offer.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Section 13(d)(3) of the Exchange Act) other than the Principals
or their Related Parties (as defined below);
(ii) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares); or
(iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
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(i) was a member of such Board of Directors on May 22, 1998; or
(ii) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Principals" means any Lehman Investor, Lockheed Martin, Frank C. Lanza
and Robert V. LaPenta.
"Related Party" with respect to any Principal means:
(i) any controlling stockholder, 50% (or more) owned Subsidiary, or
spouse or immediate family member (in the case of an individual) of such
Principal; or
(ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding a more than 50% controlling interest of which consist of such
Principal and/or such other Persons referred to in the immediately
preceding clause (i).
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
With respect to the disposition of assets, the phrase "all or
substantially all" as used in the December 1998 Indenture varies according to
the facts and circumstances of the subject transaction and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of the
Company, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the holders have the right to require the Company to
purchase the December 1998 Notes. In the event that the Company were to
determine that a Change of Control did not occur because not "all or
substantially all" of the assets of the Company and its Restricted Subsidiaries
had been sold and the holders of the December 1998 Notes disagreed with such
determination, the holders and/or the Trustee would need to seek a judicial
determination of the issue.
ASSET SALES
The December 1998 Indenture provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, consummate an Asset Sale
unless:
(i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value (evidenced by an Officers' Certificate delivered to the
Trustee which will include a resolution of the Board of Directors with
respect to such fair market value in the event such Asset Sale involves
aggregate consideration in excess of $5.0 million) of the assets or Equity
Interests issued or sold or otherwise disposed of; and
(ii) at least 80% of the consideration therefor received by the
Company or such Restricted Subsidiary, as the case may be, consists of
cash, Cash Equivalents and/or Marketable Securities;
provided, however, that:
(A) the amount of any Senior Debt of the Company or such
Restricted Subsidiary that is assumed by the transferee in any such
transaction; and
(B) any consideration received by the Company or such Restricted
Subsidiary, as the case may be, that consists of (1) all or
substantially all of the assets of one or more Similar Businesses, (2)
other long-term assets that are used or useful in one or more Similar
Businesses and (3) Permitted Securities shall be deemed to be cash for
purposes of this provision.
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Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option:
(i) to repay Indebtedness under a Credit Facility; or
(ii) to the acquisition of Permitted Securities, all or substantially
all of the assets of one or more Similar Businesses, or the making of a
capital expenditure or the acquisition of other long-term assets in a
Similar Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Indebtedness under a Credit Facility or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any
Net Proceeds from Asset Sales that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the 1997 Indenture provides that the Company will be required to make an offer
to all holders of 1997 Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of 1997 Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase, in accordance with the procedures set forth in the
1997 Indenture. To the extent that the aggregate amount of 1997 Notes tendered
pursuant to an Asset Sale Offer is less than the remaining Excess Proceeds
("Remaining Excess Proceeds") and the sum of:
(A) such amount of Remaining Excess Proceeds; and
(B) the Remaining Excess Proceeds from any subsequent Asset Sale
Offers exceeds $3.0 million,
the Company will be required to make an offer to all Holders of December 1998
Notes and any other Indebtedness that ranks pari passu with the December 1998
Notes (including the May 1998 Notes) that, by its terms, requires the Company
to offer to repurchase such Indebtedness with such Remaining Excess Proceeds (a
"Secondary Asset Sale Offer") to purchase the maximum principal amount of Notes
and pari passu Indebtedness that may be purchased out of such Remaining Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase, in accordance with the procedures set forth in the December 1998
Indenture. To the extent that the aggregate amount of December 1998 Notes or
pari passu Indebtedness tendered pursuant to a Secondary Asset Sale Offer is
less than the Remaining Excess Proceeds, the Company may use any Remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of December 1998 Notes or pari passu Indebtedness surrendered by Holders
thereof exceeds the amount of Remaining Excess Proceeds in a Secondary Asset
Sale Offer, the Company shall repurchase such Indebtedness on a pro rata basis
and the Trustee shall select the Exchange Notes to be purchased on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
The Senior Credit Facilities will substantially limit the Company's
ability to purchase subordinated Indebtedness, including the December 1998
Notes. Any future credit agreements relating to Senior Debt may contain similar
restrictions. See "-- Description of Certain Indebtedness -- Senior Credit
Facilities".
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The December 1998 Indenture provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to
the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests
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in their capacity as such (other than (A) dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company
or (B) dividends or distributions by a Restricted Subsidiary so long as, in
the case of any dividend or distribution payable on or in respect of any
class or series of securities issued by a Restricted Subsidiary other than
a Wholly Owned Restricted Subsidiary, the Company or a Restricted
Subsidiary receives at least its pro rata share of such dividend or
distribution in accordance with its Equity Interests in such class or
series of securities);
(ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company;
(iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the December 1998 Notes except a payment of interest or
principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described below under caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by the Company and its
Restricted Subsidiaries since April 30, 1997 (excluding Restricted
Payments permitted by clauses (ii) through (vii) of the next
succeeding paragraph or of the kind contemplated by such clauses that
were made prior to the date of the Indenture), is less than the sum
of:
(i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from July 1, 1997 to
the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit); plus
(ii) 100% of the aggregate net cash proceeds received by the
Company since April 30, 1997 from a contribution to its common
equity capital or the issue or sale of Equity Interests of the
Company (other than Disqualified Stock) or of Disqualified Stock
or debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a
Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into
Disqualified Stock); plus
(iii) to the extent that any Restricted Investment that was
made after April 30, 1997 is sold for cash or otherwise
liquidated or repaid for cash, the amount of cash received in
connection therewith (or from the sale of Marketable Securities
received in connection therewith); plus
(iv) to the extent not already included in such Consolidated
Net Income of the Company for such period and without
duplication;
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(A) 100% of the aggregate amount of cash received as a dividend
from an Unrestricted Subsidiary;
(B) 100% of the cash received upon the sale of Marketable
Securities received as a dividend from an Unrestricted Subsidiary; and
(C) 100% of the net assets of any Unrestricted Subsidiary on the
date that it becomes a Restricted Subsidiary.
As of December 31, 1998, the amount, adjusted to include the net
proceeds of $201.5 million contributed to the Company by Holdings from the
February 1999 Common Stock Offering, that would have been available to the
Company for Restricted Payments pursuant to this paragraph (c) would have
been $367.2 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the December 1998 Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness (other than intercompany Indebtedness) in
exchange for, or with the net cash proceeds from an incurrence of,
Permitted Refinancing Indebtedness;
(iv) the repurchase, retirement or other acquisition or retirement for
value of common Equity Interests of the Company or Holdings held by any
future, present or former employee, director or consultant of the Company
or any Subsidiary or Holdings issued pursuant to any management equity plan
or stock option plan or any other management or employee benefit plan or
agreement; provided, however, that the aggregate amount of Restricted
Payments made under this clause (iv) does not exceed $1.5 million in any
calendar year and provided further that cancellation of Indebtedness owing
to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Equity Interests
of the Company will not be deemed to constitute a Restricted Payment for
purposes of this covenant or any other provision of the Indenture;
(v) repurchases of Equity Interests deemed to occur upon exercise of
stock options upon surrender of Equity Interests to pay the exercise price
of such options;
(vi) payments to Holdings (A) in amounts equal to the amounts required
for Holdings to pay franchise taxes and other fees required to maintain its
legal existence and provide for other operating costs of up to $500,000 per
fiscal year and (B) in amounts equal to amounts required for Holdings to
pay federal, state and local income taxes to the extent such income taxes
are actually due and owing; provided that the aggregate amount paid under
this clause (B) does not exceed the amount that the Company would be
required to pay in respect of the income of the Company and its
Subsidiaries if the Company were a stand alone entity that was not owned by
Holdings; and
(vii) other Restricted Payments in an aggregate amount since May 22,
1998 not to exceed $20.0 million.
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such
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determination, all outstanding Investments by the Company and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The December 1998 Indenture provides that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company and any
Restricted Subsidiary may incur Indebtedness (including Acquired Debt) or issue
shares of preferred stock if the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such preferred stock is issued would
have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The foregoing limitation will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company of additional Indebtedness under
Credit Facilities (and the guarantee thereof by the Guarantors) in an
aggregate principal amount outstanding pursuant to this clause (i) at any
one time (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its Restricted
Subsidiaries thereunder), including all Permitted Refinancing Indebtedness
then outstanding incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (i), not to exceed $375.0
million less the aggregate amount of all Net Proceeds of Asset Sales
applied to repay any such Indebtedness pursuant to the covenant described
above under the caption "-- Asset Sales";
(ii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iii) the incurrence by the Company and the Guarantors of $200.0
million in aggregate principal amount of the December 1998 Notes and the
Subsidiary Guarantees thereof;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted
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Refinancing Indebtedness then outstanding incurred to refund,
refinance or replace any other Indebtedness incurred pursuant to this
clause (iv), not to exceed $30.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Restricted
Subsidiaries and was not incurred in connection with, or in contemplation
of, such acquisition by the Company or one of its Restricted Subsidiaries;
and provided further that the principal amount (or accreted value, as
applicable) of such Indebtedness, together with any other outstanding
Indebtedness incurred pursuant to this clause (v), does not exceed $10.0
million;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace,
Indebtedness that was permitted by the December 1998 Indenture to be
incurred (other than intercompany Indebtedness or Indebtedness incurred
pursuant to clause (i) above);
(vii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect
to reimbursement type obligations regarding workers' compensation claims;
provided, however, that upon the drawing of such letters of credit or the
incurrence of such Indebtedness, such obligations are reimbursed within 30
days following such drawing or incurrence;
(viii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided, however, that:
(A) such Indebtedness is not reflected on the balance sheet of
the Company or any Restricted Subsidiary (contingent obligations
referred to in a footnote to financial statements and not otherwise
reflected on the balance sheet will not be deemed to be reflected on
such balance sheet for purposes of this clause (A)); and
(B) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that:
(A) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the December 1998 Notes; and
(B)(1) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other
than the Company or one of its Restricted Subsidiaries and (2) any
sale or other transfer of any such Indebtedness to a Person that is
not either the Company or one of its Restricted Subsidiaries shall be
deemed, in each case, to constitute an incurrence of such Indebtedness
by the Company or such Restricted Subsidiary, as the case may be;
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(x) the incurrence by the Company or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of:
(A) fixing, hedging or capping interest rate risk with respect to
any floating rate Indebtedness that is permitted by the terms of the
December 1998 Indenture to be outstanding; or
(B) protecting the Company and its Restricted Subsidiaries
against changes in currency exchange rates;
(xi) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(xii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xii), and
the issuance of preferred stock by Unrestricted Subsidiaries;
(xiii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted
Subsidiaries in the ordinary course of business; and
(xiv) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness then outstanding incurred to refund,
refinance or replace any other Indebtedness incurred pursuant to this
clause (xiv), not to exceed $50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiv) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify, or later reclassify, such item
of Indebtedness in any manner that complies with this covenant. Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
LIENS
The December 1998 Indenture provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien securing Indebtedness on any
asset now owned or hereafter acquired, or any income or profits therefrom or
assign or convey any right to receive income therefrom, except Permitted Liens.
ANTILAYERING PROVISION
The December 1998 Indenture provides that (i) the Company will not incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the December 1998 Notes,
and (ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of a Guarantor and senior in any respect in right of
payment to any of the Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The December 1998 Indenture provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
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(i)(A) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (B) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries;
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(iii) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(A) the provisions of security agreements that restrict the
transfer of assets that are subject to a Lien created by such security
agreements;
(B) the provisions of agreements governing Indebtedness incurred
pursuant to clause (v) of the second paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(C) the December 1998 Indenture, the December 1998 Notes, the May
1998 Indenture, the May 1998 Notes, the 1997 Indenture and the 1997
Notes;
(D) applicable law;
(E) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the December 1998 Indenture
to be incurred;
(F) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with
past practices;
(G) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired;
(H) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced;
(I) contracts for the sale of assets, including, without
limitation, customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Subsidiary;
(J) agreements relating to secured Indebtedness otherwise
permitted to be incurred pursuant to the covenants described under "--
Limitations on Incurrence of Indebtedness and Issuance of Preferred
Stock" and "-- Liens" that limit the right of the debtor to dispose of
the assets securing such Indebtedness;
(K) restrictions on cash or other deposits or net worth imposed
by customers under contracts entered into in the ordinary course of
business; or
(L) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The December 1998 Indenture provides that the Company may not consolidate
or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey
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or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another corporation, Person or entity
unless:
(i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the December 1998 Notes and the December 1998 Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of
Default exists; and
(iv) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the
entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made, after giving
pro forma effect to such transaction as if such transaction had occurred at
the beginning of the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding
such transaction either:
(A) would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; or
(B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such
transaction.
Notwithstanding the foregoing clause (iv):
(i) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company; and
(ii) the Company may merge with an Affiliate that has no significant
assets or liabilities and was incorporated solely for the purpose of
reincorporating the Company in another State of the United States so long
as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
TRANSACTIONS WITH AFFILIATES
The December 1998 Indenture provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless:
(i) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
(ii) the Company delivers to the Trustee:
(A) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate
Transaction
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complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the Board of Directors; and
(B) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $15.0 million, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing.
The foregoing provisions will not prohibit:
(i) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(ii) any transaction with a Lehman Investor;
(iii) any transaction between or among the Company and/or its
Restricted Subsidiaries;
(iv) transactions between the Company or any of its Restricted
Subsidiaries, on the one hand, and Lockheed Martin or any of its
Subsidiaries or a Permitted Joint Venture, on the other hand, on terms that
are not materially less favorable to the Company or the applicable
Restricted Subsidiary of the Company than those that could have been
obtained from an unaffiliated third party; provided that (A) in the case of
any such transaction or series of related transactions pursuant to this
clause (iv) involving aggregate consideration in excess of $5.0 million but
less than $25.0 million, such transaction or series of transactions (or the
agreement pursuant to which the transactions were executed) was approved by
the Company's Chief Executive Officer or Chief Financial Officer and (B) in
the case of any such transaction or series of related transactions pursuant
to this clause (iv) involving aggregate consideration equal to or in excess
of $25.0 million, such transaction or series of related transactions (or
the agreement pursuant to which the transactions were executed) was
approved by a majority of the disinterested members of the Board of
Directors;
(v) any transaction pursuant to and in accordance with the provisions
of the Transaction Documents as the same are in effect on the Issue Date;
and
(vi) any Restricted Payment that is permitted by the provisions of the
December 1998 Indenture described above under the caption "-- Restricted
Payments".
PAYMENTS FOR CONSENT
The December 1998 Indenture provides that neither the Company nor any of
its Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any December 1998 Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the December 1998 Indenture or
the December 1998 Notes unless such consideration is offered to be paid or is
paid to all Holders of the December 1998 Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on
an annual and quarterly basis on forms provided for such annual and quarterly
reporting pursuant to rules and regulations promulgated by the Commission, the
December 1998 Indenture requires the Company to file with the Commission (and
provide the Trustee and Holders with copies thereof, without cost to each
Holder, within 15 days after it files them with the Commission):
(a) within 90 days after the end of each fiscal year, annual reports
on Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such successor
or comparable form);
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(b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 10-Q (or any successor or
comparable form);
(c) promptly from time to time after the occurrence of an event
required to be therein reported, such other reports on Form 8-K (or any
successor or comparable form); and
(d) any other information, documents and other reports which the
Company would be required to file with the Commission if it were subject to
Section 13 or 15(d) of the Exchange Act;
provided, however, the Company shall not be so obligated to file such reports
with the Commission if the Commission does not permit such filing, in which
event the Company will make available such information to prospective
purchasers of December 1998 Notes, in addition to providing such information to
the Trustee and the Holders, in each case within 15 days after the time the
Company would be required to file such information with the Commission, if it
were subject to Sections 13 or 15(d) of the Exchange Act.
FUTURE SUBSIDIARY GUARANTEES
The Company's payment obligations under the December 1998 Notes is jointly
and severally guaranteed by all of the Company's existing and future Restricted
Subsidiaries, other than Foreign Subsidiaries. The December 1998 Indenture
provides that if the Company or any of its Subsidiaries shall acquire or create
a Subsidiary (other than a Foreign Subsidiary or an Unrestricted Subsidiary)
after the Issue Date, then such Subsidiary shall execute a Subsidiary Guarantee
and deliver an opinion of counsel, in accordance with the terms of the December
1998 Indenture. The Subsidiary Guarantee of each Guarantor ranks pari passu
with the guarantees of the May 1998 Notes and the 1997 Notes and is
subordinated to the prior payment in full of all Senior Debt of such Guarantor,
which would include the guarantees of amounts borrowed under the Senior Credit
Facilities. The obligations of each Guarantor under its Subsidiary Guarantee
are limited so as not to constitute a fraudulent conveyance under applicable
law.
The December 1998 Indenture provides that no Guarantor may consolidate
with or merge with or into (whether or not such Guarantor is the surviving
Person) another Person (except the Company or another Guarantor) unless:
(i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of
such Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the December 1998 Notes and
the December 1998 Indenture;
(ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and
(iii) the Company:
(A) would be permitted by virtue of the Company's pro forma Fixed
Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described above under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock"; or
(B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such
transaction.
Notwithstanding the foregoing paragraph:
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(i) any Guarantor may consolidate with, merge into or transfer all or
part of its properties and assets to the Company; and
(ii) any Guarantor may merge with an Affiliate that has no significant
assets or liabilities and was incorporated solely for the purpose of
reincorporating such Guarantor in another State of the United States so
long as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
The December 1998 Indenture provides that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
December 1998 Indenture. See "-- Repurchase at Option of Holders -- Asset
Sales".
EVENTS OF DEFAULT AND REMEDIES
The December 1998 Indenture provides that each of the following
constitutes an Event of Default:
(i) default for 30 days in the payment when due of interest or
Liquidated Damages on the December 1998 Notes (whether or not prohibited by
the subordination provisions of the December 1998 Indenture);
(ii) default in payment when due of the principal of or premium, if
any, on the December 1998 Notes (whether or not prohibited by the
subordination provisions of the December 1998 Indenture);
(iii) failure by the Company to comply with the provisions described
under the captions "-- Change of Control", "-- Asset Sales" or "-- Merger,
Consolidation or Sale of Assets";
(iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the December 1998 Indenture or the December
1998 Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee
existed before, or is created after, the Issue Date, which default results
in the acceleration of such Indebtedness prior to its express maturity and,
in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness the maturity of which
has been so accelerated, aggregates $10.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries; and
(viii) except as permitted by the December 1998 Indenture, any
Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding December
1998 Notes may declare all the December 1998 Notes to be due and payable
immediately; provided, however, that so long as any Designated Senior Debt is
outstanding, such declaration shall not become effective until the earlier of:
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(i) the day which is five Business Days after receipt by the
Representatives of Designated Senior Debt of such notice of acceleration;
or
(ii) the date of acceleration of any Designated Senior Debt.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
Restricted Subsidiary, all outstanding December 1998 Notes will become due and
payable without further action or notice. Holders of the December 1998 Notes
may not enforce the December 1998 Indenture or the December 1998 Notes except
as provided in the December 1998 Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding December 1998
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the December 1998 Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the December 1998 Notes
pursuant to the optional redemption provisions of the December 1998 Indenture,
an equivalent premium shall also become and be immediately due and payable to
the extent permitted by law upon the acceleration of the December 1998 Notes.
If an Event of Default occurs prior to August 1, 2003 by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding the prohibition on redemption of the December 1998
Notes prior to August 1, 2003, then the premium specified in the December 1998
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the December 1998 Notes.
The Holders of a majority in aggregate principal amount of the December
1998 Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the December 1998 Notes waive any existing Default or Event
of Default and its consequences under the December 1998 Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the December 1998 Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the December 1998 Indenture, and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the December 1998 Notes and the December 1998 Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of December 1998 Notes by accepting an December 1998 Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the December 1998 Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding December 1998 Notes
("Legal Defeasance") except for:
(i) the rights of Holders of outstanding December 1998 Notes to
receive payments in respect of the principal of, premium and Liquidated
Damages, if any, and interest on such December 1998 Notes when such
payments are due from the trust referred to below;
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(ii) the Company's obligations with respect to the December 1998 Notes
concerning issuing temporary December 1998 Notes, registration of December
1998 Notes, mutilated, destroyed, lost or stolen December 1998 Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the December 1998 Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the December 1998 Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the December 1998 Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"-- Events of Default" will no longer constitute an Event of Default with
respect to the December 1998 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the December 1998 Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium and Liquidated Damages, if any, and interest on the outstanding
December 1998 Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the December
1998 Notes are being defeased to maturity or to a particular redemption
date;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that:
(A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling; or
(B) since the Issue Date, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding December 1998 Notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding December 1998 Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the December 1998 Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound;
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(vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of December 1998 Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange December 1998 Notes in accordance with
the December 1998 Indenture. The Registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the December 1998 Indenture. The Company is not
required to transfer or exchange any December 1998 Note selected for
redemption. Also, the Company is not required to transfer or exchange any
December 1998 Note for a period of 15 days before a selection of December 1998
Notes to be redeemed.
The registered Holder of a December 1998 Note will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the December
1998 Indenture or the December 1998 Notes may be amended or supplemented with
the consent of the Holders of at least a majority in principal amount of the
December 1998 Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, December 1998 Notes), and any existing default or compliance with any
provision of the December 1998 Indenture or the December 1998 Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding December 1998 Notes (including consents obtained in connection
with a tender offer or exchange offer for December 1998 Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any December 1998 Notes held by a non-consenting Holder):
(i) reduce the principal amount of December 1998 Notes whose Holders
must consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the December 1998
Notes (other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders");
(iii) reduce the rate of or change the time for payment of interest on
any December 1998 Note;
(iv) waive a Default or Event of Default in the payment of principal
of or premium and Liquidated Damages, if any, or interest on the December
1998 Notes (except a rescission of acceleration of the December 1998 Notes
by the Holders of at least a majority in aggregate principal amount of the
December 1998 Notes and a waiver of the payment default that resulted from
such acceleration);
(v) make any December 1998 Note payable in money other than that
stated in the December 1998 Notes;
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(vi) make any change in the provisions of the December 1998 Indenture
relating to waivers of past Defaults or the rights of Holders of December
1998 Notes to receive payments of principal of or premium and Liquidated
Damages, if any, or interest on the December 1998 Notes;
(vii) waive a redemption payment with respect to any December 1998
Note (other than a payment required by one of the covenants described above
under the caption "-- Repurchase at the Option of Holders"); or
(viii) make any change in the foregoing amendment and waiver
provisions.
In addition, any amendment to the provisions of Article 10 of the December
1998 Indenture (which relates to subordination) requires the consent of the
Holders of at least 75% in aggregate principal amount of the December 1998
Notes then outstanding if such amendment would adversely affect the rights of
Holders of December 1998 Notes.
Notwithstanding the foregoing, without the consent of any Holder of
December 1998 Notes, the Company and the Trustee may amend or supplement the
Indenture or the December 1998 Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated December 1998 Notes, to provide for the assumption of the
Company's obligations to Holders of December 1998 Notes in the case of a merger
or consolidation, to make any change that would provide any additional rights
or benefits to the Holders of December 1998 Notes or that does not adversely
affect the legal rights under the December 1998 Indenture of any such Holder,
or to comply with requirements of the Commission in order to effect or maintain
the qualification of the December 1998 Indenture under the Trust Indenture Act.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the December 1998
Indenture. Reference is made to the December 1998 Indenture for a full
disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"1997 Indenture" means the indenture, dated as of April 30, 1997, among
The Bank of New York, as trustee, and the Company, with respect to the 1997
Notes.
"1997 Notes" means the $225,000,000 in aggregate principal amount of the
Company's 103/8% Senior Subordinated Notes due 2007, issued pursuant to the
1997 Indenture on April 30, 1997.
"Acquired Debt" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, including, without limitation, Indebtedness incurred in connection
with, or in contemplation of, such other Person merging with or into or
becoming a Subsidiary of such specified Person; and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means:
(i) the sale, lease, conveyance or other disposition of any assets or
rights (including, without limitation, by way of a sale and leaseback)
other than sales of inventory in the ordinary course of business (provided
that the sale, lease, conveyance or other disposition of all or
substantially all
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of the assets of the Company and its Restricted Subsidiaries taken as
a whole will be governed by the provisions of the Indenture described above
under the caption "-- Change of Control" and/or the provisions described
above under the caption "-- Merger, Consolidation or Sale of Assets" and
not by the provisions of the Asset Sale covenant); and
(ii) the issue or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Restricted Subsidiaries,
in the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (A) that have a fair market value in excess of
$1.0 million or (B) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing:
(i) a transfer of assets by the Company to a Restricted Subsidiary or
by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary;
(ii) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;
(iii) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Restricted Payments"; and
(iv) a disposition of Cash Equivalents in the ordinary course of
business will not be deemed to be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(i) United States dollars;
(ii) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
having maturities of not more than one year from the date of acquisition;
(iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic financial institution to the
Senior Credit Facilities or with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch
Rating of "B" or better;
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(iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the
qualifications specified in clause (iii) above;
(v) commercial paper having the highest rating obtainable from Moody's
or S&P and in each case maturing within six months after the date of
acquisition;
(vi) investment funds investing 95% of their assets in securities of
the types described in clauses (i)-(v) above; and
(vii) readily marketable direct obligations issued by any State of the
United States of America or any political subdivision thereof having
maturities of not more than one year from the date of acquisition and
having one of the two highest rating categories obtainable from either
Moody's or S&P.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income); plus
(ii) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net Income;
plus
(iii) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus
(iv) depreciation, amortization (including amortization of goodwill,
debt issuance costs and other intangibles but excluding amortization of
other prepaid cash expenses that were paid in a prior period) and other
non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income; minus
(v) non-cash items (excluding any items that were accrued in the
ordinary course of business) increasing such Consolidated Net Income for
such period, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(i) the Net Income of any Person that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary thereof that
is a Guarantor;
(ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
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approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders;
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(iv) the cumulative effect of a change in accounting principles shall
be excluded;
(v) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Restricted
Subsidiaries; and
(vi) the Net Income of any Restricted Subsidiary shall be calculated
after deducting preferred stock dividends payable by such Restricted
Subsidiary to Persons other than the Company and its other Restricted
Subsidiaries.
"Consolidated Tangible Assets" means, with respect to the Company, the
total consolidated assets of the Company and its Restricted Subsidiaries, less
the total intangible assets of the Company and its Restricted Subsidiaries, as
shown on the most recent internal consolidated balance sheet of the Company and
such Restricted Subsidiaries calculated on a consolidated basis in accordance
with GAAP.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(i) any Indebtedness outstanding under the Senior Credit Facilities;
and
(ii) any other Senior Debt permitted under the December 1998 Indenture
the principal amount of which is $25.0 million or more and that has been
designated by the Company as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the December 1998 Notes mature; provided, however, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof
have the right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments"; and provided
further, that if such Capital Stock is issued to any plan for the benefit of
employees of the Company or its Subsidiaries or by any such plan to such
employees, such Capital Stock shall not constitute Disqualified Stock solely
because it may be required to be repurchased by the Company in order to satisfy
applicable statutory or regulatory obligations.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company or Holdings, other than any
private sales to an Affiliate of the Company or Holdings.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means any Indebtedness of the Company (other than
Indebtedness under the Senior Credit Facilities and the December 1998 Notes) in
existence on the date of the December 1998 Indenture, until such amounts are
repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations, but excluding amortization of debt
issuance costs);
(ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon); and
(iv) the product of:
(A) all dividend payments, whether or not in cash, on any series
of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company, times
(B) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person and its Restricted Subsidiaries for such
period. In the event that the Company or any of its Restricted Subsidiaries
incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues preferred stock subsequent to the commencement of
the period for which the Fixed Charge Coverage Ratio is being calculated but on
or prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above:
(i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be deemed to have occurred on the first day of
the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii)
of the proviso set forth in the definition of Consolidated Net Income;
(ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
and
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(iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary of the Company that was
not organized or existing under the laws of the United States, any state
thereof, the District of Columbia or any territory thereof or has not
guaranteed or otherwise provided credit support for any Indebtedness of the
Company.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which were in effect April 30, 1997.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the December 1998
Indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under:
(i) currency exchange or interest rate swap agreements, interest rate
cap agreements and currency exchange or interest rate collar agreements;
and
(ii) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange rates or interest rates.
"Holdings" means L-3 Communications Holdings, Inc.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be:
(i) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest; and
(ii) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, moving and
similar loans or advances to officers and employees made in the ordinary course
of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with
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GAAP. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the last paragraph of the
covenant described above under the caption
"-- Restricted Payments".
"Issue Date" means December 11, 1998.
"Lehman Investor" means Lehman Brothers Holdings Inc. and any of its
Affiliates.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are:
(i) traded on The New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market; and
(ii) issued by a corporation having a total equity market
capitalization of not less than $250.0 million;
provided that the excess of:
(A) the aggregate amount of securities of any one such
corporation held by the Company and any Restricted Subsidiary; over
(B) ten times the average daily trading volume of such securities
during the 20 immediately preceding trading days
shall be deemed not to be Marketable Securities; as determined on the date of
the contract relating to such Asset Sale.
"May 1998 Indenture" means the indenture, dated as of May 22, 1998,
between the Bank of New York, as trustee, and the Company, with respect to the
May 1998 Notes.
"May 1998 Notes" means the $180,000,000 in aggregate principal amount of
the Company's 8 1/2% Senior Subordinated notes due 2008, issued pursuant to the
May 1998 Indenture on May 22, 1998.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(i) any gain or loss, together with any related provision for taxes
thereon, realized in connection with:
(A) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions); or
(B) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness
of such Person or any of its Restricted Subsidiaries; and
(ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss; and
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(iii) the cumulative effect of a change in accounting principles.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(i) as to which neither the Company nor any of its Restricted
Subsidiaries:
(A) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness);
(B) is directly or indirectly liable (as a guarantor or
otherwise); or
(C) constitutes the lender;
(ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness (other than Indebtedness incurred under Credit
Facilities) of the Company or any of its Restricted Subsidiaries to declare
a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization, whether or not a claim for post-filing interest is allowed in
such proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages, guarantees and other liabilities or amounts
payable under the documentation governing any Indebtedness or in respect
thereto.
"Permitted Investments" means:
(i) any Investment in the Company or in a Restricted Subsidiary of the
Company that is a Guarantor;
(ii) any Investment in cash or Cash Equivalents;
(iii) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment:
(A) such Person becomes a Restricted Subsidiary of the Company
and a Guarantor; or
(B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the
Company that is a Guarantor;
(iv) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders -- Asset Sales" or any disposition of
assets not constituting an Asset sale;
(v) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
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(vi) advances to employees not to exceed $2.5 million at any one time
outstanding;
(vii) any Investment acquired in connection with or as a result of a
workout or bankruptcy of a customer or supplier;
(viii) Hedging Obligations permitted to be incurred under the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(ix) any Investment in a Similar Business that is not a Restricted
Subsidiary; provided that the aggregate fair market value of all
Investments outstanding pursuant to this clause (ix) (valued on the date
each such Investment was made and without giving effect to subsequent
changes in value) may not at any one time exceed 10% of the Consolidated
Tangible Assets of the Company; and
(x) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (x) that are at the time
outstanding, not to exceed $15.0 million.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of Directors (until designation by the Board of
Directors to the contrary); provided that:
(i) at least 25% of the Capital Stock thereof with voting power under
ordinary circumstances to elect directors (or Persons having similar or
corresponding powers and responsibilities) is at the time owned
(beneficially or directly) by the Company and/or by one or more Restricted
Subsidiaries of the Company; and
(ii) such joint venture, partnership or other Person is engaged in a
Similar Business. Any such designation or designation to the contrary shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of
the resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same extent
as, or to a greater extent than, the December 1998 Notes and the Subsidiary
Guarantees are subordinated to Senior Debt pursuant to Article 10 of the
December 1998 Indenture.
"Permitted Liens" means:
(i) Liens securing Senior Debt of the Company or any Guarantor that
was permitted by the terms of the December 1998 Indenture to be incurred;
(ii) Liens in favor of the Company or any Guarantor;
(iii) Liens on property of a Person existing at the time such Person
is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company;
(iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were
in existence prior to the contemplation of such acquisition and do not
extend to any other assets of the Company or any of its Restricted
Subsidiaries;
(v) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the
covenant entitled "-- Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
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(vii) Liens existing on the Issue Date;
(viii) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(ix) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $5.0 million at any one time outstanding;
(x) Liens on assets of Guarantors to secure Senior Debt of such
Guarantors that was permitted by the Indenture to be incurred;
(xi) Liens securing Permitted Refinancing Indebtedness, provided that
any such Lien does not extend to or cover any property, shares or debt
other than the property, shares or debt securing the Indebtedness so
refunded, refinanced or extended;
(xii) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature, in each case incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money);
(xiii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods in the ordinary course of business;
(xiv) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that
are within the general parameters customary in the industry, in each case
securing Indebtedness under Hedging Obligations; and
(xv) Liens encumbering deposits made in the ordinary course of
business to secure nondelinquent obligations arising from statutory or
regulatory, contractual or warranty requirements of the Company or its
Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that:
(i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses and prepayment premiums
incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity date
no earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
December 1998 Notes, such Permitted Refinancing Indebtedness is
subordinated in right of payment to the December 1998 Notes on terms at
least as favorable to the Holders of December 1998 Notes as those contained
in the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and
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(iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Securities" means, with respect to any Asset Sale, Voting Stock
of a Person primarily engaged in one or more Similar Businesses; provided that
after giving effect to the Asset Sale such Person shall become a Restricted
Subsidiary and a Guarantor.
"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, each Subsidiary
of such Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means the credit agreement, as in effect on the
Issue Date among the Company and a syndicate of banks and other financial
institutions led by Lehman Commercial Paper Inc., as syndication agent, and any
related notes, collateral documents, letters of credit and guarantees,
including any appendices, exhibits or schedules to any of the foregoing (as the
same may be in effect from time to time), in each case, as such agreements may
be amended, modified, supplemented or restated from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid or extended from time to
time (whether with the original agents and lenders or other agents and lenders
or otherwise, and whether provided under the original credit agreement or other
credit agreements or otherwise).
"Senior Debt" means:
(i) all Indebtedness of the Company or any of its Restricted
Subsidiaries outstanding under Credit Facilities and all Hedging
Obligations with respect thereto;
(ii) any other Indebtedness permitted to be incurred by the Company or
any of its Restricted Subsidiaries under the terms of the December 1998
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the December 1998 Notes; and
(iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt
will not include:
(i) any liability for federal, state, local or other taxes owed or
owing by the Company;
(ii) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates;
(iii) any trade payables; or
(iv) any Indebtedness that is incurred in violation of the December
1998 Indenture. The 1997 Notes and the May 1998 Notes will be pari passu
with the December 1998 Notes and will not constitute Senior Debt.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Similar Business" means a business, a majority of whose revenues in the
most recently ended calendar year were derived from:
(i) the sale of defense products, electronics, communications systems,
aerospace products, avionics products and/or communications products;
(ii) any services related thereto;
(iii) any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary
thereto; and
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(iv) any combination of any of the foregoing.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
(i) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(B) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"S&P" means Standard and Poor's Corporation.
"Transaction Documents" means the December 1998 Indenture, the December
1998 Notes, the Purchase Agreement and the Registration Rights Agreement.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(i) has no Indebtedness other than Non-Recourse Debt;
(ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
(A) to subscribe for additional Equity Interests; or
(B) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating
results;
(iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(v) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "-- Certain Covenants --
Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the December
1998 Indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock", the Company shall be in default
of such covenant).
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The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if:
(i) such Indebtedness is permitted under the covenant described under
the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock", calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period; and
(ii) no Default or Event of Default would be in existence following
such designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(i) the sum of the products obtained by multiplying (A) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (B) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned" means, when used with respect to any Subsidiary or
Restricted Subsidiary of a Person, a Subsidiary (or Restricted Subsidiary, as
appropriate) of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Subsidiaries
(or Wholly Owned Restricted Subsidiaries, as appropriate) of such Person and
one or more Wholly Owned Subsidiaries (or Wholly Owned Restricted Subsidiaries,
as appropriate) of such Person.
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CERTAIN INFORMATION ABOUT THE NOTES
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indentures provide that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indentures at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the December 1998
Indenture and Registration Rights Agreement without charge by writing to L-3
Communications Corporation, 600 Third Avenue, New York, New York 10016,
Attention: Vice President -- Finance.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form and will be deposited with the Trustee as custodian for the Depository
Trust Company, New York, New York (the "Depository") and registered in the name
of a nominee of the Depository.
The Notes may be presented for registration of transfer and exchange at
the offices of the Registrar.
DEPOSITORY PROCEDURES
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of Participants.
The Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to the Depository's system is also available to other
entities such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly (collectively, "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depository only through the Participants or Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of the Depository are recorded on the
records of the Participants and Indirect Participants.
The Depository has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Notes, the Depository will
credit the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of Global Notes and (ii) ownership of such
interests in the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depository
(with respect to Participants) or by Participants and the Indirect Participants
(with respect to other owners of beneficial interests in the Global Notes).
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Investors in the Global Note may hold their interests therein directly
through the Depository, if they are Participants in such system, or indirectly
through organizations (including Euroclear and CEDEL) that are Participants in
such system. Investors in the Regulation S Global Note must initially hold
their interests therein through Euroclear or CEDEL, if they are participants in
such systems, or indirectly through organizations that are participants in such
systems. After the expiration of the Restricted Period (but not earlier),
investors may also hold interests in the Regulation S Global Note through
organizations other than Euroclear and CEDEL that are Participants in the
Depository system. Euroclear and CEDEL will hold interests in the Regulation S
Global Note on behalf of their Participants through customers' securities
accounts in their respective names on the books of their respective
depositories, which are Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear, and Citibank, N.A. as operator of CEDEL. The
depositories, in turn, will hold such interests in the Regulation S Global Note
in customers' securities accounts in the depositories' names on the books of
the Depository. All interests in a Global Note, including those held through
Euroclear or CEDEL, may be subject to the procedures and requirements of the
Depository. Those interests held by Euroclear or CEDEL may be also be subject
to the procedures and requirements of such system.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interest in a Global Note to such persons may be
limited to that extent. Because the Depository can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having a beneficial interest in a Global Note to
pledge such interest to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such interests, may
be affected by the lack of physical certificate evidencing such interests. For
certain other restrictions on the transferability of the Notes see, "--
Exchange of Book-Entry Notes for Certificated Notes".
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium and Liquidated Damages,
if any, and interest on a Global Note registered in the name of the Depository
or its nominee will be payable by the Trustee to the Depository or its nominee
in its capacity as the registered Holder under the Indentures. Under the terms
of the Indentures, the Company and the Trustee will treat the persons in whose
names the Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of the Depository's records or any Participant's
or Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes, or for maintaining,
supervising or reviewing any of the Depository's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes or (ii) any other matter relating to the actions
and practices of the Depository or any of its Participants or Indirect
Participants.
The Depository has advised the Company that its current practices, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security such as the Global Notes as shown on the records of the Depository.
Payments by Participants and the Indirect Participants to the beneficial owners
of Notes will be governed by standing instructions and customary practices and
will not be the responsibility of the Depository, the Trustee or the Company.
Neither the Company nor the Trustee will be liable for any delay by the
Depository or its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from the Depository or its nominee as the
registered owner of the Notes for all purposes.
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Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Notes will trade in the Depository's Same-Day Funds
Settlement System and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of the Depository and its participants.
Transfers between Participants in the Depository will be effected in
accordance with the Depository's procedures, and will be settled in same-day
funds. Transfers between participants in Euroclear and CEDEL will be effected
in the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, crossmarket transfers between Participants in the
Depository, on the one hand, and Euroclear or CEDEL participants, on the other
hand, will be effected through the Depository in accordance with the
Depository's rules on behalf of Euroclear or CEDEL, as the case may be, by its
respective depository; however, such cross-market transactions will require
delivery of instructions to Euroclear or CEDEL, as the case may be, by the
counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
CEDEL, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depository to take action
to effect final settlement on its behalf by delivering or receiving interests
in the relevant Global Note in the Depository, and making or receiving payment
in accordance with normal procedures for same-day fund settlement applicable to
the Depository. Euroclear participants and CEDEL participants may not deliver
instructions directly to the Depositaries for Euroclear or CEDEL.
Because of time zone differences, the securities accounts of a Euroclear
or CEDEL participant purchasing an interest in a Global Note from a Participant
in the Depository will be credited, and any such crediting will be reported to
the relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear or CEDEL)
immediately following the settlement date of the Depository. Cash received in
Euroclear or CEDEL as a result of sales of interests in a Global Note by or
through a Euroclear or CEDEL participant to a Participant in the Depository
will be received with value on the settlement date of the Depository but will
be available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following the Depository's settlement date.
The Depository has advised the Company that it will take any action
permitted to be taken by a Holder of Notes only at the direction of one or more
Participants to whose account the Depository interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Participant or Participants has or have given
direction. However, if there is an Event of Default under the Notes, the
Depository reserves the right to exchange Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
The information in this section concerning the Depository, Euroclear and
CEDEL and their book-entry systems has been obtained from sources that the
Company believes to be reliable, but the Company takes no responsibility for
the accuracy thereof.
Although the Depository, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Note among
participants in the Depository, Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchasers or the Trustee will have any responsibility for the performance by
the Depository, Euroclear or CEDEL or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depository (A) notifies the Company that it is
unwilling or unable to continue as depository for the
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Global Note and the Company thereupon fails to appoint a successor depository
or (B) has ceased to be a clearing agency registered under the Exchange Act or
(ii) the Company, at its option, notifies the Trustee in writing that it elects
to cause issuance of the Notes in certificated form. In addition, beneficial
interests in a Global Note may be exchanged for certificated Notes upon request
but only upon at least 20 days prior written notice given to the Trustee by or
on behalf of the Depository in accordance with customary procedures. In all
cases, certificated Notes delivered in exchange for any Global Note or
beneficial interest therein will be registered in names, and issued in any
approved denominations, requested by or on behalf of the Depository (in
accordance with its customary procedures).
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of certificated Notes. Upon any such issuance,
the Trustee is required to register such certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (or the nominee of
any thereof). In addition, if (i) the Company notifies the Trustee in writing
that the Depository is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in the form of certificated Notes under the Indentures,
then, upon surrender by the Global Note Holder of its Global Note, Notes in
such form will be issued to each person that the Global Note Holder and the
Depository identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depository for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indentures require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
certificated Notes, the Company will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
certificated Notes will also be settled in immediately available funds.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITIES
The Senior Credit Facilities have been provided by a syndicate of banks
led by Bank of America National Trust & Savings Association, as administrative
agent. The Senior Credit Facilities provide for (A) $200 million in revolving
credit loans which must be repaid by March 31, 2003 (the "Revolving Credit
Facility") and (B) $200 million in revolving credit loans which must be repaid
by August 12, 1999 (the "Revolving 364 Day Facility" and together with the
Revolving Credit Facility, the "Senior Credit Facilities"); provided that all
or a portion of the Revolving 364 Day Facility may be extended for a period of
364 days following August 12, 1999 with the consent of lenders holding not less
than 50% of the commitments to make 364-day loans (August 12, 1999 or the date
364 days thereafter, the "364 Day Termination Date"); and provided further that
L-3 Communications Corporation may convert the outstanding principal amount of
any or all of the loans outstanding under the Revolving 364 Day Facility to
term loans on the 364 Day Termination Date. The Revolving Credit Facility
includes borrowing capacity available for letters of credit and for borrowings
on same-day notice (the "Swingline Loans").
All borrowings under the Senior Credit Facilities bear interest, at L-3
Communications Corporation's option, at either: (A) a "base rate" equal to, for
any day, the higher of: (a) 0.50% per annum above the latest Federal Funds
Rate; and (b) the rate of interest in effect for such day as publicly announced
from time to time by Bank of America National Trust & Savings Association in
San Francisco, California, at its "reference rate" plus a spread ranging from
0.875% to 0.0% per annum depending on L-3 Communications Corporation's ratio of
debt to EBITDA (as defined in the Senior Credit Facilities ("Bank EBITDA")) at
the time of determination or (B) a "LIBOR rate" equal to, for any Interest
Period (as defined in the Senior Credit Facilities), the London interbank
offered rate of interest per annum for such Interest Period as determined by
the administrative agent, plus a spread ranging from 1.875% to 0.625% per
annum, depending on L-3 Communications Corporation's ratio of debt to Bank
EBITDA at the time of determination, provided that Swingline Loans can only
bear interest at a "base rate" plus the applicable spread.
L-3 Communications Corporation will pay commitment fees calculated at a
rate (A) ranging from 0.50% to 0.25% per annum on the daily amount of the
available unused commitment under the Revolving Credit Facility and (B) ranging
from 0.30% to 0.125% per annum on the daily amount of the available unused
commitment under the Revolving 364 Day Facility, in each case depending on the
L-3 Communications Corporation's ratio of debt to Bank EBITDA in effect on each
day. Such commitment fees will be payable quarterly in arrears and upon
termination of the Senior Credit Facilities.
L-3 Communications Corporation will pay a letter of credit fee calculated
at a rate ranging from (A) 0.9375% to 0.3125% per annum in the case of
performance letters of credit and (B) 1.875% to 0.625% in the case of all other
letters of credit, in each case depending on L-3 Communications Corporation's
ratio of debt to Bank EBITDA at the time of determination. L-3 Communications
Corporation will also pay a fronting fee equal to 0.1250% per annum on the
aggregate face amount of all outstanding letters of credit. Such fees will be
payable quarterly in arrears and upon the termination of the Senior Credit
Facilities. In addition, L-3 Communications Corporation will pay customary
transaction charges in connection with any letters of credit. The Senior Credit
Facilities provide for the issuance of letters of credit in currencies other
than United States dollars.
The foregoing debt to Bank EBITDA-dependent rates range from the highest
rate specified if the ratio of debt to Bank EBITDA is greater than 4.75 to 1.0
and the lowest rate specified if such ratio is less than 2.75 to 1.0.
In the event that the 364 Day loans are converted into term loans, such
term loans shall be repaid by the Borrower in nine (9) consecutive quarterly
installment commencing on March 31, 2001, by funding on each amortization
payment date set forth below an amount necessary to cause the aggregate
principal amount of term loans outstanding on such date to not exceed an amount
equal to
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the product of (x) the "Applicable Percentage" set forth opposite such
amortization payment date multiplied by (y) the aggregate amount of commitments
of lenders to make loans under the Revolving 364 Day Facility on the 364 Day
Termination Date (the "Applicable Converted Commitment"):
<TABLE>
<CAPTION>
APPLICABLE PERCENTAGE OF THE
AMORTIZATION PAYMENT DATE APPLICABLE CONVERTED COMMITMENT
------------------------- -------------------------------
<S> <C>
3/31/01 90.0%
6/30/01 80.0%
9/30/01 70.0%
12/31/01 60.0%
3/31/02 50.0%
6/30/02 40.0%
9/30/02 30.0%
12/31/02 20.0%
3/31/03 0.0%
</TABLE>
Borrowings under the Senior Credit Facilities are subject to mandatory
prepayment (i) with the net proceeds of any incurrence of indebtedness and (ii)
with the proceeds of asset sales, in both cases subject to certain exceptions.
L-3 Communications Corporation's obligations under the Senior Credit
Facilities are secured by (i) a pledge by Holdings of the stock of L-3
Communications Corporation and (ii) a pledge by L-3 Communications Corporation
and its material direct and indirect subsidiaries of all of the stock of their
respective material domestic subsidiaries and 65% of the stock of L-3
Communications Corporation's material first-tier foreign subsidiaries. In
addition, indebtedness under the Senior Credit Facilities is guaranteed by
Holdings and by all of L-3 Communications Corporation's direct and indirect
material domestic subsidiaries.
The Senior Credit Facilities contain customary covenants and restrictions
on L-3 Communications Corporation's ability to engage in certain activities. In
addition, the Senior Credit Facilities provide that L-3 Communications
Corporation must meet or exceed an interest coverage ratio and must not exceed
a leverage ratio. The Senior Credit Facilities also include customary events of
default.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
Based on the advice of Simpson Thacher & Bartlett, the following summary
accurately describes the material United States federal income tax consequences
that may be relevant to the purchase, ownership and disposition of the Notes as
of the date hereof. Except where noted, it deals only with Notes held as
capital assets by initial purchasers that purchase the Notes at their issue
price and does not deal with special situations, such as those of dealers in
securities or currencies, financial institutions, tax-exempt entities, life
insurance companies, persons holding notes as a part of a hedging constructive
sale or conversion transaction or a straddle or holders of Notes whose
"functional currency" is not the U.S. dollar.
The discussion below is based upon the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in United States federal income
tax consequences different from those discussed below. PERSONS CONSIDERING THE
PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT
OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE
LAWS OF ANY OTHER TAXING JURISDICTION.
A U.S. Holder is any beneficial owner of a Note that is (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source and (iv) a trust (x) that is
subject to the supervision of a court within the United States and the control
of one or more United States persons as described in section 7701(a)(30) of the
Code or (y) that has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a United States person. As used herein the term
"Non-U.S. Holder" means any person or entity that is not a United States Holder
("U.S. Holder").
U.S. HOLDERS
Payments of Interest. Interest on a Note will generally be taxable to a
U.S. Holder as ordinary income at the time it is paid or accrued in accordance
with the U.S. Holder's method of accounting for tax purposes.
Market Discount. If a U.S. Holder purchases a Note for an amount that is
less than its face amount, the amount of the difference will be treated as
"market discount" for United States federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market
discount rules, a U.S. Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, a
Note as ordinary income to the extent of the market discount which has not
previously been included in income and is treated as having accrued on such
Note at the time of such payment or disposition. In addition, the U.S. Holder
may be required to defer, until the maturity of the Note or its earlier
disposition in a taxable transaction, the deduction of all or a portion of the
interest expense on any indebtedness incurred or continued to purchase or carry
such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the U.S.
Holder elects to accrue on a constant interest method. A U.S. Holder of a Note
may elect to include market discount in income currently as it accrues (on
either a ratable or constant interest method), in which case the rule described
above regarding deferral of interest deductions will not apply. This election
to include market discount in income currently, once made, applies to all
market discount obligations acquired on or after the first taxable year to
which the election applies and may not be revoked without the consent of the
Internal Revenue Service ("IRS").
Amortizable Bond Premium. A U.S. Holder that purchases a Note for an
amount in excess of its face amount will be considered to have purchased the
Note at a "premium." A U.S. Holder generally may elect to amortize the premium
over the remaining term of the Note on a constant yield method as an offset to
interest when includible in income under the U.S. Holder's regular accounting
method. Bond premium on a Note held by a U.S. Holder that does not make such an
election will
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<PAGE>
decrease the gain or increase the loss otherwise recognized on disposition of
the Note. The election to amortize premium on a constant yield method once made
applies to all debt obligations held or subsequently acquired by the electing
U.S. Holder on or after the first day of the first taxable year to which the
election applies and may not be revoked without the consent of the IRS.
Sale, Exchange and Retirement of Notes. A U.S. Holder's tax basis in a
Note will, in general, be the U.S. Holder's cost therefor. Upon the sale,
exchange, retirement or other disposition of a Note, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange, retirement or other disposition (less any accrued qualified
stated interest, which will be taxable as such) and the tax basis of the Note.
Such gain or loss will be capital gain or loss. Capital gains of individuals
derived in respect of capital assets held for more than one year are eligible
for reduced rates of taxation. The deductibility of capital losses is subject
to limitations.
NON-U.S. HOLDERS
Under present United States federal income and estate tax law, and subject
to the discusssion below concerning backup withholding:
(a) no withholding of the United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest on a Note owned by a Non-U. S. Holder (the "Portfolio
Interest Exception"), provided that (i) that the beneficial owner does not
actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote within the
meaning of section 871(h)(3) of the Code and the regulations thereunder,
(ii) the beneficial owner is not a controlled foreign corporation that is
related to the Company through stock ownership, (iii) the beneficial owner
is not a bank whose receipt of interest on a Note is described in section
881(c)(3)(A) of the Code and (iv) the beneficial owner satisfies the
statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder;
(b) no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of
death is a Non-U.S. Holder will not be subject to United States federal
estate tax as a result of such individual's death, provided that such
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h) of the Code and provided that the
interest payments with respect to such Note would not have been, if
received at the time of such individual's death, effectively connected with
the conduct of a United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner
is not a U.S. Holder. Currently, these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a U.S. Holder (which certification may be made on an
IRS Form W-8 (or successor form)) or (2) a financial institution holding the
Note on behalf of the beneficial owner certifies, under penalties of perjury,
that such statement has been received by it and furnishes a paying agent with a
copy thereof. Under final Treasury regulations (the "Final Regulations"), the
statement requirement referred to in (a)(iv) above may also be satisfied with
other documentary evidence for interest paid after December 31, 2000 with
respect to an offshore account or through certain foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the Portfolio
Interest Exception described in (a) above, payments on a Note made to such
Non-U.S. Holder will be subject to a 30% withholding tax unless the beneficial
owner of the Note provides the Company or its paying agent, as the case may be,
with a properly executed (i) IRS Form 1001 (or successor form) claiming an
exemption from withholding under the benefit of a tax treaty or (ii) IRS Form
4224 (or successor
180
<PAGE>
form) stating that interest paid on the Note is not subject to withholding tax
because it is effectively connected with the beneficial owner's conduct of a
trade or business in the United States. Under the Final Regulations, Non-U.S.
Holders will generally be required to provide IRS Form W-8 in lieu of IRS Form
1001 and IRS Form 4224, although alternative documentation may be applicable in
certain situations.
If a Non-U.S. Holder is engaged in a trade or business in the United
States and interest on the Note is effectively connected with the conduct of
such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed above, will be subject to United States federal
income tax on such interest on a net income basis in the same manner as if it
were a U.S. Holder. In addition, if such holder is a foreign corporation, it
may be subject to a branch profits tax equal to 30% (or lower applicable treaty
rate) of its effectively connected earnings and profits for the taxable year,
subject to adjustments. For this purpose, interest on a Note will be included
in such foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with the
conduct of a trade or business in the United States by the Non-U.S. Holder, or
(ii) in the case of a Non-U.S. Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal and interest paid on the Notes and to the proceeds of
sale of a Note made to U.S. Holders other than certain exempt recipients (such
as corporations). A 31 percent backup withholding tax will apply to such
payments if the U.S. Holder fails to provide a taxpayer identification number
or certification of foreign or other exempt status or fails to report in full
dividend and interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-U.S. Holders
if a statement described in (a)(iv) above has been received and the payor does
not have actual knowledge that the beneficial owner is a U.S. Holder.
In addition, backup withholding and information reporting will not apply
if payments on a Note are paid or collected by a foreign office of a custodian,
nominee or other foreign agent on behalf of the beneficial owner of such Note,
or if a foreign office of a broker (as defined in applicable Treasury
regulations) pays the proceeds of the sale of a Note to the owner thereof. If,
however, such nominee, custodian, agent or broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation or a
foreign person that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, or, for taxable
years beginning after December 31, 2000, a foreign partnership in which one or
more U.S. persons, in the aggregate, own more than 50% of the income or capital
interests in the partnership or which is engaged in a trade or business in the
United States, such payments will be subject to information reporting (but not
backup withholding), unless (1) such custodian, nominee, agent or broker has
documentary evidence in its records that the beneficial owner is not a U.S.
Holder and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption.
Payments on a Note paid to the beneficial owner of a Note by a United
States office of a custodian, nominee or agent, or the payment by the United
States office of a broker of the proceeds of sale of a Note, will be subject to
both backup withholding and information reporting unless the beneficial owner
provides the statement referred to in (a)(iv) above and the payor does not have
actual knowledge that the beneficial owner is a U.S. Holder or otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
181
<PAGE>
PLAN OF DISTRIBUTION
This prospectus is to be used by Lehman Brothers Inc. in connection with
offers and sales of the Notes in market-making transactions effected from time
to time. Lehman Brothers Inc. may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form
of discounts and commissions, including from both counterparties when it acts
as agent for both. Such sales will be made at prevailing market prices at the
time of sale, at prices related thereto or at negotiated prices.
Affiliates of Lehman Brothers Inc. currently own 24.7% of the Holdings'
common stock. See "Ownership of Capital Stock". Lehman Brothers Inc. has
informed the Company that it does not intend to confirm sales of the Notes to
any accounts over which it exercises discretionary authority without the prior
specific written approval of such transactions by the customer.
The Company has been advised by Lehman Brothers Inc. that, subject to
applicable laws and regulations, Lehman Brothers Inc. currently intends to make
a market in the Notes. However, Lehman Brothers Inc. is not obligated to do so
and any such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will be sustained.
Lehman Brothers Inc. and the Company have entered into registration rights
agreements with respect to the use by Lehman Brothers Inc. of this prospectus.
Pursuant to such agreements, the Company agreed to bear all registration
expenses incurred under such agreements, and the Company agreed to indemnify
Lehman Brothers Inc. against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Notes offered by this prospectus was passed upon for
the Company by Simpson Thacher & Bartlett, New York, New York and for the
underwriters by Latham & Watkins, New York, New York.
EXPERTS
The (i) consolidated balance sheets of the Company as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 1998 and
the nine months ended December 31, 1997, (ii) the combined statements of
operations, changes in invested equity and cash flows of the Predecessor
Company for the three months ended March 31, 1997 and (iii) the combined
statements of operations, changes in invested equity and cash flows of the
Predecessor Company for the year ended December 31, 1996 have been included in
this prospectus and the Registration Statement in reliance of the report of
PricewaterhouseCoopers LLP, independent auditors, given in the authority of
such firm as experts in accounting and auditing. The report on the combined
financial statements of the Predecessor Company for the year ended December 31,
1996 indicates that PricewaterhouseCoopers LLP's opinion, insofar as it relates
to the financial statements of the Lockheed Martin Communications Systems
Division included in such combined financial statements, is based solely on the
report of other auditors.
The consolidated financial statements of SPD Technologies Inc. and
Subsidiaries as of December 31, 1997, 1996 and 1995 and for the years then
ended and the consolidated financial statements of Aydin Corporation as of
December 31, 1998 and the year then ended have been included in this prospectus
and the Registration Statement in reliance of the reports of Grant Thornton
LLP, independent certified public accountants upon the authority of such firm
as experts in accounting and auditing.
182
<PAGE>
Ernst & Young LLP, independent auditors, have audited our combined
financial statements of operations, changes in invested equity and
shareholders' equity, and cash flows of Lockheed Martin Communications Systems
Division for the year ended December 31, 1996 (not separately presented
herein), as set forth in their report. We've included our combined financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
183
<PAGE>
INDEX TO FINANCIAL STATEMENTS
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
(AND THE PREDECESSOR COMPANY)
<TABLE>
<S> <C>
Reports of Independent Auditors .......................................................... F-3
Consolidated Balance Sheets at December 31, 1998 and 1997 ................................ F-5
Consolidated (Combined) Statements of Operations for the year ended December 31, 1998,
nine months ended December 31, 1997, three months ended March 31, 1997 and year
ended December 31, 1996 ................................................................. F-6
Consolidated (Combined) Statements of Changes in Invested Equity and Shareholders'
Equity for the year ended December 31, 1998, nine months ended December 31, 1997,
three months ended March 31, 1997 and year ended December 31, 1996 ...................... F-7
Consolidated (Combined) Statements of Cash Flows for the year ended December 31,
1998, nine months ended December 31, 1997, three months ended March 31, 1997 and
year ended December 31, 1996 ............................................................ F-8
Notes to Consolidated Financial Statements ............................................... F-10
AYDIN CORPORATION
Consolidated Financial Statements as of December 31, 1998 and for the year ended
December 31, 1998 ....................................................................... F-32
Report of Grant Thornton LLP .......................................................... F-33
Consolidated Statement of Operations for the year ended December 31, 1998 ............. F-34
Consolidated Balance Sheet as of December 31, 1998 .................................... F-35
Consolidated Statement of Cash Flows for the year ended December 31, 1998 ............. F-36
Notes to the Consolidated Financial Statements ........................................ F-37
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Financial Statements as of June 30, 1998 and for
the six months ended June 30, 1998 and 1997 ............................................. F-47
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 1998 .................. F-48
Condensed Consolidated Statements of Earnings (Unaudited) for the six months ended
June 30, 1998 and 1997 ............................................................... F-49
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months
ended June 30, 1998 and 1997 ......................................................... F-50
Notes to Condensed Consolidated Financial Statements .................................. F-51
Consolidated Financial Statements as of December 31, 1997 and for the year ended
December 31, 1997 ....................................................................... F-52
Report of Grant Thornton LLP .......................................................... F-53
Consolidated Balance Sheet as of December 31, 1997 .................................... F-54
Consolidated Statement of Earnings for the year ended December 31, 1997 ............... F-55
Consolidated Statement of Cash Flows for the year ended December 31, 1997 ............. F-56
Notes to Consolidated Financial Statements ............................................ F-57
Consolidated Financial Statements as of December 31, 1996 and 1995 and for the years
ended December 31, 1996 and 1995 ........................................................ F-66
Report of Grant Thornton LLP .......................................................... F-67
Consolidated Balance Sheets as of December 31, 1996 and 1995 .......................... F-68
Consolidated Statements of Earnings and Accumulated Deficit for the years ended
December 31, 1996 and 1995 ........................................................... F-69
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995 ............................................................................. F-70
Notes to Consolidated Financial Statements ............................................ F-71
</TABLE>
F-1
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
(AND THE PREDECESSOR COMPANY)
Condensed Consolidated (Combined) Financial Statements as of December 31, 1998
and 1997 and for the year ended December 31, 1998, the nine months ended
December 31, 1997, the three months ended March 31, 1997 and the year ended
December 31, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
L-3 Communications Holdings, Inc.
We have audited the accompanying (i) consolidated balance sheets of L-3
Communications Holdings, Inc. and subsidiaries (the "Company") as of December
31, 1998 and 1997, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the year ended December 31,
1998 and the nine months ended December 31, 1997, (ii) the combined statements
of operations, changes in invested equity and cash flows of the Predecessor
Company, as defined in Note 1 to the Company's financial statements, for the
three months ended March 31, 1997 and (iii) the combined statements of
operations, changes in invested equity and cash flows of the Predecessor
Company for the year ended December 31, 1996. 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, respectively, 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
Lockheed Martin 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, 1998 and 1997 and their
consolidated results of operations and cash flows for the year ended December
31, 1998 and the nine months ended December 31, 1997, and (ii) based on our
audits and the report of other auditors for 1996, present fairly in all
material respects, the combined results of operations and cash flows of the
Predecessor Company for the three months ended March 31, 1997 and the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lockheed Martin Corporation:
We have audited the combined statements of operations, changes in invested
equity and shareholders' equity, and cash flows of Lockheed Martin
Communications Systems Division for the year ended December 31, 1996, as
defined in Note 1 to the combined financial statements. 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 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 combined financial statements referred to above
present fairly, in all material respects, the results of its operations and its
cash flows of Lockheed Martin Communications Systems Division for the year
ended December 31, 1996 (not presented separately herein), in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
March 7, 1997
F-4
<PAGE>
L-3 COMMUNICATIONS HOLDINGS , INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 26,130 $ 77,474
Contracts in process .............................................. 351,049 164,780
Net assets held for sale .......................................... -- 6,653
Deferred income taxes ............................................. 16,591 13,298
Other current assets .............................................. 11,597 2,750
---------- --------
Total current assets ........................................... 405,367 264,955
---------- --------
Property, plant and equipment ...................................... 155,712 95,034
Less, accumulated depreciation and amortization ................... 32,557 12,025
---------- --------
123,155 83,009
---------- --------
Intangibles, primarily cost in excess of net assets acquired, net of
amortization ...................................................... 669,362 297,503
Deferred income taxes .............................................. 39,139 24,217
Other assets ....................................................... 48,373 27,298
---------- --------
Total assets ................................................... $1,285,396 $696,982
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................................. $ -- $ 5,000
Accounts payable, trade ........................................... 81,826 33,052
Accrued employment costs .......................................... 58,380 31,585
Accrued expenses .................................................. 18,241 9,923
Customer advances ................................................. 45,874 15,989
Accrued interest .................................................. 6,698 4,419
Other current liabilities ......................................... 36,515 21,748
---------- --------
Total current liabilities ...................................... 247,534 121,716
---------- --------
Pension and postretirement benefits ................................ 114,293 38,113
Other liabilities .................................................. 18,595 12,438
Long-term debt ..................................................... 605,000 392,000
Commitments and contingencies
Common stock subject to repurchase agreement ($.01 par value,
authorized 3,000,000 shares, issued and outstanding 2,944,000)
shares ............................................................ -- 19,048
Shareholders' equity:
Common stock, including additional paid-in-capital ($.01 par
value; authorized 100,000,000 shares, issued and outstanding
27,402,429 and 17,056,000 shares) ............................... 264,769 101,362
Retained earnings ................................................. 44,856 12,305
Accumulated other comprehensive loss .............................. (9,651) --
---------- --------
Total shareholders' equity ......................................... 299,974 113,667
---------- --------
Total liabilities and shareholders' equity ..................... $1,285,396 $696,982
========== ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-5
<PAGE>
L-3 COMMUNICATIONS HOLDINGS , INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED PREDECESSOR COMPANY COMBINED
--------------------------------------- -----------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 MARCH 31, 1997 DECEMBER 31, 1996
------------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Sales ................................ $1,037,045 $546,525 $158,873 $543,081
Costs and expenses ................... 936,696 495,079 150,937 499,390
---------- -------- -------- --------
Operating income ..................... 100,349 51,446 7,936 43,691
Interest income ...................... 2,659 1,430 -- --
Interest expense ..................... 49,558 29,884 8,441 24,197
---------- -------- -------- --------
Income (loss) before income taxes 53,450 22,992 (505) 19,494
Income taxes (benefit) ............... 20,899 10,687 (247) 7,798
---------- -------- -------- --------
Net income (loss) .................... $ 32,551 $ 12,305 $ (258) $ 11,696
========== ======== ======== ========
Earnings per common share:
Basic ............................... $ 1.32 $ 0.62
========== ========
Diluted ............................. $ 1.26 $ 0.61
========== ========
Weighted average common shares
outstanding:
Basic ............................... 24,679 20,000
========== ========
Diluted ............................. 25,900 20,012
========== ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-6
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENT OF CHANGES IN INVESTED EQUITY
AND SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
COMBINED COMPANY CONSOLIDATED
------------ ------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED
------------------ ADDITIONAL OTHER
INVESTED SHARES PAR PAID-IN RETAINED COMPREHENSIVE
EQUITY ISSUED VALUE CAPITAL EARNINGS INCOME (LOSS) TOTAL
------------ -------- ------- ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 ......................... $194,663
Comprehensive income:
Net income .................. 11,696
Other comprehensive
income ..................... --
--------
Total ...................... 11,696
Advances from Lockheed
Martin ...................... 267,250
--------
Balance at December 31,
1996 ......................... 473,609
Comprehensive loss:
Net loss .................... (258)
Other comprehensive
income ..................... --
--------
Total ...................... (258)
Advances from Lockheed
Martin ...................... 20,579
--------
Balance at March 31, 1997 ..... $493,930
========
Comprehensive income:
Net income .................. $12,305 $ 12,305
Other comprehensive
income ..................... $ -- --
--------
Total ...................... 12,305
Shares issued ................ 17,056 $171 $110,191 110,362
Deemed distribution .......... (9,000) (9,000)
-------- --------
Balance at December 31,
1997 ......................... 17,056 $171 $101,191 $12,305 $ -- $113,667
Comprehensive income:
Net income .................. 32,551 32,551
Other comprehensive
losses: ....................
Minimum pension
liability adjustment ...... (9,514) (9,514)
Foreign currency
translation
adjustments ............... (137) (137)
--------
Total ..................... 22,900
Shares issued:
Sale of common stock ........ 6,900 69 139,431 139,500
Exercise of stock options 480 5 3,887 3,892
Employee benefit plans ...... 22 -- 967 967
Conversion of common
stock subject to
repurchase agreement ....... 2,944 29 19,019 19,048
------ ---- -------- --------
Balance at December 31,
1998 ......................... 27,402 $274 $264,495 $44,856 $ (9,651) $299,974
====== ==== ======== ======= ======== ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-7
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED PREDECESSOR COMPANY COMBINED
--------------------------------- ---------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 MARCH 31, 1997 DEC. 31, 1996
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................. $ 32,551 $ 12,305 $ (258) $ 11,696
Depreciation and amortization ................. 40,355 22,190 7,790 28,139
Noncash compensation charge ................... -- 4,410 -- --
Amortization of deferred debt issue costs ..... 2,564 1,517 -- --
Deferred income taxes ......................... 19,786 9,991 -- --
Other noncash expenses ........................ 967 -- -- --
Changes in operating assets and liabilities,
net of amounts acquired
Contracts in process ......................... (23,807) 20,266 (17,857) 26,242
Other current assets ......................... 48 (275) (481) 3,049
Other assets ................................. (376) 2,141 (765) (8,346)
Accounts payable ............................. 23,480 (6,146) (207) 4,104
Accrued employment costs ..................... 8,653 6,786 (625) 2,282
Accrued expenses ............................. 241 3,225 523 3,012
Customer advances ............................ (12,132) (611) 1,146 (5,541)
Accrued interest ............................. 2,279 4,419 -- --
Other current liabilities .................... (12,281) (11,894) (5,045) (8,576)
Pension and postretirement benefits .......... 18 4,284 -- --
Other liabilities ............................ 2,873 1,252 (500) (25,327)
All other operating activities ............... (137) -- -- --
---------- ---------- --------- ----------
Net cash from (used in) operating
activities ................................... 85,082 73,860 (16,279) 30,734
---------- ---------- --------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash
acquired ..................................... (447,988) (466,317) -- (287,803)
Net cash from assets held for sale ............ -- 3,179 -- --
Proceeds from sale of property ................ 6,653 9,458 -- --
Proceeds from assumption of contract
obligation ................................... -- 12,176 -- --
Purchases of investments ...................... (9,069) (5,113) -- --
Capital expenditures .......................... (23,429) (11,934) (4,300) (13,528)
Disposition of property, plant and
equipment .................................... 970 771 -- 3,347
---------- ---------- --------- ----------
Net cash (used in) investing activities ....... (472,863) (457,780) (4,300) (297,984)
---------- ---------- --------- ----------
</TABLE>
F-8
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED PREDECESSOR COMPANY COMBINED
--------------------------------- ---------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 MARCH 31, 1997 DEC. 31, 1996
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Borrowings under term loan facilities .......... -- 175,000 -- --
Repayment of borrowings under term loan
facilities .................................... (172,000) (3,000) -- --
Borrowings under revolving credit facility ..... 367,000 -- -- --
Repayment of borrowings under revolving
credit facility ............................... (367,000) -- -- --
Proceeds from sale of 81/2% senior
subordinated notes ............................ 180,000 -- -- --
Proceeds from sale of 8% senior
subordinated notes ............................ 200,000 -- -- --
Proceeds from sale of 103/8% senior
subordinated notes ............................ -- 225,000 -- --
Proceeds from sale of common stock, net ........ 139,500 80,000 -- --
Debt issuance costs ............................ (14,173) (15,606) -- --
Proceeds from exercise of stock options ........ 3,110 -- -- --
Advances from Lockheed Martin .................. -- -- 20,579 267,250
-------- ------- ------ -------
Net cash from financing activities ............. 336,437 461,394 20,579 267,250
-------- ------- ------ -------
Net (decrease) increase in cash ................ (51,344) 77,474 -- --
Cash and cash equivalents, beginning of
the period .................................... 77,474 -- -- --
-------- ------- ------ -------
Cash and cash equivalents, end of the
period ........................................ $ 26,130 $ 77,474 $ -- $ --
========== ========= ======= ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-9
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Company (herein after defined) is a leading merchant supplier of
sophisticated secure communication systems and specialized communication
products. These systems and products are critical elements of virtually all
major communication, command and control, intelligence gathering and space
systems. The Company's customers include the U.S. department of defense (the
"DoD"), certain U.S. government intelligence agencies, major aerospace and
defense contractors, foreign governments and commercial customers. The Company
has two reportable segments, Secure Communication Systems and Specialized
Communication Products.
Secure Communication Systems. This segment provides secure, high data rate
communications systems for military and other U.S. government reconnaissance
and surveillance applications. These operations are principally performed under
cost plus, sole source contracts supporting long-term programs for the U.S.
armed forces and classified customers. Major secure communications programs and
systems include: secure data links for airborne, satellite, ground- and
sea-based remote platforms for information collection, command and control and
dissemination to users in real-time; strategic and tactical signal intelligence
systems that detect, collect, identify, analyze and disseminate information and
related support contracts for military and intelligence efforts; secure
telephone, fax and network equipment and encryption management; communication
software support services to military and related government intelligence
markets; and communications systems for surface and undersea platforms and
manned space flights.
Specialized Communication Products. This segment includes three product
categories: microwave components, avionics and ocean products, and telemetry,
instrumentation and space products. Microwave Components includes commercial
off-the-shelf, high-performance microwave components and frequency monitoring
equipment. Avionics and Ocean Products include aviation recorders, display
products, antenna products, acoustic undersea warfare systems and naval power
distribution, conditioning, switching and protection equipment for naval ships
and submarines. Telemetry, Instrumentation and Space Products include
commercial off-the-shelf real-time data collection and transmission products
and components for missile, aircraft and space-based electronic systems. The
Specialized Communication Products segment provides products, systems and
services used in the satellite transmission of voice, video and data through
earth stations for uplink and downlink terminals. This segment also provides
commercial off-the-shelf satellite control software, telemetry, tracking and
control, mission processors and software engineering services to the worldwide
military, civilian and commercial satellite markets.
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 U.S. 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 U.S. defense industry has undergone significant changes precipitated
by ongoing U.S. 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 the
value-added capability of digital command and control communications by
incorporating advanced electronics to improve the performance, reduce operating
costs 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.
F-10
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying consolidated financial statements represent L-3
Communications Holdings, Inc. ("Holdings", and together with its subsidiaries,
"L-3" or "the Company"), for the year ended December 31, 1998 and for the
nine-month period ended December 31, 1997. Prior to April 1, 1997, the
statements comprised 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 "Predecessor Company"). Holdings is the successor
company of the Predecessor Company following the change in ownership which was
effective April 1, 1997. See Note 2. Holdings has no other assets or
liabilities and conducts no other operations other than through its
wholly-owned subsidiary, L-3 Communications Corporation ("L-3 Communications").
See Note 12. The combined financial statements of the Predecessor Company
reflect assets, liabilities and results of operations included in Lockheed
Martin's historical financial statements. Intercompany accounts between
Lockheed Martin and the Predecessor Company have been included in invested
equity. Significant intercompany and inter-business transactions and balances
have been eliminated.
2. CHANGE IN OWNERSHIP TRANSACTION
L-3 was formed in April 1997 by Mr. Frank C. Lanza, the former President
and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the former Senior
Vice President and Controller of Loral (collectively, the "Equity Executives"),
Lehman Brothers Capital Partners III, L.P. and its affiliates ("the Lehman
Partnership") and Lockheed Martin to acquire the Predecessdor Company. On
December 31, 1998, the Equity Executives, the Lehman Partnership and Lockheed
Martin each owned approximately 12.4%, 36.6% and 24.8% of Holdings.
On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, L-3 and
Lockheed Martin entered into a Transaction Agreement (the "L-3 Acquisition
Agreement") pursuant to which Holdings acquired the Predecessor Company from
Lockheed Martin (the "L-3 Acquisition"). Also included in the L-3 Acquisition
was a semiconductor product line of another business and certain leasehold
improvements in New York City which were not material. The consideration paid
for the L-3 Acquisition to Lockheed Martin was $503,779, comprised of $458,779
in cash reflecting a $21,221 reduction related to a purchase price adjustment
and $45,000 of common equity, representing a 34.9% interest in Holdings
initially retained by Lockheed Martin, plus acquisition costs of $8,000.
The Company entered into service agreements with Lockheed Martin pursuant
to which Lockheed Martin provides L-3 and L-3 provides Lockheed Martin certain
services of the type previously provided at costs consistent with past
practices. The parties also entered into supply agreements which reflect
previously existing intercompany work transfer agreements using prices and
other terms consistent with those arrangements. The Company and Lockheed Martin
have entered into certain subleases of real property and cross-licenses of
intellectual property.
The L-3 Acquisition has been accounted for as a purchase business
combination effective as of April 1, 1997. The assets and liabilities recorded
in connection with the purchase price allocation were $664,800 and $164,400,
respectively. The Company valued acquired contracts in process at contract
price, less the estimated costs to complete and an allowance for normal profit
on the Company's effort to complete such contracts. The excess of the purchase
cost 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 initially retained by
Lockheed Martin, a deemed distribution of $9,000 was recognized in the purchase
price allocation.
F-11
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
REVENUE RECOGNITION: Sales on production-type contracts are recorded as
units are shipped and 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
reasonably assured. Losses on contracts are recognized when determined. The
impact of revisions in profit estimates are recognized on a cumulative catch-up
basis in the period in which the revisions are made.
CONTRACTS IN PROCESS: Costs accumulated on contracts in process include
direct costs and manufacturing overhead costs, and for U.S. 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 computed by applying principally the straight-line method
to the estimated useful lives of the related assets. Useful live ranges are
substantially 10 to 40 years for buildings and improvements and 3 to 10 years
for machinery, equipment, furniture and fixtures. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements.
DEBT ISSUANCE COSTS: The costs incurred to issue the debt are deferred and
amortized as interest expense over the terms of the related debt using a method
that approximates the effective interest method.
INTANGIBLES: Intangibles, consisting primarily of the excess of the
purchase cost of acquired businesses over the fair value of net assets acquired
(goodwill) are amortized on a straight-line basis over periods ranging from 10
to 40 years. Amortization expense was $17,892 for 1998 and $8,870 for the
nine-month period ended December 31, 1997. Accumulated goodwill amortization
was $19,707 and $5,741, respectively, at December 31, 1998 and 1997. The
carrying amount of cost in excess of net assets acquired is evaluated on a
recurring basis. Current and future profitability and undiscounted cash flows
excluding financing costs of the acquired businesses are the primary indicators
used to assess recoverability. For 1998 and the nine-month period ended
December 31, 1997, there were no reductions to the carrying amount of the cost
in excess of net assets acquired resulting from these evaluations. Predecessor
Company intangibles also consisted primarily of cost in excess of net assets
acquired and were amortized on a straight-line basis over a 40-year period.
Other intangibles were amortized over their estimated useful lives which ranged
from 11 to 15 years. Amortization expense of the Predecessor Company was $2,655
for the three-month period ended March 31, 1997 and $10,115 for 1996.
INCOME TAXES: The Company provides for income taxes using the liability
method prescribed by the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") 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.
F-12
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the
Company and the Predecessor Company include 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 Holdings' 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 the 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
123, Accounting for Stock-Based Compensation.
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 sales and costs and
expenses during the reporting period. The most significant of these estimates
and assumptions relate to contract estimates of sales and costs, estimates of
pension and postretirement benefit obligations, allocations of costs and
expenses from Lockheed Martin to the Predecessor Company, recoverability of
recorded amounts of fixed assets and cost in excess of net assets acquired,
income taxes, litigation and environmental obligations. Actual results could
differ from these estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS: In April 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities ("SOP 98-5"), which provides guidance on the financial
reporting of start-up and organization costs, including precontract costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The Company does not expect SOP 98-5 to have a material impact on its
results of operations or financial position.
In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value and
is effective for all quarters of fiscal years beginning after June 15, 1999.
The Company does not expect SFAS 133 to have a material impact on its financial
position.
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 the Loral Acquired
Businesses. The acquisition was accounted for as a purchase business
combination by Lockheed Martin Communications Systems -- Camden Division and
has been reflected in the financial statements based on the purchase price
allocated to the Loral Acquired Businesses by Lockheed Martin. The assets and
liabilities recorded in connection with the purchase price allocation were
$401,000 and $113,200, respectively.
F-13
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. ACQUISITIONS
1998 Acquisitions. On August 13, 1998, the Company purchased all of the
outstanding stock of SPD Technologies, Inc. ("SPD") for $230,000 of cash
subject to adjustment based on final closing adjusted net assets, as defined.
On March 30, 1998 the Company purchased the assets of the Ocean Systems
business ("Ocean Systems") of AlliedSignal, Inc. for $67,500 of cash. On March
4, 1998, the Company purchased substantially all of the assets of ILEX Systems
("ILEX") for $51,923 of cash subject to adjustment based on closing net assets
plus additional consideration contingent upon post-acquisition performance of
ILEX. On February 5, 1998, the Company purchased the assets of the Satellite
Transmission Systems division ("STS") of California Microwave, Inc. for $27,000
of cash subject to adjustment based upon closing net assets, as defined. SPD,
Ocean Systems, ILEX, and STS collectively comprise the "1998 Acquisitions".
During 1998, the Company also purchased several other operations and product
lines for an aggregate purchase price of $57,700 of cash before expenses and
certain adjustments based on closing date net assets, as defined, and certain
additional consideration based on post-acquisition performance. These other
acquisitions, both individually and in the aggregate were not material to the
results of operations or financial position of the Company. All of the
acquisitions have been accounted for as purchase business combinations and are
included in the Company's results of operations from their effective dates.
The assets and liabilities recorded in connection with the acquisitions of
SPD and Ocean Systems are based upon preliminary estimates of fair values.
Actual adjustments will be based on the final purchase prices and the final
appraisals and other analyses of fair values which are in process. Management
does not expect that differences between the preliminary and final purchase
price allocations will have a material impact on the Company's financial
position or results of operations. The assets and liabilities recorded in
connection with the acquisitions of SPD, Ocean Systems, ILEX and STS were
$326,664 and $85,111, $143,612 and $74,792, $59,061 and $4,790, and $35,559 and
$7,909, respectively. The Company has valued acquired certain contracts in
process at contract price, less the estimated costs to complete and an
allowance for normal profit on the Company's effort to complete such contracts.
The excess of purchase cost over the fair value of net assets acquired is being
amortized on a straight-line basis over periods of 40 years for SPD, Ocean
Systems and ILEX and 15 years for STS.
Had the L-3 Acquisition, the 1998 Acquisitions and the related financing
transactions occurred on January 1, 1997, the unaudited pro forma sales, net
income and diluted earnings per share would have been $1,163,200, $28,500 and
$1.10, respectively, for 1998 and $1,063,900, $11,300 and $0.41, respectively,
for 1997. The pro forma results are based on various assumptions and are not
necessarily indicative of the result of operations that would have occurred had
the acquisitions and the related financing transactions occurred on January 1,
1997.
Microdyne Corporation. On December 3, 1998, the Company signed an
agreement to acquire all of the outstanding common stock of Microdyne
Corporation ("Microdyne") for approximately $90.0 million in cash, including
the repayment of Microdyne's debt. In January 1999, pursuant to the acquisition
agreement, a subsidiary of the Company purchased 91.9% of the common stock of
Microdyne in a cash tender offer. The Company completed the acquisition and
merger of Microdyne in February 1999. The purchase of shares of Microdyne
common stock was financed using available cash and borrowings under the Senior
Credit Facilities. See Note 8.
Aydin Corporation. On March 1, 1999, the Company signed an agreement to
acquire all of the outstanding common stock of Aydin Corporation ("Aydin") for
approximately $72.3 million in cash before reductions for Aydin's cash on hand
which amounted to approximately $11.3 million at the end
F-14
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
of February 1999. The acquisition is subject to the receipt of a majority of
Aydin's common shares outstanding in the tender offer, regulatory approvals and
other customary closing conditions. The Company expects to complete this
acquisition during the first half of 1999.
6. CONTRACTS IN PROCESS
The components of contracts in process are presented on the table below.
Unbilled contract receivables are comprised of accumulated costs and profits on
contracts. The amount of billed contract receivables, unbilled contract
receivables, inventoried costs and progress payments are principally related to
contracts with the U.S. government.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
Billed contract receivables ............................................. $ 100,234 $ 39,185
Unbilled contract receivables ........................................... 69,361 32,653
Other billed receivables, principally commercial and affiliates ......... 81,372 31,580
Inventoried costs ....................................................... 130,350 80,532
--------- ---------
381,317 183,950
Less, unliquidated progress payments .................................... (30,268) (19,170)
--------- ---------
Total contracts in process ........................................... $ 351,049 $ 164,780
========= =========
</TABLE>
The U.S. government has title to or a secured interest in, inventory to
which progress payments on its contracts are applied. Unbilled contract
receivables represent accumulated costs and earned profits which are not yet
billed to customers. The Company believes that substantially all of the
unbilled contract receivables will be billed and collected within one year.
The following data have been used in the determination of the costs and
expenses presented on the statements of operations:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
----------------------------- -------------------------
NINE THREE
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1997 1996
-------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Selling, general and administrative ("SG&A") costs
included in inventoried costs .................... $ 16,550 $15,379 $14,536 $14,700
SG&A incurred costs ............................... 189,507 88,527 28,449 82,226
Independent research and development, including bid
and proposal costs included in SG&A incurred
costs ............................................ 59,897 28,893 12,024 36,500
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
----------- ---------
<S> <C> <C>
Land ................................................. $ 9,145 $ 6,670
Buildings and improvements ........................... 28,168 19,487
Machinery, equipment, furniture and fixtures ......... 105,569 58,978
Leasehold improvements ............................... 12,830 9,899
-------- -------
Total property, plant and equipment ................. $155,712 $95,034
======== =======
</TABLE>
F-15
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Depreciation and amortization expense for property, plant and equipment
was $22,463 for 1998 and $13,320 for the nine-month period ended December 31,
1997, $4,529 for the three-month period ended March 31, 1997 and $14,924 for
1996.
8. DEBT
The Company's long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- -----------
<S> <C> <C>
Senior Credit Facilities:
Term Loan Facilities ............................. $ -- $172,000
103/8% Senior Subordinated Notes due 2007 ......... 225,000 225,000
81/2% Senior Subordinated Notes due 2008 .......... 180,000 --
8% Senior Subordinated Notes due 2008 ............. 200,000 --
-------- --------
Total debt ....................................... 605,000 397,000
Less current portion .............................. -- 5,000
-------- --------
Total long-term debt ............................. $605,000 $392,000
======== ========
</TABLE>
In connection with the L-3 Acquisition, the Company entered into credit
facilities (the "Senior Credit Facilities") with a syndicate of banks and
financial institutions led by Bank of America National Trust & Savings
Association ("B of A"), as administrative agent, originally consisting of
$175,000 of term loans (the "Term Loan Facilities") and a $100,000 revolving
credit facility (the "Revolving Credit Facility"). In 1998, the Company prepaid
all of the outstanding borrowings under the Term Loan Facilities and the Senior
Credit Facilities were amended to increase the Revolving Credit Facility to
$200,000 and to add a revolving 364 day credit facility for $185,000 (the
"Revolving 364 Day Credit Facility"). The Revolving 364 Day Credit Facility
expires on August 12, 1999 at which time the Company may (i) request that the
creditors extend it for one additional 364 day period or (ii) exercise an
option to convert any or all of the borrowings outstanding thereunder into term
loans which amortize over a two year period beginning March 31, 2001, and must
be paid in full no later than March 31, 2003. Available borrowings under the
Revolving Credit Facility and the Revolving 364 Day Credit Facility at December
31, 1998 were $112,644 and $185,000, respectively, after reductions for
outstanding letters of credit of $87,356. On March 3, 1999, the Senior Credit
Facilities were further amended to increase the Revolving 364 Day Credit
Facility by $15,000 to $200,000.
Borrowings under the Senior Credit Facilities bear interest, at L-3
Communications' option, at either: (i) a "base rate" equal to the higher of
0.50% per annum above the latest federal funds rate and the B of A "reference
rate" (as defined) plus a spread ranging from 0.875% to 0.0% per annum
depending on L-3 Communications' ratio of debt to EBITDA, as defined (the "Debt
to EBITDA Ratio") at the time of determination or (ii) a "LIBOR rate" (as
defined) plus a spread ranging from 1.875% to 0.625% per annum depending on L-3
Communications' Debt to EBITDA Ratio at the time of determination.
L-3 Communications pays commitment fees calculated on the daily amounts of
the available unused commitments under the Revolving Credit Facility at a rate
ranging from 0.50% to 0.25% per annum and under the Revolving 364 Day Facility
at a rate ranging from 0.30% to 0.125% per annum, in each case depending on L-3
Communications' Debt to EBITDA Ratio in effect. L-3 Communications pays letter
of credit fees calculated at a rate ranging from 0.9375% to 0.3125% per annum
for performance letters of credit and 1.875% to 0.625% for all other letters of
credit, in each case depending on L-3 Communications' Debt to EBITDA Ratio at
the time of determination.
F-16
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In April 1997, L-3 Communications sold $225,000 of 103/8% 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. In
May 1998, L-3 Communications sold $180,000 of 81/2 % senior subordinated notes
(the "May 1998 Notes") due May 15, 2008 with interest payable semi-annually on
May 15 and November 15 of each year commencing November 15, 1998. In December
1998, L-3 Communications sold $200,000 of 8% senior subordinated notes (the
"December 1998 Notes") due August 1, 2008 with interest payable semi-annually
on February 1 and August 1 of each year commencing February 1, 1999.
Collectively, the 1997 Notes, May 1998 Notes and December 1998 Notes comprise
the "Senior Subordinated Notes". The Senior Subordinated Notes mature $225.0
million in 2007 and $380.0 million in 2008.
The 1997 Notes, May 1998 Notes and December 1998 Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after May 1,
2002, August 1, 2003, and August 1, 2003, respectively, at various redemption
prices plus accrued and unpaid interest to the applicable redemption date. In
addition, prior to May 1, 2000, May 15, 2001, and December 11, 2001, the
Company may redeem up to 35% of the aggregate principal amount of the 1997
Notes, May 1998 Notes and December 1998 Notes, respectively, at redemption
prices of 109.375%, 108.500%, and 108.00% of the principal amount thereof, plus
accrued and unpaid interest to the applicable 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.
In February 1999, the Company exchanged all of the December 1998 Notes for
notes identical in all material respects to the December 1998 Notes, except
that the notes are registered under the Securities Exchange Act of 1933.
The Senior Credit Facilities and Senior Subordinated Notes agreements
contain financial and other restrictive covenants that limit, among other
things, the ability of the Company to borrow additional funds, dispose of
assets, or pay cash dividends. The Senior Credit Facilities contain financial
covenants which require that (i) the Company's Debt to EBITDA Ratio be less
than or equal to 5.00 for the quarter ended December 31, 1998, and that the
maximum allowable debt ratio, as defined, thereafter decline over time to less
than or equal to 3.25 for the quarters ending September 30, 2002 and
thereafter, and (ii) the Company's interest coverage ratio, as defined, be
greater than or equal to 2.00 for the quarter ended December 31, 1998, and that
the minimum allowable interest coverage ratio, as defined, thereafter increase
over time to greater than or equal to at least 3.00 for the quarters ending
September 30, 2002 and thereafter. Through December 31, 1998 the Company was in
compliance with these covenants at all times.
In connection with the Senior Credit Facilities, the Company has granted
the lenders a first priority lien on the stock of L-3 Communications and
substantially all of its domestic subsidiaries. The borrowings under the Senior
Credit Facilities are guaranteed by Holdings and by substantially all of the
Company's subsidiaries. The payment of principal and premium, if any, and
interest on the Senior Subordinated Notes is unconditionally guaranteed, on an
unsecured senior subordinated basis, jointly and severally, by substantially
all of the Company's subsidiaries, all of which are wholly owned.
9. PREDECESSOR COMPANY'S INTEREST EXPENSE
Interest expense was allocated to the Predecessor Company by applying
Lockheed Martin's weighted average consolidated interest rate to the portion of
the beginning of period invested equity account deemed to be financed by
consolidated debt, which was determined based on Lockheed
F-17
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Martin's debt to equity ratio on such date, except that the acquisition of the
Loral Acquired Businesses was assumed to be fully financed by debt. Interest
expense of the Predecessor Company was calculated using these balances and
interest rates:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, 1997 1996
---------------- -------------
<S> <C> <C>
Invested equity ......... $ 473,609 $ 482,466
Interest rate ........... 7.10% 7.20%
</TABLE>
10. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments. The Company's financial instruments
consist primarily of cash and cash equivalents, billed contract receivables,
other billed receivables (principally commercial and affiliates), investments,
trade accounts payable, customer advances, Senior Subordinated Notes (see Note
8), and interest rate cap and interest rate floor contracts. The carrying
amounts of cash and cash equivalents, billed contract receivables, other billed
receivables, trade accounts payable and customer advances are representative of
their respective fair values because of the short-term maturities or expected
settlement dates of these instruments. The fair value of the Company's
investments are based on quoted market prices, as available, and historical
costs which approximate fair value. The May 1998 Notes and 1997 Notes are
registered, unlisted public debt which are traded in the over-the-counter
market. The December 1998 Notes were unlisted privately placed debt at December
31, 1998 which trade in the over-the counter market. In February 1999, the
December 1998 Notes were exchanged for unlisted public debt. The fair value of
the Senior Subordinated Notes are based on quoted trading activity. The fair
values of the interest rate agreements were estimated by discounting expected
cash flows using quoted market interest rates. The carrying amounts and
estimated fair value of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1998 1997
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Investments ....................... $ 11,446 $ 12,274 $ 5,113 $ 5,113
Senior Subordinated Notes ......... 605,000 633,830 225,000 243,000
Interest rate caps ................ 1,170 236 1,569 561
Interest rate floors .............. (200) (1,094) (268) (531)
</TABLE>
Interest Rate Risk Management. To mitigate risks associated with changing
interest rates on borrowings under the Senior Credit Facilities, the Company
entered into interest rate caps and interest rate floors (collectively, the
"interest rate agreements"). The interest rate agreements are denominated in
U.S. dollars and have designated maturities which occur every three months
until the interest rate agreements expire in March 2002. Cash payments are
received from (paid to) the counterparties on the interest rate caps (floors)
contracts by the amount that the reference interest rates are greater than
(less than) the cap (floor) contract rates on the designated maturity dates,
multiplied by the notional amounts underlying the respective interest rate
agreements. Cash payments between the Company and counterparties are recorded
as a component of interest expense. The initial cost (receipt) of these
arrangements are deferred and amortized as interest expense. 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.
F-18
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 or cash flows for 1998 and for
the nine-month period ended December 31, 1997. Information with respect to the
interest rate agreements is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
--------------------------- --------------------------
NOTIONAL UNREALIZED NOTIONAL UNREALIZED
AMOUNT GAINS (LOSSES) AMOUNT GAINS (LOSSES)
---------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
Interest rate caps ........... $100,000 $ (934) $100,000 $ (1,008)
Interest rate floors ......... $ 50,000 $ (894) $ 50,000 $ (263)
</TABLE>
11. COMMON STOCK
On May 19, 1998, Holdings sold 6.9 million shares of its Common Stock in
an Initial Public Offering ("IPO") representing 25.2% of Holdings' outstanding
common stock immediately after the IPO. The net proceeds of the IPO amounted to
$139,500 and were contributed by Holdings to L-3 Communications. After the
completion of the IPO, the Lehman Partnership and Lockheed Martin owned 36.6%
and 24.8%, respectively, of the outstanding shares of Holdings' Common Stock.
Immediately prior to the IPO, each authorized share of Holdings Class A
common stock, Class B common stock and Class C common stock was converted into
one class of common stock and the authorized Holdings common stock was
increased to 100 million shares. The Class B common stock which was owned by
the Equity Executives was subject to a repurchase agreement wherein prior to an
initial public offering by Holdings, the Equity Executives under certain
circumstances could have required the Company to repurchase that common stock.
Accordingly, the Class B common stock was not classified as stockholders'
equity at December 31, 1997.
In connection with the initial capitalization of L-3 in April 1997, the
Class A common stock and Class B common stock were issued at per share prices
of $6.47 and $5.00, respectively. The aggregate difference in issuance prices
of $4,410 was recorded as a noncash compensation charge effective April 1,
1997.
On February 4, 1999, Holdings sold 5.0 million shares of common stock in a
offering for $42.00 per share (the "February 1999 Common Stock Offering")
representing 15.4% of Holdings outstanding common stock immediately after the
February 1999 Common Stock Offering. The net proceeds to Holdings from the
February 1999 Common Stock Offering amounted to $201.5 million and were
contributed to the L-3 Communications. In addition, 6.5 million shares were
also sold in the February 1999 Common Stock Offering by the Lehman Partnership
and Lockheed Martin. After the February 1999 Common Stock Offering, the Lehman
Partnership owned 24.7% and Lockheed Martin owned 7.1% of the outstanding
shares of Holding's common stock.
F-19
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. L-3 COMMUNICATIONS SHAREHOLDERS' EQUITY
Holdings has no other assets or liabilities and conducts all of its
operations through its wholly-owned subsidiary, L-3 Communications. The table
below presents the shareholders' equity of L-3 Communications:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
------------ ----------
<S> <C> <C>
Common stock, $0.1 par value; 100 shares authorized and
outstanding ......................................... $ -- $ --
Additional paid-in capital ............................ 264,769 120,410
Retained earnings ..................................... 44,856 12,305
Accumulated other comprehensive income (loss) ......... (9,651) --
-------- --------
Total shareholders' equity ........................... $299,974 $132,715
======== ========
</TABLE>
The additional paid-in capital at December 31, 1998 reflects the
contributions to L-3 Communications from Holdings of (i) the net proceeds from
the IPO and the February 1999 Common Stock Offering (see Note 11), (ii)
proceeds and income tax benefits from the exercise of Holdings stock options
(see Note 15), and (iii) its common stock issued to the Company's savings plans
for employer matching contributions (see Note 17).
13. EARNINGS PER SHARE
Basic earnings per share ("EPS") is based on the weighted average common
shares outstanding for the period, excluding any dilutive common share
equivalents. Diluted EPS reflects the potential dilution that could occur if
stock options were exercised. A reconciliation of basic and diluted EPS follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
AVERAGE EARNINGS
NET SHARES PER
INCOME OUTSTANDING SHARE
---------- ------------- ---------
<S> <C> <C> <C>
1998:
Basic ............................................................... $32,551 24,679 $1.32
Effect of potential dilution from exercise of stock options ......... 1,221
------- ------ -----
Diluted ............................................................. $32,551 25,900 $1.26
======= ====== =====
NINE MONTHS ENDED DECEMBER 31, 1997:
Basic ............................................................... $12,305 20,000 $0.62
Effect of potential dilution from exercise of stock options ......... 12
------- ------ -----
Diluted ............................................................. $12,305 20,012 $0.61
======= ====== =====
</TABLE>
For purposes of computing EPS for the nine-month period ended December 31,
1997, the Class B common stock subject to repurchase agreement was included in
the average shares outstanding. EPS data is not presented for the Predecessor
Company because it was wholly-owned by Lockheed Martin prior to the L-3
Acquisition.
F-20
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. INCOME TAXES
COMPANY
Pretax income of the Company was $53,450 for 1998 and $22,992 for the
nine-month period ended December 31, 1997, substantially all of which was
derived from domestic operations. The components of the Company's provision for
income taxes were:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Current income tax provision, primarily federal ......... $ 1,113 $ 696
Deferred income tax provision:
Federal ................................................ 18,203 8,635
State and local ........................................ 1,583 1,356
------- -------
Subtotal .............................................. 19,786 9,991
------- -------
Total provision for income taxes ........................ $20,899 $10,687
======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate of the Company follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Statutory federal income tax rate ....................................... 35.0% 35.0%
State and local income taxes, net of federal income tax benefit ......... 2.4 3.8
Noncash compensation charge ............................................. -- 6.8
Nondeductible goodwill amortization and other expenses .................. 4.6 3.1
Research and experimentation and other tax credits ...................... (4.5) (3.5)
Other, net .............................................................. 1.6 1.3
---- ----
Effective income tax rate ............................................... 39.1% 46.5%
==== ====
</TABLE>
F-21
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The significant components of the Company's net deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventoried costs .................................... $ 8,243 $ 8,711
Compensation and benefits ............................ -- 528
Pension and postretirement benefits .................. 25,597 12,826
Property, plant and equipment ........................ 7,748 8,098
Income recognition on long-term contracts ............ 436 3,691
Accrued warranty costs ............................... 5,268 1,834
Net operating loss carryforwards ..................... 8,112 1,688
Tax credit carryforwards ............................. 4,320 1,281
Other, net ........................................... 475 27
-------- --------
Total deferred tax assets .......................... 60,199 38,684
Deferred tax liabilities:
Cost in excess of net assets acquired ................ (3,348) (1,099)
Compensation and benefits ............................ (378) --
Other, net ........................................... (743) (70)
-------- --------
Total deferred tax liabilities ..................... (4,469) (1,169)
-------- --------
Net deferred tax assets .............................. $ 55,730 $ 37,515
======== ========
The net deferred tax assets are classified as follows:
Current deferred tax assets .......................... $ 16,591 $ 13,298
Long-term deferred tax assets ........................ 39,139 24,217
-------- --------
Total net deferred tax assets ...................... $ 55,730 $ 37,515
======== ========
</TABLE>
At December 31, 1998 and 1997, the Company had $12,432 and $2,969,
respectively, of tax carryforwards primarily related to U.S. federal net
operating losses and research and experimentation tax credits which will expire
if unused beginning 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 Predecessor Company. Substantially
all the income of the Predecessor Company was from domestic operations. The
estimated benefit for deferred income taxes was $1,315 for the three-month
period ended March 31, 1997 and $2,143 for 1996.
F-22
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The principal components of the deferred taxes are contract accounting
methods, property, plant and equipment, goodwill amortization and timing of
accruals. The effective income tax rate of the Predecessor Company differs from
the statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Statutory federal income tax rate ............................. (35.0)% 35.0%
Amortization of cost in excess of net assets acquired ......... (8.1) 2.0
Research and experimentation and other tax credits ............ (11.3) (2.0)
State and local income taxes, net of federal income tax benefit
and state and local income tax credits ...................... 4.8 6.0
Foreign sales corporation tax benefits ........................ (8.4) (1.0)
Other, net .................................................... 9.1 --
----- ----
Effective income tax rate ..................................... (48.9)% 40.0%
===== ====
</TABLE>
15. STOCK OPTIONS
COMPANY
On March 10, 1998 the 1997 option plan for key employees was amended to
increase the shares available for option grants to 4,255,815 shares of Holdings
common stock, of which 897,146 were available for future option grants as of
December 31, 1998. On January 19, 1999, Holdings granted options to purchase
414,150 shares of Holdings common stock at an exercise price of $40.50 to
certain employees of the Company.
On April 30, 1997, Holdings granted 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. The following table presents
stock option activity for the nine-month period ended December 31, 1997 and
1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Balance at April 1, 1997 ............. -- --
Options granted .................... 2,975 $ 6.47
Options exercised .................. -- --
Options canceled ................... (4) $ 6.47
-------
Balance at December 31, 1997 ......... 2,971 $ 6.47
Options granted .................... 425 $25.60
Options exercised .................. (481) $ 6.47
Options canceled ................... (37) $ 8.19
------
Balance at December 31, 1998 ......... 2,878 $ 9.27
======
</TABLE>
F-23
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ -----------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OF OPTIONS LIFE (YEARS) PRICE OF OPTIONS LIFE (YEARS) PRICE
- ---------------- ------------ -------------- ---------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 6.47 ......... 2,455,474 7.7 $ 6.47 204,158 8.5 $6.47
$22.00 ......... 282,880 9.3 $22.00 -- -- --
$32.75 ......... 139,700 9.7 $32.75 -- -- --
--------- -------
Total ......... 2,878,054 7.9 $ 9.27 204,158 8.5 $6.47
========= =======
</TABLE>
The weighted average fair values of stock options at their grant date
during 1998 and 1997, where the exercise price equaled the market price
(estimated fair value) on the grant date were $8.86 and $6.47, respectively. In
accordance with APB 25, no compensation expense was recognized. The following
table reflects pro forma net income and EPS had the Company elected to adopt
the fair value approach of SFAS 123:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Net income:
As reported ......... $32,551 $12,305
Pro forma ........... 31,246 11,751
Basic EPS:
As reported ......... $ 1.32 $ 0.62
Pro forma ........... 1.27 0.59
Diluted EPS:
As reported ......... $ 1.26 $ 0.61
Pro forma ........... 1.21 0.59
</TABLE>
The estimated fair values of each option granted in 1998 were calculated
using the Black-Scholes option-pricing model. The estimated fair value of each
option granted in 1997 was calculated using the minimum value method under SFAS
123 because Holdings common stock was not publicly traded prior to its IPO. See
Note 11. The weighted average assumptions used in the valuation models were as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected option term (years) .......... 4.1 5.5
Expected volatility ................... 31.0% n.a.
Expected dividend yield ............... -- --
Risk-free interest rate ............... 5.6% 6.3%
</TABLE>
PREDECESSOR COMPANY
During the three-month period ended March 31, 1997 and the year ended
December 31, 1996, 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 two years. Exercise prices of options awarded in both
years were equal to the market price of the stock on the date of grant. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with
F-24
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
the following weighted-average assumptions for the three-month period ended
March 31, 1997, and the years ended December 31, 1996 and 1995, respectively:
risk-free interest rates of 5.58%, and 5.58%; dividend yield of 1.70%;
volatility factors related to the expected market price of the Lockheed
Martin's common stock of 18.6%, and 18.6%; weighted-average expected option
life of five years. The weighted-average fair values of options granted during
the three-month period ended March 31, 1997 and the year ended December 31,
1996 were $17.24 and $17.24, 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 income (loss) was ($386) for the
three-month period ended March 31, 1997 and $11,531 for 1996.
16. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2018. At December 31, 1998, future minimum
payments under noncancellable operating leases with initial or remaining terms
in excess of one year were:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------------------------------
REAL ESTATE EQUIPMENT TOTAL
------------- ----------- ----------
<S> <C> <C> <C>
1999 ............... $ 17,165 $1,458 $ 18,623
2000 ............... 17,467 1,080 18,547
2001 ............... 15,943 503 16,446
2002 ............... 16,126 184 16,310
2003 ............... 10,876 84 10,960
Thereafter ......... 128,267 12 128,279
-------- ------ --------
Total ........... $205,844 $3,321 $209,165
======== ====== ========
</TABLE>
Real estate lease commitments have been reduced by minimum sublease rental
income of $7,173 due in the future under noncancellable subleases. Leases
covering major items of real estate and equipment contain renewal and or
purchase options. Rent expense, net of sublease income was $15,290 for 1998,
$7,330 for the nine-month period ended December 31, 1997, $2,553 for the
three-month period ended March 31, 1997, $8,495 for 1996.
On March 30, 1998, the Company entered into a real estate lease agreement
as lessee, accounted for as an operating lease, which expires on March 30,
2001. On or before the lease expiration date, the Company can exercise options
to either renew the lease, purchase the property for $12,500, or sell the
property on behalf of the lessor (the "sale option"). If the Company exercises
the sale option, the Company must pay the lessor a residual guarantee amount of
$10,894 on or before the lease expiration date, and at the time the property is
sold, the Company must pay the lessor a supplemental rent in the amount of
$1,606. Accordingly, the $12,500 has been included in the noncancellable real
estate operating lease payments relating to the expiration of such lease.
The Company is 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 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 the federal government for a specified term.
F-25
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 L-3 Communications
assumed 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 retained all environmental liabilities for all
facilities not used by the Predecessor Company as of April 1997 and fully
indemnified Holdings for such pre-existing site environmental obligations.
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 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 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.
17. PENSIONS AND OTHER EMPLOYEE BENEFITS
The Company maintains a number of pension plans, both contributory and
noncontributory, covering employees of certain locations. Eligibility for
participation in these plans varies and benefits are generally based on the
participant's compensation and/or 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.
The Company also provides postretirement medical 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.
F-26
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and postretirement benefit plans.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................ $ 198,431 $ -- $ 18,880 $ --
Service cost ........................................... 10,717 5,109 1,288 466
Interest cost .......................................... 17,996 8,883 2,933 840
Actuarial loss ......................................... 18,590 6,883 1,547 624
Acquisitions ........................................... 105,072 181,084 52,435 17,177
Benefits paid .......................................... (10,323) (3,528) (1,821) (227)
--------- --------- --------- ---------
Benefit obligation at end of year ...................... $ 340,483 $ 198,431 $ 75,262 $ 18,880
--------- --------- --------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ......... $ 173,450 $ -- $ -- $ --
Actual return on plan assets ........................... 22,059 11,539
Acquisitions ........................................... 93,822 165,339 -- --
Employer contributions ................................. 9,494 100 1,821 227
Benefits paid .......................................... (10,323) (3,528) (1,821) (227)
--------- --------- --------- ---------
Fair value of plan assets at end of year ............... $ 288,502 $ 173,450 $ -- $ --
--------- --------- --------- ---------
Funded status of the plans ............................. $ (51,981) $ (24,981) $ (75,262) $ (18,880)
Unrecognized actuarial loss ............................ 20,299 5,124 2,165 624
--------- --------- --------- ---------
Net amount recognized .................................. $ (31,682) $ (19,857) $ (73,097) $ (18,256)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
Accrued benefit liability .............................. $ (41,196) $ (19,857) $ (73,097) $ (18,256)
Accumulated other comprehensive income ................. 9,514 -- -- --
--------- --------- --------- ---------
Net amount recognized .................................. $ (31,682) $ (19,857) $ (73,097) $ (18,256)
========= ========= ========= =========
RATE ASSUMPTIONS:
Discount rate .......................................... 6.75% 7.25% 6.75% 7.25%
Rate of return on plan assets .......................... 9.00% 9.00% n.a. n.a.
Salary increases ....................................... 4.50% 5.00% 4.50% 5.00%
Annual increase in cost of benefits .................... n.a. n.a. 6.50% 6.50%
</TABLE>
The annual increase in cost of benefits ("health care cost trend rate") is
assumed to decrease gradually to a rate of 4.5% by the year 2001. Assumed
health care cost trend rates have a significant effect on amounts reported for
postretirement medical benefit plans. A one percentage point decrease in the
assumed health care cost trend rates would have the effect of increasing the
aggregate service and interest cost components and the postretirement medical
obligations by $473 and $4,560, respectively. A one percentage point increase
in the assumed health care cost trend rate would have the effect of decreasing
the aggregate service and interest cost components and the postretirement
medical obligations by $384 and $3,723, respectively.
F-27
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the components of net periodic pension and
postretirement medical costs.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
------------------------ -------------------
1998 1997 1998 1997
------------ ----------- --------- ---------
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ............................. $ 10,717 $ 5,109 $1,288 $ 466
Interest cost ............................ 17,996 8,883 2,933 840
Expected return on plan assets ........... (19,938) (9,704) -- --
Recognized actuarial (gain) loss ......... (25) -- 7 --
Recognition due to settlement ............ (376) -- -- --
--------- -------- ------ ------
Net periodic benefit cost ................ $ 8,374 $ 4,288 $4,228 $1,306
========= ======== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $271,411, $251,228, and $228,856, respectively, as
of December 31, 1998, and $118,751, $113,052, and $104,182, respectively, as of
December 31, 1997.
In connection with the Company's assumption of certain plan obligations
pursuant to the L-3 Acquisition, Lockheed Martin has provided the Pension
Benefit Guaranty Corporation ("PBGC") with commitments to assume sponsorship or
other forms of financial support under certain circumstances of the Company's
pension plans for Communication Systems -- West and Aviation Recorders (the
"Subject Plans"). In this connection, the Company has provided certain
assurances to Lockheed Martin including, but not 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 U.S.
government contracts, (ii) agreeing not to increase benefits under the Subject
Plans without the consent of Lockheed Martin, (iii) restricting the Company
from a sale of any business 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, has the right to decide whether to cause the Company to transfer
sponsorship of any or all of the Subject Plans to Lockheed Martin, even if the
PBGC has not sought to terminate the Subject Plans. Lockheed Martin may
exercise this right by giving 45 days prior written notice to the Company after
the occurrence of such triggering events if it has concluded that the
liabilities of the Subject Plans would increase unreasonably. As a result of a
decrease in the PBGC-mandated discount rate in 1998 and the resulting increase
in the underlying liability, one of such triggering events has occurred. The
Company notified Lockheed Martin of this fact. In February 1999, Lockheed
Martin informed the Company that it has no present intention to exercise its
right to cause the Company to transfer sponsorship of the Subject Plans. If
Lockheed Martin did assume sponsorship of these plans, it would be primarily
liable for the costs associated with funding the Subject Plans or any costs
associated with the termination of the Subject Plans but L-3 Communications
would be required to reimburse Lockheed Martin for these costs. To date, the
impact on pension expense and funding requirements resulting from this
arrangement has not been significant. However, should Lockheed Martin assume
sponsorship of the Subject Plans or if these plans were terminated, the impact
of any increased pension expenses or funding requirements could be material to
the Company. 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.
F-28
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Employee Savings Plans. 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
contributions vary among the plans. Under these plans, the Company's matching
contributions, in Holdings common stock or cash, for 1998 and nine-month period
ended December 31, 1997 were $6,366 and $3,742, respectively.
18. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
COMPANY
---------------------------------
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
1998 DECEMBER 31, 1997
-------------- ------------------
<S> <C> <C>
Interest paid ......................................... $42,908 $21,245
Income taxes paid ..................................... 496 109
Noncash transactions:
Issuance of common stock ............................. -- 45,000
Savings plan employer matching contributions in common
stock .............................................. 967 --
</TABLE>
Prior to the L-3 Acquisition, the Predecessor Company 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 statement 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.
19. OTHER TRANSACTIONS WITH LOCKHEED MARTIN
The Company and the Predecessor Company sell products to Lockheed Martin
and its affiliates. Such net sales amounted to $70,401 for 1998 and $60,402 for
the nine- month period ended December 31, 1997; $21,171 for the three-month
period ended March 31, 1997 and $70,658 for 1996, respectively. Included in
Contracts in Process are receivables from Lockheed Martin and its affiliates of
$11,990 and $8,846 at December 31, 1998 and 1997, respectively.
Lockheed Martin provides the Company information systems and other
services and previously provided similar services to the Predecessor Company
for which the Company and the Predecessor Company were charged $12,095,
$13,690, $4,210, and $20,901 for 1998, the nine-month period ended December 31,
1997, the three-month period ended March 31, 1997 and the year ended December
31, 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 these services have been allocated to the Predecessor Company, the combined
financial position, results of operations and cash flows presented in the
accompanying combined financial statements would not be the same had the
Predecessor Company been an independent entity.
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 were $5,208 for the three-month period
ended March 31, 1997, and $10,057 for the year ended December 31, 1996.
20. SEGMENT INFORMATION
The Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products. Secure Communication Systems consists of
secure, high data rate
F-29
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
communications in support of military and other U.S. government reconnaissance
and surveillance applications. Specialized Communication Products consists of
the microwave components, avionics and ocean products, and telemetry,
instrumentation and space products operations of the Company. See Note 1.
The Company evaluates the performance of its operating divisions and
reportable segments based on sales and operating income. All corporate expenses
are allocated to the Company's divisions using an allocation methodology
prescribed by U.S. government regulations for government contractors.
Accordingly, all costs and expenses are included in the segment measure of
profitability.
<TABLE>
<CAPTION>
SECURE SPECIALIZED ELIMINATION OF CONSOLIDATED
COMMUNICATION COMMUNICATION INTERSEGMENT (COMBINED)
SYSTEMS PRODUCTS CORPORATE SALES TOTAL
--------------- --------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
COMPANY
1998
- ----
Sales ................................. $493,188 $561,393 $ (17,536) $1,037,045
Operating income ...................... 38,530 61,819 100,349
Total assets .......................... 368,891 797,469 $119,036 1,285,396
Capital expenditures .................. 5,755 17,674 23,429
Depreciation and amortization ......... 12,246 14,143 26,389
Goodwill amortization ................. 5,441 8,525 13,966
Nine Months Ended December 31, 1997
- -----------------------------------
Sales ................................. $309,143 $244,497 $ (7,115) $ 546,525
Operating income ...................... 25,800 30,056 $ (4,410) 51,446
Total assets .......................... 265,959 290,244 140,779 696,982
Capital expenditures .................. 5,534 6,400 11,934
Depreciation and amortization ......... 9,646 6,803 16,449
Goodwill amortization ................. 3,232 2,509 5,741
PREDECESSOR COMPANY
Three Months Ended March 31, 1997
- ---------------------------------
Sales ................................. $ 84,862 $ 74,399 $ (388) $ 158,873
Operating income ...................... 127 7,809 7,936
Total assets .......................... 402,867 203,345 606,212
Capital expenditures .................. 1,263 3,037 4,300
Depreciation and amortization ......... 2,671 2,590 5,261
Goodwill amortization ................. 2,424 105 2,529
1996
- ----
Sales ................................. $322,423 $221,336 $ (678) $ 543,081
Operating income ...................... 18,867 24,824 43,691
Total assets .......................... 390,492 200,107 590,599
Capital expenditures .................. 7,089 6,439 13,528
Depreciation and amortization ......... 11,642 6,711 18,353
Goodwill amortization ................. 9,486 300 9,786
</TABLE>
F-30
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Corporate assets not allocated to the reportable segments primarily
include cash and cash equivalents, corporate office fixed assets, deferred
income tax assets and deferred debt issuance costs. Corporate operating income
for the nine-month period ended December 31, 1997 represents the non-recurring
noncash charge recorded in April, 1997 related to the initial capitalization of
the Company. See Note 11.
Substantially all of the Company's operations are domestic. The Company's
foreign operations are not material to the Company's results of operations,
cash flows or financial position.
Sales to principal customers are as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------------------------- ------------------------------
NINE MONTHS THREE MONTHS YEAR
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1997 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
U.S. government agencies ................ $ 716,234 $434,020 $128,505 $425,033
Foreign governments ..................... 100,911 12,090 2,017 19,239
Commercial export ....................... 85,331 32,743 11,595 14,236
Other (principally U.S. commercial) ..... 134,569 67,672 16,756 84,573
---------- -------- -------- --------
$1,037,045 $546,525 $158,873 $543,081
========== ======== ======== ========
</TABLE>
21. UNAUDITED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unaudited summarized financial data by quarter for the years ended
December 31, 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
1998
Sales .................... $186,564 $230,424 $291,312 $328,745
Operating income ......... 14,093 19,458 30,068 36,730
Net income ............... 2,613 5,610 10,467 13,861
Basic EPS ................ $ 0.13 $ 0.24 $ 0.38 $ 0.51
Diluted EPS .............. $ 0.13 $ 0.23 $ 0.37 $ 0.48
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
COMPANY --------------------------------------------
MARCH 31, JUNE 30(A) SEPTEMBER 30 DECEMBER 31
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
1997
Sales ..................... $158,873 $168,030 $174,822 $203,673
Operating income .......... 7,936 10,711 17,854 22,881
Net income (loss) ......... (258) (1,319) 5,276 8,348
Basic EPS ................. n.a. $ (0.07) $ 0.26 $ 0.42
Diluted EPS ............... n.a. $ (0.07) $ 0.26 $ 0.42
</TABLE>
- ----------
(a) Includes a $4,410 ($0.22 per share) noncash compensation charge.
F-31
<PAGE>
AYDIN CORPORATION
Consolidated Financial Statements as of and for the year ended
December 31, 1998
F-32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Aydin Corporation
We have audited the consolidated balance sheet of Aydin Corporation and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations 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 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 consolidated financial position of Aydin
Corporation and subsidiaries as of December 31, 1998 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
February 19, 1999
Except for Note O as to
which the date is March 1, 1999
F-33
<PAGE>
AYDIN CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Net sales ................................................... $ 77,888,000
Costs and expenses
Cost of sales
Contract arbitration and related ......................... 19,814,000
Other .................................................... 59,724,000
Selling, general and administrative ........................ 21,496,000
Research and development ................................... 1,502,000
Interest income, net ....................................... (701,000)
Restructuring costs ........................................ 1,548,000
Environmental remediation costs ............................ 511,000
Gain on sale of divisions .................................. (5,608,000)
-------------
Total costs and expenses ................................... 98,286,000
Loss from continuing operations before income taxes ......... (20,398,000)
Income tax recovery ......................................... (750,000)
-------------
Loss from continuing operations ............................. (19,648,000)
Discontinued operations
Loss from operations of discontinued division .............. (4,069,000)
Loss on disposal of discontinued division .................. (2,590,000)
-------------
Total loss from discontinued operation ..................... (6,659,000)
-------------
Net loss .................................................... $ (26,307,000)
=============
Loss per common and common equivalent share --
Continuing operations --
Basic .................................................... $(3.77)
======
Fully diluted ............................................ $(3.77)
======
Discontinued operation --
Basic .................................................... $(1.28)
======
Fully diluted ............................................ $(1.28)
======
Net loss
Basic .................................................... $(5.05)
======
Fully diluted ............................................ $(5.05)
======
</TABLE>
F-34
<PAGE>
AYDIN CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents ................................................ $ 5,861,000
Restricted cash and investment securities ................................ 3,589,000
Accounts receivable, net of allowances for doubtful accounts of $681,000 . 21,738,000
Unbilled revenue ......................................................... 26,128,000
Inventories, net of obsolesence allowances of $176,000 ................... 10,361,000
Prepaid expenses and other ............................................... 1,378,000
-----------
Total Current Assets ................................................... 69,055,000
Property, Plant and Equipment, at cost, net of accumulated depreciation and
amortization of $20,903,000 .............................................. 12,587,000
Other assets .............................................................. 483,000
-----------
Total Assets ........................................................... $82,125,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term bank debt ..................................................... $ 133,000
Accounts payable ......................................................... 4,859,000
Accrued liabilities:
Compensation ........................................................... 3,370,000
Other .................................................................. 5,448,000
Contract billings in excess of recognized revenues ........................ 2,279,000
Accrued and deferred income taxes ......................................... 382,000
-----------
Total Current Liabilities ............................................... 16,471,000
Deferred Income Taxes ..................................................... 905,000
Other Liabilities ......................................................... 1,181,000
Stockholders' Equity:
Common stock, par value $1 -- authorized, 7,500,000 shares; issued and
outstanding, 1998 -- 5,220,900 shares .................................. 5,221,000
Additional paid-in capital ............................................... 3,243,000
Retained earnings ........................................................ 55,104,000
-----------
Total Stockholders' Equity .............................................. 63,568,000
-----------
Total Liabilities and Stockholders' Equity ................................ $82,125,000
===========
</TABLE>
F-35
<PAGE>
AYDIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
OPERATING ACTIVITIES
Net loss ................................................................. $ (26,307,000)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Loss from discontinued operation ....................................... 4,069,000
Loss from disposal of discontinued operation ........................... 2,590,000
Gain on sale of divisions .............................................. (5,608,000)
Depreciation and amortization .......................................... 1,985,000
Deferred income taxes .................................................. 573,000
Changes in other operating assets and liabilities, net:
Accounts receivable .................................................... (1,506,000)
Unbilled revenue ....................................................... 12,490,000
Contract billings in excess of recognized revenues ..................... (183,000)
Inventories ............................................................ 1,503,000
Prepaid expenses and other ............................................. 3,983,000
Accounts payable ....................................................... (2,412,000)
Accrued liabilities .................................................... 3,730,000
Other long-term liabilities ............................................ 233,000
Accrued income taxes ................................................... (3,616,000)
Other .................................................................. (547,000)
--------------
Net cash used by continuing operations ................................. (9,023,000)
Net cash provided by discontinued operations ........................... 685,000
--------------
Cash used by operating activities ........................................ (8,338,000)
INVESTING ACTIVITIES
Proceeds from sale of divisions ........................................ 9,202,000
Purchase of property, plant, and equipment ............................. (1,410,000)
Equipment purchases of discontinued operation .......................... (36,000)
--------------
Cash provided by investing activities .................................. 7,756,000
FINANCING ACTIVITIES
Proceeds from exercise of stock options ................................ 114,000
Net short-term borrowings .............................................. (67,000)
--------------
Cash provided by financing activities .................................. 47,000
--------------
DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (535,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ 9,985,000
--------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................................. $ 9,450,000
==============
</TABLE>
F-36
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company transactions
and balances are eliminated in consolidation.
CONTRACT ACCOUNTING
Revenue on long-term type contracts which are greater than $100,000 is
generally recorded on the percentage-of-completion method. For such contracts,
a portion of the total contract price is included in sales in the proportion
that costs incurred to date bear to total estimated costs at completion. The
impact of periodic revisions in costs and estimated profit is reflected in the
accounting period in which the facts become known.
For all other contracts, revenue is recognized upon completion of the
contract or upon shipment of identifiable units. The entire amount of ultimate
losses estimated to be incurred upon completion of contracts is charged to
income when such losses become known.
Contract progress billings are based upon contract provisions for customer
advance payments, contract costs incurred, and completion of specified contract
objectives. Progress billing balances at December 31, 1998 amounted to
$2,092,000. Progress billings are netted against unbilled revenue on the
consolidated balance sheet. Contracts may provide for customer retainage of a
portion of amounts billed until contract completion. All contract retainage of
$370,000 at December 31, 1998 matures in 1999. Contract retainage is included
on the consolidated balance sheet as part of accounts receivable. Substantially
all of the accounts receivable and unbilled revenue balances at December 31,
1998 are expected to be collected during 1999, although collection of the
unbilled revenue is dependent upon the Company meeting performance milestones.
USE OF ESTIMATES
In preparing its financial statements in accordance with generally
accepted accounting principles, management is required 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 revenues and expense during the reported periods. Actual results
could differ from those estimates. One such area where the use of estimates
could have a significant impact on future results is estimated costs at
completion and, in some cases, contract value on the Company's larger long-term
type contracts. During 1998, changes to these estimates on the Company's larger
long-term type contracts had no negative significant aggregate impact, except
for a contract with the Government of Turkey to develop a Turkish mobile radar
complex ("TMRC"). For TMRC contract, there was a negative impact in 1998 of
approximately $21.5 million pre-tax resulting from increases of estimates of
costs to complete the contract. Of this amount, approximately $19.8 million
resulted from the arbitration award to Lockheed Martin Tactical Systems, Inc.
and other contract costs (described in Note B) booked in the first quarter and
$1.7 million related to subsequent increases to estimated costs at completion.
Other areas where use of estimates could have a significant impact on future
results are inventory obsolescence, accounts receivable bad debts, warranties,
claims and litigation.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalent
balances at December 31, 1998 amounted to $5,861,000. All of this cash and cash
equivalents is in high quality banks.
F-37
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted cash and investment securities at December 31, 1998 represents
interest bearing cash collateral required to be maintained against letters of
credit. Approximately $2.8 million of the Company's total cash (restricted and
non-restricted) balances at December 31, 1998 were in foreign banks in Turkey.
Almost all of this cash in Turkey is in dollar denominated instruments. As a
result, there is no material effect of exchange rate changes on cash balances.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) and average cost method which approximates
FIFO.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash equivalents and
receivables. The carrying amounts of these instruments approximate their market
value.
DEPRECIATION AND AMORTIZATION
Depreciation is provided by the straight-line method over the estimated
useful lives of the depreciable assets. Amortization of leasehold improvements
under operating leases is provided over the terms of the related leases or the
asset lives, if shorter. Buildings are depreciated over lives ranging up to 35
years. Machinery and equipment is depreciated over useful lives ranging from 3
to 5 years. Accelerated methods are used for tax purposes.
ADVERTISING, RESEARCH AND DEVELOPMENT COSTS AND INTEREST EXPENSE
The Company expenses advertising costs and research and development costs
as incurred. Advertising costs were $333,000 for 1998. Interest expense for the
year 1998 amounted to $380,000. Interest paid for the year 1998 amounted to
$1,079,000.
INCOME TAXES
The Company accounts for income taxes on the liability method in
accordance with Statement of Financial Accounting Standards (SAS) No. 109,
"Accounting for Income Taxes."
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's United Kingdom subsidiary (most of
which business was sold during 1998 as part of the discontinued Displays
Division described in Note C) were translated from the local currency into U.S.
dollars at year-end rates while income and expenses were translated at the
weighted average exchange rate for the year. The resulting unrealized net
translation losses were shown as a separate component of stockholders' equity
in years prior to 1998. These translation losses became realized in 1998 and
were written off as part of the loss on the sale of the discontinued operation.
The translation effects of the Turkish subsidiary are reflected in the
statements of operations because of the high inflation in the Turkish economy.
Pretax income includes foreign currency translation losses relating to the
Turkish subsidiary of $148,000 for 1998.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic earnings
per share excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average common shares
F-38
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
outstanding during the period. Diluted earnings per share takes into account
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. Weighted
average shares outstanding for 1998 were 5,215,331.
The number of shares to be purchased from outstanding stock options were
not included in the computation of 1998 diluted loss per share. The number of
shares and the corresponding weighted average exercise prices for each period
are shown in Note I. Also, warrants for 200,000 shares at a weighted exercise
price of $12.65 were not included in the computation of loss per share for
these periods.
WARRANTY COSTS
The usual warranty period on the Company's contracts and products is one
year, which is provided for in warranty accruals.
LONG-LIVED ASSETS
The Company continually reviews long-lived assets to assess recoverability
from future operations using undiscounted cash flows. Impairments would be
recognized in operating results if a permanent dimunition in value had
occurred.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
which the Company adopted in 1998 with no resulting material impact on the
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which was adopted in 1998. See note N
for this disclosure.
NOTE B--CONTRACT ARBITRATION
As previously reported in 1998, the Company previously submitted to
arbitration its dispute with a subcontractor (Lockheed Martin Tactical Systems,
Inc.) on the TMRC contract with the Government of Turkey. On April 10, 1998,
the arbitration panel awarded Lockheed $17,162,000 plus interest. As of
December 31, 1998, the award and interest was paid in full. The consolidated
statement of operations caption "Cost of sales-contract arbitration and
related" includes this charge as well as other related costs on the TMRC
contract aggregating $19,814,000.
NOTE C--SALE OF DIVISIONS
In November 1998, the Company sold its Displays Division business segment
pursuant to a plan adopted in the third quarter 1998. The current and prior
period results of the Displays Division are reported in the accompanying
financial statements in the discontinued operations categories. The Displays
Division was sold for a cash payment of approximately $6.4 million. The sale
resulted in a loss of $1,390,000, and an operating loss of $1,200,000 (pre-tax
and after tax) was incurred during the fourth quarter phase out period. These
losses included accruals of $570,000 at December 31, 1998 for estimated costs
in connection with the sale, including severance, employee incentives and legal
fees. The net assets sold consisted primarily of inventories and accounts
receivable. Summarized results of the Displays Division for the year ended
December 31, 1998 were as follows:
F-39
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
Net sales ............................................. $ 13,326,000
Costs and expenses .................................... 17,395,000
------------
Loss before income taxes .............................. (4,069,000)
Provision (benefit) for income taxes .................. --
------------
Net loss from discontinued operations ................. (4,069,000)
Loss from sale of discontinued operations ............. (2,590,000)
------------
Total loss related to discontinued operations ......... $ (6,659,000)
============
</TABLE>
In October 1998, the Company sold the West Coast Microwave Division
component of its Communications segment for a cash payment of approximately
$8.8 million. The sale resulted in a gain of $5.6 million (pre-tax and after
tax) which is reported in the accompanying statement of operations.
NOTE D--INVENTORIES
Inventories consist of:
<TABLE>
<S> <C>
Raw materials ............ $ 4,810,000
Work in process .......... 4,593,000
Finished product ......... 958,000
-----------
$10,361,000
===========
</TABLE>
NOTE E--PROPERTY, PLANT, AND EQUIPMENT
The Company's investment in property, plant, and equipment is shown below.
<TABLE>
<S> <C>
Land ................................................... $ 1,456,000
Buildings .............................................. 9,511,000
Machinery and equipment ................................ 22,523,000
-----------
33,490,000
Less accumulated depreciation and amortization ......... 20,903,000
-----------
$12,587,000
===========
</TABLE>
NOTE F--CREDIT ARRANGEMENT
At December 31, 1998, $7.2 million of letters of credit were outstanding
for various foreign contracts under a credit line which is renewable annually.
The letters of credit have been issued to foreign entities principally to
guarantee performance under contracts or the return of advance payments. The
Company's real estate has been pledged as security against these letters of
credit which carry a commission rate of 1.5% annually. At December 31, 1998 the
Company is in default of certain financial covenants against this agreement.
The bank has placed a prospective $5 million limit on this credit line. As a
result, new letters of credit cannot be issued until existing ones are
liquidated to bring the current balance under $5 million.
F-40
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also at December 31, 1998 there was a $7 million of letter of credit
balance open with a foreign bank for the completion of the Company's TMRC
contract with the Government of Turkey. Cash collateral of $2.5 million was on
deposit with this bank at December 31, 1998 as security for this letter of
credit which carries a commission rate of .8%. This letter of credit was
originally $49 million in 1990. The letter of credit has been liquidated in the
past based on collections against the contract. The customer is currently
requesting that further liquidation of the balance ($7 million) be based on
progress by the Company in satisfying certain remaining contractual obligations
rather than collections against the contract. The Company is currently seeking
an appropriate source to establish a replacement letter of credit along the
lines requested by the customer.
In addition, there was an outstanding letter of credit against a foreign
contract at December 31, 1998 for approximately $1 million which was 100%
secured with cash collateral.
The weighted average interest rates on short-term borrowings outstanding
at December 31, 1998 were 10%. Subsequent to year end, all short-term
borrowings were paid off.
NOTE G--ENVIRONMENTAL REMEDIATION
The Company, along with others, was responsible for the costs of cleanup
under an order of the State of California at a site leased by the Company prior
to 1984. Cleanup of the site was completed during 1996 and site monitoring over
a thirty (30) year period commenced in 1997. The estimated site monitoring
costs to be expended over the remaining 28 year period are $2.9 million, or
approximately $105,000 per year. The amount to be paid has been included in the
accompanying consolidated balance sheet as an other (non current) liability
discounted at 7% to the expected payment dates.
NOTE H--STOCKHOLDERS' EQUITY
The changes in common stock, additional paid-in capital, and retained
earnings during the year 1998 were as follows:
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN RETAINED
PAR $1 CAPITAL EARNINGS
------------- ------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1997
(5,208,800 common shares) .................................. $5,209,000 $3,141,000 $ 81,411,000
Issuance of 1,136 shares pursuant to a stock grant ........... 1,000 18,000 --
Issuance of 11,000 shares in payment of employee
bonuses .................................................... 11,000 84,000 --
Net loss ..................................................... -- -- (26,307,000)
---------- ---------- -------------
Balance, December 31, 1998 (5,220,936 common shares) ......... $5,221,000 $3,243,000 $ 55,104,000
========== ========== =============
</TABLE>
NOTE I--STOCK OPTIONS AND WARRANTS
Pursuant to stock option plans, the Company has granted certain officers,
directors, and key employees options to purchase shares of its common stock.
Options granted under the plans must have an option price determined by the
Board of Directors, but in any event, not less than the fair market value of
the stock on the date of grant. Generally, options become exercisable
one-fourth annually beginning one year after grant, on a cumulative basis, and
expire ten years after grant.
F-41
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There is no charge to income with respect to stock options under the
plans. A summary of the changes in options during 1998 follows:
<TABLE>
<CAPTION>
SHARES
SHARES UNDER WEIGHTED AVERAGE AVAILABLE FOR
OPTION EXERCISE PRICE OPTION
-------------- ------------------ --------------
<S> <C> <C> <C>
At December 31, 1997 .................... 496,113 $10.89 245,797
Options granted:
Option plan ............................ 325,400 $ 9.25 (325,400)
Options cancelled ....................... (396,963) $10.85 396,963
Cancellations of authorizations ......... -- -- (9,322)
-------- ------ --------
At December 31, 1998 .................... 424,550 $ 9.67 308,038
======== ====== ========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
TOTAL SHARES UNDER OPTION SHARES EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------- ------------- -------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 8.00 -- $12.00 411,300 9.2 $ 9.54 30,431 $10.30
$12.01 -- $16.75 13,250 8.7 $13.59 8,770 $13.20
------- ------
424,550 39,201
======= ======
</TABLE>
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS
123). It applies APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than
restricted stock. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by FAS 123, the Company's net income
and earnings per share would be reduced to the pro forma amounts indicated
below :
<TABLE>
<S> <C> <C>
NET LOSS ............... As reported $ (26,307,000)
Pro-forma $ (27,366,000)
LOSS PER SHARE ......... As reported $ (5.05)
Pro-forma $ (5.25)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of each option grant is estimated on
the date of grant using the Black-Sholes options-pricing model with the
following weighted-average assumptions used for grants in 1998: dividend yield
of 0 percent for all years; expected volatility of 27.9 percent; risk-free
interest rates of 5.36 percent; and expected lives of 5 to 10 years.
In May 1997, the Company issued warrants with three year expiration dates
for 200,000 shares of its common stock at exercise prices of $12.10 and $13.20
per share. These warrants remain outstanding and have had no impact on the
Company's earnings per share calculations.
F-42
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--TAXES ON INCOME
The recovery of income taxes is shown below. The recovery represents tax
loss carrybacks to earlier years, utilization of foreign tax credits, and other
items.
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
---------------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Current ........... $ (693,000) 0 $516,000 $ (177,000)
Deferred .......... (573,000) 0 0 (573,000)
------------ ------- -------- ----------
$ (1,266,000) 0 $516,000 $ (750,000)
============ ======= ======== ==========
</TABLE>
The components of deferred income tax balances follow.
<TABLE>
<S> <C>
Federal net operating loss carryforward .............. $ 4,984,000
Valuation reserve against net operating loss ......... (4,984,000)
Contract accounting .................................. 835,000
Excess of tax over book depreciation ................. 1,306,000
Inventory valuation .................................. (163,000)
Environmental clean-up ............................... (402,000)
Other, net ........................................... (1,099,000)
------------
Total Deferred Liability ............................. $ 477,000
============
</TABLE>
A reconciliation between the federal statutory rate and the effective
income tax rate (computed by dividing income taxes by income before income
taxes) is as follows:
<TABLE>
<S> <C>
Federal statutory rate ................................................. (34.0)%
Effects of higher foreign income taxes, including dividends of a foreign
subsidiary and foreign tax credits ................................... 13.6
Valuation allowance due to net operating loss .......................... 18.4
Other, net ............................................................. (.8)
-----
Effective income tax rate .............................................. (2.8)%
=====
</TABLE>
Income tax refunds, net of payments, amounted to $1,802,000 in 1998.
At December 31, 1998 the Company had available approximately $14.7 million
of unused net operating losses which expire in 20 years and approximately $2.1
million of unused foreign tax credits which expire in 2002. Pre-tax income from
foreign operations is shown under Note K below.
NOTE K--NATURE OF OPERATIONS, EXPORT SALES, MAJOR CUSTOMERS, AND
FOREIGN OPERATIONS
The Company designs, engineers, manufactures, markets, distributes, and
installs technologically advanced communications products and systems which are
sold worldwide. Aydin generates approximately 30% of its sales from standard
products and systems and the balance of its sales from custom-designed systems
and equipment based on customers' specific requirements. Aydin offers a broad
range of products due to its ability to combine analog microwave engineering
methods with digital techniques and software.
F-43
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Export sales by geographic area are as follows:
<TABLE>
<S> <C>
Asia ....................... $ 3,075,000
Africa ..................... 3,235,000
Europe ..................... 15,425,000
North America .............. 1,982,000
South America .............. 1,116,000
Other ...................... 39,000
-----------
Total export sales ......... $24,872,000
===========
</TABLE>
The U.S. Government and the Government of Turkey were the only customers
to whom sales exceeded 10% of consolidated sales during any of the past three
years. Sales to U.S. Government agencies, principally the Department of
Defense, amounted to $26,567,000 in 1998. Sales to the Government of Turkey
amounted to $9,575,000 in 1998. Foreign assets included in the consolidated
balance sheet amounted to $10.9 million at December 31, 1998. Of $2.8 million
at December 31, 1998 are cash and short-term investments of the Company's
Turkish subsidiary consisting primarily of U.S. dollar denominated
interest-bearing time deposits. Foreign sales and pretax loss for 1998 were
$5.7 million and $7.4 million, respectively. Most of the loss was from
increases in estimated costs at completion on the TMRC contract with the
Government of Turkey at the Turkish subsidiary.
NOTE L--RESTRUCTURING COSTS
During the first quarter of 1998 the Company recorded a restructuring
charge of $1.5 million as a result of a decision to close its Raytor Division
($961,000) and downsize the corporate staff ($587,000) in line with expected
declines in backlog and sales levels. The restructuring was completed during
the third quarter. Of the total charge of $1.5 million, approximately $.6
million was for cash outlays and $.9 million was for non-cash asset write-offs.
The major charges consisted of: severance benefits for 60 employees ($.6
million); facility exit costs ($.2 million); and write-offs of inventory,
equipment, and receivables ($.7 million).
NOTE M--COMMITMENTS AND CONTINGENCIES
The Company's contracts with the U.S. Government are subject to audit by
the government and price adjustment under certain circumstances. The Company
also has receivables due from the U.S. Government on certain contracts whose
collectability is dependent on the Company prevailing in its positions.
Management believes it has sufficient reserves to cover such matters. However,
unfavorable outcomes could have a material impact on future results of
operations.
Future annual minimum rental payments required under operating leases that
have lease terms in excess of one year at December 31, 1998 are $45,000 for
each of the years 1999 through 2003.
NOTE N--SEGMENT REPORTING
Aydin adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about the operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company's current chief operating decision maker is the
President and Chief Operating Officer, formerly it was the Chief Executive
Officer. The operating segments are managed separately by operating unit heads
reporting to the chief operating decision maker.
F-44
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's reportable operating segments include the Telemetry
Division, the Communications Division and the Turkish Operations. The Telemetry
segment designs, manufactures and markets components and systems worldwide for
flight and ground testing for military and commercial applications. The
Communications segment designs, manufactures and markets data and voice
communication systems and products worldwide for commercial and military
markets. The Turkish segment consists of the 100% owned Turkish subsidiary
(Aydin Yazilim) and includes a US support program office. This segment designs,
manufactures and markets a range of communications products. This segments main
area of business is the design and manufacture of a command, control and
communications system (the TMRC program) for the Turkish military. The other
segment manufactures and markets printed circuit boards used in commercial
products.
The accounting policies used for the operating segments are the same as
those described in the summary of significant accounting policies in Note A.
<TABLE>
<CAPTION>
COMMUNI- TURKISH
TELEMETRY CATIONS OPERATIONS OTHER TOTAL
-------------- -------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
1998
Net sales from external
customers ................. $43,818,000 $16,434,000 $ 9,575,000 $3,013,000 $ 72,840,000
Net sales-intersegment ...... -- 69,000 -- 1,014,000
Depreciation ................ 572,000 468,000 383,000 124,000 1,547,000
Interest income ............. -- -- 577,000 -- 577,000
Interest expense ............ -- -- -- -- 0
Pre-tax income (loss) ....... 1,460,000 (134,000) (22,122,000) 436,000 (20,360,000)
Segment assets .............. 33,531,000 20,003,000 19,252,000 2,018,000 74,804,000
Capital expenditures ........ 335,000 368,000 392,000 306,000 1,401,000
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable lines in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
DISPOSED DIVISIONS
-------------------------------
ACCOUNTED FOR
AS DISCONTINUED
REPORTABLE OPERATION ELIMINATIONS CONSOLIDATED
SEGMENT TOTAL TOTAL (A) & CORPORATE TOTAL
--------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1998
Net sales from external
customers ................... $ 72,840,000 $ 20,345,000 $ (13,326,000) $ (1,971,000) $ 77,888,000
Depreciation .................. 1,547,000 407,000 (174,000) 31,000 1,811,000
Interest income ............... 577,000 504,000 1,081,000
Interest expense .............. 0 380,000 380,000
Pre-tax income (loss) ......... (20,360,000) (6,718,000) 6,659,000 21,000 (20,398,000)
Segment assets ................ 74,804,000 846,000 6,475,000 82,125,000
Capital expenditures .......... 1,401,000 135,000 (36,000) (90,000) 1,410,000
</TABLE>
(A) Represents amount pertaining to the Displays Division sold in
November 1998. These amounts have been included in the discontinued
operations classifications in the financial statements.
F-45
<PAGE>
AYDIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--SUBSEQUENT EVENT
On March 1, 1999, Aydin entered into an Agreement and Plan of Merger among
Aydin, L-3 and Angel Acquisition Corporation, a wholly owned subsidiary of L-3
("Angel"), pursuant to which Angel launched a tender offer on March 5, 1999 to
acquire all the issued and outstanding common stock of Aydin for $13.50 per
share of common stock. L-3 and Angel expect to complete the tender offer and
acquisition in April 1999.
F-46
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Unaudited Condensed
Consolidated Financial Statements
As of June 30, 1998 and for the
Six Months Ended June 30, 1998 and 1997
F-47
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Current Assets
Cash ............................................................. $ 197,000
Accounts receivable, less allowance for doubtful accounts of
$582,000........................................................ 25,931,000
Inventories ...................................................... 28,174,000
Unbilled costs ................................................... 5,259,000
Deferred income tax benefit ...................................... 6,100,000
Prepaid expenses and other ....................................... 2,596,000
------------
Total current assets ............................................. 68,257,000
Property, plant and equipment--at cost $ 15,663,000
Less accumulated depreciation and amortization ................... (2,782,000) 12,881,000
------------
Deferred Income Tax Benefit ....................................... 927,000
Intangible Assets--net ............................................ 78,035,000
Other Assets ...................................................... 366,000
------------
$160,466,000
============
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities
Current maturities of long-term debt ............................. $ 6,250,000
Accounts payable ................................................. 12,428,000
Accrued expenses and other liabilities ........................... 21,808,000
------------
Total current liabilities ........................................ 40,486,000
Long-term debt, less current maturities ........................... 69,745,000
Postretirement benefits liability ................................. 25,500,000
Pension benefits liability ........................................ 4,731,000
Other liabilities ................................................. 435,000
Commitments and contingencies
Stockholders' equity
Preferred stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 38,010 shares, at stated value ......... $ 3,801,000
Common stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 99,000 shares .......................... 990
Additional paid-in capital ....................................... 2,422,010
Carryover basis adjustment ....................................... (2,151,000)
Net earnings ..................................................... 15,785,000
Cumulative translation adjustment ................................ (289,000) 19,569,000
------------ ------------
$160,466,000
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-48
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net revenues ..................................................... $105,505,000 $ 50,782,000
Cost of goods sold ............................................... 76,429,000 33,929,000
------------ ------------
Gross profit ..................................................... 29,076,000 16,853,000
------------ ------------
Operating expenses
Selling, general and administrative ............................. 14,132,000 5,525,000
Engineering, research and development ........................... 3,853,000 3,942,000
------------ ------------
Actuarial and other changes to postretirement and defined benefit
pension plans ................................................. -- (2,663,000)
------------ ------------
17,985,000 6,804,000
------------ ------------
Earnings from operations ........................................ 11,091,000 10,049,000
------------ ------------
Other income (expenses)
Interest expense, net ........................................... (4,951,000) (554,000)
Earnings before income taxes .................................. 6,140,000 9,495,000
Income tax expense ............................................... 2,272,000 2,460,000
------------ ------------
Net earnings .................................................. $ 3,868,000 $ 7,035,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ....................................................... $ 3,868,000 $ 7,035,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization ...................................... 2,559,000 529,000
Changes in operating assets and liabilities, net of effect of
acquisition of SPD Technologies Inc.
Accounts receivable .............................................. (6,544,000) (2,868,000)
Inventories ...................................................... 7,036,000 (386,000)
Unbilled costs ................................................... (644,000) 827,000
Prepaid expenses and other ......................................... (793,000) (511,000)
Accounts payable ................................................... 1,332,000 (618,000)
Pension and postretirement benefits liability ...................... (1,033,000) (2,956,000)
Accrual expenses and other liabilities ............................. 1,776,000 880,000
Income taxes payable ................................................ 1,284,000 703,000
------------ -------------
Net cash provided by operating activities ........................... 8,841,000 2,635,000
------------ -------------
Cash flows from investing activities
Acquisition of SPD Technologies Inc., net of cash acquired ......... (791,000) --
Capital expenditures ............................................... (2,950,000) (914,000)
------------ -------------
Net cash (used in) investing activities .......................... (3,741,000) (914,000)
------------ -------------
Cash flows from financing activities
Proceeds from the issuance of common and preferred stock ............ 1,000 --
Principal payments on short-term debt ............................... (2,955,000) (1,978,000)
Principal payments on long-term debt ................................ (2,500,000) (750,000)
------------ -------------
Net cash (used in) financing activities .......................... (5,454,000) (2,728,000)
------------ -------------
Net (decrease) in cash ........................................... $ (354,000) $ (1,007,000)
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SPD Technologies Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and market electrical power delivery systems and components and
vehicular control systems, focused on switching and distribution and frequency
and voltage conversion for military, commercial marine, rail transportation,
utility and commercial specialty markets in the United States and overseas.
SPD's products encompass the entire electrical distribution (power delivery)
system utilized on self-contained power systems such as ships and rail cars.
In January 1997, SPD Holdings Inc., a company formed by an investor group
and certain minority stockholders of SPD Technologies Inc., the predecessor
company, acquired all of the outstanding stock of the Company. The acquisition
was accounted for as a purchase and was financed by the issuance of common and
preferred stock and bank borrowings. As a result of certain minority
shareholders of the predecessor company acquiring ownership in SPD Holdings
Inc., the Company recorded a carryover basis adjustment to stockholders' equity
of $(2,151,000). During 1997, SPD Holdings Inc. changed its name to SPD
Technologies Inc.
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 June 30, 1998 and 1997 are
not necessarily indicative of the results that may be expected for the years
ended December 31, 1997 and 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's financial
statements for the year ended December 31, 1997.
NOTE B--INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist
of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
Materials and purchased parts ...................................... $10,730,000
Work-in-process, primarily on U.S. Government contracts ............ 24,064,000
Finished goods ..................................................... 1,703,000
-----------
36,497,000
Less progress billings related to long-term contracts and programs . 8,323,000
-----------
$28,174,000
===========
</TABLE>
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE C--SUBSEQUENT EVENT
Pursuant to a definitive agreement entered into on July 2, 1998, L-3
Communications Corporation acquired the stock of the Company on August 13, 1998
for $230,000,000, subject to adjustment based on closing net assets, as
defined. In connection with the sale of the Company, as provided for in the
Company's stock option plan, on August 13, 1998 the vesting date for all
outstanding stock options of the Company was accelerated and the Company
recorded a related $22,078,000 pre-tax compensation charge.
F-51
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Consolidated Financial Statements and
Report of Independent Certified
Public Accountants
December 31, 1997
F-52
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SPD Technologies Inc.:
We have audited the accompanying consolidated balance sheet of SPD
Technologies Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of earnings 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 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 consolidated financial position of SPD
Technologies Inc. and Subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
New York, New York
February 25, 1998
F-53
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C> <C>
Current assets
Cash ............................................................. $ 551,230
Accounts receivable, less allowance for doubtful accounts of
$772,000........................................................ 19,791,544
Inventories ...................................................... 35,209,738
Unbilled costs ................................................... 4,616,034
Deferred income tax benefit ...................................... 6,100,000
Prepaid expenses and other ....................................... 1,219,101
------------
Total current assets ........................................... 67,487,647
Property, plant and equipment--at cost
Land ............................................................. $ 150,651
Building and improvements ........................................ 826,754
Machinery and equipment .......................................... 8,701,809
Furniture and fixtures ........................................... 783,851
Leasehold improvements ........................................... 2,469,130
------------
12,932,195
Less accumulated depreciation and amortization ................... (1,626,808) 11,305,387
------------ ------------
Deferred income tax benefit ....................................... 927,466
Intangible assets--net ............................................ 78,434,265
Other assets ...................................................... 726,932
------------
$158,881,697
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt ............................. $ 6,305,700
Accounts payable ................................................. 11,096,002
Postretirement benefits liability ................................ 3,500,000
Pension benefits liability ....................................... 3,049,508
Accrued expenses and other liabilities ........................... 18,808,646
Income taxes payable ............................................. 229,479
------------
Total current liabilities ...................................... 42,989,335
Long-term debt, less current maturities ........................... 75,403,527
Postretirement benefits liability ................................. 22,681,000
Pension benefits liability ........................................ 2,033,797
------------
143,107,659
------------
Commitments and contingencies
Stockholders' equity
Preferred stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 38,010 shares, at stated value ......... $ 3,801,000
Common stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 99,000 shares .......................... 990
Additional paid-in capital ....................................... 2,422,170
Carryover basis adjustment ....................................... (2,151,000)
Net earnings ..................................................... 11,916,021
Cumulative translation adjustment ................................ (215,143) 15,774,038
------------ ------------
$158,881,697
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-54
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net revenues .................................................................... $130,039,536
Cost of goods sold .............................................................. 86,533,682
------------
Gross profit ................................................................... 43,505,854
------------
Operating expenses
Selling, general and administrative ............................................ 15,749,504
Engineering, research and development .......................................... 8,500,920
Amortization of intangible assets .............................................. 1,458,755
Actuarial and other changes to postretirement and defined benefit pension plans (5,332,680)
------------
20,376,499
------------
Earnings from operations ..................................................... 23,129,355
Other income (expenses)
Interest expense, net .......................................................... (4,842,334)
------------
Earnings before income taxes ................................................. 18,287,021
Income taxes
Current ........................................................................ 3,100,000
Deferred ....................................................................... 3,271,000
------------
6,371,000
------------
Net earnings ................................................................. $ 11,916,021
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-55
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net earnings .......................................................................... $ 11,916,021
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization of property, plant and equipment ...................... 1,626,808
Amortization of intangible assets ................................................... 1,458,755
Deferred income taxes ............................................................... 3,271,000
Actuarial and other changes to postretirement and defined benefit pension plans ..... (5,332,680)
Provision for losses on accounts receivable ......................................... 643,000
Changes in operating assets and liabilities, net of effect of acquisitions of SPD
Technologies Inc. and Power Paragon Inc.
Accounts receivable ................................................................ 664,814
Inventories ........................................................................ (6,995,194)
Unbilled costs ..................................................................... 2,484,834
Prepaid expenses and other ......................................................... 923,808
Accounts payable ................................................................... 1,897,353
Pension and postretirement benefits liability ...................................... (2,893,879)
Other liabilities .................................................................. 2,055,969
-------------
Net cash provided by operating activities ........................................ 11,720,609
-------------
Cash flows from investing activities
Acquisition of SPD Technologies Inc. and Power Paragon Inc., net of cash acquired ..... (84,920,664)
Capital expenditures .................................................................. (1,886,136)
-------------
Net cash used in investing activities .............................................. (86,806,800)
-------------
Cash flows from financing activities
Proceeds from the issuance of common and preferred stock .............................. 3,122,000
Net proceeds from long-term debt ...................................................... 96,954,761
Principal payments on long-term debt .................................................. (22,718,315)
Payment of deferred financing costs ................................................... (1,721,025)
-------------
Net cash provided by financing activities .......................................... 75,637,421
-------------
Net increase in cash ............................................................... $ 551,230
=============
</TABLE>
The accompanying notes are an integral part of this statement.
F-56
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
SPD Technologies Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and market electrical power delivery systems and components and
vehicular control systems, focused on switching and distribution and frequency
and voltage conversion for military, commercial marine, rail transportation,
utility and commercial specialty markets in the United States and overseas.
SPD's products encompass the entire electrical distribution (power delivery)
system utilized on self-contained power systems such as ships and rail cars.
In January 1997, SPD Holdings Inc., a company formed by an investor group
and certain minority stockholders of SPD Technologies Inc., the predecessor
company, acquired all of the outstanding stock of the Company. The acquisition
was accounted for as a purchase and was financed by the issuance of common and
preferred stock and bank borrowings. As a result of certain minority
shareholders of the predecessor company acquiring ownership in SPD Holdings
Inc., the Company recorded a carryover basis adjustment to stockholders' equity
of $(2,151,000). During 1997, SPD Holdings Inc. changed its name to SPD
Technologies Inc.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPD and its
wholly-owned subsidiaries, SPD Electrical Systems, Inc., SPD Switchgear Inc.,
PacOrd Inc., Henschel, Inc., Power Paragon Inc. and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
2. REVENUE RECOGNITION
Revenues for production-type contracts are recognized as units are shipped
or are substantially ready to be shipped subject to customer inspection.
Revenues on long-term, production-type contracts, service contracts and
engineering and development contracts are recognized on the
percentage-of-completion method, whereunder the estimated sales value is
determined on the basis of contract milestones achieved and costs are
recognized on the basis of contract percentage completions (as measured by
applying the most recent estimated profit margin for the entire contract at
completion to the revenues recognized based on contractual milestones
achieved).
The Company believes its approach is conservative and generally results in
lower revenues and gross profits in the early stages of a contract when
estimates are more susceptible to change.
Sales under cost reimbursement contracts are recorded as costs are
incurred and include estimated earned fees proportionate to total estimated
costs. The fees under certain government contracts may be increased or
decreased in accordance with cost or performance incentive provisions, which
measure actual performance against established targets or other criteria. Such
incentive fee awards or penalties are included in sales at the time the amounts
can be reasonably determined.
Generally, sales and earnings on long-term government contracts are
determined on a contract-by-contract basis, based on estimates that are
reviewed and revised periodically and adjustments to recognized sales and
earnings resulting from such revisions are recorded on a cumulative basis in
the period in which they are identified. Provisions for anticipated losses are
made in the period in which they first become determinable.
3. CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with original
maturities of less than three months as cash equivalents.
F-57
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
4. INVENTORIES
Inventories are stated at the lower of cost or market with appropriate
provision to reduce excess and obsolete inventory to net realizable values.
Generally, the Company values inventory at cost, which approximates actual on a
first-in, first-out basis and the weighted moving average method. One
subsidiary values inventory related to government contracts to include all
costs identified with the contract and an allocation of all other indirect
costs, including marketing, general and administrative, and other expenses.
5. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization of property, plant and equipment are
computed by the straight-line method over the estimated useful lives of the
assets for financial reporting purposes and straight-line and accelerated
methods for tax reporting purposes.
6. INTANGIBLE ASSETS
Goodwill is being amortized on a straight-line basis over forty years.
Deferred financing costs are being amortized over the five-year term of the
loan agreement. The Company evaluates goodwill on an annual basis for possible
impairment based on the expected future cash flows of the businesses acquired.
7. INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to postretirement benefits other
than pensions, pension costs, depreciation, inventory and various accrued
expenses.
8. FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's German subsidiaries are
translated into U.S. dollars at current exchange rates in effect at the
reporting date. Income statement items are generally translated at average
exchange rates prevailing during the year. The resulting translation
adjustments are recorded as a separate component of stockholders' equity. Gains
or losses resulting from foreign currency transactions are included in the
consolidated statement of earnings as incurred.
9. ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE B--ACQUISITION OF POWER PARAGON INC.
At the close of business on June 30, 1997, SPD acquired all of the
outstanding stock of Power Paragon Inc. ("PPI") and subsidiaries (formerly
known as PTS Holdings, Inc. and subsidiaries). PPI develops and manufactures
electrical power systems and components for military and commercial specialty
applications in the United States and overseas. The acquisition was financed
principally by bank borrowings. The acquisition has been accounted for as a
purchase and, accordingly, the results of
F-58
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE B--ACQUISITION OF POWER PARAGON INC. (CONTINUED)
operations of PPI are included in the consolidated financial statements from
the date of acquisition. In lieu of cash, certain minority stockholders of PPI
exchanged options for the purchase of stock in PPI for options to purchase
shares of the Company's common stock. The fair value of the PPI options
exchanged, totalling approximately $2,324,000, was recorded as additional
paid-in capital at the date of the acquisition.
NOTE C--INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist
of the following:
<TABLE>
<S> <C>
Materials and purchased parts ..................................... $ 8,939,257
Work-in-process, primarily on U.S. Government contracts ........... 33,786,558
Finished goods .................................................... 1,874,897
-----------
44,600,712
Less progress billings related to long-term contracts and programs 9,390,974
-----------
$35,209,738
===========
</TABLE>
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE D--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Goodwill .............................. $ 78,171,995
Deferred financing costs .............. 1,721,025
------------
79,893,020
Less accumulated amortization ......... (1,458,755)
------------
$ 78,434,265
============
</TABLE>
NOTE E--LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Term loan A payable in quarterly installments of principal plus interest at a
variable rate (9.5% at December 31, 1997) maturing June 30, 2002 ........... $37,550,000
Term loan B payable in quarterly installments of principal plus interest at a
variable rate (9.75% at December 31, 1997) maturing June 30, 2004 .......... 24,950,000
Revolving loan payable bearing interest at a variable rate (9.5% at
December 31, 1997) maturing June 30, 2002 .................................. 18,949,707
Capital lease obligation payable in monthly installments of $6,261 through
January 2002 less amount representing interest of $47,285................... 259,520
-----------
81,709,227
Less current maturities ...................................................... 6,305,700
-----------
$75,403,527
===========
</TABLE>
F-59
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE E--LONG-TERM DEBT (CONTINUED)
Substantially all of the assets and capital stock of the Company's
subsidiaries are pledged as collateral for borrowings under the term and
revolving loans. The loan agreement limits the payment of dividends and
provides for mandatory prepayments based upon excess cash flow, as defined. The
agreement also contains various restrictive financial covenants including
interest coverage and leverage ratios and limitations on annual capital
expenditures. Commencing January 1, 1998, the Company has the option to elect a
fixed rate of interest based on LIBOR. At December 31, 1997, approximately
$16,000,000 is available on the revolving loan payable.
The following is a summary of the annual maturities of long-term debt:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------
<S> <C>
1998 $ 6,305,700
1999 7,561,100
2000 8,816,100
2001 10,320,300
2002 29,081,000
Thereafter 19,625,027
-----------
$81,709,227
===========
</TABLE>
NOTE F--COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its business utilizing
leased facilities and equipment with terms lasting through June 2009. The terms
of one principal facility lease include an option to purchase the leased
premises based on 50% of the fair market value of the land and 100% of the fair
market value of the building. The Company can renew the lease for two
additional five-year terms.
At December 31, 1997, future minimum payments under noncancellable
operating leases with remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------
<S> <C>
1998 $ 4,086,000
1999 3,870,000
2000 2,892,000
2001 2,488,000
2002 2,464,000
Thereafter 7,942,000
-----------
$23,742,000
===========
</TABLE>
Rent expense for operating leases was approximately $3,344,000 for the
year ended December 31, 1997.
As a defense contractor for the U.S. Government, the books, records and
other supporting documentation of the Company used to establish certain
contract prices are subject to audit to determine the allowability and
reasonableness of costs. The Company routinely undergoes audits by the
Government on both a pre-award and post-award basis.
F-60
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE F--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company contributed approximately $1,000 in 1997 to multiemployer
pension plans for employees covered by collective bargaining agreements. Under
the Multiemployer Pension Plan Amendments Act of 1980, if the plan terminates
or the Company withdraws, the Company could be subject to a "withdrawal
liability."
NOTE G--PREFERRED STOCK AND COMMON STOCK WARRANT AND OPTIONS
The preferred stock has a stated value of $100 per share and provides for
cumulative dividends at 8%. All shares of preferred stock are subject to
mandatory redemption at the stated value in the event of a sale of securities
of the Company or a sale of substantially all of the assets or a significant
subsidiary of the Company.
In connection with the acquisition discussed in Note A, the Company issued
a warrant for the purchase of 1,000 shares of common stock at an exercise price
of $1.00 to the principal stockholder of the Company. The warrant expires on
December 31, 2006.
In connection with the acquisition discussed in Note B, the Company issued
options for the purchase of 4,397 shares of the Company's common stock at an
exercise price of $68.37 per share. The options are exercisable in four years
or if the Company is acquired. The Company issued additional options to acquire
an aggregate of 14,740 Class B Nonvoting common shares to employees and
directors. The options are exercisable at $1.00 per share and expire on July 1,
2007. These options become exercisable only upon the closing of an initial
public offering or a sale of the Company for an amount in excess of a "minimum
threshold amount." One-half of the options vest in 12 1/2% increments over the
initial four-year period. The remaining one-half of the options vest in four
equal installments beginning on December 31, 1998, based upon the attainment of
certain performance goals.
The Company has determined that a compensation charge will be recorded
once it is determined that it is likely that the options will become
exercisable, as defined above. The amount of the compensation charge will be
based upon the difference between the fair value of the shares of the Company's
common stock at the date of exercise and the exercise price. No compensation
charge has been recorded as of December 31, 1997.
NOTE H--POSTRETIREMENT BENEFITS
1. PENSION PLAN
Substantially all the employees of the Company are covered under two
defined benefit pension plans in the United States and one defined benefit plan
in Germany. The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheet at December 31, 1997:
F-61
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
UNITED STATES GERMANY
--------------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations including vested benefits in
the United States of $61,292,666 and in Germany of $325,971 ............... $61,698,595 $494,879
=========== ========
Projected benefit obligation for services rendered to date ................. $65,881,023 $682,412
Plan assets at fair value, primarily fixed income investments and
common stocks ............................................................. 62,312,893 --
----------- --------
Projected benefit obligation in excess of plan assets -- pension liability . $ 3,568,130 $682,412
=========== ========
</TABLE>
<TABLE>
<CAPTION>
UNITED STATES GERMANY
--------------- ----------
<S> <C> <C>
Net periodic pension cost includes the following components:
Service cost -- benefit earned during the year ............. $ 1,562,196 $21,731
Interest cost on projected benefit obligation .............. 4,956,982 23,171
Actual (return) on plan assets ............................. (7,532,589) --
Net amortization and deferral .............................. 2,477,131 --
------------ -------
Net periodic pension cost .................................. $ 1,463,720 $44,902
============ =======
</TABLE>
The weighted average discount rates used in determining the present value
of the projected benefit obligations was 8.15%. The projected rate of increase
in future compensation levels was 5% - 5.5%. The expected long-term rate of
return on assets was 8% - 9.5%. The Company's policy is to fund pension cost
under its pension plan to the extent necessary under the Employee Retirement
Income Security Act of 1974. For the year ended December 31, 1997, the Company
recorded actuarial and other gains on its pension plans totalling approximately
$3,239,000 principally resulting from better than projected performance of plan
assets.
2. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain subsidiaries of the Company have a defined benefit postretirement
plan that provides medical benefits for retirees. The Company does not fund
retiree benefits in advance. In 1993, the predecessor company established plan
cost maximums to account for and control future medical costs more effectively.
The Company requires that the projected future cost of providing postretirement
benefits, principally health care, be accrued over the period earned rather
than expensed as claims are incurred.
Net periodic postretirement benefit cost for the year ended December 31,
1997, included the following components:
<TABLE>
<S> <C>
Service cost benefits attributed to service during the period .......... $ 117,000
Interest cost on the accumulated postretirement benefit obligation ..... 2,088,000
Net amortization and deferral .......................................... (2,114,000)
------------
Net periodic postretirement benefit cost ............................... $ 91,000
============
</TABLE>
Cost was determined by application of the terms of the medical plan,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health care
F-62
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
cost trend rates projected at annual rates progressively declining from 12% in
1995. Future benefits for union-represented employees will be capped at the
limits in effect for December 31, 1996. The effect of a 1% annual increase in
these assumed cost trend rates would increase the accumulated postretirement
benefit obligation by approximately $919,000 in 1997; the annual costs would
not be materially affected. For the year ended December 31, 1997, the Company
recognized prior service costs of approximately $4,362,000 relating to
additional costs of salaried employees whose employer contributions do not have
a cap and approximately $6,476,000 of net gains resulting from various
underwriting changes including lower expected medical cost premiums as a result
of more salaried employees choosing HMO's.
The following table provides information on the status of the plan at
December 31, 1997:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation
Retirees ............................................ $18,420,000
Fully eligible active plan participants ............. 5,984,000
Other active plan participants ...................... 1,777,000
-----------
Accumulated postretirement benefit obligation ......... $26,181,000
===========
</TABLE>
Measurement of the accumulated postretirement benefit obligation was based
on an assumed discount rate of 8.15% in 1997. The health care cost trend rate
for salaried employees was 9% in 1997.
3. EMPLOYEES' SAVINGS AND PROFIT-SHARING PLAN
The Company maintains various employee 401(k) savings plans. The Company
contributes a guaranteed minimum of eligible employee contributions. Additional
company contributions are voluntary and at the discretion of the Board of
Directors. Profit-sharing expense was approximately $754,000 for the year ended
December 31, 1997.
4. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has two supplemental executive retirement plans which are
nonqualified plans maintained primarily for the purpose of providing additional
deferred compensation for a select group of management or highly compensated
employees, as defined by the Employee Retirement Income Security Act of 1974.
Participation in, benefits under, and the duration of the plans are subject to
the Company's discretion.
Participants in the plans accrue benefits each fiscal year based on the
Company's discretionary contribution for each participant. The Company has
accrued $132,000 of estimated yearly contributions to be paid for the year
ended December 31, 1997.
In conjunction with the establishment of the plans, the Company
established rabbi trusts to aid in the payment of plan benefits. The trusts are
revocable and the assets contributed to the trusts can only be used to pay
participant benefits, with certain exceptions. Although the rabbi trusts
established are revocable by the Company, the trust agreements provide that,
after a change in control, the rabbi trusts shall not be revocable until all
protected benefits have been paid in full. The assets held in the trusts at
December 31, 1997 (included in other assets) amounted to approximately
$576,000. Earnings on trust assets are allocated to participants' accounts and
are included in the trust assets amount.
F-63
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE I--INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<S> <C>
Currently payable Federal ......... $2,377,000
State ............................. 708,000
Germany ........................... 15,000
----------
3,100,000
----------
</TABLE>
<TABLE>
<S> <C>
Deferred
Federal ................ 2,842,000
State .................. 711,000
Germany ................ (282,000)
---------
3,271,000
---------
$6,371,000
==========
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<S> <C>
Expected provision for Federal income taxes ..................... 34.0%
State and local taxes, net of Federal income tax benefit ........ 5.1
Research and development credits ................................ (4.9)
Amortization of goodwill ........................................ 2.8
Other ........................................................... (2.2)
----
34.8%
====
</TABLE>
Deferred income taxes at December 31, 1997 relate to the following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
---------------- ------------
<S> <C> <C>
Pension and postretirement benefits ............. $ 12,773,000
Net operating loss of German subsidiary ......... 1,245,466
Inventory costs ................................. 2,097,000
Contract costs .................................. $2,663,000
Vacation pay accrual ............................ 1,180,000
Warranty costs .................................. 519,000
Other temporary differences ..................... 2,822,000 318,000
Valuation allowance ............................. (10,628,000)
-------------
$ 10,008,466 $2,981,000
============= ==========
</TABLE>
The Federal income tax returns of PPI for the year ended June 30, 1995 are
under examination by the Internal Revenue Service. As of December 31, 1997, no
adjustments have been proposed.
PPI's subsidiaries in Germany have a net operating loss carryforward of
approximately $2,600,000 which has no expiration date.
F-64
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE J--CASH FLOW INFORMATION
The following is supplemental cash flow information:
<TABLE>
<S> <C>
Cash paid for Interest ......... $2,850,000
Income taxes ................... 4,431,000
</TABLE>
In connection with the acquisitions of SPD Technologies Inc. and Power
Paragon Inc., liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired ......... $161,974,000
Cash paid ............................. 84,921,000
------------
Liabilities assumed ................... $ 77,053,000
============
</TABLE>
NOTE K--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<S> <C>
Accrued employment costs ................... $ 7,365,243
Accrued interest ........................... 2,112,342
Allowance for contract adjustments ......... 2,258,777
Accrued warranties ......................... 1,287,972
Customer advances .......................... 1,315,714
Other current liabilities .................. 4,468,598
-----------
$18,808,646
===========
</TABLE>
F-65
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
December 31, 1996 and 1995
F-66
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SPD TECHNOLOGIES INC.:
We have audited the accompanying consolidated balance sheets of SPD
Technologies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings and accumulated deficit and cash
flows for the years 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 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SPD
Technologies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
New York, New York
February 28, 1997
F-67
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 738,344 $ 689,013
Accounts receivable, less allowance for doubtful accounts of
$825,000 and $1,147,000 in 1996 and 1995, respectively......... 12,536,032 10,570,568
Inventories ..................................................... 15,622,720 13,261,009
Unbilled costs .................................................. 6,896,859 6,146,263
Deferred income tax benefit ..................................... 3,185,000 3,279,000
Prepaid expenses and other ...................................... 185,954 446,548
------------- -------------
Total current assets .......................................... 39,164,909 34,392,401
Equipment and leasehold improvements--at cost
Machinery and equipment ......................................... 15,312,374 13,874,680
Furniture and fixtures .......................................... 2,627,740 1,958,226
Leasehold improvements .......................................... 895,940 815,572
------------- -------------
18,836,054 16,648,478
Less accumulated depreciation and amortization .................. 13,834,973 13,041,802
------------- -------------
5,001,081 3,606,676
------------- -------------
Deferred income tax benefit ...................................... 2,900,000 2,900,000
Intangible assets--net ........................................... 2,476,449 3,473,475
Other assets ..................................................... 211,961 224,016
------------- -------------
$ 49,754,400 $ 44,596,568
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Note payable .................................................... $ 2,187,087 $ 3,604,724
Current maturities of long-term debt ............................ 2,500,000 2,500,000
Accounts payable ................................................ 6,000,531 2,760,861
Accrued employment costs ........................................ 3,902,930 3,182,689
Pension and postretirement benefits liability ................... 6,091,716 8,651,354
Other liabilities and accrued expenses .......................... 7,258,908 5,170,895
Income taxes payable ............................................ 55,100 521,000
------------- -------------
Total current liabilities ..................................... 27,996,272 26,391,523
Long-term debt, less current maturities .......................... 2,500,000 5,000,000
Postretirement benefits liability ................................ 26,138,784 26,432,090
Pension liability ................................................ 2,870,173 3,750,000
Deferred income taxes ............................................ 285,000 379,000
Minority interest in subsidiary .................................. 116,955
Commitments and contingencies
Stockholders' deficiency
Common stock--authorized, 1,000,000 shares of $.01 par
value; issued and outstanding, 102,750 shares, in 1996 and
1995, respectively ............................................ 1,027 1,027
Additional paid-in capital ...................................... 2,394,281 2,394,281
Accumulated deficit ............................................. (12,294,547) (19,868,308)
------------- -------------
(9,899,239) (17,473,000)
Less: 2,355 shares of common stock in treasury--at cost at
December 31, 1996 ............................................. 136,590
-------------
(10,035,829) (17,473,000)
------------- -------------
$ 49,754,400 $ 44,596,568
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Net revenues ................................................ $ 93,340,918 $ 87,181,721
Cost of goods sold .......................................... 61,902,538 57,193,503
-------------- --------------
Gross profit ............................................... 31,438,380 29,988,218
-------------- --------------
Operating expenses:
Selling, general and administrative ........................ 10,328,101 11,432,406
Engineering, research and development ...................... 7,213,821 5,487,788
Actuarial gain from postretirement plan .................... (3,000)
--------------
17,541,922 16,917,194
-------------- --------------
Earnings from operations ................................. 13,896,458 13,071,024
Other income (expenses)
Interest expense, net ...................................... (1,179,697) (1,728,787)
-------------- --------------
Earnings before provision for income tax expense (benefit)
and minority interest ................................... 12,716,761 11,342,237
Income taxes--currently payable ............................. 5,143,000 3,042,000
-------------- --------------
Earnings before minority interest ........................ 7,573,761 8,300,237
Minority interest ........................................... 125,414
--------------
Net earnings ............................................. 7,573,761 8,425,651
Accumulated deficit at beginning of year .................... (19,868,308) (28,293,959)
-------------- --------------
Accumulated deficit at end of year .......................... $ (12,294,547) $ (19,868,308)
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................. $ 7,573,761 $ 8,425,651
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization .......................... 1,179,610 988,886
Actuarial gain from postretirement plan ................ (3,000)
Provision for losses on accounts receivable ............ (74,200) 9,495
Loss on sale of equipment .............................. 25,198
Minority interest ...................................... (142,214)
Changes in operating assets and liabilities
Accounts receivable ................................... (1,891,264) 823,833
Inventories ........................................... (2,361,711) 1,437,531
Unbilled costs ........................................ (750,596) (613,467)
Prepaid expenses and other ............................ 272,649 (134,658)
Accounts payable ...................................... 3,239,670 (1,383,543)
Pension and postretirement benefits liability ......... (2,971,220) (4,915,779)
Other liabilities ..................................... 2,247,311 501,886
------------ -------------
Net cash provided by operating activities .............. 6,464,010 5,019,819
------------ -------------
Cash flows from investing activities:
Capital expenditures ................................... (2,338,539) (1,202,917)
Proceeds from sale of equipment ........................ 24,069
-------------
Net cash used in investing activities ................. (2,338,539) (1,178,848)
------------ -------------
Cash flows from financing activities:
Net (decrease) increase in borrowings .................. (1,417,638) 3,345,454
Term loan borrowing .................................... 7,500,000
Principal payments on long-term debt ................... (2,500,000) (14,500,000)
(Purchase) sale of company stock ....................... (136,590) 2,351
Purchase of minority interest .......................... (21,912)
------------
Net cash used in financing activities ................. (4,076,140) (3,652,195)
------------ -------------
Net increase in cash .................................. 49,331 188,776
Cash at beginning of year ................................. 689,013 500,237
------------ -------------
Cash at end of year ....................................... $ 738,344 $ 689,013
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
SPD Technologies, Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and service circuit protection systems, ship control systems and
combat systems, and perform overhaul and repairs for naval vessels primarily
under fixed-price contracts. At December 31, 1996, Merrill Lynch Capital Corp.
("MLCC") owned 77.9% of the Company. Reference is made to Note L.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPD and its
wholly-owned subsidiaries, SPD Switchgear Inc., PacOrd Inc. and Henschel, Inc.
All material intercompany accounts and transactions have been eliminated. In
1996, the Company purchased the minority interest of Henschel, Inc. for
$21,912.
2. REVENUE RECOGNITION
Substantially all of the Company's revenues and accounts receivable arise
from contracts with the U.S. Navy or its suppliers.
Production-type contracts, not classified as long-term, provide a
substantial portion of the Company's revenues. Revenues are recognized as units
are shipped or are substantially ready to be shipped subject to customer
inspection. Revenues on long-term, production-type contracts, service contracts
and engineering and development contracts are recognized on the
percentage-of-completion method. Under the Company's methodology, revenues and
gross profit are recognized based on billings rather than on a level-of-effort
basis. The Company believes its approach is more conservative and generally
results in lower revenues and gross profits in the early stages of a contract
when estimates are more susceptible to change. Provisions for anticipated
losses are made in the period in which they first become determinable.
3. INVENTORIES
Inventories are stated at the lower of cost or market, with appropriate
provision to reduce excess and obsolete inventory to net realizable values. In
general, cost is currently adjusted standard cost, which approximates actual
cost on a first-in, first-out basis, and the weighted moving average method.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are computed by the straight-line method
over their estimated useful lives for financial reporting purposes and
straight-line and accelerated methods for tax reporting purposes.
5. INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to postretirement benefits other
than pensions, pension costs, depreciation, inventory and various accrued
expenses.
6. ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-71
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--INVENTORIES
Inventories primarily relate to production-type contracts and include
expenditures for materials, purchased parts and work-in-process beyond what is
required for recorded orders. These expenditures are incurred primarily to help
maintain stable production schedules.
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Materials and purchased parts .................................... $ 2,906,353 $ 2,960,879
Work-in-process, primarily on U.S. Government contracts .......... 10,624,008 9,248,883
Finished goods ................................................... 2,092,359 1,051,247
----------- -----------
$15,622,720 $13,261,009
=========== ===========
</TABLE>
NOTE C--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Engineering drawings ................... $ 699,013 $ 699,013
Less accumulated amortization .......... (699,013) (463,538)
---------- ----------
-- 235,475
Intangible asset - pension ............. 2,476,449 3,238,000
---------- ----------
$2,476,449 $3,473,475
========== ==========
</TABLE>
NOTE D--REVOLVING CREDIT FACILITY
During 1995, the Company entered into a $15,000,000 revolving credit
facility with a financial institution which expires on November 29, 1998.
Borrowings are based upon eligible accounts receivable and inventory of the
Company, as defined. Borrowings bear interest at the lender's prime rate plus
.50% (9% at December 31, 1996).
The agreement contains certain restrictive covenants, including, among
other matters, the requirement to maintain certain financial ratios, and
restricts the payment of dividends. Borrowings under this facility are
collateralized by the Company's inventories and accounts receivable. Available
borrowings under this credit arrangement are subject to a 0.37 percent
commitment fee.
NOTE E--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Term Loan due to Heller Financial Inc. .......... $5,000,000 $7,500,000
Less current maturities ......................... 2,500,000 2,500,000
---------- ----------
$2,500,000 $5,000,000
========== ==========
</TABLE>
The term loan due to Heller Financial Inc. is payable in quarterly
installments of $625,000, and bears interest at prime plus .75% per annum,
payable monthly (9.25% as of December 31, 1996).
The term loan is collateralized by substantially all of the Company's
equipment and leasehold improvements. The loan agreement restricts payment of
dividends and contains certain restrictive covenants regarding the maintenance
of financial ratios.
F-72
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its business utilizing
leased facilities and equipment with terms lasting through January 31, 2005.
The terms of the facility lease include an option to purchase the leased
premises based on 50% of the fair market value of the land and 100% of the fair
market value of the building. The Company can renew the lease for two
additional five-year terms.
A subsidiary of the Company also conducts its business in a leased
facility. The lease has a non-cancellable initial term of ten years expiring in
December 1999 with two five-year renewal options.
At December 31, 1996, future minimum payments under noncancellable
operating leases with remaining terms of more than one year were as follows:
<TABLE>
<S> <C>
Year ending December 31, 1997 ......... $1,450,000
1998 ................................ 1,337,000
1999 ................................ 1,324,000
2000 ................................ 720,000
2001 ................................ 651,000
Thereafter .......................... 778,000
----------
$6,260,000
==========
</TABLE>
Total rental expense for operating leases was approximately $1,875,000 and
$1,787,000 for the years ended December 31, 1996 and 1995, respectively.
As a defense contractor for the U.S. Government, the books, records and
other supporting documentation of the Company used to establish certain
contract prices are subject to audit to determine the allowability and
reasonableness of costs. The Company routinely undergoes audits by the
Government on both a pre-award and post-award basis.
NOTE G--COMMON STOCK AND INCENTIVE STOCK OPTIONS
In 1995, the Company sold 2,355 shares of common stock previously held in
treasury to two employees and a director.
The Company has options outstanding to key executives for the purchase of
954 shares of common stock at an exercise price of $1.00 per share. The options
expire on December 31, 2002.
F-73
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--POSTRETIREMENT BENEFITS
1. PENSION PLAN
Substantially all the employees of the Company are covered under a defined
benefit pension plan. The following table sets forth the plan's funded status
and amounts recognized in the Company's balance sheets at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations including vested benefits of
$59,278,594 in 1996 and $52,700,092 in 1995...................... $ 60,303,661 $ 58,252,380
============ ============
Projected benefit obligation for services rendered to date ......... $ 63,413,303 $ 61,142,368
Plan assets at fair value, primarily fixed income investments and
common stocks ..................................................... 54,588,989 49,449,375
------------ ------------
Projected benefit obligation in excess of plan assets .............. 8,824,314 11,692,993
Unrecognized net loss .............................................. (3,054,968) (3,056,450)
Unrecognized prior service costs ................................... (2,596,625) (3,238,223)
Unrecognized net transition asset .................................. 65,502 77,783
Minimum liability adjustment ....................................... 2,476,449 3,326,902
------------ ------------
Pension liability .................................................. $ 5,714,672 $ 8,803,005
============ ============
Net periodic pension cost includes the following components:
1996 1995
------------- -------------
Service cost -- benefit earned during the year ..................... $ 1,327,831 $ 1,300,886
Interest cost on projected benefit obligation ...................... 4,872,752 4,743,858
Actual (return) on plan assets ..................................... (4,854,957) (6,663,443)
Net amortization and deferral ...................................... 879,262 3,511,186
------------- -------------
Net periodic pension cost ......................................... $ 2,224,888 $ 2,892,487
============= =============
</TABLE>
The weighted average discount rates used in determining the present value
of the projected benefit obligations was 8.15% in 1996 and 1995. The projected
rate of increase in future compensation levels was 5.0% for both years. The
expected long-term rate of return on assets was 9.5% for both years. Prior
service costs are amortized using a straight-line method over the average
remaining service period of employees expected to receive benefits under the
plan. The Company's policy is to fund pension cost under its pension plan to
the extent necessary under the Employee Retirement Income Security Act of 1974.
2. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a defined benefit postretirement plan that provides
medical benefits for retirees. The Company does not fund retiree benefits in
advance. In 1992, the Company established plan cost maximums to account for and
control future medical costs more effectively. The Company requires that the
projected future cost of providing postretirement benefits, principally health
care, be accrued over the period earned rather than expensed as claims are
incurred.
Net periodic postretirement benefit cost for the years ended December 31,
1996 and 1995, included the following components:
F-74
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Service cost benefits attributed to service during the period .......... $ 9,000 $ 13,000
Interest cost on the accumulated postretirement benefit
obligation ............................................................ 2,216,000 2,305,000
Net amortization and deferral .......................................... (104,000)
---------- ----------
Net periodic postretirement benefit cost ............................... $2,121,000 $2,318,000
========== ==========
</TABLE>
Cost was determined by application of the terms of the medical plan,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health care cost trend rates projected at
annual rates progressively declining from 12% in 1995. Future benefits will be
capped at the limits in effect for December 31, 1996. The effect of a 1% annual
increase in these assumed cost trend rates would increase the accumulated
postretirement benefit obligation by approximately $-0- in 1996 and $32,000 in
1995; the annual costs would not be materially affected. In addition to net
periodic postretirement cost, the Company recognized an actuarial gain of
$3,000 in 1995.
The following tables provide information on the status of the plan at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees ............................................. $23,193,000 $23,144,000
Fully eligible active plan participants .............. 4,197,000 4,552,000
Other active plan participants ....................... 142,000 183,000
----------- -----------
Accumulated postretirement benefit obligation ......... 27,532,000 27,879,000
Unrecognized net gain (loss) .......................... 1,854,000 2,135,000
----------- -----------
Accrued postretirement benefit cost recognized in the
consolidated balance sheet ........................... $29,386,000 $30,014,000
=========== ===========
</TABLE>
Measurement of the accumulated postretirement benefit obligation was based
on an assumed discount rate of 8.15% in 1996 and 1995. The health care cost
trend rate was 0% in 1996 and 12% in 1995.
3. EMPLOYEES' SAVINGS AND PROFIT-SHARING PLAN
The Company maintains an hourly and salaried employees' savings plan. The
Company contributes a guaranteed minimum of eligible employee contributions.
Additional company contributions of up to 25% of eligible employee
contributions are voluntary and at the discretion of the Board of Directors.
Profit-sharing expense was approximately $642,000 and $506,000 for the years
ended December 31, 1996 and 1995, respectively.
4. MULTIEMPLOYER PLAN
The Company contributed $1,000 in 1996 and 1995 to multiemployer pension
plans for employees covered by collective bargaining agreements. These plans
are not administered by the Company and contributions are determined in
accordance with provisions of the negotiated labor contract. Information with
respect to the Company's proportionate share of the excess, if any, of the
actuarially computed value of vested benefits over the total of the pension
plans' net assets is not available from the plans' administrators.
F-75
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provisions of the Act, if the plan terminates or the
Company withdraws, the Company could be subject to a "withdrawal liability."
NOTE I--INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Currently payable
Federal ......... $4,133,000 $2,269,000
State ........... 1,010,000 773,000
---------- ----------
$5,143,000 $3,042,000
========== ==========
</TABLE>
The effective tax rate varies from the statutory rate primarily due to
state and local income taxes and for the year ended December 31, 1995 due to
adjustment of prior year's tax provision.
Deferred income taxes at December 31 relate to the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Pension and postretirement benefits ......... $ 13,821,000 $ -- $ 15,462,000 $ --
Other temporary differences ................. 1,683,000 285,000 2,252,000 379,000
Inventory costs ............................. 1,640,000 -- 1,713,000 --
Vacation pay accrual ........................ 644,000 -- 625,000 --
Warranty costs .............................. 484,000 -- 652,000 --
Valuation allowance ......................... (12,187,000) -- (14,525,000) --
------------- -------- ------------- --------
$ 6,085,000 $285,000 $ 6,179,000 $379,000
============= ======== ============= ========
</TABLE>
NOTE J--CASH FLOW INFORMATION
The following is supplemental cash flow information:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash paid for
Interest ............. $1,179,000 $1,665,000
Income taxes ......... 5,621,000 3,916,000
</TABLE>
NOTE K--OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Allowance for contract adjustments .......... $2,499,449 $ 783,513
Accrued warranties .......................... 1,160,613 1,490,294
Customer advances ........................... 797,931 851,364
Other current liabilities ................... 2,800,915 2,045,724
---------- ----------
$7,258,908 $5,170,895
========== ==========
</TABLE>
NOTE L--SUBSEQUENT EVENTS
In January 1997, a newly formed company, by an investor group and certain
minority stockholders of the Company, acquired all the outstanding stock of the
Company. The acquisition was financed through the issuance of preferred and
common stock and bank borrowings.
F-76
<PAGE>
================================================================================
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING
AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE
IS NOT PERMITTED.
--------------------------------------------
TABLE OF CONTENTS
PAGE
----
Where You Can Find More Information ......... i
Prospectus Summary .......................... 1
Risk Factors ................................ 14
Use of Proceeds ............................. 21
Capitalization .............................. 22
Unaudited Pro Forma Condensed
Consolidated Financial Information ....... 23
Selected Financial Information .............. 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 32
Business .................................... 42
Certain Relationships and Related
Transactions ............................. 64
Management .................................. 66
Ownership of Capital Stock .................. 75
Description of the 1997 Notes ............... 77
Description of the May 1998 Notes ........... 108
Description of the December 1998 Notes ...... 140
Certain Information About the Notes ......... 173
Description of Certain Indebtedness ......... 177
Certain United States Federal Tax
Considerations ........................... 179
Plan of Distribution ........................ 182
Legal Matters ............................... 182
Experts ..................................... 182
Index to Financial Statements ............... F-1
================================================================================
================================================================================
[L-3 COMMUNICATIONS CORPORATION LOGO]
L-3 COMMUNICATIONS CORPORATION
--------------------------------
PROSPECTUS
MAY , 1999
--------------------------------
103/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2007
81/2% SENIOR SUBORDINATED
NOTES DUE 2008
8% SERIES B
SENIOR SUBORDINATED NOTES
DUE 2008
LEHMAN BROTHERS
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- ------
<S> <C>
Legal fees and expenses ........................... $25,000
Accounting fees and expenses ...................... 25,000
Printing and engraving fees and expenses .......... 25,000
Miscellaneous expenses ............................ 5,000
-------
Total ........................................... $80,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
for, among other things:
a. permissive indemnification for expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by designated persons, including directors and officers
of a corporation, in the event such persons are parties to litigation other
than stockholder derivative actions if certain conditions are met;
b. permissive indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are parties to
stockholder derivative actions if certain conditions are met;
c. mandatory indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are successful on
the merits or otherwise in defense of litigation covered by a. and b.
above; and
d. that the indemnification provided for by Section 145 is not deemed
exclusive of any other rights which may be provided under any by-law,
agreement, stockholder or disinterested director vote, or otherwise.
In addition to the indemnification provisions of the DGCL described above,
the Registrant's certificate of incorporation (the "Certificate of
Incorporation") authorizes indemnification of the Registrant's officers and
directors, subject to a case-by-case determination that they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company, and in the case of any criminal proceeding, they
had no reasonable cause to believe their conduct was unlawful. In the event
that a Change in Control (as defined in the Certificate of Incorporation) shall
have occurred, the proposed indemnitee director or officer may require that the
determination of whether he met the standard of conduct be made by special
legal counsel selected by him. In addition, whereas the DGCL would require
court-ordered indemnification, if any, in cases in which a person has been
adjudged to be liable to the Registrant, the Certificate of Incorporation also
permits indemnification in such cases if and to the extent that the reviewing
party determines that such indemnity is fair and reasonable under the
circumstances.
The Certificate of Incorporation requires the advancement of expenses to
an officer or director (without a determination as to his conduct) in advance
of the final disposition of a proceeding if such person furnishes a written
affirmation of his good faith belief that he has met the applicable standard of
conduct and furnishes a written undertaking to repay any advances if it is
ultimately determined that he is not entitled to indemnification. In connection
with proceedings by or in the right of the Registrant, the Certificate of
Incorporation provides that indemnification shall include not only reasonable
expenses, but also penalties, fines and amounts paid in settlement. Unless
ordered by a
II-1
<PAGE>
court, such indemnification shall not include judgments. Under the Certificate
of Incorporation, no officer or director is entitled to indemnification or
advancement of expenses with respect to a proceeding brought by him against the
Registrant other than a proceeding seeking or defending such officer's or
director's right to indemnification or advancement of expenses. Finally, the
Certificate of Incorporation provides that the Company may, subject to
authorization on a case by case basis, indemnify and advance expenses to
employees or agents to the same extent as a director or to a lesser extent (or
greater, as permitted by law) as determined by the Board of Directors.
The Certificate of Incorporation purports to confer upon officers and
directors contractual rights to indemnification and advancement of expenses as
provided therein. In addition, as permitted by the DGCL, the Registrant has
entered into indemnity agreements with its directors and selected officers that
provide contract rights substantially identical to the rights to
indemnification and advancement of expenses set forth in the Certificate of
Incorporation, as described above.
The Certificate of Incorporation limits the personal liability of
directors to the Registrant or its stockholders for monetary damages for breach
of the duty as a director, other than liability as a director (i) for breach of
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (certain illegal
distributions), or (iv) for any transaction for which the director derived an
improper personal benefit.
The Registrant maintains officers' and directors' insurance covering
certain liabilities that may be incurred by officers and directors in the
performance of their duties.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 30, 1997, L-3 Communications issued 100 shares of its common
stock to Holdings for aggregate consideration of $125 million. The securities
were sold directly by L-3 Communications and did not involve any underwriter.
L-3 Communications considers these securities to have been offered and sold in
a transaction not involving any public offering and, therefore, to be exempted
from registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See Exhibit Index.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereto, which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-2
<PAGE>
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
L-3 COMMUNICATIONS CORPORATION
By: /s/ Michael T. Strianese
-----------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* President, Chief Financial Officer (Principal
- -------------------------------
Robert V. LaPenta Financial Officer) and Director
/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
- -------------------------------
John M. Shalikashvili
* Director
- -------------------------------
Alan H. Washkowitz
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
HYGIENETICS ENVIRONMENTAL SERVICES, INC.
By: /s/ Michael T. Strianese
---------------------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
L-3 COMMUNICATIONS ILEX SYSTEMS, INC.
By: /s/ Michael T. Strianese
-----------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
SOUTHERN CALIFORNIA MICROWAVE, INC.
By: /s/ Michael T. Strianese
---------------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
William H. Kirk
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
L-3 COMMUNICATIONS SPD TECHNOLOGIES, INC.
By: /s/ Michael T. Strianese
--------------------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
L-3 COMMUNICATIONS ESSCO, INC.
By: /s/ Michael T. Strianese
----------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
*
- -------------------------------
Christopher C. Cambria Director
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
L-3 COMMUNICATIONS STORM CONTROL SYSTEMS, INC.
By: /s/ Michael T. Strianese
---------------------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
L-3 COMMUNICATIONS DBS MICROWAVE, INC.
By: /s/ Michael T. Strianese
----------------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
Larry A. Colangelo
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
SPD ELECTRICAL SYSTEMS, INC.
By: /s/ Michael T. Strianese
---------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
Larry A. Colangelo
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
SPD SWITCHGEAR INC.
By: /s/ Michael T. Strianese
-----------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
Larry A. Colangelo
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
PAC ORD INC.
By: /s/ Michael T. Strianese
--------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
*
- -------------------------------
Christopher C. Cambria Director
*
- -------------------------------
Larry A. Colangelo Director
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
HENSCHEL INC.
By: /s/ Michael T. Strianese
---------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
Larry A. Colangelo
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
POWER PARAGON, INC.
By: /s/ Michael T. Strianese
---------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
Larry A. Colangelo
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 12, 1999.
SPD HOLDINGS, INC.
By: /s/ Michael T. Strianese
---------------------------------
Name: Michael T. Strianese
Title: Vice President--Finance and
Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 12th day of May, 1999 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer, (Principal
- ------------------------------- Executive Officer) and Director
Frank C. Lanza
* 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
- -------------------------------
Christopher C. Cambria
* Director
- -------------------------------
Larry A. Colangelo
</TABLE>
* By Michael T. Strianese as attorney-in-fact.
II-17
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below are on file with the SEC and are
incorporated herein by reference to such previous filings.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of L-3 Communications Corporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4
No. 333-31649).
3.2 By-Laws of L-3 Communications Corporation (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-4 No. 333-31649).
3.3 Certificate of Incorporation of Hygienetics Environmental Services, Inc. (incorporated by
reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1
No. 333-46983).
3.4 By-laws of Hygienetics Environmental Services, Inc. (incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on Form S-1 No. 333-46983).
3.5 Certificate of Incorporation of L-3 Communications ILEX Systems, Inc. (incorporated by
reference to Exhibit 3.5 to the Company's Registration Statement on Form S-1
No. 333-46983).
3.6 By-laws of L-3 Communications ILEX Systems, Inc. (incorporated by reference to
Exhibit 3.6 to the Company's Registration Statement on Form S-1 No. 333-46983).
3.7 Certificate of Incorporation of Southern California Microwave, Inc. (incorporated by
reference to Exhibit 3.7 to the Company's Registration Statement on Form S-1
No. 333-46983).
3.8 By-laws of Southern California Microwave, Inc. (incorporated by reference to Exhibit
3.8 to the Company's Registration Statement on Form S-1 No. 333-46983).
3.9 Certificate of Incorporation of L-3 Communications SPD Technologies, Inc.
(incorporated by reference to Exhibit 3.9 to the Company's Registration Statement on
Form S-4 No. 333-70199).
3.10 By-laws of L-3 Communications SPD Technologies, Inc. (incorporated by reference to
Exhibit 3.10 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.11 Certificate of Incorporation of L-3 Communications ESSCO, Inc. (incorporated by
reference to Exhibit 3.11 to the Company's Registration Statement on Form S-4
No. 333-70199).
3.12 By-laws of L-3 Communications ESSCO, Inc. (incorporated by reference to Exhibit 3.12
to the Company's Registration Statement on Form S-4 No. 333-70199).
3.13 Certificate of Incorporation of L-3 Communications Storm Control Systems, Inc.
(incorporated by reference to Exhibit 3.13 to the Company's Registration Statement on
Form S-4 No. 333-70199).
3.14 By-laws of L-3 Communications Storm Control Systems, Inc. (incorporated by reference
to Exhibit 3.14 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.15 Certificate of Incorporation of L-3 Communications DBS Microwave, Inc. (incorporated
by reference to Exhibit 3.15 to the Company's Registration Statement on Form S-4 No.
333-70199).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
3.16 By-laws of L-3 Communications DBS Microwave, Inc. (incorporated by reference to
Exhibit 3.16 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.17 Certificate of Incorporation of SPD Electrical Systems, Inc. (incorporated by reference
to Exhibit 3.17 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.18 By-laws of SPD Electrical Systems, Inc. (incorporated by reference to Exhibit 3.18 to the
Company's Registration Statement on Form S-4 No. 333-70199).
3.19 Certificate of Incorporation of SPD Switchgear Inc. (incorporated by reference to
Exhibit 3.19 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.20 By-laws of SPD Switchgear Inc. (incorporated by reference to Exhibit 3.20 to the
Company's Registration Statement on Form S-4 No. 333-70199).
3.21 Certificate of Incorporation of Pac Ord Inc. (incorporated by reference to Exhibit 3.21 to
the Company's Registration Statement on Form S-4 No. 333-70199).
3.22 By-laws of Pac Ord Inc. (incorporated by reference to Exhibit 3.22 to the Company's
Registration Statement on Form S-4 No. 333-70199).
3.23 Certificate of Incorporation of Henschel Inc. (incorporated by reference to Exhibit 3.23
to the Company's Registration Statement on Form S-4 No. 333-70199).
3.24 By-laws of Henschel Inc. (incorporated by reference to Exhibit 3.24 to the Company's
Registration Statement on Form S-4 No. 333-70199).
3.25 Certificate of Incorporation of Power Paragon, Inc. (incorporated by reference to
Exhibit 3.25 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.26 By-laws of Power Paragon, Inc. (incorporated by reference to Exhibit 3.26 to the
Company's Registration Statement on Form S-4 No. 333-70199).
3.27 Certificate of Incorporation of SPD Holdings, Inc. (incorporated by reference to Exhibit
3.27 to the Company's Registration Statement on Form S-4 No. 333-70199).
3.28 By-laws of SPD Holdings, Inc. (incorporated by reference to Exhibit 3.28 to the
Company's Registration Statement on Form S-4 No. 333-70199).
4.1 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 No. 333-31649).
4.2 Indenture dated as of May 22, 1998 between L-3 Communications and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4 No. 333-70199).
4.3 Indenture dated as of December 11, 1998 among L-3 Communications Corporation, the
Guarantors and The Bank of New York, as Trustee (incorporated by reference to
Exhibit 10.32 to L-3 Communications Holdings' Registration Statement on Form S-1
No. 333-70125).
4.4 Form of 103/8% Series B Senior Subordinated Note due 2007 (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-4 No. 333-31649).
4.5 Form of 81/2% Senior Subordinated Note due 2008 (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-4 No. 333-70199).
4.6 Form of 8% Series B Senior Subordinated Note due 2008 (included in Exhibit 4.3).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
5.1 Opinion of Simpson Thacher & Bartlett (incorporated by reference to Exhibit 5 to the
Company's Registration Statement on Form S-4 No. 333-31649).
5.2 Opinion of Simpson Thacher & Bartlett (incorporated by reference to Exhibit 5 to the
Company's Registration Statement on Form S-1 No. 333-46983).
5.3 Opinion of Simpson Thacher & Bartlett (incorporated by reference to Exhibit 5 to the
Company's Registration Statement on Form S-4 No. 333-70199).
10.1 Amended and Restated Credit Agreement, dated as of August 13, 1998, among L-3
Communications Corporation and lenders named therein (incorporated by reference to
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998).
10.2 364 Day Credit Agreement, dated August 13, 1998, among L-3 Communications and
lenders named therein (incorporated by reference to Exhibit 99.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998).
10.3 Registration Rights Agreement, dated as of December 11, 1998, among L-3
Communications Corporation, the Guarantors, Lehman Brothers Inc. and NationsBanc
Montgomery Securities LLC (incorporated by reference to Exhibit 10.33 to L-3
Communications Holdings' Registration Statement on Form S-1 No. 333-70125).
10.4 Purchase Agreement, dated as of December 3, 1998, among L-3 Communications
Corporation, the Guarantors, Lehman Brothers Inc. and NationsBanc Montgomery
Securities LLC (incorporated by reference to Exhibit 10.34 to L-3 Communications
Holdings' Registration Statement on Form S-1 No. 333-70125).
10.5 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 No. 333-31649).
10.6 Stockholders' Agreement between L-3 Communications Corporation and the
stockholders parties thereto (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4 No. 333-31649).
10.7 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 Corporation (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-4 No. 333-31649).
10.8 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4 No. 333-31649).
10.9 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.61 to the
Company's Registration Statement on Form S-4 No. 333-31649).
10.10 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin
Corporation and L-3 Communications Corporation (incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-4 No. 333-31649).
10.11 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications
Corporation and California Microwave, Inc. (incorporated by reference to Exhibit 10.8
to the Company's Registration Statement on Form S-1 No. 333-46983).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
10.12 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3
Communications Corporation (incorporated by reference to Exhibit 10.81 to the
Company's Registration Statement on Form S-1 No. 333-46983).
10.13 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc.,
AlliedSignal Technologies, Inc., AlliedSignal Deutschland GMBH and L-3
Communications Corporation (incorporated by reference to Exhibit 10.82 to the
Company's Registration Statement on Form S-1 No. 333-46983).
10.14 Agreement and Plan of Merger dated as of December 3, 1998 among L-3
Communications, L-M Acquisition Corporation and Microdyne Corporation
(incorporated by reference to Exhibit 2 to L-3 Communications Holdings' Current
Report on Form 8-K filed on December 9, 1998).
10.15 Amended and Restated Agreement and Plan of Merger dated as of August 13, 1998 by
and among L-3 Communications Corporation, SPD Merger Co., SPD Technologies, Inc.
and Midmark Capital, L.P. (incorporated by reference to Exhibit 2 to L-3
Communications Corporation's Current Report on Form 8-K filed on October 27, 1998).
10.20 Form of Stock Option Agreement for Employee Options (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1 No. 333-46983).
10.30 Form of 1997 Stock Option Plan for Key Employees (incorporated by reference to
Exhibit 10.91 to the Company's Registration Statement on Form S-1 No. 333-46983).
10.31 L-3 Communications Corporation Pension Plan (incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1 No. 333-46983).
*12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company's
Registration Statement on Form S-4 No. 333-70199).
23.1 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1).
23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.2).
23.3 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.3).
*23.4 Consent of PricewaterhouseCoopers LLP, independent auditors.
*23.5 Consent of Ernst & Young LLP, independent auditors.
*23.6 Consent of Grant Thornton LLP, independent certified public accountants.
*23.7 Consent of Grant Thornton LLP, independent certified public accountants.
24.1 Powers of Attorney (incorporated by reference to Exhibit 24 to the Company's
Registration Statement on Form S-4 No. 333-31649).
24.2 Powers of Attorney (incorporated by reference to Exhibit 24 to the Company's
Registration Statement on Form S-1 No. 333-46983).
24.3 Powers of Attorney (incorporated by reference to Exhibit 24 to the Company's
Registration Statement on Form S-4 No. 333-70199).
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of
New York, as Trustee (incorporated by reference to Exhibit 25 to the Company's
Registration Statement on Form S-4 No. 333-31649).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of
New York, as Trustee (incorporated by reference to Exhibit 25 to the Company's
Registration Statement on Form S-1 No. 333-46983).
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of
New York, as Trustee (incorporated by reference to Exhibit 25 to the Company's
Registration Statement on Form S-4 No. 333-70199).
</TABLE>
- ----------
* Filed herewith.
<PAGE>
L-3 COMMUNICATIONS CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY
-------------------------------------------------------------
ADJUSTED
PRO FORMA PRO FORMA ACTUAL ACTUAL
YEAR YEAR YEAR NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998 1997
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 41,700 $ 21,900 $ 53,450 $ 22,992
Add:
Interest expense 56,900 56,900 47,015 29,884
Amortization of debt expense 3,900 3,900 2,564 1,517
Interest component of rent expense 6,561 6,561 5,097 3,213
-------- -------- -------- --------
Earnings $ 109,061 $ 89,261 $ 108,126 $ 57,606
-------- -------- -------- --------
Fixed Charges:
Interest expense 56,900 56,900 47,015 29,884
Amortization of debt expense 3,900 3,900 2,564 1,517
Interest component of rent expense 6,561 6,561 5,097 3,213
-------- -------- -------- --------
Fixed Charges $ 67,361 $ 67,361 $ 54,676 $ 34,614
-------- -------- -------- --------
Ratio of earnings to fixed charges 1.6x 1.3x 2.0x 1.7x
======== ======== ======== ========
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------------------------
THREE MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
--------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $(505) $ 19,494 $ 174 $ 2,929
Add:
Interest expense 8,441 24,197 4,475 5,450
Amortization of debt expense - - - -
Interest component of rent expense 851 2,832 1,591 1,866
------ -------- ------- --------
Earnings $8,787 $ 46,523 $ 6,240 $ 10,245
------ -------- ------- --------
Fixed Charges:
Interest expense 8,441 24,197 4,475 5,450
Amortization of debt expense - - - -
Interest component of rent expense 851 2,832 1,591 1,866
------ -------- ------- --------
Fixed Charges $9,292 $ 27,029 $ 6,066 $ 7,316
------ -------- ------- --------
Ratio of earnings to fixed charges n.a.(a) 1.7x 1.0x 1.4x
====== ======== ======= ========
</TABLE>
(a) For the three months ended March 31, 1997, earnings were insufficient to
cover fixed charges by $.5 million.
<PAGE>
EXHIBIT 23.4
Consent of Independent Auditors
We consent to the inclusion in the Post-Effective Amendments to Form S-4 and
S-1 of L-3 Communications Corporation and subsidiaries (File Nos. 333-31649,
333-46983 and 333-70199) of our report dated February 19, 1999 on our audits of
(i) the consolidated balance sheets of L-3 Communications Holdings, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the year ended December 31, 1998 and for the nine months ended December 31,
1997, (ii) the combined statements of operations, changes in invested equity
and cash flows of the Predecessor Company for the three months ended March 31,
1997 and (iii) the combined statements of operations, changes in invested
equity and cash flows of the Predecessor Company for the year ended
December 31, 1996, which report is included in this registration statement.
As indicated in our report, our opinion insofar as it relates to the financial
statements of Communications Systems Division included in the combined
financial statements of the Predecessor Company for the year ended December 31,
1996 is based solely on the report of other auditors. We also consent to the
reference to our Firm under the caption "Experts".
PricewaterhouseCoopers LLP
New York, New York
May 6, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 7, 1997, with respect to the combined financial
statements of Locheed Martin Communications Systems Division for the year ended
December 31, 1996 (not presented separately herein), included in Post-Effective
Amendment No. 1 to the Registration Statements (Forms S-4 Nos. 333-31649 and
333-4683; and Form S-1 No. 333-70199) and related Prospectus of L-3
Communications Corporation for the registration of its senior subordinated
notes.
Washington, D.C.
May 6, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 19, 1999, accompanying the financial
statements of Aydin Corporation and Subsidiaries contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned reports
in the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
/s/ Grant Thornton LLP
- ---------------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
May 6, 1999
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 25, 1998 and February 28, 1997,
accompanying the financial statements of SPD Technologies Inc. and Subsidiaries
contained in the Registration Statement and Prospectus. We consent to the use
of the aforementioned reports in the Registration Statement and Prospectus, and
to the use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
New York, New York
May 6, 1999
