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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) November 16, 2000
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L-3 Communications Holdings, Inc.
L-3 Communications Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
001-14141 13-3937434
333-46983 13-3937436
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(Commission File Number) (IRS Employer Identification No.)
600 Third Avenue, New York, New York 10016
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(Address of Principal Executive Offices) (Zip Code)
(212) 697-1111
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(Registrant's Telephone Number, Including Area Code)
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Item 5. Other Events
On November 15, 2000, L-3 Communications Holdings, Inc. announced that
it planned to offer $250 million in Convertible Senior Subordinated Notes due
2009 in a private placement. The Company also plans to offer an over-allotment
option to increase the issue size by up to 20%. The notes will be convertible
into the Company's common stock.
The Company will offer these securities in a private placement to
qualified institutional buyers in the United States pursuant to Rule 144A under
the Securities Act of 1933.
L-3 Communications intends to use the net proceeds from the offering to
repay existing debt under its Senior Credit Facilities and for general corporate
purposes, including potential acquisitions.
These notes and the common stock issuable upon conversion of these notes
have not been registered under the Securities Act of 1933, as amended or any
state securities laws, and are being offered only to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. Unless so registered,
the notes and common stock issued upon conversion of the notes may not be
offered or sold in the United States except pursuant to an exemption from the
registration requirements of the Securities Act and applicable state securities
laws.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits.
Exhibit Number Title
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99 Press Release of L-3 Communications dated
November 15, 2000 (p. 27).
Item 9. Regulation FD Disclosure.
"L-3 Holdings" refers to L-3 Communications Holdings, Inc., and
"L-3 Communications" refers to L-3 Communications Corporation, a wholly-owned
operating subsidiary of L-3 Holdings. "L-3," "we," "us" and "our" refer to L-3
Holdings and its subsidiaries, including L-3 Communications. "Predecessor
Company" refers to the ten initial business units we purchased from Lockheed
Martin Corporation ("Lockheed Martin") in 1997. L-3 Holdings has no other assets
or liabilities and conducts no other operations other than through L-3
Communications. L-3 Holdings has guaranteed the bank debt of L-3 Communications.
RISK FACTORS
RISKS RELATED TO L-3
OUR SIGNIFICANT LEVEL OF DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING
ACTIVITY.
We incurred substantial indebtedness in connection with our acquisitions.
As of September 30, 2000, we had $1,073.5 million of indebtedness outstanding,
of which $468.5 million was senior debt (excluding outstanding letters of
credit). 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 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
Financial Condition and Results of Operations in our Form 10-Q for the Period
Ended September 30, 2000 (the "September Form 10-Q.")
Our level of indebtedness has important consequences to you. These
consequences may 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 for acquisitions or
working capital to make investments or other expenditures, which may
limit our ability to carry out our acquisition strategy;
o higher interest expenses due to increases in interest rates on our
borrowings, that 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.
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OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO FINANCE OUR FUTURE OPERATIONS AND,
IF WE ARE UNABLE TO MEET OUR FINANCIAL RATIOS, COULD CAUSE OUR EXISTING DEBT TO
BE ACCELERATED.
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, some 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:
o declare all outstanding debt, accrued interest and fees to be due and
payable;
o require us to apply all of our available cash to repay the senior debt;
and
o prevent us from making debt service payments on other debt.
If we were unable to repay any of our outstanding borrowings when due, the
lenders under our bank credit facilities could proceed against their collateral,
which consists of a first priority security interest in the capital stock of our
material subsidiaries, including L-3 Communications. 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.
L-3 HOLDINGS MAY NOT RECEIVE THE DIVIDENDS FROM ITS SUBSIDIARIES THAT IT WILL
RELY UPON TO MAKE INTEREST AND PRINCIPAL PAYMENTS ON ITS DEBT.
L-3 Holdings is a holding company and derives all of its operating income
and cash flow from its subsidiaries, including L-3 Communications, and has no
assets or liabilities other than through L-3 Communications. As of September 30,
2000, L-3 Holdings has no senior indebtedness outstanding and its only
obligations were its guarantees of the indebtedness of L-3 Communications under
its bank credit facilities. L-3 Holdings relies on dividends and other payments
from its subsidiaries or must raise funds in public or private equity or debt
offerings to generate the funds necessary to pay principal of and interest on
its debt. The subsidiaries of L-3 Holdings are separate and distinct legal
entities, and their ability to pay any amounts due under L-3 Holdings'
indebtedness or to make any funds available to pay L-3 Holdings' debt
obligations whether by dividends, loans or other payments is restricted under
the terms of their present and future indebtedness. There can be no assurance
that L-3 Holdings will be able to obtain such funds on acceptable terms or at
all.
WE DO NOT HAVE AUDITED FINANCIAL STATEMENTS FOR TWO RECENT ACQUISITIONS FOR
PERIODS PRIOR TO SUCH ACQUISITIONS, WHICH MAY HAVE A MATERIAL IMPACT ON OUR
FINANCIAL PERFORMANCE.
On February 10, 2000, we acquired the assets of the Training Devices and
Training Services (TDTS) business of Raytheon Company for $160.0 million in
cash, subject to adjustment. In addition,
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on April 28, 2000, we acquired the Traffic Alert and Collision Avoidance System
(TCAS) product line from Honeywell International Inc. for $237.0 million,
subject to adjustment. Our results of operations for the nine months ended
September 30, 2000 which are presented in our financial statements as of and for
the nine months ended September 30, 2000, include the results of operations of
these acquired businesses from their effective dates of acquisition. The
Securities and Exchange Commission ("SEC") requires us to file separate audited
financial statements and unaudited pro forma financial information for each of
these acquired businesses within 75 days of the completion of each acquisition.
However, we have been unable to do so because, prior to the acquisitions these
operations were not stand-alone entities and their financial statements were not
audited. Accordingly, such audited financial statements are not available. These
financial statements are currently being audited and upon their completion we
will file the required TDTS and TCAS financial statements and pro forma
financial information with the SEC. Based upon the unaudited preliminary data
for the year ended December 31, 1999, sales for the TDTS business, were $270.6
million and operating loss, including a loss provision for estimated costs in
excess of estimated billings to complete certain contracts in process, was $36.9
million, and sales for the TCAS product line were $108.0 million and operating
income was $46.1 million. Actual results, based upon completion of the audits,
could differ materially from these preliminary statements of operations data.
Additionally, depending on the December 31, 1999 audit results for TDTS, the
final purchase allocation for TDTS relating to loss reserves for estimated costs
in excess of estimated billings to complete certain acquired contracts in
process could be materially different than what we have recorded in our
preliminary purchase allocation for the TDTS acquisition which is reflected on
our consolidated balance sheet as of September 30, 2000.
OUR ACQUISITION STRATEGY INVOLVES RISKS, AND WE MAY NOT SUCCESSFULLY IMPLEMENT
OUR STRATEGY.
We seek to acquire companies that 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 benefits anticipated from the acquisition 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 managerial resources
that would otherwise be available for the ongoing development or expansion of
our existing operations. Possible future acquisitions could result in the
incurrence of additional debt, contingent liabilities and amortization expenses
related to goodwill and other intangible assets, all of which could have a
materially adverse effect on 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 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in the September Form 10-Q.
WE RELY ON SALES TO U.S. GOVERNMENT ENTITIES, AND THE LOSS OF SUCH CONTRACTS
WOULD HAVE A MATERIAL IMPACT ON OUR REVENUES.
Our sales are predominantly derived from contracts with agencies of, and
prime contractors to, the U.S. Department of Defense ("DoD") and other agencies
of the U.S. Government. Approximately 68.9% of our sales for the nine months
ended September 30, 2000 of $1,352.4 million were made directly or indirectly to
the DoD and other agencies of the U.S. Government. For the nine months ended
September 30, 2000 we had approximately 454 contracts with a value exceeding
$1.0 million. Our sales to the DoD and other agencies of the U.S. Government for
the nine months ended September 30, 2000, including sales through prime
contractors, were $931.3 million. Our largest program is a long-term,
sole-source cost-plus support contract for the U-2 aerial reconnaissance program
that provided 3.9% of our sales for the nine months ended September 30, 2000. No
other program represented more than 2.1% of our sales for the nine months ended
September 30, 2000. The loss of all or a substantial portion of our sales to the
U.S. Government
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would have a material adverse effect on our income and cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Contracts" in our September Form 10-Q.
OUR GOVERNMENT CONTRACTS ENTAIL CERTAIN RISKS.
o Government contracts are dependent upon the U.S. defense budget.
The reduction in the U.S. defense budget in the early 1990s caused most
defense-related government contractors to experience decreased revenues,
increased pressure on operating margins and, in certain cases, net losses. Our
businesses taken as a whole experienced a substantial decline in sales during
that 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. U.S. Government contracts are also
conditioned upon the continuing approval by Congress of the amount of 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.
o Government contracts contain unfavorable termination provisions and
are subject to audit and modification.
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.
All of our U.S. Government contracts can be terminated by the U.S.
Government either for its convenience or if we default. 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. 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.
o Government contracts are subject to competitive bidding and we are
required to obtain licenses for non-U.S. sales.
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 our profitability. See "Business -- Major Customers" and
"--Contracts," below. 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);
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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.
In addition to these U.S. Government contract risks, we are required to
obtain licenses from U.S. Government agencies to export many of our products
and systems. Additionally, we are not permitted to export some of our products.
We cannot be sure of our ability to gain any licenses required to export our
products, and failure to receive required licenses would eliminate our ability
to sell our products outside the United States.
OUR FIXED PRICE CONTRACTS MAY COMMIT US TO UNFAVORABLE TERMS.
We provide our products and services primarily through fixed price or cost
plus contracts. Fixed price contracts provided 72.8% of our sales for the nine
months ended September 30, 2000. We record sales and profits on our long-term
fixed price contracts using the percentage-of-completion methods of accounting.
As a result, revisions made to our estimates of sales 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 estimating costs and sales 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 losses on fixed price contracts
in excess of amounts received will not be incurred in the future.
OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE.
The rapid change of technology is a key feature of the communication
equipment industry as a whole, and for defense applications in particular. To
succeed in the future, we will need to continue 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-funded 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," below. In the past we have allocated
substantial funds to capital expenditures, programs and other investments. This
practice will continue to be required in the future. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the September Form 10-Q.
WE MAY NOT SUCCESSFULLY IMPLEMENT OUR PLAN TO EXPAND INTO COMMERCIAL MARKETS.
Our revenues have primarily come from business with the DoD and other
government agencies. In addition to continuing to pursue this 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, airport security equipment and voyage
recorders, 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;
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o respond to rapid technological advances; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in commercial markets may require
significant resources, including additional working capital and capital
expenditures, as well as the use of our management's 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 invested. We can give no assurance that
these distributors or service providers will be able to market our equipment or
their services successfully or that we will be able to realize a return on our
investment in them. We cannot assure you that we will be successful in
addressing these risks or in developing these commercial business
opportunities.
CONSOLIDATION AND INTENSE COMPETITION IN OUR INDUSTRY COULD LIMIT OUR ABILITY
TO ATTRACT AND RETAIN
CUSTOMERS.
The communications equipment industry as a whole, and the market for
defense applications in particular, 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 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 manufacturing 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
o the readiness of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, the U.S. Government directs all work for a particular
project to a single supplier, commonly known as a sole-source project. In such
cases, other suppliers who may otherwise be able to compete for the programs
involved can only do so if the U.S. Government chooses to reopen the particular
program to competition. Additionally, many of our competitors are larger than
us and have substantially greater financial and other resources than we have.
See "Business -- Competition," below.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY
BECOME UNABLE TO OPERATE OUR BUSINESS EFFECTIVELY.
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. As of September 30, 2000 Messrs. Lanza and LaPenta
owned, in the aggregate, 14.1% of the common stock of L-3 Holdings. We have
entered into employment agreements with Messrs. Lanza and LaPenta. We face
competition for management and technical personnel from other companies and
organizations. Failure to attract and retain such personnel would damage our
prospects.
ENVIRONMENTAL LAWS AND REGULATION MAY SUBJECT US TO SIGNIFICANT LIABILITY.
Our operations are subject to various federal, state and local
environmental laws and regulations within the countries in which we operate
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
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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.
TERMINATION OF OUR BACKLOG OF ORDERS COULD NEGATIVELY IMPACT OUR REVENUES.
We currently have a backlog of orders, primarily 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 existing 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.
OUR PENSION PLAN LIABILITIES MAY RESULT IN SIGNIFICANT EXPENSES.
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 our formation, 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 its 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.
With respect to these plans, Lockheed Martin entered into an agreement
with L-3 Communications and the PBGC dated as of April 30, 1997. Under that
agreement, Lockheed Martin agreed, upon the occurrence of certain
circumstances, either to
o assume sponsorship of the subject plans; or
o provide another form of financial support.
If Lockheed Martin did assume sponsorship of these plans, it would be
primarily liable for the costs associated with funding these plans or any costs
associated with the termination of them, but L-3 Communications would be
required to reimburse Lockheed Martin. To date, the impact on our 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 DISCLOSURES CONTAIN FORWARD LOOKING STATEMENTS, WHICH MAY NOT BE CORRECT.
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 Securities Exchange Act
of 1934 ("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.
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BUSINESS
GENERAL
We are a leading merchant supplier of sophisticated secure communication
systems and specialized communication products. We produce secure, high data
rate communication systems, training and simulation systems, avionics and
ocean products, telemetry, instrumentation and space products and microwave
components. 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 DoD,
certain U.S. Government intelligence agencies, major aerospace and defense
contractors, foreign governments, commercial customers and certain other U.S.
agencies. For the nine months ended September 30, 2000, direct and indirect
sales to the DoD provided 64.4% of our sales, and sales to commercial and
other customers provided 35.6% of our sales. 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.
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 and we believe that we have developed virtually every high
bandwidth data link that is currently used by the DoD for surveillance and
reconnaissance. Our operations are principally strategic, long-term programs
performed under cost-plus, sole-source contracts supporting the DoD and other
government agencies. Our major secure communication programs and systems
include:
o secure data links for airborne, satellite, ground-and sea-based
remote platforms for real time information collection and
dissemination to users;
o strategic and tactical signal intelligence systems that detect,
collect, identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management;
o communication software support services; and
o communication systems for surface and undersea vessels and manned
space flights.
Our Secure Communication Systems segment includes our Training and
Simulation business. We design, develop and manufacture advanced simulation
products with high-fidelity representations of cockpits and operator stations
for aircraft and vehicle system simulation, which are principally performed
under long-term fixed price contracts. Our training business provides a full
range of teaching, training and logistic services and training device support
to domestic and international military customers.
Our Secure Communication Systems segment provided 43.9% of our sales for
the nine months ended September 30, 2000.
SPECIALIZED COMMUNICATION PRODUCTS
We are a leading merchant supplier of products to military and commercial
customers. We focus on niche markets in which we can achieve a market
leadership position. This reportable segment includes three product
categories:
o Avionics and Ocean Products;
o Telemetry, Instrumentation and Space Products; and
o Microwave Components.
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Avionics and Ocean Products. This business area includes our aviation
recorders, airborne collision avoidance products, displays, antennas,
acoustic undersea warfare products and naval power distribution,
conditioning, switching and protection equipment. We are the world's leading
manufacturer of commercial cockpit voice and flight data recorders (known as
"black boxes") and a leading supplier of acoustic undersea warfare products
and airborne dipping sonars to the U.S. Navy and over 20 foreign navies.
These products represented 31.0% of our sales for the nine months ended
September 30, 2000.
Telemetry, Instrumentation and Space Products. We 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. We are also 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 commercial, off-the-shelf
satellite control software, telemetry, tracking and control, mission
processors and software engineering services to foreign governments and
commercial satellite markets. We are a leading producer of navigation
products, gyroscopes, controlled momentum devices and star sensors for
commercial, military and other applications. These products represented 20.2%
of our sales for the nine months ended September 30, 2000.
Microwave Components. We are a preeminent worldwide supplier of premier
commercial off-the-shelf, high-performance microwave components and frequency
monitoring equipment. Our microwave components are sold under the
industry-recognized Narda brand name using 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. These products represented 4.9% of our sales for the nine months
ended September 30, 2000.
Our Specialized Communication Products segment provided 56.1% of our sales
for the nine months ended September 30, 2000.
DEVELOPING COMMERCIAL OPPORTUNITIES
An integral part of our growth strategy is to identify and exploit
commercial applications for select products and technologies currently sold
to defense customers. We have currently identified two vertical markets where
we believe there are significant opportunities to expand our existing
commercial sales: Transportation Products and Broadband Wireless
Communications Products. We believe that these vertical markets, together
with our existing commercial products, provide us with the opportunity for
substantial commercial growth in future years.
Within the transportation market, we have developed and are offering an
explosive detection system for checked baggage at airports, cruise ship
voyage recorders, power propulsion systems and power switches and displays
for rail transportation and internet service providers. We are developing
additional products, including an enhanced collision avoidance product that
incorporates ground proximity warning.
Within the communications product market, we are offering local wireless
access equipment for voice, DSL and internet access, transceivers for LMDS
and a broad range of commercial components and digital test equipment for
broadband communications providers.
We have developed the majority of our commercial products employing
technology funded by and used in our defense electronics businesses, thereby
minimizing any required incremental development expenses. Sales generated
from our developing commercial opportunities have not yet been material to
us.
INDUSTRY OVERVIEW
The U.S. defense industry has undergone significant changes precipitated
by ongoing federal budget pressures and new political roles and missions to
reflect changing strategic and tactical threats.
9
<PAGE>
From the mid-1980s to the late 1990s, the U.S. defense budget experienced a
decline in real dollars. This trend was reversed by increased defense
spending in 1999, followed by an increase in fiscal 2000, to $268.0 billion.
In addition, the DoD has increased its focus on enhancing military readiness,
joint operations and digital command and control communications capabilities
by incorporating advanced electronics to improve performance, reduce
operating cost, and extend the life expectancy of its existing and future
platforms. As a result, defense budget program allocations have shifted in
favor of advanced information technologies related to command and control
communications, computers, intelligence, surveillance and reconnaissance. In
addition, the DoD's 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 U.S. defense industry has also undergone dramatic consolidation
resulting in the emergence of three dominant prime system contractors: The
Boeing Company, Lockheed Martin and Raytheon Company. One outgrowth of this
consolidation among the remaining major prime contractors is their desire to
limit purchases of products and subsystems from one another. However, there
are numerous essential products, components and systems that are economically
unfeasible for the major prime contractors to design, develop or manufacture
for their own use. This situation 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, we expect 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 Lockheed Martin and Raytheon Company.
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. We believe 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 subsystems, components and products. In the
future, successful merchant suppliers will use their resources to complement
and support, rather than compete with, the prime contractors. We anticipate
that the relationship between the major prime contractors and our primary
suppliers will evolve in a fashion similar to that employed in the automotive
and commercial aircraft industries. In this model, our relationships will be
defined by 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 us, 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
We intend to grow our revenues, enhance our profitability and build on our
position as a premier merchant supplier of communication systems and products
to the major contractors in the aerospace/defense industry as well as the
U.S. Government. We intend to leverage our expertise and products into new
commercial business areas where we can adapt our existing products and
technologies. Our strategy to achieve our objectives includes:
EXPAND MERCHANT SUPPLIER RELATIONSHIPS. We have developed strong
relationships with virtually all of the major defense prime contractors, the
DoD and other major government agencies, enabling us to identify new business
opportunities and anticipate customer needs. As an independent merchant
supplier, we anticipate that our growth will be driven by expanding our share
of existing programs and by participating in new programs. We identify
opportunities where we will be able to use our strong
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<PAGE>
relationships to increase our business presence and allow customers to reduce
their costs. We also expect 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 our capabilities on a more
favorable basis due to our status as an independent company, which positions
us to be a merchant supplier to multiple bidders on prime contract bids.
SUPPORT CUSTOMER REQUIREMENTS. A significant portion of our sales is
derived from strategic, long-term programs and from programs for which we
have been the incumbent supplier, and in many cases acted as the sole
provider, over many years. Our customer satisfaction and excellent
performance record are evidenced by our performance-based award fees
exceeding an average of 90% of the available award fees since our inception
in April 1997. We believe that prime contractors will increasingly award
long-term, sole-source, outsourcing contracts to the merchant supplier they
believe to be most capable on the basis of quality, responsiveness, design,
engineering and program management support as well as cost. We intend to
continue to align our research and development, manufacturing and new
business efforts to complement our customers' requirements and provide
state-of-the-art products.
ENHANCE OPERATING MARGINS. We have a history of improving the operating
performance of the businesses we acquire through the reduction of corporate
administrative expenses and facilities costs, increasing sales and improving
competitive contract award win rates. We have a tradition of enhancing
operating margins, primarily due to efficient management and elimination of
significant corporate expense allocations. We intend to continue to enhance
our operating performance by reducing overhead expenses, continuing
consolidation and increasing productivity.
LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. We have developed
strong, proprietary technical capabilities that have enabled us to capture a
number one or two market position in most of our key business areas,
including secure, high data rate communications systems, solid state aviation
recorders, telemetry, instrumentation and space products, advanced antenna
products and high performance microwave components. We continue to invest in
L-3 sponsored independent research and development, including bid and
proposal costs, in addition to making substantial investments in our
technical and manufacturing resources. Further, we have a highly skilled
workforce, including approximately 5,000 engineers. We are applying our
technical expertise and capabilities to several closely aligned commercial
business markets and applications such as transportation and broadband
wireless communications and will continue to explore other similar commercial
opportunities.
MAINTAIN DIVERSIFIED BUSINESS MIX. We have a diverse business mix with
limited reliance on any particular program, a favorable balance of cost-plus
and fixed price contracts, a significant sole-source follow-on business and
an attractive customer profile. Our largest program represented 3.9% of our
sales for the nine months ended September 30, 2000 and is a long term,
sole-source, cost-plus contract for the U-2 aerial reconnaissance program. No
other program represented more than 2.1% of sales for the nine months ended
September 30, 2000. Furthermore, 27.2% of our sales for the same period were
from cost-plus contracts, and 72.8% were from fixed price contracts,
providing us with a favorable mix of predictable profitability (cost-plus)
and higher margin (fixed price) business. We also enjoy a mix of defense and
non-defense business, with sales to the DoD accounting for 64.4%, and sales
to commercial customers, foreign governments and U.S. Government agencies
other than the DoD accounting for 35.6% of our sales for the nine months
ended September 30, 2000. We intend to leverage this business profile to
expand our merchant supplier business base.
CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent industry
consolidation has significantly reduced the number of traditional middle-tier
aerospace/defense companies. We intend to enhance our existing product base
through internal research and development efforts and selective acquisitions
that will add new products in areas that complement our present technology.
We will acquire potential targets with the following criteria:
o significant market position in their business area;
o product offerings which complement and/or extend our product
offerings; and
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o positive future growth and earnings prospects.
During the nine months ended September 30, 2000, we acquired nine
businesses for an aggregate purchase price of $527.8 million, subject to
adjustment based on closing date net assets and, in three cases, additional
purchase price contingent upon the post-acquisition financial performance of
the acquired company. The chart below sets forth our primary acquisitions
since January 1, 2000:
SELECTED RECENT ACQUISITIONS
<TABLE>
<CAPTION>
PRICE
BUSINESS NAME DATE ACQUIRED ACQUIRED FROM ($ MM) BUSINESS DESCRIPTION
-------------------- ----------------- ------------------- -------- ----------------------------------
<S> <C> <C> <C> <C>
LogiMetrics, Inc. July 11, 2000 LogiMetrics, Inc. $ 15.0 Designs, manufactures and markets
(53 1/2% interest) solid state, broadband wireless
communications infrastructure
equipment, subsystems and modules
used to provide
point-to-multipoint terrestrial
and satellite-based distribution
services in frequency bands from
24 to 38 gigahertz.
MPRI, Inc. June 30, 2000 MPRI Stockholders 34.5 Provides teaching and training
programs to the U.S. and
international governments and to
commercial customers.
Traffic Alert and April 28, 2000 Honeywell 237.0 Produces airborne collision
Collision Avoidance International, Inc. avoidance products that reduce
Systems mid-air collisions and near-miss
incidents among aircraft.
Trex Communications February 14, 2000 MCK Communications 50.2 Provides antennas and tracking for
Statutory Trust telemetry, tracking and control
systems, flight termination
systems, fixed and portable
command and control ground
stations, and portable commercial
satellite news gathering uplinks
and satellite components.
Training Devices and February 10, 2000 Raytheon 160.0 Produces and supports training
Training Services Company systems and equipment designed to
enhance operational proficiency.
-------------------- ----------------- ------------------- -------- ----------------------------------
</TABLE>
12
<PAGE>
PRODUCTS AND SERVICES
The systems, selected applications and selected platforms or end users of
our Secure Communication Systems segment as of September 30, 2000 are
summarized in the table below:
SECURE COMMUNICATION SYSTEMS PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
------------------------------------- ---------------------------------------- -------------------------------------
<S> <C> <C> <C>
HIGH DATA RATE COMMUNICATIONS
o Wideband data links and ground o High performance, wideband secure o Manned and unmanned aircraft,
terminals communication links for relaying of naval ships, terminals and
intelligence and reconnaissance satellites
information
SATELLITE COMMUNICATION TERMINALS
o Ground-based satellite o Interoperable, transportable ground o Remote personnel provided with
communication terminals and terminals communication links to distant
payloads forces
SPACE COMMUNICATION AND SATELLITE CONTROL
o Satellite communication and o On-board satellite external o International Space Station,
tracking system communications, video systems, Space Shuttle and various
solid state recorders and ground satellites
support equipment
o Satellite command and control o Software integration, test and o U.S. Air Force Satellite Control
sustainment and support maintenance support satellite Network and rocket launch system
control network and engineering
support for satellite launch system
MILITARY COMMUNICATIONS
o Shipboard communications systems o Internal and external o Naval vessels
communications (radio room)
o Communication software support o Value-added, critical software o DoD
services support for C(3)I (Command,
Control, Communication and
Intelligence)
INFORMATION SECURITY SYSTEMS
o STE (Secure Terminal Equipment) o Secure and non-secure voice, data o Armed services, intelligence and
and video communication for office security agencies
and battlefield utilizing ISDN and
ATM commercial network technologies
TRAINING AND SIMULATION
o Military Flight Simulators o Training for pilots, navigators, o Military fixed and rotary winged
flight engineers, gunners and aircraft and ground vehicles
operators
o Training o Training and logistics services and o DoD and foreign governments
training device support
o Human Patient Simulators o Medical training o Medical schools, nursing
schools, and DoD
------------------------------------- ---------------------------------------- -------------------------------------
</TABLE>
SECURE COMMUNICATION SYSTEMS
We are a leader in the development, construction and installation of
communication systems for high performance intelligence collection, imagery
processing and ground, air, sea and satellite communications for the DoD and
other U.S. Government agencies. We provide secure, high data rate,
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<PAGE>
real-time communication systems for surveillance, reconnaissance and other
intelligence collection systems. We also design, develop, produce and
integrate communication systems and support equipment for space, ground and
naval applications, as well as provide 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 terminals, naval 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.
High Data Rate Communications
We are a technology leader in high data rate, covert, jam-resistant
microwave communications used in military and other national agency
reconnaissance and surveillance applications. Our 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. Our 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 and during operations in Bosnia.
Our current family of strategic and tactical data links or CDL (Common
Data Link) systems are considered DoD standards for data link hardware. Our
primary focus is spread spectrum secure communication links technology, which
involves transmitting a data signal with a high-rate noise signal making it
difficult to detect by others, and then re-capturing the signal and removing
the noise. Our data links are capable of providing information at over 300
megabytes per second and use point-to-point and point-to-multipoint
architectures.
We provide these secure high bandwidth products to the U.S. Air Force, the
U.S. Navy, the U.S. Army and various U.S. 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 such as
the U-2 Support Program, CHBDL (Common High Band-Width Data Link), LAMPS
(Light Airborne Multi-Purpose System) GUARDRAIL, ASTOR and major UAV
(unmanned aerial vehicle) programs, such as Predator and Globalhawk.
Satellite Communication Terminals
We provide ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals
used to communicate with commercial, military and international satellites.
These terminals provide remote personnel with constant and effective
communication capability and provide communications links to distant forces.
Our TSS (TriBand SATCOM Subsystem) 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. We also offer an 11.3 meter dish which is transportable on two
C-130 aircraft. The SHF PTS (Portable Terminal System) is a lightweight (28
lbs.), portable terminal, which communicates through DSCS, NATO or SKYNET
satellites and brings connectivity to small military tactical units and
mobile command posts. We delivered 14 of these terminals for use by NATO
forces in Bosnia.
Space Communications and Satellite Control
We are currently producing and delivering three communication subsystems
for the ISS (International Space Station). These systems will control all ISS
radio frequency communications and external video activities. We also provide
solid-state recorders and memory units for data capture, storage, transfer
and retrieval for space applications. Our standard NASA tape recorder has
completed over five million hours of service without a mission failure. Our
recorders are on National Oceanic & Atmospheric Administration weather
satellites, the Earth Observing Satellite, AM spacecraft and Landsat-7
Earth-monitoring spacecraft. We also provide 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.
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<PAGE>
Military Communications
We provide integrated, computer controlled switching systems for the
interior and exterior voice and data needs of naval vessels. Our products
include Integrated Voice Communication Systems for Aegis class cruisers and
Arleigh Burke class destroyers and the Integrated Radio Room 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. Our MarCom 2000 secure digital
switching system 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. Along
with the Keyswitch Integrated Terminals, MarCom 2000 provides automated
switching of radio/crypto circuits, which results in significant time
savings. We also offer 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 terminals. We supply the
U.S. Army's Command and Control Vehicle Mission Module Systems, which provide
the "communications on the move" capability needed for the digital
battlefield by packaging advanced communications into a modified Bradley
Fighting Vehicle.
Information Security Systems
We are a leader in the development of secure communications equipment for
both military and commercial applications. We are producing the next
generation digital, ISDN-compatible STE (secure telephone equipment). STE
provides clearer voice and thirteen-times faster data/fax transmission
capabilities than the previous generation secure telecommunications
equipment. STE also supports secure conference calls and secure video
teleconferencing. STE uses a CryptoCard security system which consists of a
small, portable, cryptographic module holding the algorithms, keys and
personalized credentials to identify its user for secure communications
access. We also provide the workstation component of the U.S. Government's
EKMS (Electronic Key Management System), the next generation of information
security systems. EKMS is the government system to replace current "paper"
encryption keys used to secure government communications with "electronic"
encryption keys. The component we provide produces and distributes the
electronic keys. We also develop specialized strategic and tactical signal
intelligence 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.
Training and Simulation
We are a leading provider of fully-integrated simulation training systems
and related support services to the U.S. and foreign military agencies.
Our training devices business designs, develops and manufacturers advanced
virtual reality simulation and training products for training air crews with
high-fidelity representations of cockpits and operator stations for aircraft
and vehicle simulation. We believe that we have developed flight simulators
for most of the U.S. military aircraft in active operation. We have numerous
proprietary technologies and fully-developed systems integration capabilities
that provide competitive advantages. Our proprietary software is used for
visual display systems, high-fidelity system models, database production,
digital radar land mass image simulation and creation of synthetic
environments. We are also a leader in developing DMT (Distributed Mission
Training) systems which allow multiple trainees at multiple sites to engage
in group, unit and task force training and combat simulations. In addition we
are currently developing all phases of the U.S. Air Force's warfighter
training and combat readiness program.
Our products and services can be designed to meet customer training
requirements for pilots, navigators, flight engineers, gunners, operators and
maintenance technicians for virtually any platform, including military fixed
and rotary wing aircraft, air vehicles and various ground vehicles. As one of
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<PAGE>
the leading suppliers of both simulator systems and training services, we
believe we are able to leverage our unique full-service capabilities to
develop fully-integrated, innovative solutions for training systems, propose
and provide program upgrades and modifications, as well as provide hands-on,
best-in-class training operations in accordance with virtually any customer
requirement in a timely manner.
Our training services business is a recognized provider of premium
training services and helps us maintain our market presence in training
devices by providing our primary customers, including the U.S. Air Force,
U.S. Army and U.S. Navy, with synergistic technical expertise in system
instructional design, maintainability, user requirements integration and
system development.
We also develop and manage extensive programs in the United States and
internationally focusing on training and education, strategic planning,
organizational design, democracy transition and leadership development. To
provide these services, we utilize a pool of experienced former armed
service, law enforcement and other national security professionals. In the
United States, our personnel are instructors in the U.S. Army's ROTC program
and are involved in recruiting for the U.S. Army. In addition, we own a
one-third interest in Medical Education Technologies, Inc., which has
developed and is producing human patient simulators for sale to medical
teaching and training institutions and the DoD.
The products, selected applications and selected platforms or end users of
our Specialized Communications Products segment as of September 30, 2000, are
summarized in the table below:
SPECIALIZED COMMUNICATION PRODUCTS
<TABLE>
<CAPTION>
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
AVIONICS AND OCEAN PRODUCTS
Aviation Products
o Solid state crash protected o Voice recorders continuously o Business and commercial
cockpit voice and flight data record most recent 30-120 aircraft and certain military
recorders minutes of voice and sounds transport aircraft; sold to
from cockpit and aircraft both aircraft manufacturers and
intercommunications. Flight airlines under the Fairchild
data recorders record the last brand name
25 hours of flight parameters
o TCAS (Traffic Alert and o Prevents midair aircraft o Commercial, business, regional
Collision Avoidance System) collisions by providing visual and military transport aircraft
and audible warnings and
maneuvering instructions to
pilots
Antenna Products
o Ultra-wide frequency and o Surveillance and radar o Military aircraft including
advanced radar antennas and detection surveillance, fighters and
rotary joints bombers, attack helicopters and
transport
o Precision antennas serving o Antennas for high frequency, o Various military and commercial
major military and commercial millimeter satellite customers including scientific
frequencies, including Ka band communications astronomers
Display Products
o Cockpit and mission displays o High performance, ruggedized o Military aircraft including
and controls flat panel and cathode ray tube surveillance, fighters and
displays and processors bombers, attack helicopters,
transport aircraft and land
vehicles
------------------------------------ ------------------------------------ ------------------------------------
</TABLE>
16
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS (CONT.)
<TABLE>
<CAPTION>
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
Ocean Products
o Airborne dipping sonars o Submarine detection and o Various military helicopters
localization
o Submarine and surface ship towed o Submarine and surface ship o U.S. Navy and foreign navies
arrays detection and localization
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
o Commercial transfer switches, o Production and maintenance of o Federal Aviation Administration,
uninterrupted power supplys and systems and high-speed switches internet service providers,
power products for power interruption financial institutions and rail
prevention transportation
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
Airborne, Ground and Space Telemetry
o Aircraft, missile and satellite o Real-time data acquisition, o Aircraft, missiles and
telemetry and instrumentation measurement, processing, satellites
systems simulation, distribution,
display and storage for flight
testing
o GPS (Global Positioning Systems) o Tracking location o Guided projectiles
receivers
o Navigation systems and o Space navigation o Hubble Space Telescope,
subsystems, gyroscopes, reaction Delta IV launch vehicle and
wheels, star sensor satellites
Space Products
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private
systems video and data networks, direct to home
uplinks, satellite news
gathering and wideband
applications
MICROWAVE COMPONENTS
o Passive components, switches and o Radio transmission, switching o DoD, telephony service providers
wireless assemblies and conditioning, antenna and and original equipment
base station testing and manufacturers
monitoring, broad-band and
narrow-band applications (PCS,
cellular, SMR and paging
infrastructure)
o Safety products o Radio frequency monitoring and o Monitor cellular base station
measurement for safety and industrial radio frequency
emissions frequency monitoring
o Satellite and wireless o Satellite transponder control, o Communications satellites
components (channel amplifiers, channel and frequency separation
transceivers, converters,
filters and multiplexers)
o Amplifiers and amplifier based o Automated Test Equipment, o DoD and commercial satellite
components (amplifiers, up/down military electronic warfare, operators
converters and Ka assemblies) ground and space communications
------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
17
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS
Avionics and Ocean Products
Aviation Recorders. We manufacture commercial, solid-state,
crash-protected aviation recorders, commonly known as black boxes, under the
Fairchild brand name, and have delivered over 50,000 flight recorders to
airplane manufacturers and airlines around the world. We believe we have the
leading worldwide market position for commercial cockpit voice recorders and
flight data recorders. We offer two types of recorders:
o the cockpit voice recorder, which records the last 30 to 120
minutes of crew conversation and ambient sounds from the cockpit;
and
o the flight data recorder, 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. Our recorders are mandated and regulated by
various worldwide agencies for use in commercial airlines and a large portion
of business aviation aircraft. We anticipate growth opportunities in aviation
recorders as a result of the current high level of orders for new commercial
aircraft. The U.S. military has recently required the installation of black
boxes in military transport aircraft. We believe this development will
provide us with new opportunities for expansion into the military market. Our
recorders were recently selected for installation on certain military
transport aircraft.
We have completed development of a combined voice and data recorder and
are developing an enhanced recorder that monitors engine and other aircraft
parameters for use in maintenance and safety applications.
Antenna Products. We produce high performance antennas under the Randtron
brand name which are designed for:
o surveillance of high-resolution, ultra-wide frequency bands;
o detection of low radar cross-section targets and low radar
cross-section installations;
o severe environmental applications; and
o polarization diversity.
Our primary product is a sophisticated 24-foot diameter antenna used on
all E-2C surveillance aircraft. This airborne antenna is a rotating
aerodynamic radome containing a UHF surveillance radar antenna, an IFF
antenna, and forward and aft auxiliary antennas. Production is planned beyond
2000 for the E-2C, P-3 and C-130 AEW aircraft. We have been funded to begin
the development of the next generation for this antenna. We also produce
broadband antennas for a variety of tactical aircraft, as well as rotary
joints for the AWAC antenna. We have delivered over 2,000 sets of antennas
for aircraft and have a backlog of orders through 2004.
We are a leading supplier of ground based radomes used for air traffic
control, weather radar, defense and scientific purposes. These radomes
enclose an antenna system as a protective shield against the environment and
are intended to enhance the performance of an antenna system.
Display Products. We design, develop and manufacture ruggedized displays
for military and high-end commercial applications. Our current product line
includes a family of high performance display processing systems, which use
either a cathode ray tube or active matrix liquid crystal display. Our
displays are used in numerous airborne, ship-board and ground based platforms
and are designed to survive in military and harsh environments.
Ocean Products. We are one of the world's leading suppliers of acoustic
undersea warfare systems. Our experience spans a wide range of platforms,
including helicopters, submarines and surface ships. Our products include
towed array sonar, hull mounted sonar, airborne dipping sonar and ocean
mapping sonar for navies around the world.
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<PAGE>
We are also a leading provider of state-of-the-art electronics and
electrical power delivery systems and subsystems, as well as communications
and control systems for the military and commercial customers. We offer the
following:
o military power delivery equipment and components which focus on
switching, distribution and protection providing engineering design
and development, manufacturing and overhaul and repair services;
o high technology electrical power distribution, control and
conversion equipment, which focus on frequency and voltage
conversion for military and commercial applications; and
o ship control and interior communications equipment.
We have been able to apply our static transfer switch technology, which we
developed for the U.S. military, to commercial applications. Our commercial
customers for static transfer switches are primarily financial institutions
and internet service providers, including American Express, AOL, AT&T, Schwab
and the Federal Aviation Administration. In addition, we provide electrical
products for rail transportation and utilities businesses.
Telemetry, Instrumentation and Space Products
We are a leader in the development and marketing of 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 of various equipment
performance parameters and is required when the object under test is moving
too quickly or is of too great a distance to use direct connection. Telemetry
measures as many as 1,000 different parameters of the platform's operation
such as heat, vibration, stress and operational performance and transmits
this data to the ground.
Additionally, our satellite telemetry equipment transmits data necessary
for ground processing. These applications demand high reliability of
components because of the high cost of satellite repair and the need for
uninterrupted service. Telemetry also provides the data used to terminate the
flight of missiles and rockets under errant conditions and/or at the end of a
mission. These telemetry and command/control products are currently used for
a variety of missile and satellite programs.
Airborne, Ground and Space Telemetry. We provide airborne equipment and
data link systems that gather critical information and then process, format
and transmit the data to the ground from communications satellites,
spacecraft, aircraft and missiles. These products are available in both
commercial off-the-shelf and custom configurations and include software and
software engineering services. Primary customers include many of the major
defense contractors who manufacture aircraft, missiles, warheads, launch
vehicles and munitions. Our ground station instrumentation receives, encrypts
and/or decrypts the serial stream of combined data in real-time as it is
received from the airborne platform. We are a leader in digital GPS (Global
Positioning System) receiver technology for high performance military
applications. These GPS receivers are currently in use on aircraft, cruise
missiles and precision guided bombs and provide highly accurate positioning
and navigational information. Additionally, we provide navigation systems for
high performance weapon pointing and positioning systems for programs such as
MLRS (Multiple Launch Rocket System) and MFCS (Mortar Fire Control System).
Space Products. We offer value-added solutions that provide our customers
with complex product integration and comprehensive support. We focus on the
following niches within the satellite ground segment equipment market:
telephony, video broadcasting and multimedia. Our customers include foreign
communications companies, domestic and international prime communications
infrastructure contractors, telecommunications or satellite service
providers, broadcasters and media-related companies. We also provide space
products for advanced guidance and control systems including gyroscopes,
controlled momentum devices and star sensors. These products are used on
satellites, launch vehicles, the Hubble Telescope, the Space Shuttle and the
International Space Station.
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Microwave Components
We believe we are a premier worldwide supplier of commercial
off-the-shelf, high performance RF (radio frequency) microwave components,
assemblies and instruments supplying the wireless communications, industrial
and military markets. We are also a leading provider of state-of-the-art
space-qualified commercial satellite and strategic military RF products and
millimeter amplifier based products. We sell many of these components under
the well-recognized Narda brand name through a comprehensive catalog of
standard, stocked hardware. We also sell our 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.
Passive components are generally purchased in narrow frequency
configurations by wireless equipment manufacturers, wireless service
providers and military equipment suppliers. Commercial applications include
cellular and PCS base station automated test equipment, and equipment for the
paging industry. Military applications include electronic surveillance and
countermeasure systems.
Our space-qualified and wireless components separate various signals and
direct them to sections of the satellites' payload. Our main satellite
products are channel amplifiers and linearizers, payload products,
transponders and antennas. Channel amplifiers amplify the weak signals
received from earth stations, and then drive the power amplifier tubes that
broadcast the signal back to earth. 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 for
amplification. This pre-distortion is exactly the opposite of the distortion
created at peak power by the traveling wave tube and, consequently, has a
cancellation effect that keeps the signal linear over a much larger power
band of the tube. The traveling wave tube and area covered by the satellite
is significantly increased.
We design and manufacture both broad and narrow band amplifiers and
amplifier-based products in the microwave and millimeter wave frequencies. We
use these amplifiers in defense and communications applications. These
devices can be narrow band for communication needs or broadband for
electronic warfare.
We offer standard packaged amplifiers for use in various test equipment
and system applications. We design and manufacture millimeter range (at least
20 to 38 GHz) amplifier products for use in emerging communication
applications such as back haul radios, LMDS (Local Multipoint Distribution
Service) and ground terminals for LEO satellites. On July 11, 2000, to
further our millimeter wave efforts, we agreed to acquire a 53-1/2% equity
interest in LogiMetrics, Inc. LogiMetrics designs, manufactures and markets
solid state, broadband wireless communications infrastructure equipment,
subsystems and modules used to provide point-to-multipoint terrestrial and
satellite-based distribution services in frequency bands from 24 to 38
gigahertz. LogiMetrics' products include solid-state power amplifiers, hub
transmitters, active repeaters, cell-to-cell relays, Internet access systems
and other millimeter wave-based modules and subsystems. These products are
used in various applications, such as broadband communications, including
LMDS, PMP (Point to Multipoint) local loop services and Ka-band satellite
communications.
DEVELOPING COMMERCIAL OPPORTUNITIES
Part of our growth strategy is to identify commercial applications for
select products and technologies currently sold to defense customers. We have
initially identified two vertical markets where we believe there are
significant opportunities to expand our products: transportation and
broadband wireless communications.
Transportation. Our products, designed to meet strict government quality
and reliability standards, are easily adapted to the commercial
transportation marketplace. Our aircraft voice recorders, designed to meet
FAA requirements, have been successfully marketed to the cruise ship, marine
shipping and railroad industries. Similarly, our state-of-the-art power
propulsion products, originally designed for the U.S. Navy, meet the needs of
commuter railroads, including Philadelphia's
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regional rail system and New York City's Metropolitan Transportation
Authority. Our explosive detection system, the eXaminer 3DX (Trade Mark)
6000, enables the rapid scanning of passenger checked baggage at airports
using state-of-the-art technology.
Communications. The wireless communications technology we developed for
our military customers also meets the needs of a growing commercial
marketplace for technologically advanced communications products. Some of the
products we have developed or are developing to exploit this market include
wireless loop products, transceivers, LMDS, compression products, remote
sensing internet networks, microwave links and products for microwave base
stations. Our fixed wireless loop products are an example of our expanding
involvement in the commercial communications industry. Using synchronous CDMA
technology that supports terrestrial, space, fixed and mobile communications,
we produce wireless loop equipment for use in areas that do not have an
adequate telecommunications infrastructure, including emerging market
countries and customers in rural areas.
In the expanding broadband wireless commercial communications market, we
also have developed a broad assortment of other products including
transponders, payloads, uplinks|Ac downlinks, fly-away SATCOM terminals,
telemetry tracking and control and test equipment and waveform generators.
BACKLOG
Our funded backlog as of September 30, 2000 was $1,262.8 million, as of
December 31, 1999 was $1,003.7 million and as of December 31, 1998 was $855.9
million. We define funded backlog as the value of contract awards that we
received for which the government has appropriated funds. Our funded orders
for the nine months ended September 30, 2000 was $1,378.6, for the year ended
December 31, 1999 was $1,423.1 million and for the year ended December 31,
1998 was $1,057.0 million. We expect to record as sales approximately 60.0%
of our backlog as of September 30, 2000 during the next twelve months.
However, there can be no assurance that our backlog will become sales in any
particular period, if at all.
Funded backlog does not include the full value of contract awards
including those pertaining to multi-year, cost-plus reimbursable contracts,
which are funded as we incur costs. Funded backlog also does not include
unexercised contract options which represent the amount of revenue that 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.
MAJOR CUSTOMERS
For the nine months ended September 30, 2000, direct and indirect sales to
the DoD provided 64.4% of our sales, and sales to commercial and other
customers provided 35.6% of our sales.
Our government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Various U.S.
Government agencies and contracting entities exercise independent purchasing
decisions. Therefore, we do not regard sales to the U.S. Government generally
as constituting sales to one customer. Instead, we regard each contracting
entity as a separate customer. As of September 30, 2000, we had approximately
454 contracts with a value exceeding $1.0 million. For the nine months ended
September 30, 2000, sales to our five largest customers amounted to $145.5
million or 10.8% of our sales. We are working to grow our relationships with
our major commercial customers, and believe that we have established a
competitive position in the markets that we have entered.
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RESEARCH AND DEVELOPMENT
We conduct research and development activities that consist of projects
involving basic research, applied research, development, and systems and
other concept studies. We employ scientific, engineering and other personnel
to improve our existing product lines and develop new products and
technologies. As of September 30, 2000, we employed approximately 5,000
engineers, a substantial portion of whom held advanced degrees. For the nine
months ended September 30, 2000, we incurred $205.1 million on research and
development costs for customer-funded contracts and spent $82.6 million on
company-sponsored research projects including bid and proposal costs.
COMPETITION
We encounter intense competition in both our defense and government
related businesses and our other commercial activities. We believe that we
are a significant supplier of many of the products that we manufacture and of
many services that we provide and therefore are a strong competitor in both
our defense and government business, as well as our other commercially
related activities.
Defense and Government Business
Our ability to compete for defense contracts depends on a variety of
factors, including:
o the effectiveness and innovation of our research and development
programs;
o our ability to offer better program performance than our
competitors at a lower cost; and
o the availability 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
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. Competitive contracts accounted for
48.4% of our sales for the nine months ended September 30, 2000. The majority
of our sales are derived from contracts with the U.S. Government and its
prime contractors. These contracts are awarded on the basis of negotiations
or competitive bids.
We compete with various industrial firms and U.S. Government agencies,
some of which have substantially greater resources than we have available to
us. Several of these companies are listed below. We do not believe that any
of these individual competitors, nor any small number of these competitors
together, are dominant in any of our business areas.
o Cubic Corporation;
o Eaton Corporation;
o Harris Corporation;
o Motorola, Inc.;
o Scientific-Atlanta, Inc.;
o Thomson Marconi Sonar Ltd.;
o Titan Corporation; and
o TRW Inc.
We believe that we will continue to be a successful participant in our
industry, based upon the quality and cost competitiveness of our products and
services. Despite the competition that our defense and government related
businesses continue to face, we believe that we are well positioned to
continue to succeed in this industry.
Commercial Activities
Our non-government related commercial activities have become an
increasingly significant portion of our business mix, comprised 24.5% of our
total business for the nine months ended September 30, 2000. Our ability to
compete for commercial business depends on a variety of factors, including:
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o Pricing;
o Product features and performance;
o Reliability, scalability and compatibility;
o Customer relationships, service and support; and
o Brand recognition.
In these markets, we compete with various companies, several of which are
listed below:
o Agilent Technologies, Inc.;
o Globecomm Systems, Inc.;
o Honeywell Internatonal Inc.; and
o Smiths Industries.
We believe that these business areas will continue to grow as a percentage
of our overall business, despite the fact that we will be competing against
companies that may have greater resources and technologies available to them
than we currently do. Despite these challenges, we believe that we can
continue competing effectively in the commercial activities that we currently
participate in, and plan to participate in the future. We believe that our
ability to develop businesses gives us a proven advantage over our
competitors.
PATENTS AND LICENSES
Although we own some patents and have filed applications for additional
patents, we do not believe that our operations depend upon our ownership of
patents. In addition, our U.S. Government contracts generally permit us to
use patents owned by others. Similar provisions in U.S. Government contracts
awarded to other companies make it impossible for us to prevent the use of
our patents in most domestic work performed by other companies for the U.S.
Government.
CONTRACTS
A significant portion of our sales are derived from strategic, long-term
programs and from programs for which we are the incumbent supplier or have
been the sole provider for many years. Approximately 51.6% of sales for the
nine months ended September 30, 2000 were generated from sole-source
contracts. Our customer satisfaction and performance record are evidenced by
our receipt of performance-based award fees exceeding 90% of the available
award fees on average during the nine months ended September 30, 2000. We
believe that our customers will award long-term, sole-source, outsourcing
contracts to the most capable merchant supplier in terms of quality,
responsiveness, design, engineering and program management support as well as
cost. As a consequence of our strong competitive position, for the nine
months ended September 30, 2000 we won contract awards in excess of 57.0% on
new competitive contracts that we bid on, and in excess of 90.0% of the
contracts for which were the incumbent supplier.
We have a diverse business mix with limited reliance on any single
program, a favorable balance of cost-plus and fixed price contracts, a
significant sole-source follow-on business and an attractive customer
profile. For the nine months ended September 30, 2000, 27.2% of our sales
were generated from cost-plus contracts and 72.8% from fixed price contracts,
providing us with a favorable mix of predictable profitability (cost-plus)
and higher profit margin (fixed price) business.
Under firm fixed price contracts we agree to perform for a predetermined
contract price. Although our fixed price contracts generally permit us to
keep profits if costs are less than projected, we bear the risk that
increased or unexpected costs may reduce profit or cause us to sustain losses
on the contracts. Generally, firm fixed price contracts offer higher margins
than cost plus type contracts. All domestic defense contracts and
subcontracts to which we are 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 permitting termination at the convenience of the
government. To date, none of our significant fixed price contracts have been
terminated. See "Risk Factors--Our government contracts entail certain
risks."
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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 a
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 and services of the type
we manufacture and provide, lower margins resulting from increasingly
competitive procurement policies, a reduction in the volume of contracts or
subcontracts awarded to us or substantial cost overruns could have an adverse
effect on us.
ENVIRONMENTAL MATTERS
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 respect to these requirements. Management
believes that our current operations are in substantial compliance with all
existing applicable environmental laws and permits. We believe our current
expenditures will allow us to continue to comply with applicable
environmental laws and regulations.
Despite our current level of compliance, new laws and regulations,
stricter enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new clean-up
requirements may require us to incur costs in the future that could have a
negative effect on our financial condition or results of operations.
We have assessed the risk of environmental contamination on various
manufacturing facilities of our acquired businesses and, where appropriate,
have obtained indemnification, either from the sellers of those acquired
businesses or through pollution liability insurance. We do not project any
material, non-indemnified environmental remediation expenses for such
manufacturing facilities.
EMPLOYEES
As of September 30, 2000, we employed approximately 13,400 full-time and
part-time employees, the majority of whom are located in the United States.
Of these employees, approximately 11.3% are covered by 23 separate collective
bargaining agreements with various labor unions. We have a continuing need
for skilled and professional personnel to meet contract schedules and obtain
new and ongoing orders for our products. We believe that relations with our
employees are good.
PROPERTIES
As of September 30, 2000, we operated at 179 facilities serving a variety
of manufacturing, administrative and sales functions. Of these, we owned
space at 29 locations, aggregating approximately 1.3 million square feet, and
we leased space at 150 locations, aggregating approximately 4.5 million
square feet.
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The table below sets forth certain information with respect to our
significant facilities and properties as of September 30, 2000:
<TABLE>
<CAPTION>
LOCATION OWNED LEASED
---------------------------------------- ------- --------
(thousands of
square feet)
<S> <C> <C>
L-3 Headquarters, New York, NY........... -- 35.3
L-3 Washington Operations, Arlington,
VA...................................... -- 4.6
SECURE COMMUNICATION SYSTEMS:
Camden, NJ.............................. -- 580.6
Arlington, TX........................... 82.5 150.1
Salt Lake City, UT...................... -- 487.7
SPECIALIZED COMMUNICATION PRODUCTS:
Anaheim, CA............................. 293.6 242.0
Folsom, CA.............................. -- 57.5
Menlo Park, CA.......................... -- 93.1
San Diego, CA........................... 196.0 68.9
Sylmar, CA.............................. -- 253.0
Ocala, FL............................... 112.0 --
Sarasota, FL............................ -- 143.7
Alpharetta, GA.......................... 93.0 --
Concord, MA............................. -- 60.0
Lowell, MA.............................. -- 47.0
Newburyport, MA......................... -- 81.2
Teterboro, NJ........................... -- 250.0
Binghamton, NY.......................... 428.0 --
Hauppauge, NY........................... 282.1 --
Newton, PA.............................. 78.0 13.5
Philadelphia, PA........................ -- 230.0
Kiel, Germany........................... -- 302.7
Leer, Germany........................... -- 26.5
</TABLE>
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe we have adequately reserved for
these liabilities and that there is no litigation pending that could have a
material adverse effect on our results of operations and financial condition.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC.
By: /s/ Robert V. LaPenta
------------------------------------
President and Chief Financial Officer
L-3 COMMUNICATIONS CORPORATION
Date November 16, 2000 By: /s/ Robert V. LaPenta
----------------- -----------------------------------
President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Title
-------------- -----
99 Press Release of L-3 Communications dated
November 15, 2000 (p. 27).
27
