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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998 Commission file number 333-43619.
UNITED DEFENSE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 52-2059782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CO-REGISTRANTS AND GUARANTORS
IRON HORSE INVESTORS, L.L.C. DELAWARE 52-2059783
UDLP HOLDINGS CORP. DELAWARE 52-2059780
UNITED DEFENSE, L.P. DELAWARE 54-1693796
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1525 Wilson Boulevard, Suite 700,
Arlington, Virginia, 22209-2411
(703)312-6100
(Address and telephone number of principal executive offices of
Registrant and each Co-Registrant)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [_]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. None as of March 29, 1999.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. Common Stock outstanding as of
March 29, 1999.
No. of shares Par Value
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United Defense Industries, Inc. .............. 18,039,624 $0.01
Iron Horse Investors, L.L.C. ................. -NONE-
UDLP Holdings Corp. .......................... 1,000 $0.01
United Defense, L.P. ......................... -NONE-
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Forward-Looking Statements
This report on Form 10-K contains forward-looking statements that are
based on management's expectations, estimates, projections and assumptions.
Words such as "expects," "anticipates," "plans," "believes," "estimates,"
variations of these words, and similar expressions are intended to identify
forward-looking statements which include but are not limited to projections of
revenues, earnings, performance, cash flows and contract awards. Forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and involve certain risks and uncertainties which are
difficult to predict. Therefore, actual future results and trends may differ
materially from those made in or suggested by any forward-looking statements due
to a variety of factors, including: the ability of United Defense Industries,
Inc. (the "Company") to design and implement key technological improvements
(such as, in the Crusader program discussed herein) and to execute its internal
performance plans; performance issues with key suppliers and subcontractors;
developments with respect to contingencies such as legal proceedings and
environmental matters; labor negotiations; changing priorities or reductions in
the U.S. government defense budget; the performance of, and political and other
risks associated with, the Company's international operations and joint
ventures; termination of government contracts due to unilateral government
action; and the impact of the "Year 2000" issue on the Company and its customers
and suppliers. For additional information, see "Risk Factors" in the Company's
Registration Statement on Form S-4, SEC File Number 333-43619.
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ITEM 1. Description of Business
Overview
The Company is a subsidiary of Iron Horse Investors, L.L.C. ("Iron
Horse") and is organized under the laws of the state of Delaware and was formed
in 1997 for the primary purpose of facilitating the acquisition of United
Defense, L.P. by Iron Horse. Iron Horse is owned by an investment group led by
the Carlyle Group ("Carlyle"). On October 6, 1997, the Company acquired 100% of
the partnership interests of United Defense, L.P. from FMC Corporation ("FMC")
and Harsco Corporation ("Harsco"), (collectively the "Sellers"). Iron Horse's
only assets is the Company and therefore except as indicated, the discussion
herein is the same for both entities.
The Company is a supplier of tracked, armored combat vehicles and
weapons delivery systems to the U.S. Department of Defense and a number of
allied military forces worldwide. The Company's primary products include the
Bradley Fighting Vehicle and its derivatives, and the development program for
the Crusader Field Artillery System. The Bradley Fighting Vehicle is the only
domestically produced vehicle able to fulfill the dual role of troop transport
and armored fighting vehicle. The Company has maintained its prime contractor
position on the Bradley program since production began in 1981, and has added a
number of technology-based upgrades and derivative vehicles that continue to
extend the program's life-cycle. Building on over twenty years of experience on
the M109 self-propelled howitzer and upgrades, the Company is also the prime
contractor for the development of the Crusader Field Artillery System. The U.S.
Army has identified the Crusader as its planned multi-billion dollar
next-generation field artillery system and the largest U.S. military vehicle
development program of this decade. In addition to fighting vehicle and howitzer
programs, the Company serves as the prime contractor for a number of mission
critical military programs, several of which have spanned decades, including the
M113 armored personnel carrier since 1960, the M88 tank recovery vehicle since
1960, and the U.S. Navy's Mk45 naval gun system since 1968. The status of the
Company's major programs is described below.
Tracked Combat Vehicles ("TCVs"). TCVs are highly mobile vehicles that can cross
natural and man-made obstacles and urban terrain in all weather conditions,
while under fire from enemy combat forces. The U.S. Army and Marines use tracked
combat vehicles for four basic missions: (i) close combat, where the combination
of tanks, scout vehicles, fighting vehicles, armored personnel carriers, and
command and control vehicles provide the capability to present an integrated and
flexible combat front to face enemy forces at close range; (ii) fire support, by
providing lethal indirect firepower through self-propelled armament and multiple
launch rocket systems; (iii) combat support, including the provision of
operational assistance, such as crossing barriers, clearing or laying obstacles
and recovering disabled systems; and (iv) amphibious assaults, in which
amphibious assault vehicles are able to initiate attack from the sea and
continue the attack on land.
TCVs are classified into two weight classes: medium/light and heavy.
The Company produces and services vehicles primarily in the medium/light class.
Medium/light vehicles weigh less than 40 tons and normally are fabricated from
aluminum. The
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medium/light class of vehicles made its first appearance during
World War II, with an amphibious assault vehicle produced by the Company. Since
then, this vehicle class has expanded to include fighting vehicles,
self-propelled artillery and specialty vehicles.
The Bradley Fighting Vehicle ("BFV"). The Company has been the
sole-source, prime contractor of the BFV to the U.S. Army since its initial
production in 1981. The BFV is a tracked armored vehicle with a 25mm cannon, TOW
missiles and a stabilized turret, and is the only domestically produced vehicle
able to fulfill the dual role of troop transport and armored fighting vehicle.
Weighing 35 tons, the BFV is outfitted with armor and day/night sights, and can
transport up to nine people across rough terrain. The vehicle's combination of
lethality, survivability and tactical and strategic mobility has established it
as a critical component of the U.S. government's full-spectrum warfare strategy.
A total of 6,742 BFVs have been built, of which 400 were for the Saudi Arabian
Army.
Although new BFVs are not currently being built, the Army has invested
substantial time in upgrading much of its existing fleet of BFVs to the BFV A2
version. The Company initiated delivery of a further upgrade, the BFV A3
version, in October of 1998 as part of a low rate initial production contract
awarded in July of 1997. The BFV A3 provides enhancements such as situation
awareness capability, lethality, survivability and sustainability and is a key
component to the U.S. Army's program to digitize the battlefield. The U.S. Army
is currently planning to upgrade 1,103 older version BFVs to the A3
configuration by 2005. A new production contract was signed in December 1998 to
upgrade 70 vehicles for delivery starting in March 2000.
BFV Derivatives and Support. The BFV has served as a platform for a
number of derivative vehicles developed by the Company. One such derivative, the
Multiple Launch Rocket System ("MLRS") carrier, was developed to provide a
carrier for a long-range rocket artillery system and is outfitted with rockets,
a launcher and fire control system developed and produced by Lockheed Martin
Vought Systems. The Company was awarded a contract to initiate an MLRS
remanufacture program, with the first delivery completed in August 1997. Another
derivative, the Fire Support Vehicle, supports armor and mechanized forces by
pinpointing enemy targets using laser technology, which allows more accurate and
timely calls for fire from the artillery. The Company provided 22 kits to
convert BFV's under a workshare arrangement with Red River Army depot to produce
Fire Support Vehicles. The Command and Control Vehicle ("C2V") is a
self-contained vehicle that keeps pace with armored maneuver forces while
providing the crew with a protected environment. The Company was awarded the
third year production contract for C2V conversions in December 1998 with
scheduled deliveries to be completed in May 2001. Finally, the Army's Linebacker
air defense vehicle integrates the BFV with Stinger missiles and adds
improvements to turret fire control, target acquisition subsystems and
survivability. The Company received a new contract for Linebacker conversions in
July 1998 for delivery in 1999. Contracts for BFV derivatives are generally
smaller in value than the basic BFV upgrade contract.
In addition to the development and manufacture of BFV derivatives, the
Company provides BFV upgrade kits and field services. Kits allow for the upgrade
of BFVs to
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incorporate advancements in technology. The Company also deploys experts to
provide on-site training and advice to customers, complete maintenance and
repairs, and assess the necessity of replacement parts. The Company is also
under contract with the U.S. Army's Simulation, Training and Instrumentation
Command for the development and demonstration of a multi-purpose
simulator/trainer for the BFV family of vehicles.
M109 Self-Propelled Howitzer ("M109"). The M109 has been the most
widely-used field artillery vehicle for the U.S. military and certain foreign
governments since it was first produced by the Company in 1974. The M109 is
recognized for its ability to deliver rapid and high volume artillery support
and maximize survivability through mobility. The latest generation of the M109,
the M109A6 Paladin, is the most advanced M109 upgrade fielded today. The Company
also designs and produces unique configurations of the M109 and offers M109
upgrade kits, servicing and training to various foreign governments, with
deliveries to Austria, Egypt, Korea and Taiwan occurring throughout 1998.
The M109A6 Paladin is currently produced for the U.S. Government at the
Company's Letterkenny Army Depot facility in a partnering arrangement with the
depot. The Company's multi-year contract for 786 vehicles will conclude in
mid-1999. Since the Company has not received a follow-on award and no foreign
orders in a timeframe that will prevent a production interruption, the Paladin
facility will be shut down after the completion of the current contract. Any
future Paladin work awarded to the Company will be performed at other Company
locations.
M992 Field Artillery Ammunition Supply Vehicle ("FAASV"). The single
mission of the FAASV, the battlefield partner of the M109, is to safely
transport ammunition, supplies and personnel to howitzer artillery vehicles on
the battlefield during both firing and non-firing conditions. By utilizing
synchronized and semi-automated resupply strategies and mechanisms to carry the
M109 ammunition, the FAASV enables the howitzer to remain in the field longer
and thereby increase its lethality. The FAASV accommodates all standard 155mm
rounds and its heavily armored chassis provides ballistic protection to its
munition supply crew. The Company is currently operating under a production
contract for 96 new vehicles and 36 converted vehicles scheduled to be delivered
in 1998 and 1999.
M88 Armored Recovery Vehicle ("M88"). The M88 currently has an
installed base of more than 3,240 vehicles, including more than 70 M88A2
("Hercules") models, throughout the world. The M88 performs towing, lifting and
pulling tasks in the recovery of impaired tanks or in basic tank maintenance.
With the deployment at the beginning of this decade of heavier M1 tanks by the
U.S. Army, in 1991 the Company began the development effort for the Hercules
upgrade. The Hercules is the only recovery vehicle worldwide that can safely
recover 70-ton tanks (for example, the M1A1/A2). The U.S. Army has been awarding
annual contracts for M88 upgrades over the past several years and the Company is
currently under contract to deliver vehicles through January 2000.
M113 Armored Personnel Carrier ("M113"). The M113 has been the main
troop transport vehicle used by the U.S. military and allied governments
throughout the world,
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with more than 80,000 units delivered since initial production in 1960. The
Company has produced various M113 models in cooperation with U.S. allies,
including production of various configurations of the Armored Infantry Fighting
Vehicle, historically produced in Europe and currently by the Company's Turkish
affiliate, FNSS. The U.S. Army, which received its last delivery of new M113s
from the Company in 1992, continues to upgrade its M113s to the latest A3
configuration. The installed base of M113s includes a number of derivative
vehicles worldwide, and the Company is currently engaged in M113 upgrade
programs in several countries around the world. This upgrade work currently
occurs in the Company's Anniston, Alabama facility and continues to be a source
of revenues for the Company because of the large number of M113s currently in
existence. The upgrade work is performed in a partnering arrangement with the
Anniston Army Depot.
M9 Armored Combat Earthmover ("M9 ACE"). The M9 ACE is an 18-ton,
fully-tracked, aluminum armored vehicle, used on the battlefield to bulldoze,
rough grade, excavate, haul and scrape. With a crew of one, the multi-purpose M9
ACE can attain road speeds of up to 35 miles per hour, and unlike a standard
bulldozer, requires no transport vehicle. The M9 ACE can serve as the prime
mover of vehicles weighing up to 39,000 pounds and can clear debris left in the
wake of battles or civil disasters. The Company currently is performing on a
contract for 51 vehicles through 1999.
Linear Obstacle Breacher ("Grizzly"). The Grizzly is a 70-ton vehicle
currently under development designed to clear mines and other obstacles. Mounted
on a modified M1 chassis, the Grizzly features a mine-clearing blade outfitted
with complex software that provides automatic depth control. It is also equipped
with a power-driven arm for digging, grappling and lifting, as well as external
cameras for vision and remote operation, with full electronic integration. The
Company was awarded a $129.0 million development contract for the Grizzly with
work scheduled for completion in 2001.
AAV7A1 Amphious Assault Vehicle ("AAV"). The AAV has been the U.S.
Marine Corps' amphibious assault vehicle for over two decades with more than
1,500 vehicles delivered. The Company currently produces different kit
configurations for foreign customers such as Korea and Spain which then assemble
the kits locally. In July 1998, the Company was awarded a four year contract by
the U.S. Marine Corps to rebuild the existing fleet of AAVs in a partnering
arrangement with the Albany, Georgia and Barstow, California Marine Corps
Logistic Bases.
Crusader. The Crusader is an integrated and automated two-vehicle
artillery system consisting of a 155-mm, self-propelled howitzer and a resupply
vehicle. The Company is the sole-source, prime contractor and systems integrator
responsible for the design and development of the Crusader, including delivery
of two prototype systems, under a $1.1 billion Product Development Risk
Reduction contract, which is presently scheduled to be completed in 2001. The
Company expects to become the sole-source, prime contractor for the follow on
development phase, known as Engineering and Manufacturing Development ("EMD"),
presently scheduled to be awarded in 2000. The Company would then seek to become
the sole-source prime contractor for the production phase presently scheduled to
begin in 2004.
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The Crusader is designed to achieve the U.S. Army's stated objectives
for the next-generation howitzer. These specifications include: (i) increased
mobility, (ii) increased lethality, (iii) improved survivability, and (iv)
better sustainability. The Crusader is being designed to be the first howitzer
capable of keeping pace with the maneuver strike force, including M1 tanks and
BFVs. The Crusader is also being designed to provide substantially greater
responsiveness and high rates of fire through long-range and accurate firings
enabled by the vehicle's advanced autoloading technology and actively-cooled
cannon, thereby giving it a multiple round simultaneous impact capability. This
firing capability is being designed to allow commanders to extend and dominate
the battle space and set a higher tempo for land operations. The Crusader is
being designed to enhance survivability and allow the vehicle to be run by a
three person crew compared to the four person crew required for the M109. The
Crusader is being developed with an embedded digitized command, control,
communications and intelligence system for enhanced situational awareness, and
for new capabilities for battlefield movement and resupply.
Naval Systems. The U.S. Navy is implementing a variety of programs to increase
its ability to support land forces, with pronounced changes expected to occur in
the surface fleet. The U.S. Navy plans for additional missile launcher firepower
in its surface combatant ship building program for the 21st century ("SC 21").
The identity of contractors and scope of terms for any production of launchers
for the SC 21 program have not been determined, although significant competition
is expected to exist for any SC 21 contract. In addition, the U.S. Navy plans to
bolster surface land attack capability with modifications to existing ships. The
U.S. Navy's focus on land attack warfare is spurring the development of new and
modified weapon systems, including (i) a modified naval gun system, the Mk45
Mod4; (ii) a new 155mm gun system; (iii) integrating land attack missiles into
the Vertical Launch System, requiring new cannisters and missile integration;
and (iv) new or modified launching systems. The Company expects that the design,
engineering and production of these systems will be the primary focus of naval
ordnance manufacturers for the foreseeable future. The Company is currently the
sole source producer of the Mk45 gun and has a worksplit arrangement with
Lockheed Martin to produce vertical missile launchers.
Mk45 Naval Gun System ("Mk45"). The Mk45 is the U.S. Navy's sole
5-inch gun system, with more than 150 systems installed. For the Navy's newest
class of destroyers, the Arleigh Burke DDG 51 class ("DDG51"), one 5-inch gun is
being installed on each ship built. The Company also has a sole-source, prime
development contract to upgrade Mk45 guns on older Navy ships from Mod2 to Mod4
configuration, which extends the Mk45's range and improves surface fire support
capability. Furthermore, the U.S. government recommends that foreign allied
navies have compatible armaments, and has recently increased its support for the
Company's efforts to place Mk45s on foreign ships. Management believes the
improvements included in the Mod4 configuration will make the Mk45 more
competitive internationally. The Company is also the lead agent for the gun
weapons systems integration for the Naval Surface Fire Support program, with
responsibility for the development and integration of a new naval gun system
which includes managing the interfaces of other components with the gun weapons
system.
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Mk41 Vertical Launching System ("VLS"). The VLS is the U.S. Navy's
primary missile launcher on surface combatants, firing the anti-air Standard
Missile, strike mission-related Tomahawk cruise missile, anti-submarine VLASROC,
and ship self-defense Sea Sparrow missile. The VLS is manufactured under a
work-split agreement with Lockheed Martin Corporation, which is the prime
contractor of the VLS launcher. The Company is the designated mechanical
subcontractor and, separately from the work-split agreement, is the sole-source,
prime provider of VLS canisters, which hold a variety of missiles. The U.S. Navy
places the VLS, like the Mk45, on all DDG 51s, each of which contains twelve
8-cell VLS modules. In February 1998, the Company completed negotiations with
the U.S. Navy and Lockheed Martin Corporation for a five year multi-year
contract which will provide production and ancillary VLS work for the Company
from 1998 through 2002.
Overhaul, Repair, Maintenance and Other. The Company also provides
aftermarket service for the Mk45 and smaller caliber gun mounts, guided missile
launching systems, surface vessel torpedo tubes, gun fire control systems,
target and decoy launchers and other naval equipment. These services include
engineering, repair, upgrade, maintenance, logistic support, replacement parts
and onboard technical assistance. The majority of the service work is performed
at the Company's Louisville operation which is located at the facilities of the
former U.S. Navy operated Naval Ordnance Station.
International Operations. The Company operates joint ventures and co-production
programs in countries throughout the world. Current operations include joint
ventures in Turkey and Saudi Arabia, in each of which the Company owns a 51%
interest, and co-production programs in Japan and Korea.
The Company's objective in setting up a joint venture or co-production
program is to provide the host country with an indigenous production capability
that will utilize the Company's developed programs, adapted to local
requirements. The Company uses project financing, letters of credit and offsets
to structure programs that meet unique customer needs.
FMC-Arabia. The joint venture was formed in 1994 to pursue defense
contracts within the Kingdom of Saudi Arabia. The Company's 51% interest in the
joint venture is a beneficial interest, but record ownership has remained with
FMC for administrative convenience. The initial contract was to provide
contractor logistics support (CLS) and training to the Royal Saudi Land Forces
Infantry Corps for Bradley Fighting Vehicles previously purchased from the
Company. This contract is scheduled to be complete in the first quarter of 1999.
FMC-Arabia has submitted a proposal for follow-on with substantially the same
scope as the existing contract. In early 1997, FMC-Arabia was awarded a 3-year
contract to commence the modernization of 523 of Saudi Arabia's M113s (out of a
fleet of approximately 1700 vehicles) to an A3 configuration. As part of that
contract FMC-Arabia is designing and constructing a depot facility and will
perform the M113 upgrade work in the Saudi Army owned depot. The depot facility
is nearing completion and production has commenced on a limited basis. Because
of overall budgeting constraints affecting the Saudi Arabian government, the
funding for both the M113 and CLS programs has been
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substantially reduced, with the result that FMC-Arabia has been operating both
programs at only a nominal level during 1998. Current funding will only support
work in Saudi Arabia through May of 1999. The Company is continuing to work with
the Saudi Arabian government and the U.S. government in an effort to arrange
increased and more stable funding for the programs, but there can be no
assurance as to when or whether such funding will be provided.
FNSS-Turkey. The FMC-Nurol Savunma Sanayii A.S. ("FNSS") joint venture
was formed in 1987 to pursue armored combat vehicle sales to the Turkish Army.
Four types of armored vehicles using a common chassis are included in the
contract: personnel carrier, fighting vehicle, TOW missile vehicle and mortar
vehicle. The initial production contract began in August 1989 and required
FNSS-Turkey to deliver 1,698 vehicles, of which 1,562 have been presented for
acceptance to date. At the request of the Turkish government, the contract was
modified in 1996 to extend the production and delivery timetable to November
1999. In 1998, FNSS signed its first export contract with the United Arab
Emirates (Abu Dhabi) to provide 133 vehicles comprised of a mix of forward
observation vehicles, engineer squad vehicles and recovery vehicles. Delivery of
the first six vehicles occurred in January 1999 with production and deliveries
of the remaining vehicles extending out through the year 2000. FNSS is expected
to begin negotiations in the first quarter of 1999, for an anticipated follow-on
contract for 665 additional vehicles for the Turkish Government. FNSS is also
actively pursuing additional export opportunities within its licensed territory,
which includes much of the Middle East and Southeast Asia.
Research and Development and Engineering Capabilities
The Company's ability to compete for defense contracts depends to a
large extent on the effectiveness and innovativeness of its research and
development programs. Among the Department of Defense's ("DoD") procurement
requirements is the research and development of new technologies for application
to new weapon systems and upgrades.
The Company's engineering capability has been a critical component of
its success. The Company's experience in simulation, systems integration, armor,
mobility, survivability and armaments, as well as its software development,
engineering and electronics capabilities have allowed the Company to stay at the
forefront of the development, manufacture and upgrade of its products.
The Company expended $13.0 million, $16.7 million and $12.9 million on
research and development in 1998, 1997 and 1996 respectively, a substantial
portion of which was included in overhead allocable to both U.S. government and
foreign government contracts.
Government Contracts; Regulatory Matters
Management expects that for the foreseeable future approximately 90% of the
Company's sales will continue to result from contracts with the U.S. government,
either directly, through prime contractors, or pursuant to the U.S. government's
Foreign Military Sales program. The Company's U.S. government business is
performed under cost-plus
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contracts (cost-plus-fixed-fee, cost-plus-incentive-fee, or cost-plus-award-fee)
and under fixed-price contracts (firm fixed-price, fixed-price incentive, or
fixed-price-level-of-effort).
Cost-plus-fixed-fee contracts provide for reimbursement of costs, to
the extent that such costs are allowable, and the payment of a fixed "fee",
which is essentially the profit negotiated between the contractor and the U.S.
government. Cost-plus-incentive-fee and cost-plus-award-fee contracts provide
for increases or decreases in the contract fee, within specified limits, based
upon actual results as compared to contractual targets for such factors as cost,
quality, schedule and performance.
Cost-plus contracts accounted for more than 35% of the Company's business in
1998.
Under firm fixed-price contracts, the Company agrees to perform certain
work for a fixed price and, accordingly, realizes all the benefit or detriment
resulting from decreases or increases in the costs of performing the contract.
Fixed-price incentive contracts are fixed-price contracts providing for
adjustment of profit and establishment of final contract prices by a formula
based on the relationship which final costs bear to target cost.
Fixed-price-level-of-effort contracts are generally structured with a fixed
price per labor hour subject to the customer's labor hour needs up to a contract
cap. Almost all of the Company's fixed-price contracts in 1998 were firm
fixed-price contracts.
The Company's U.S. government business is subject to unique procurement
and administrative rules based on both laws and regulations. These laws and
rules include compliance with socio-economic requirements, non-reimbursement of
certain costs, such as lobbying expenses, and the distribution of costs to
contracts. The Company's contract administrative and cost accounting policy and
practices are subject to oversight by government inspectors, technical
specialists and auditors.
U.S. government contracts are, by their terms, subject to termination
by the U.S. government either for its convenience or default by the contractor.
Cost-plus contracts provide that, upon termination, the contractor is entitled
to reimbursement of its allowable costs, and if the termination is for
convenience, a total fee proportionate to the percentage of the work completed
under the contract. Fixed-price contracts provide for payment upon termination
for items delivered to and accepted by the U.S. government, and, if the
termination is for convenience, for payment of fair compensation of work
performed plus the costs of settling and paying claims by terminated
subcontractors, other settlement expenses, and a reasonable profit on the costs
incurred. If a contract termination is for default, however, (i) the contractor
is paid an amount agreed upon for completed and partially completed products and
services accepted by the U.S. government; (ii) the U.S. government is not liable
for the contractor's costs with respect to unaccepted items and is entitled to
repayment of advance payments and progress payments, if any, related to the
terminated portion of the contract; and (iii) the contractor may be liable for
excess costs incurred by the U.S. government in procuring undelivered items from
another source.
In addition to the right of the U.S. government to terminate, U.S.
government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds for a given
program on a September 30 fiscal year
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basis, even though contract performance may take many years. Consequently, at
the outset of a major program, the contract is usually partially funded, and
additional monies are normally committed to the contract by the procuring agency
only as appropriations are made by Congress for future fiscal years.
Generally, the Company's engineering and development programs are
performed under cost-plus contracts, while the production contracts are awarded
on a firm fixed-price basis.
In common with other companies which derive a substantial portion of
their sales from contracts with the U.S. government for defense-related
products, the Company is subject to business risks, including changes in
governmental appropriations, national defense policies or regulations, and
availability of funds. Any of these factors could materially adversely affect
the Company's business with the U.S. government in the future.
Competition
With respect to certain products and programs, the Company competes
with one or more companies, most of which are multinational firms with
substantial resources and capital. The Company from time to time faces
competition from a number of competitors, both domestic and foreign, and in the
tracked, armored combat vehicle market, the Company encounters General Dynamics
Corporation most frequently. The Company's ability to compete for defense
contracts depends to a large extent on the effectiveness and innovativeness of
its research and development programs, its capability as a systems integrator,
its ability to offer better program performance than its competitors at a lower
cost to its government customers, and its readiness in facilities, equipment and
personnel to undertake the programs for which it competes. In some instances,
programs are sole-sourced by the U.S. government to a single supplier, and in
other cases involve a prime contractor and multiple suppliers. In cases where
the Company is the sole-source provider, 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 U.S. government should choose to reopen the particular
program to competition.
The Company's customers, particularly the so-called depots which are
industrial facilities operated by DoD, often compete with the Company for
after-market business, such as upgrade work and various overhaul and servicing
work performed by the Company.
Management believes that the Company will continue to be able to
compete successfully based upon the quality, technological advancement and cost
competitiveness of its products and services. However, all defense contractors
are competing for a limited amount of budgeted funding.
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Major Customers
The Company's sales are predominantly derived from contracts with
agencies of the U.S. government. The various government agency customers
exercise largely independent purchasing decisions. Sales to the U.S. government
generally are not regarded as constituting sales to one customer. Instead, each
contracting entity (including multiple contracting entities within the U.S. Army
and U.S. Navy) is considered to be a separate customer. The Company's largest
programs, representing approximately 20%, 20% and 10% of 1998 revenues, were the
BFV programs (including derivatives and represented by multiple contracts
through multiple entities within the U.S. Army), the Crusader program and the
Paladin program, respectively.
Backlog
As of December 31, 1998, the Company's funded backlog was approximately
$1.4 billion compared with $1.5 billion at the end of 1997. The small reduction
in backlog in 1998 was due to timing of deliveries and the timing of new foreign
orders. Funded backlog does not include the awarded but unfunded portion of
total contract values. This backlog provides management with a useful tool to
project sales and plan its business on an on-going basis; however, no assurance
can be given that the Company's backlog will become revenues in any particular
period or at all. A substantial majority of this backlog is expected to be
earned as revenues by the end of 1999.
Intellectual Property
Although the Company owns a number of patents and has filed
applications for additional patents, it does not believe that its operations
depend upon its patents. In addition, the Company's U.S. government contracts
generally license it to use patents owned by others. Similar provisions in the
U.S. government contracts awarded to other companies make it impossible for the
Company to prevent the use by other companies of its patents in most domestic
work. Additionally, the Company owns certain data rights in its products under
certain of its government contracts. The protection of data developed by the
Company from use by other government contractors is from time to time a source
of negotiation between the Company and the U.S. government, and the extent of
the Company's data rights in any particular product generally depends upon the
degree to which that product was developed by Company, rather than with U.S.
government funds. The Company routinely enters into confidentiality and
non-disclosure agreements with its employees to protect its trade secrets.
Employees
At December 31, 1998, the Company had approximately 5,125 employees and
approximately 300 contract workers (excluding employees of the foreign joint
ventures). Approximately 1,620 of these employees at five locations are
represented by six unions, including the Glass, Moulders, Pottery, Plastics and
Allied Workers (Anniston); the International Association of Machinists
(Louisville and San Jose); the United Automobile,
11
<PAGE>
Aerospace and Agricultural Implement Workers (Minneapolis); the International
Guards (Minneapolis); the International Brotherhood of Teamsters (San Jose); and
the United Steelworkers (York). The next bargaining unit contract scheduled for
negotiation is in San Jose with the International Association of Machinists.
This contract is up for renewal on April 1, 1999. The Company considers its
relations with its employees to be generally good, and has not experienced a
work stoppage since 1986.
Sources and Availability of Raw Materials
The Company's manufacturing operations require raw materials, primarily
aluminum and steel, which are purchased in the open market and are normally
available from a number of suppliers. The Company also purchases a variety of
electronic and mechanical components for which the Company has multiple
commercial sources. The Company has not experienced any significant delays in
obtaining timely deliveries of essential raw materials.
Environmental Matters
The Company's operations are subject to federal, state and local laws
and regulations relating to, among other things, emissions to air, discharges to
water, the handling and disposal of hazardous and solid wastes and the cleanup
of hazardous substances ("Environmental Laws"). The Company continually assesses
its compliance status and other obligations with respect to Environmental Laws
and believes that its operations currently are in substantial compliance with
Environmental Laws.
Operating and maintenance costs associated with environmental
compliance and prevention of contamination at the Company's facilities are a
normal, recurring part of operations, are not significant relative to total
operating costs or cash flows, and are generally allowable as contract costs
under the Company's contracts with the U.S. government ("Allowable Costs"). Such
costs have not been material in the past and, based on information presently
available to the Company and on U.S. government environmental policies relating
to Allowable Costs in effect at this time (all of which are subject to change),
are not expected to have a material adverse effect on the Company.
As with compliance costs, a significant portion of the Company's
expenditures for remediation at its facilities consists of Allowable Costs.
Management believes that it has sufficient reserves to cover any remediation
costs that may not be allowable costs under its U.S. government contracts
("Non-Allowable Remediation Costs") and does not expect that such costs will
materially adversely affect the Company.
Based on historical experience, the Company expects that a significant
percentage of the total remediation and compliance costs associated with its
facilities will continue to be Allowable Costs. In addition, pursuant to the
terms of the Acquisition Agreement, the Sellers are required to reimburse the
Company for 75% of certain Non-Allowable Remediation Costs relating to
operations prior to the Closing Date.
12
<PAGE>
ITEM 2. Properties
The table below sets forth information with respect to the Company's
manufacturing facilities and properties.
<TABLE>
<CAPTION>
Location Leased/Owned Square Footage
- -------- ------------ --------------
<S> <C> <C>
Arlington, VA Leased 17,968
Anniston, AL Leased 100,000
Anniston, AL Owned 267,000
Aiken, SC Leased 21,000
Aiken, SC Owned 189,000
Aberdeen, SD Owned 105,000
Aberdeen, SD Leased 30,000
Chambersburg, PA Gov't Owned 90,000
Fayette County, PA Leased 179,700
Fridley, MN Gov't Owned 1,712,240
Fridley, MN Owned 326,023
Louisville, KY Leased 633,609
Orlando, FL Leased 15,600
San Benito, CA Leased 1,218 acres
San Jose, CA
1125 Coleman Leased* 31,005
1205 Coleman Leased* 123,100
1450 Coleman Leased* 36,600
340 Brokaw Leased* 4,400
328 Brokaw Leased* 174,300
2830 De La Cruz Leased 86,785
2890 De La Cruz Leased 68,708
215 Devcon Leased 48,700
150 Brokaw Leased 48,666
York County, PA Owned 996,518
York County, PA Leased 10,000
</TABLE>
The U.S. government is currently attempting to divest its Fridley,
Minnesota facility that has historically been provided rent free to the Company
for production of systems and spares for the U.S. government. The proposed
divestiture requires any purchaser to make the facility available for the
performance of government contracts and subcontracts for a minimum of five
years. The U.S. government has made an offer to sell its portion of the facility
to the Company. The Company is considering alternatives to a purchase including
the sale of its portion of the facility with a leaseback of the portion it
occupies. Depending on the alternative chosen, the Company's historical
occupancy costs associated with its operations at this facility and any lease
obligations associated with operating after a sale of the facility may be
affected.
* Indicates properties at which FMC, the Company's former majority owner, is the
lessor.
13
<PAGE>
ITEM 3. Legal Proceedings
The Company's proceeding with the Kentucky Department of Environmental
Protection, as described in the Company's Form 10-Q Report for the period ended
June 30, 1998, was resolved under an Agreed Order dated October 13, 1998 with
the Kentucky Department of Environmental Protection ("KDEP") pursuant to which
the Company paid KDEP $30,000 and agreed to treat as hazardous waste any
comparable materials which might be disposed of in the future.
Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in
connection with the Paladin howitzer prime contract, filed suit on February 20,
1998 in the U.S. District Court for the District of Minnesota, Alliant
-------
Techsystems, Inc. v. United Defense Limited Partnership, FMC Corporation, Harsco
- --------------------------------------------------------------------------------
Corporation and Sechan Electronics, Inc. Alliant sought damages in an
- ----------------------------------------
unspecified amount, stated only to be in excess of $75,000 on breach of contract
and other theories. In response to a motion by the Company, the District Court
dismissed Alliant's case on January 15, 1999, and Alliant did not appeal the
dismissal.
However, on August 27, 1998, Alliant filed a second lawsuit regarding
essentially the same subject matter in Minnesota state court, Alliant
-------
Techsystems, Inc. v. United Defense, L.P., FMC Corp., and Harsco Corp., Fourth
- ----------------------------------------------------------------------
Judicial District Court, Hennepin County, Minnesota. Both Alliant lawsuits
pertain to the Company's upgrade program for the M109A6 Paladin howitzer and
arose out of a U.S. Army-directed termination for convenience in 1996 of certain
subcontract work under the program which, until the time of termination, had
been performed by Alliant and was thereafter replaced by a subcontract which the
Company awarded to Sechan Electronics. In response to a motion by the Company,
the Minnesota District Court dismissed four of the five counts of Alliant's
state court case on March 4, 1999. Management does not believe that Alliant's
suit will have a material adverse effect on the Company.
The Company is also a defendant in two so-called qui tam cases filed under the
U.S. Civil False Claims Act (the "FCA") by present or former employees of the
Company's Armament Systems Division ("ASD") in Fridley, Minnesota. The FCA,
among other things, permits individuals to seek recovery, including treble
damages and additional civil penalties, of amounts which under certain
circumstances have been improperly claimed from the government by its
contractors, and provides that such plaintiffs may personally collect 15-30% of
any recovery obtained. The Company's qui tam cases are respectively, U.S. ex
-------
rel. Shukla v. United Defense, L.P., FMC Corp., Harsco Corp., and United Defense
- --------------------------------------------------------------------------------
Industries, Inc., in the U.S. District Court for the District of Minnesota; and
- ----------------
U.S. ex rel. Seman v. United Defense, FMC Corp., and Harsco Corp., in the U.S.
- -----------------------------------------------------------------
District Court for the District of Minnesota. Each case primarily alleges that
the Company improperly obtained payment under various of ASD's government
contracts by supplying components which did not comply with applicable technical
specifications.
14
<PAGE>
Since qui tam cases assert rights on behalf of the U.S. government, the
Department of Justice ("DOJ") has the statutory right to intervene in such cases
and essentially take control of such litigation. Historically, DOJ has chosen to
intervene in cases which appear to offer relatively better prospects of ultimate
recovery. DOJ investigated both the Shukla and Seman matters and declined to
intervene in either case. The Company has moved to dismiss the Shukla case and
has filed an answer denying the material allegations in the Seman case.
Management does not believe the outcome of these qui tam cases will have a
material adverse effect on the Company.
The Company is also subject to other claims and lawsuits arising in the ordinary
course of business. Management believes that the outcome of any such proceedings
to which the Company is party will not have a material adverse effect on the
Company.
15
<PAGE>
ITEM 4. Submission of Maters to a Vote of Security Holders
None.
ITEM 5. Market for Registrant's Stock and Related Stockholder Matters
On December 23, 1998, the Company issued an aggregate of 5,357 shares of
its common stock for aggregate proceeds to the Company of $53,570. Such shares
were issued to a management member of the Company. The Company provided a loan
to the management member to purchase the shares. Given the limited nature of
the sale and the individual to whom the sale was made, such sale was made under
exemption provided by Section 4(2) and Rule 701 of the Securities Act of 1933.
16
<PAGE>
Item 6. Selected Financial Data (In thousands)
The selected financial data presented below are derived from the Company's
consolidated financial statements, audited by Ernst & Young and should be read
in conjunction with such audited statements and the notes that are included in
Item 8.
<TABLE>
<CAPTION>
(In thousands) Nine months || Three months
ended || ended Year ended
Year ended December 31, September 30, || December 31, December 31,
1994 1995 1996 1997 || 1997 1998
----------------------------------------------------------|| ----------------------------
(Predecessor) ||
<S> <C> <C> <C> <C> || <C> <C>
Net sales $1,076,259 $967,553 $1,029,333 $913,925 || $342,627 $1,217,555
||
Net income/(loss) 129,527 107,665 98,170 68,893 || (36,259) (120,007)
||
Total assets 479,897 569,604 644,979 612,138 || 1,246,083 989,741
||
Long term debt || 647,800 490,343
</TABLE>
Note: As a result of the Acquisition and the related revaluation of assets, net
income and total assets for periods ended after September 30, 1997 are not
comparable to prior periods. Information for Iron Horse is indentical except
its total assets were $991,080 for the year ended 1998.
17
<PAGE>
ITEM 7. Management's Discussion and Analysis of the Results of Operations
and Financial Condition
The following discussion and analysis should be read in conjunction
with the financial statements and related notes and the other financial
information, included elsewhere in this report.
Introduction
In October 1997, the Company's direct parent, Iron Horse, was funded
with $173 million of equity capital from several partnerships controlled by
Carlyle. This equity was invested in the Company. On October 6, 1997, the
Company acquired (the "Acquisition") directly or through its wholly owned
subsidiary, UDLP Holdings Corp., 100% of the partnership interests in United
Defense, L.P. ("UDLP") for $880.0 million from FMC and Harsco. This price was
subsequently adjusted downward by $16.1 million to reflect adjustment clauses in
the acquisition agreement.
United Defense Industries, Inc. is the only asset of Iron Horse.
Accordingly, Management's Discussion and Analysis of the Results of Operations
and Financial Condition is the same for both Iron Horse and the Company. The
Company's subsidiary guarantors, UDLP Holdings Corp. and UDLP, are directly or
indirectly wholly owned and both of those subsidiary guarantors have guaranteed
the Company's 8 3/4% Senior Subordinated Notes on a full, unconditional and
joint and several basis. Any non-guarantor subsidiaries have assets, equity,
income and cash flows on an individual and combined basis less than 3% of
related amounts of the Company. Accordingly, separate financial statements of
those subsidiaries are not considered material or provided herein.
Overview
Variability in Quarterly and Annual Performance. The Company's
operating performance frequently varies significantly from period to period,
depending upon the terms and schedules for the Company's contracts, export
sales, and, in particular, the award or expiration of one or more contracts and
the timing of manufacturing and delivery of products under such contracts. As a
result, period-to-period comparisons may show substantial increases and
decreases disproportionate to underlying business activity and results for any
given period should not be considered indicative of longer term results.
Performance can also be materially affected by the timing and amount of
dividends from the Company's Turkish and Saudi joint ventures, which has
generally resulted in higher earnings during the first quarter of the year when
such dividends are usually received.
18
<PAGE>
Joint Ventures
FNSS-Turkey. The Company's investment in FNSS-Turkey is carried at cost
since there is uncertainty regarding the Company's ability to control the
repatriation of earnings. Royalties are reported as revenues, while dividends
are reported as earnings from foreign affiliates. Dividends and royalties are
paid in U.S. dollars.
Turkey has experienced high inflation and its currency, the Turkish
lira, has consistently fallen in value over several years against the U.S.
dollar. FNSS-Turkey receives payments from its Turkish government customer, T.C.
Savunma Sanayii Mustesarligi ("SSM"), in Turkish lira, and pricing under the
contract is calculated annually based on scheduled product deliveries pursuant
to a formula designed to adjust such pricing for, among other things,
fluctuations in the value of the Turkish lira against the U.S. dollar. Upon
receipt of such payments, FNSS-Turkey promptly converts Turkish lira into hard
currency. As a result, management believes that the terms of FNSS-Turkey's
contract with the Turkish government have generally protected FNSS-Turkey
against the impact of the devaluation of the Turkish lira. However, FNSS-Turkey
is adversely affected by depreciation of the Turkish lira if there is a delay in
payment after calculation of pricing under the contract. For example, when a
delivery schedule is delayed, FNSS-Turkey is adversely affected unless a pricing
adjustment is negotiated to give effect to any devaluation in the Turkish lira
between the time the products were priced under the contract and the delayed
delivery dates. Such an adjustment was made after protracted negotiations when
delivery schedules were first extended in 1996.
In February 1996, a fire occurred at the FNSS-Turkey vehicle production
facility which destroyed a warehouse and the majority of production parts on
site. The plant resumed production in late 1996; however, the work stoppage
caused by the fire had a significant negative impact on royalties received from
FNSS-Turkey in 1996 and negatively impacted dividends received in 1997. The
Turkish government, which is responsible for delivering turrets for one of the
vehicle models produced by FNSS-Turkey, has experienced difficulties in meeting
the production schedule and, as a result, has paid FNSS-Turkey for a number of
vehicles that are parked and awaiting delivery of turrets. The Turkish
government has refused to continue this practice, but has agreed to a revised
delivery schedule along with corresponding pricing adjustments, which management
believes will not have a material impact on royalty and dividend receipts.
FNSS-Turkey is required by its agreement with SSM to achieve a
significant level of export sales by 2000 to meet the "offset" requirements of
the contract or pay a penalty of 9% of the unpaid offset obligations to SSM.
Such payment could be as high as $32.0 million if no additional offset sales are
completed. Production from a potential award which would approximately halve the
remaining liability is being pursued, but is unlikely to occur prior to 2000.
There can be no assurance that FNSS-Turkey will be able to complete this
potential sale, otherwise fulfill its offset obligations or renegotiate an
acceptable alternative. Management believes that the time frame for meeting the
offset deadline may be extended to some extent to accommodate changes in the
production schedule, although no assurance can be given that such an extension
will occur.
19
<PAGE>
FMC-Arabia. FMC-Arabia is accounted for on an equity basis. The Company
records its share (50%) of FMC-Arabia earnings as they are recognized by the
joint venture. Although formal dividends are not declared on earnings until
after the end of the fiscal year, FMC-Arabia has historically paid advances
against future dividends as quarterly earnings become known. Consequently, the
Company receives cash payments which approximate earnings from FMC-Arabia on a
quarterly basis.
FMC-Arabia is treated as a partnership for United States tax purposes.
UDLP is the beneficiary of a "tax holiday," granted by the Kingdom of Saudi
Arabia, with respect to its proportionate share of FMC-Arabia's income and loss.
The tax holiday granted by the Kingdom of Saudi Arabia expires in April 1999,
and the Company is attempting to extend the tax holiday beyond April 1999. Due
to the uncertainty of extending the tax holiday, UDLP may incur taxes on its
proportionate share of FMC-Arabia's income at the Saudi Arabian statutory tax
rate of up to 45% beginning in April 1999, although the Company should be
eligible for a foreign tax credit with respect to such taxes.
Results of Operations
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenue. Revenue for 1998 was $1,217.6 million, a decline of $39.0 million or
3.1%, from 1997. The lower revenue was due to reduced vehicle shipments to
foreign customers, lower deliveries of naval five inch guns and of Paladin
artillery upgrades, and the shipment in 1997 of a large component for the
Seawolf submarine which did not recur in 1998. This decline was partially offset
by higher revenue from the Crusader contract in 1998, the shipment of ammunition
supply vehicles, and higher engineering sales such as for development contracts.
Gross Profit. Gross profit declined $59.2 million, or 33.4%, to $118.3 million
for 1998 from $177.5 million for 1997. The gross profit rate deteriorated 4.4
percentage points to 9.7% for 1998. The decline is a result of a full year of
amortization of the Acquisition purchase price in 1998 versus only one quarter
of amortization in 1997, the establishment of reserves including a sizeable non-
cash pension charge for restructuring the Company's Minneapolis operation, the
write-off of unusable, capitalized software and other impaired assets, and the
lower revenue described above. Reserves established for contracting issues and
downward adjustments to contract profit estimates in 1997 partially offset the
decline.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $177.4 million in 1998, an increase of $51.1
million, or 40.4% from 1997. The increase in expenses is attributable to the
amortization of goodwill and other intangible assets established in conjunction
with the Acquisition. The higher costs were partially offset by lower expense
for corporate services, lower commissions to foreign representatives, and
savings related to the consolidation of certain staff functions.
20
<PAGE>
Research and Development. Research and development costs were $13.0 million for
1998 which was $3.6 million, or 21.8%, below spending for 1997. The reason for
the decline is that costs in 1997 were higher than usual as the culmination of
several projects required heightened spending to insure that they were completed
in a timely fashion.
Earnings from Foreign Affiliates. Earnings from foreign affiliates were $6.2
million in 1998, a decline of $7.7 million from 1997. The decline was due to
lower earnings derived from the Company's Saudi Arabian joint venture as a
result of lower funding available from the Saudi government and, as a
consequence, decreased activity on Saudi contracts.
Interest Expense. Net interest expense including the amortization of financing
costs for 1998 was $50.8 million which was $36.6 million higher than for 1997.
The Company began incurring interest expense in the fourth quarter of 1997
associated with debt that was obtained to finance the Acquisition.
Net Income. As a result of the foregoing, including the addition of interest
expense and amortization of the Acquisition purchase price discussed earlier,
there was a net loss of $120.0 million in 1998 compared with net income of $32.6
million for 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenue. Revenue increased $227.2 million, or 22.1% to $1,256.6 million for 1997
from $1,029.3 million for 1996. The increase was due to the ramp-up of the
Crusader and the M109 A6 Paladin upgrade programs, sales from the Company's
involvement in the August 1996 privatization of the Louisville Naval Ordnance
Station and increased shipments of military vehicles to foreign customers. These
increases were partially offset by lower sales of two large development
contracts, which were essentially complete in 1996.
Gross Profit. Gross profit for 1997 declined $31.0 million, or 14.9%, to $177.5
million from the comparable period in 1996. The gross margin percentage declined
to 14.1% of sales for 1997 versus 20.3% for 1996. The primary reason for the
decline is a result of the depreciation and amortization of the Acquisition
purchase price. Otherwise gross profit in 1997 was higher compared with the
prior year, consistent with the increased sales described above and higher award
fees on the Crusader program. Gross profit in 1997 was also adversely affected
by approximately $13.5 million of charges for changes in estimated contract
profitability related to contractual issues with customers and other matters
resulting from the periodic reassessment of the estimated profitability of
contracts in progress and lower royalties. Gross profit in 1996 was favorably
impacted by a $14.3 million price adjustment with the U.S. government on a gun
and mount procurement contract which also impacted the change between 1997 and
1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses declined by $2.1 million, or 1.6%, to $126.4 million in
1997 from $128.5 million for 1996. The favorable variance is attributable to the
lower cost of corporate
21
<PAGE>
related services, the reclassification of certain costs in the Armament Systems
Division formerly recorded as general and administrative to cost of production,
lower pension costs, and the realization of benefits of the restructuring of the
Ground Systems Division. These savings were partially offset by the increase in
amortization of goodwill and other intangible assets associated with the
Acquisition and higher selling commissions related to foreign contracts.
Research and development. Research and development expenses increased $3.8
million, or 29.6% to $16.7 million for 1997 from $12.9 million for 1996. The
increased expense is a result of the culmination of several projects in 1997
which required heightened spending to insure that they were completed in a
timely fashion.
Earnings related to investments in foreign affiliates. Earnings from foreign
affiliates decreased $18.0 million, or 56.3%, to $14.0 million for 1997 from
1996. The decrease was due to a decline in dividends received from FNSS-Turkey,
primarily resulting from lower earnings from the joint venture in 1996 as a
consequence of production curtailments associated with fire-related destruction
of the manufacturing facility.
Interest expense. Net interest expense for 1997 was $14.2 million associated
with the debt raised to finance the Acquisition whereas interest income for 1996
was $1.9 million.
Net Income. As a result of the foregoing, including the addition of interest
expense and the depreciation and amortization of the Acquisition purchase price
discussed above, net income was $32.6 million for 1997 versus net income of
$98.2 million for 1996.
Liquidity, Capital Resources and Financial Condition
The Company's liquidity requirements depend on a number of factors
relative to the timing of production and deliveries under its U.S. government
and direct foreign sales ("DFS") contracts. The Company generally receives
progress payments on U.S. government contracts based either on meeting
performance milestones or on a percentage of contract expenditures, and it
generally negotiates for the payment of advances from customers on DFS
contracts. Advances on DFS contracts vary depending on the specific programs
involved. These payments reduce the need for Company financed working capital,
and changes in working capital between periods are frequently due to program
status changes and the level of such payments for the specific programs by
period.
Cash provided by operating activities. Cash provided by operating
activities for 1998, 1997 and 1996 was $197.3 million, $194.8 million and $81.1
million respectively. Cash from net income (or net loss) plus depreciation and
amortization declined from $137.2 million in 1996 to $98.6 million in 1997 and
$58.0 million in 1998. The decline is mainly due to incurring a full year of
interest expense to service the debt in 1998 versus only one quarter of interest
expense in 1997 and interest income in 1996. The Company generated significant
cash in 1998 as a result of reductions in receivables and inventories as the
U.S. government payment office successfully made an effort to pay all billings
received by a certain deadline, and the Company successfully met shipment
22
<PAGE>
schedules which called for a reduction in backlog. Cash flow was also higher in
1997 as a result of a significant reduction in inventory, but was lower in 1996
due to a significant increase in inventory.
Cash used in investing activities. Capital spending in 1998 was $24.0
million compared with $39.6 million in 1997 and $22.4 million in 1996. The
Company received $16.1 million in 1998 representing a downward purchase price
adjustment related to the Acquisition. 1997 includes a cash use of $838.9
million representing the payment of the Acquisition purchase price net of cash
on hand at the closing.
Financing activities. In 1998, the Company raised $6.1 million from the
sale of additional shares of its common stock to certain officers, directors and
other management members of the Company and to individuals affiliated with Iron
Horse. In 1997, the Company raised $707.0 million of debt and $173.0 million of
equity to finance the Acquisition and paid $28.7 million associated with the
Acquisition transaction costs. Cash used for financing activities included the
pay down of $152.8 million in debt for 1998 and $47.2 million for 1997. Also,
$114.4 million and $75.0 million was distributed to FMC and Harsco in 1997 and
1996 respectively.
Impact of The Year 2000 ("Y2K")
The Company continues to pursue its Y2K compliance program and is
committing extensive resources to overcome Y2K issues with the intent of
minimizing or eliminating disruption related to this potential computer problem.
The Company has determined that all of its operating divisions are affected by
this problem. A Company Y2K task force provides guidance, coordination and
oversight to all division efforts. The task force has promulgated a standard
definition for Y2K compliance, a standard response to customer and supplier
inquiries and requests for information, a standard certification letter and form
to be sent to suppliers and business partners, guidelines on documentation
requirements, and standard Y2K language for new and modified contracts. Each
division is executing a Y2K program to identify, assess and remediate Y2K
problems. The approach is a five-phase strategy of awareness, assessment,
renovation, validation and implementation. Implementation for all mission-
critical systems is expected to be complete by mid-1999. Contingency plans are
being developed to address critical systems if unexpected failures occur.
The Company is tracking its state of readiness in terms of completion
status against the five-phase approach to remediation of Y2K problems. As of the
fourth quarter 1998, the overall completion status is 98% in Awareness, 92% in
Assessment, 65% in Renovation, 58% in Renovation and 54% in Implementation.
The largest projects underway to resolve Y2K problems are the
integrated business systems projects being executed at the Company's two largest
operations, Armament Systems Division and Ground Systems Division. These
projects are projected to be completed in mid-1999. Armament Systems Division is
installing a new manufacturing system that is part of an Enterprise Resource
Planning software package,
23
<PAGE>
but plans to retain the existing financial systems which are essentially already
Y2K compliant. Ground Systems Division has decided to remediate its legacy
manufacturing and financial systems to comply with Y2K issues and defer
installing a new Enterprise Resource Planning package.
Although all divisions have completed significant assessments of
internal systems and assets with embedded systems, assessments will continue to
occur until the Year 2000. This ongoing assessment is needed to make sure new
assets and systems are compliant. Systems inventories and disposition decisions
will be updated as part of the ongoing assessment.
All divisions continue to contact suppliers regarding their Y2K issues.
A standard request for certification has been formulated and is being used by
all divisions as they continue to pursue Y2K certifications from active
suppliers. Procurement documents utilized by the Company will continue to
include requirements for Y2K compliance. Despite these efforts, the Company
expects to have only a limited understanding of the potential Y2K shortcomings
of its many suppliers, and will therefore be uncertain as to the full nature and
extent of the potential supplier-derived impact on the Company. The Company is
concerned that supplier Y2K problems could interrupt the flow of components and
services to the Company, which could in turn impair the Company's timely
delivery under its own customer contacts.
Product assessments indicate there are no known Y2K problems with
products the Company produces or sells. The Company continues to receive
requests for certifications or warranties from customers. In some cases, these
requests resulted in contract modifications or negotiations. In others, the
Company had to provide details on its Y2K compliance programs by responding to
detailed surveys.
In order to obviate Y2K problems, the Company expects to spend $30.1
million repairing or replacing existing business and information technology
computing systems and assets with embedded systems. Through December 1998, $19.3
million, or 64% of the estimated total spending requirement, has been spent.
The SEC requires all reporting companies to include a statement
regarding the impact of doing nothing to resolve Y2K problems with internal
computer systems and other risk assessments. If the Company were to do nothing
to resolve Y2K problems, the Company could potentially experience work slowdowns
or stoppages in production, resulting in delayed product deliveries to
customers. The Company's research and product development business could be
negatively impacted as well, since this area is technology-driven and depends
heavily on both internal and external computers and telecommunications services.
Contingency plans to address these issues are being established.
As to other Y2K risks, to the extent that the Company's results depend
upon foreign sales, such results could also be adversely impacted by Y2K
problems which might beset the foreign customers of the Company or its foreign
affiliates. Many foreign
24
<PAGE>
governments appear to seriously lag the U. S. government ("USG") in terms of
assessing and addressing Y2K problems. As a result, the Company does not expect
to develop an adequate understanding of potential foreign government Y2K
problems. The Company's foreign affiliates have assessed their internal Y2K
situation and have determined some limited exposure due to non-compliant
internal systems. The foreign affiliates have indicated that they expect to
resolve non-compliance problems in time to avoid any disruptions to operations.
The Company continues to monitor the Y2K compliance status of USG
agencies that it does business with, especially payment offices. While these
agencies have indicated that they are working to resolve their Y2K problems, the
Company regards their ability to achieve this objective as uncertain. Because
the Company's understanding of the ways in which the USG could experience Y2K
difficulties is inherently limited, the Company is uncertain as to the full
nature and extent of the potential USG derived Y2K impact on the Company.
However, the Company is concerned that Y2K problems affecting USG financial
administration functions could interrupt or delay the orderly flow of payments
to the Company under its USG contracts. Because of the Company's debt service
obligations, any such interruption or delay could adversely impact the Company's
financial condition, and a payment interruption of extraordinary magnitude and
duration could result in the Company going into default under its debt
instruments.
Management believes it is expending appropriate efforts in addressing
the Y2K issue so as not to incur disruptions to its business operations.
However, there can be no assurance that the Company will not incur Y2K problems
relating to its efforts or those involving its customers or suppliers or that
the costs of such efforts will not be greater than estimated currently.
Because not all instances of date failure can be anticipated or
controlled, the Company is developing contingency plans that enable critical
operations to continue to operate if significant Y2K issues persist into the
year 2000.
ITEM 7A. Market Risk
In October 1997, the Company entered into a three year interest rate
swap agreement involving the exchange of floating rate interest payment
obligations for fixed rate interest payment obligations. The notional amount of
this interest rate swap agreement is $160 million. The Company entered into this
agreement as a hedge to manage interest costs and risks associated with
fluctuating interest rates. For additional information, see Note 12 to the
Consolidated Financial Statements. As of December 1998, the Company had debt
totaling $507 million of which $307 million was subject to variable interest
rates.
The Company entered into a series of forward foreign exchange contracts
with its bank in December 1997 to hedge against the impact of currency
fluctuations between the U.S. dollar and the Belgian franc. These contracts
provided that the Company would purchase Belgian francs from the bank for a
specified amount of U.S. dollars. The total
25
<PAGE>
value of the Belgian francs purchased amounted to BF134 million. The maturity
dates for such contracts span the period from January 1998 through April 1999.
As of December 31, 1998, a total of BF28 million in forward contracts remained
outstanding.
26
<PAGE>
ITEM 8. Consolidated Financial Statements and Supplementary Data
The following consolidated financial statements of Iron Horse Investors,
L.L.C. and United Defense Industries, Inc. are provided in response to the
requirements of Item 8:
IRON HORSE INVESTORS, L.L.C. AND UDLP
Report of Independent Auditors........................................ F1
Consolidated Balance Sheets as of December 31, 1997 and 1998.......... F2
Consolidated Statements of Operations for the year ended
December 31 1996, the nine months ended
September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998.......... F3
Consolidated Statements of Partners' Capital and Members' Capital
for the year ended December 31, 1996, the nine months
ended September 30, 1997, the three months ended December 31,
1997, and the year ended December 31, 1998....................... F4
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, the nine months ended
September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998.......... F5
Notes to Consolidated Financial Statements............................ F6-F25
UNITED DEFENSE INDUSTRIES, INC. and UDLP.
Report of Independent Auditors........................................ F26
Consolidated Balance Sheets as of December 31, 1997 and 1998.......... F27
Consolidated Statements of Operations for the year ended
December 31, 1996, the nine months ended
September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998.......... F28
Consolidated Statements of Partners' Capital and Stockholder's Equity
For the year ended December 31, 1996, the nine months
ended September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998.......... F29
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, the nine months ended
September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998.......... F30
Notes to Consolidated Financial Statements............................ F31-F50
27
<PAGE>
United Defense Industries, Inc. has no operations independent from its
subsidiaries. It's subsidiaries that are guarantors of the Senior Subordinated
Notes, UDLP Holdings Corp. and United Defense, L.P., are directly or indirectly
wholly-owned and both of those subsidiary guarantors have guaranteed the Senior
Subordinated Notes on a full, unconditional and joint and several basis. Any
non-guarantor subsidiaries have assets, equity, income and cash flows on an
individual combined basis less than 3% of related amounts of United Defense
Industries, Inc. Accordingly, separate audited financial statements of the
guarantor subsidiaries are not provided herein.
28
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Iron Horse Investors, L.L.C.
We have audited the accompanying consolidated balance sheets of Iron Horse
Investors, L.L.C. and subsidiaries as of December 31, 1997 and 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1998 and the three months ended December
31, 1997. We have also audited the consolidated statements of operations,
partners' capital, and cash flows of United Defense, L.P. (predecessor) and
subsidiaries for the nine months ended September 30, 1997 and the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Iron Horse
Investors, L.L.C. and its subsidiaries at December 31, 1997 and 1998 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1998 and the three months ended December 31, 1997, and the
consolidated results of operations and cash flows of United Defense, L.P. and
its subsidiaries for the nine months ended September 30, 1997 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
January 29, 1999
Washington D.C.
F-1
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31
1997 1998
----------------------
<S> <C> <C>
Assets
Current assets:
Cash and marketable securities $ 35,623 $ 85,520
Trade receivables 94,847 64,395
Inventories (Note 4) 330,373 254,343
Other current assets 6,998 4,255
----------------------
Total current assets 467,841 408,513
Property, plant and equipment, net (Note 5) 198,909 122,721
Intangible assets, net (Note 6) 433,048 330,024
Prepaid pension cost (Note 7) 139,431 123,912
Other assets 6,854 5,910
----------------------
Total assets $1,246,083 $991,080
======================
Liabilities and Capital
Current liabilities:
Accounts payable, trade and other $ 93,641 $ 88,497
Accrued and other liabilities 71,002 75,832
Advanced payments 261,401 258,395
Current portion of long-term debt (Note 8) 12,000 16,643
----------------------
Total current liabilities 438,044 439,367
Long-term liabilities:
Long-term debt, net of current portion (Note 8) 647,800 490,343
Accrued pension cost (Note 7) 7,108 12,807
Accrued postretirement benefit cost (Note 7) 3,290 1,803
Other liabilities 13,100 22,630
----------------------
Total liabilities 1,109,342 966,950
Minority interest - 3,851
Commitments and contingencies (Notes 8, and 9)
Members' capital 136,741 20,279
----------------------
Total liabilities and members' capital $1,246,083 $991,080
======================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year Nine months || Three months Year
ended ended September || ended ended
December 31, 30, || December 31, December 31,
1996 1997 || 1997 1998
----------------------------------||----------------------------
<S> <C> <C> || <C> <C>
(UDLP) ||
Revenue: ||
Sales $1,029,333 $913,925 || $342,627 $1,217,555
||
Costs and expenses: ||
Cost of sales 820,845 754,977 || 324,123 1,099,291
Selling, general and ||
administrative expenses 128,455 91,413 || 34,947 177,449
Research and development 12,853 12,096 || 4,558 13,021
----------------------------------||----------------------------
Total costs and expenses 962,153 858,486 || 363,628 1,289,761
Earnings related to investments ||
in foreign affiliates 31,916 13,521 || 432 6,208
----------------------------------||----------------------------
||
Income (loss) from operations 99,096 68,960 || (20,569) (65,998)
||
Other income (expense): ||
Interest expense -- -- || (15,622) (52,155)
Interest income 1,933 1,456 || -- 1,396
Miscellaneous, net -- -- || (68) --
----------------------------------||----------------------------
Total other income (expense) 1,933 1,456 || (15,690) (50,759)
----------------------------------||----------------------------
||
Income (loss) before income taxes ||
and minority interest 101,029 70,416 || (36,259) (116,757)
||
Provision for income taxes (Note 7) 2,859 1,523 || -- 3,250
----------------------------------||----------------------------
Income (loss) before minority ||
interest 98,170 68,893 || (36,259) (120,007)
Minority interest -- -- || -- 3,545
----------------------------------||----------------------------
Net income (loss) $ 98,170 $ 68,893 || $(36,259) $ (116,462)
==================================||============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Statements of
Partners' Capital and Members' Capital
(In thousands)
<TABLE>
<CAPTION>
Partners' Members'
(UDLP) Capital Capital Total
-----------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 156,433 - $ 156,433
Distributions (74,965) - (74,965)
Net income for the year ended
December 31, 1996 98,170 - 98,170
-----------------------------------------------
Balance at December 31, 1996 179,638 - 179,638
Distributions (114,409) - (114,409)
Liabilities transferred from FMC (3,120) - (3,120)
Net income for the nine months
ended September 30, 1997 68,893 - 68,893
-----------------------------------------------
Balance at September 30, 1997 $ 131,002 - $ 131,002
===============================================
==================================================================================
Balance at October 1, 1997 - $ - $ -
Members' contributions - 173,000 173,000
Net loss for the three months
ended December 31, 1997 - (36,259) (36,259)
-----------------------------------------------
Balance at December 31, 1997 - 136,741 136,741
Net loss for the year ended
December 31, 1998 - (116,462) (116,462)
-----------------------------------------------
Balance at December 31, 1998 - $ 20,279 $ 20,279
===============================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
------------------------------------||-----------------------------
(UDLP) ||
<S> <C> <C> || <C> <C>
Operating activities ||
Net income (loss) $ 98,170 $ 68,893 || $ (36,259) $(116,462)
Adjustments to reconcile net income (loss) to cash ||
provided by operating activities: ||
Depreciation 26,327 19,331 || 20,660 83,153
Amortization 12,667 9,673 || 16,263 94,806
Restructuring costs (7,778) -- || -- --
Minority interest -- -- || -- (3,545)
Other 519 (4,039) || 9,001 5,291
Changes in assets and liabilities: ||
Trade receivables 13,446 7,600 || (13,335) 30,452
Inventories (113,453) 15,546 || 92,875 76,030
Other current assets 5,144 (745) || (2,187) 1,636
Prepaid pension cost (6,120) (8,783) || (2,736) 15,519
Accounts payable, trade and other (26,579) (14,585) || 17,639 (5,144)
Advanced payments 64,714 15,082 || (12,671) (3,006)
Accrued and other liabilities 9,702 11,626 || (16,717) 14,360
Accrued pension cost 7,876 5,428 || 1,403 5,699
Accrued postretirement benefit cost (3,543) (2,247) || (1,878) (1,487)
------------------------------------||-----------------------------
Cash provided by operating activities 81,092 122,780 || 72,058 197,302
||
Investing activities ||
Capital spending (22,396) (23,722) || (15,893) (24,020)
Disposal of property, plant and equipment 4,543 6,938 || 3,170 7,298
Short-term investment with FMC Corporation 10,853 19,497 || -- --
-- -- || -- --
Purchase of business (net of $11,107 cash acquired) -- -- || (838,893) --
Adjustment to purchase price of business -- -- || -- 16,074
||
------------------------------------||-----------------------------
Cash (used in) provided by investing activities (7,000) 2,713 || (851,616) (648)
||
Financing activities ||
Partner distributions (74,965) (114,409) ||
Payments on long-term debt -- -- || (47,200) (152,814)
Payments for financing and transaction costs -- -- || (28,726) --
Proceeds from issuance of long-term debt -- -- || 707,000 --
Proceeds from sale of common stock by subsidiary -- -- || 173,000 6,057
------------------------------------||-----------------------------
Cash (used in) provided by financing activities (74,965) (114,409) || 804,074 (146,757)
------------------------------------||-----------------------------
(Decrease) increase in cash and marketable ||
securities (873) 11,084 || 24,516 49,897
||
Cash and marketable securities at beginning of ||
period 896 23 || 11,107 35,623
------------------------------------||-----------------------------
Cash and marketable securities at end of period $ 23 $ 11,107 || $ 35,623 $ 85,520
====================================||=============================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements
December 31, 1998
1. Basis of Presentation
Iron Horse Investors, L.L.C. together with its subsidiaries, (the "Company") was
formed for the primary purpose of facilitating the acquisition of United
Defense, L.P. ("UDLP") via its investment in United Defense Industries, Inc.
("UDI").
In October 1997, the Company was funded with $173 million of equity capital,
from an investment group led by the Carlyle Group ("Carlyle"), which was
invested in UDI. On October 6, 1997, UDI acquired 100% of the partnership
interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation ("Harsco")
(the "Sellers"). As a result of adjustments to the carrying value of assets and
liabilities pursuant to this transaction (see Note 3), the financial position
and results of operations for periods subsequent to the acquisition are not
comparable to UDLP amounts.
The Company through UDI designs, develops and manufactures various tracked
armored combat vehicles and a wide spectrum of weapons delivery systems for the
armed forces of the United States and nations around the world. Approximately
30% of the Company's employees are covered by collective bargaining agreements.
The financial statements include the accounts of the Company and its
subsidiaries. Prior to the acquisition, the financial statements include the
accounts of UDLP and its subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes,
in particular, estimates of contract cost and revenues used in the earnings
recognition process. Actual results could differ from those estimates.
Cash and Marketable Securities
Cash and marketable securities consist of investments with initial maturities of
three months or less.
F-6
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is provided
principally on the sum-of-the-years digits and straight-line methods over
estimated useful lives of the assets (land improvements--twenty years;
buildings--twenty to thirty-five years; and machinery and equipment--two to
twelve years).
Maintenance and repairs are expensed as incurred. Expenditures that extend the
useful life of property, plant and equipment or increase its productivity are
capitalized and depreciated.
Long-lived Assets, Including Intangible Assets and Goodwill
The Company evaluates on a quarterly basis its long-lived assets to be held and
used, including certain identifiable intangible assets and goodwill, to
determine whether any events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company bases its
evaluation on such impairment indicators as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors exist that
indicate that the carrying amount of the asset may not be recoverable, the
Company would use an estimate of the undiscounted value of expected future
operating cash flows to determine whether the asset is recoverable and measure
the amount of the impairment based on the difference between the carrying amount
of the asset and its estimated fair value.
Investments in Affiliated Companies
The investment in a majority owned foreign joint venture in Turkey is carried at
cost since there is uncertainty regarding the ability to control the venture or
to repatriate earnings. Income is recognized as dividends are received.
Dividends received net of amounts accrued for taxes and future obligations were
$28.1 million for the year ended December 31, 1996, $5.3 million for the nine
months ended September 30, 1997, $0 for the three months ended December 31,
1997, and $4.6 million for the year ended December 31, 1998.
F-7
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
UDLP accounted for its investment in a foreign joint venture in Saudi Arabia at
cost through 1995 because of uncertainties as to the long-term prospects for
this venture. In 1996, consistent with a significant expansion of the venture's
business and positive long-term prospects for the business, UDLP changed from
the cost to the equity method. The impact on UDLP's results of operations was
not material. Equity in earnings from this venture was $3.8 million for the
year ended December 31, 1996, $8.2 million for the nine months ended September
30, 1997, $0.4 million for the three months ended December 31, 1997, and $1.6
million for the year ended December 31, 1998.
Advanced Payments
Advanced payments by customers for deposits on orders not yet billed and
progress payments on contracts-in-progress are recorded as current liabilities.
Revenue and Profit Recognition for Contracts-in-Progress
Both the Company and UDLP recognize sales on most production contracts as
deliveries are made or accepted. Gross margin on sales is based on the
estimated margin to be realized over the life of the related contract. Sales
under cost reimbursement contracts for research, engineering, prototypes, repair
and maintenance and certain other contracts are recorded when funded, as costs
are incurred and include estimated fees in the proportion that costs incurred to
date bear to total estimated costs. Changes in estimates for sales and profits
are recognized in the period in which they are determinable using the cumulative
catch-up method. Claims are considered in the estimated contract performance at
such time as realization is probable. Any anticipated losses on contracts
(i.e., cost of sales exceeds sales) are charged to operations as soon as they
are determinable.
During 1996, UDLP recognized a $14.3 million increase in gross profit as a
result of a settlement with the U.S. government on the cost of a component
supplied by the U.S. government on a group of related contracts. Gross profit
for the nine months ended September 30, 1997 includes approximately $13.5
million of noncash charges for changes in estimated contract profitability
related to contractual issues with customers and other matters resulting from
the periodic reassessment of the estimated profitability of contracts in
progress.
F-8
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation
Provided the option price is not less than fair value of the common stock at the
date an option is granted, the Company records no compensation expense in its
consolidated statements of operations. See Note 10 for the pro forma effect on
operating results had the Company recorded compensation expense for the fair
value of stock options.
Income Taxes
As a limited partnership, income earned by UDLP passed to its partners and was
taxable at that level, except for taxes payable on the income of UDLP's Foreign
Sales Corporation ("FSC") subsidiary.
As a limited liability company, income which has not been taxed previously is
passed through to its members. The Company's corporate subsidiaries are
responsible for income taxes on earnings at that level, and accordingly the
Company's subsidiaries provide for income taxes at the corporate level
determined under the liability method. Under this method, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws expected to be effective when these differences
reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. Business Purchase
On October 5, 1997, the Company via its direct investment in UDI, acquired 100%
of the partnership interests of UDLP and certain other related business assets
of FMC. The purchase price including expenses was $864 million after an
adjustment of $16 million agreed to during 1998. The Company financed the
acquisition through a cash equity investment of $173 million and debt (see Note
8). The acquisition was accounted for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired in the
amount of $733 million was allocated to inventory; property, plant and
equipment; other tangible assets; and intangible assets based on management's
estimate of their fair values. The excess purchase price over the fair value of
the net assets acquired was allocated to goodwill.
F-9
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The operating results of UDLP are presented in the consolidated statements of
operations since the date of acquisition. The unaudited pro forma results below
assume the acquisition occurred at January 1, 1997 (in thousands):
Year ended December 31,
1997
-------------------------
Sales $1,260,000
Net loss (140,000)
The unaudited pro forma net loss for 1997 adjusts the historical results of
operations for interest expense and the effects of amortization of the increased
basis of assets subsequent to the acquisition. The total interest expense and
purchase accounting impact on the pro forma statement of operations was
approximately $60 million and $190 million, respectively, for the year ended
December 31, 1997. The unaudited pro forma combined results of operations are
not necessarily indicative of the actual results that would have occurred had
the acquisition been consummated at January 1, 1997 or of future operations
under the ownership and management of the Company.
4. Inventories
For periods through September 30, 1997 UDLP valued inventory and recorded cost
of sales based on inventory cost determined on a last-ink first-out ("LIFO")
basis. At October 1, 1997, the Company valued inventory at its estimated fair
value in connection with the application of purchase accounting pursuant to the
acquisition of the partnership by the Company (see Note 3). At December 31,
1998, the majority of the Company's inventories are recorded at cost determined
on a LIFO basis. Inventory costs include manufacturing overhead.
The current replacement cost of LIFO inventories exceeded their recorded values
by approximately $5.2 million at December 31, 1998. At December 31, 1998, $25
million of non-production inventories are recorded at actual cost.
F-10
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
---------------------
<S> <C> <C>
Buildings $ 33,467 $ 38,213
Machinery and equipment 165,289 160,788
Land and improvements 7,737 7,802
Construction in progress 13,076 7,500
---------------------
219,569 214,303
Less: Accumulated depreciation (20,660) (91,582)
---------------------
Net property, plant and equipment $198,909 $122,721
=====================
</TABLE>
Depreciation expense for UDLP was $26.3 million and $19.3 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. Depreciation expense was $ 20.7 million for the three months
ended December 31, 1997 and $83.2 million for the year ended December 31, 1998.
6. Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
----------------------
<S> <C> <C>
Software and other intangibles $ 67,715 $ 75,200
Firm business and ongoing programs 225,103 225,103
Goodwill 140,833 125,130
Deferred restructuring costs 15,660 -
----------------------
449,311 425,433
Less: accumulated amortization (16,263) (95,409)
----------------------
Net intangible assets $433,048 $ 330,024
======================
</TABLE>
F-11
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The Company's software and other intangibles are being amortized over their
estimated useful lives on a straight-line basis over three to five years. The
excess of purchase cost over the fair value of the net assets acquired
(goodwill) and other specifically identifiable assets related to the Company's
contracts and programs that resulted from the application of purchase accounting
for the acquisition of UDLP are being amortized over periods of up to thirty
years.
Amortization expense, which is recorded on a straight-line basis or other
methods based on revenues of related contracts or programs, was $12.7 million
for the year ended December 31, 1996, $9.7 million for the nine months ended
September 30, 1997, $16.3 million for the three months ended December 31, 1997,
and $94.8 million for the year ended December 31, 1998.
In October 1994, UDLP entered into an Advance Agreement with the U.S. Department
of Defense. Under the terms of the Agreement, UDLP was permitted to defer
certain costs associated with consolidation and restructuring of its ground
systems businesses. Costs deferred were allocated ratably to contracts with the
Department of Defense for thirty-six months beginning January 1, 1996.
7. Pensions and Other Postretirement Benefits
Substantially all of the Company's domestic employees are covered by retirement
plans. Plans covering salaried employees provide pension benefits based on
years of service and compensation. Plans covering hourly employees generally
provide benefits of stated amounts for each year of service. The Company's
funding policy is to make contributions based on the projected unit credit
method and to limit contributions to amounts that are currently deductible for
tax purposes.
Substantially all of the Company's employees are also covered by postretirement
health care and life insurance benefit programs. Employees generally become
eligible to receive benefits under these plans after they retire when they meet
minimum retirement age and service requirements. The cost of providing most of
these benefits is shared with retirees. The Company has reserved the right to
change or eliminate these benefit plans.
F-12
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The change in benefit obligation and plan assets of the plans and prepaid or
accrued pension and postretirement costs recognized in the balance sheets at
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1997 1998 1997 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $269,659 $348,199 $56,154 $52,992
Service cost 10,561 11,751 1,201 1,382
Interest cost 22,250 27,017 3,889 3,515
Net benefits paid, including settlements (13,750) (22,289) (3,934) (4,330)
Actuarial (gain) loss 55,487 61,576 (4,318) 1,236
Special termination benefits and
curtailments 3,992 16,397 - -
------------------------------------------------
Benefit obligation at end of year $348,199 $442,651 $52,992 $54,795
================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1997 1998 1997 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Change in plan assets
Fair value of plan assets at beginning
of year $384,210 $480,522 $38,630 $49,702
Assets transferred from Sellers 12,415 4,469 - -
Actual return on plan assets 97,317 82,668 10,025 12,830
Employer contributions 330 2,633 4,981 2,210
Net benefits paid, including settlements (13,750) (22,289) (3,934) (4,330)
------------------------------------------------
Fair value of plan assets at end of year $480,522 $548,003 $49,702 $60,412
================================================
</TABLE>
F-13
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1997 1998 1997 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Funded status $132,323 $105,352 $(3,290) $ 5,617
Unrecognized actuarial (gain) loss - 1,626 - (7,420)
Unrecognized prior service cost - 4,127 - -
------------------------------------------------
Net amount recognized $132,323 $111,105 $(3,290) $(1,803)
================================================
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid pension cost $139,431 $123,912 - -
Accrued pension cost (7,108) (12,807) - -
Accrued postretirement benefit cost - - $(3,290) $(1,803)
------------------------------------------------
Net amount recognized $132,323 $111,105 $(3,290) $(1,803)
================================================
</TABLE>
The following table summarizes the assumptions used in the determination of net
pension and postretirement benefit costs and benefit obligations for the year
ended December 31, 1996, the nine months ended September 30, 1997, the three
months ended December 31, 1997, and the year ended December 31, 1998:
<TABLE>
<CAPTION>
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
--------------------------------||-----------------------------
<S> <C> <C> || <C> <C>
Weighted-average assumptions ||
Discount rate 8.00% 8.00% || 7.00% 6.50%
Expected return on plan assets 9.62% 9.62% || 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% || 4.00% 3.50%
</TABLE>
F-14
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The following tables show the components of the net periodic benefit cost (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits
----------------
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
--------------------------------||-----------------------------
<S> <C> <C> || <C> <C>
Service cost $ 9,191 $ 7,286 || $ 3,275 $ 11,751
Interest cost 19,826 16,309 || 5,941 27,017
Expected return on plan assets (32,330) (27,721) || (10,512) (43,080)
Net amortization and recognized losses 4,513 1,172 || - 703
Special termination benefits and ||
curtailments 1,600 3,992 || - 27,500
--------------------------------||-----------------------------
Net periodic benefit cost (income) $ 2,800 $ 1,038 || $ (1,296) $ 23,891
================================||=============================
</TABLE>
<TABLE>
<CAPTION>
Postretirement Benefits
------------------------
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
--------------------------------||-----------------------------
<S> <C> <C> || <C> <C>
Service cost $ 1,174 $ 901 || $ 300 $ 1,382
Interest cost 4,159 2,985 || 898 3,515
Expected return on plan assets (3,065) (2,761) || (1,076) (4,422)
Net amortization and recognized losses (870) (1,043) || - -
--------------------------------||-----------------------------
Net periodic benefit cost $ 1,398 $ 82 || $ 122 $ 475
================================||=============================
</TABLE>
Pension special termination benefits and curtailments cost relates to various
early retirement incentive and involuntary workforce reduction programs related
to the Company's downsizing and consolidation of operations.
The projected benefit obligation and fair value of plan assets for the pension
plan with projected benefit obligations in excess of plan assets were $234.9
million and $206.3 million, respectively, at December 31, 1998 and $149.3
million and $142.2 million, respectively, at December 31, 1997.
F-15
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5% for 2001 and remain at that level thereafter. Assumed
health care cost trend rates have an effect on the amounts reported for the
postretirement health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ 222 $ (178)
Effect on the postretirement benefit obligation $2,059 $(1,685)
</TABLE>
8. Long-term Debt
Borrowings under long-term debt arrangements are as follows:
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------
<S> <C> <C>
Senior credit facility $409,800 $306,986
Senior subordinated notes 200,000 200,000
Seller note 50,000 -
--------------------
659,800 506,986
Less: current portion 12,000 16,643
--------------------
$647,800 $490,343
====================
</TABLE>
Senior Credit Facility
In October 1997, the Company entered into a senior credit facility that included
$495 million of term loan facilities and a $230 million revolving credit
facility. Outstanding borrowings are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------
<S> <C> <C>
Term loan facilities $397,800 $306,986
Revolving credit facility 12,000 -
--------------------
$409,800 $306,986
====================
</TABLE>
F-16
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The term loan facilities bear interest at variable rates with a weighted average
rate of 8.35% and 6.75% at December 31, 1997 and 1998, respectively. These
loans are due through 2006 and provide for quarterly principal payments.
The revolving credit facility provides for loans and letters of credit and
matures in 2003. The Company has outstanding letters of credit under the
facility of $107 million at December 31, 1998. There was $123 million available
under the revolving credit facility at December 31, 1998. The revolving credit
facility bears interest at variable rates with a weighted average rate of 8.21%
at December 31, 1997. The Company is obligated to pay a fee of 0.25% on the
unused revolving credit facility.
Amounts outstanding under the senior credit facility are secured by a lien on
all the assets of the Company and its domestic subsidiaries and by a pledge of
all the stock of the Company and its domestic subsidiaries and two-thirds of the
stock of certain of the Company's foreign subsidiaries and joint ventures.
Mandatory prepayments and reductions of outstanding principal amounts are
required upon the occurrence of certain events. The senior credit facility
contains customary covenants restricting the incurrence of debt, encumbrances on
and sales of assets, limitations on mergers and certain acquisitions,
limitations on changes in control, provision for the maintenance of certain
financial ratios, and various other financial covenants and restrictions.
Senior Subordinated Notes
In October 1997, the Company issued $200 million of senior subordinated notes.
The senior subordinated notes are unsecured, bear interest at 8.75% payable
semiannually, and mature in 2007. The payment of principal and interest is
subordinated in right of payment to all senior debt.
The subordinated notes are not redeemable other than in connection with a public
equity offering or a change in control prior to November 2002, at which time the
notes may be redeemed at a premium, initially at 104.375% of the principal
amount. The subordinated notes have customary covenants for subordinated debt
facilities including the right to require repurchase upon a change in control,
restrictions on payment of dividends, and restrictions on the acquisition of
equity interests by the Company.
F-17
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Seller Note
In October 1997, the Company issued a $50 million note to former partners of
UDLP. Interest was payable quarterly at 8.75%. The seller note was paid in
full during 1998.
Annual Maturities
Annual maturities of long-term debt for the five years are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1999 $ 16,643
2000 23,086
2001 23,086
2002 23,086
2003 23,085
Thereafter 398,000
----------
Total $506,986
==========
</TABLE>
Cash paid for interest for the three months ended December 31, 1997 and for the
year ended December 31, 1998 was $2.9 million and $45.4 million, respectively.
9. Commitments and Contingencies
Operating Leases
The Company leases office space, plants and facilities, and various types of
manufacturing, data processing and transportation equipment. Rent expense for
the year ended December 31, 1996, the nine months ended September 30, 1997, the
three months ended December 31, 1997, and the year ended December 31, 1998 was
$12.9 million, $11.7 million, $6.4 million and $13.5 million, respectively.
Minimum future rentals under noncancellable leases are estimated to be $10.3
million in 1999, $11.0 million in 2000, $10.3 million in 2001, $9.6 million in
2002, $9.9 million in 2003, and $7.7 million thereafter.
F-18
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Legal Proceedings
Alliant Techsystems Inc. ("Alliant"), a subcontractor to UDLP in connection with
the Paladin howitzer prime contract, has filed suit against UDLP and its former
owners. Alliant seeks damages in an unspecified amount on breach of contract
and other theories. The dispute arises out of a U.S. Army-directed termination
for convenience in 1996 of certain subcontract work, which, until the time of
termination, had been performed by Alliant, and was thereafter replaced by
subcontract work performed by another subcontractor. Management does not
believe that Alliant's suit will have a material adverse impact on the Company.
The Company is also a defendant in two so-called qui tam cases filed under the
U.S. Civil False Claims Act (the "FCA") by present or former employees of the
Company's Armament Systems Division in Fridley, Minnesota. The FCA, among other
things, permits individuals to seek recovery, including treble damages and
additional civil penalties, of amounts which under certain circumstances have
been improperly claimed from the government by its contractors, and provides
that such plaintiffs may personally collect 15-30% of any recovery obtained.
Each case primarily alleges that the Company improperly obtained payment under
various government contracts by supplying components which did not comply with
applicable technical specifications. The Department of Justice has declined to
intervene in either case. The Company has moved to dismiss one case and has
filed an answer denying the material allegations in the other case. Management
does not believe the suits will have a material adverse impact on the Company.
The Company is subject to other claims and suits arising in the ordinary course
of its operations. In the opinion of management, the ultimate resolution of any
other current pending legal proceedings will not have a material effect on the
Company's financial position or results of operations.
Environmental Matters
The Company spends certain amounts annually to maintain compliance with
environmental laws and to remediate contamination. Operating and maintenance
costs associated with environmental compliance and prevention of contamination
at the Company's facilities are a normal, recurring part of operations, are not
significant relative to total operating costs or cash flows, and are generally
allowable as contract costs under the Company's contracts with the U.S.
government (Allowable Costs).
As with compliance costs, a significant portion of the Company's expenditures
for remediation at its facilities consists of Allowable Costs. Management
believes that it has sufficient reserves to cover remediation costs that are not
allowable costs under its U.S. government contracts (Non-
F-19
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Allowable Costs). In addition, pursuant to the terms of the acquisition of UDLP,
the Sellers are required to reimburse the Company for 75% of certain remediation
costs relating to operations prior to the acquisition that are Non-Allowable
Costs.
The Company has reflected a liability for the gross amount of environmental
remediation costs which it expects to be liable for after giving effect to
reimbursement under government contracts. The Company has recorded an asset for
the amounts expected to be reimbursed by the Sellers under the terms of the
acquisition agreement.
10. Subsidiary Equity Plans
During 1998, UDI adopted the 1998 Stock Option Plan (the "Option Plan") under
which 1,500,000 shares of common stock were reserved for issuance. The options
generally vest over a period of 10 years; however, vesting may be accelerated
over 5 years if certain targets related to earnings and cash flow are met.
Common stock options activity is as follows:
<TABLE>
<CAPTION>
Year ended December
31, 1998
-----------------------
<S> <C>
Options outstanding at beginning of year -
Options granted 1,432,000
Options canceled -
Options exercised -
-----------------------
Options outstanding at end of year 1,432,000
=======================
Options exercisable at end of year 106,200
=======================
</TABLE>
All options were granted at $10 per share during the year ended December 31,
1998 and had an estimated grant date fair value of $4.51 per option.
F-20
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Had compensation cost for the UDI's stock option plans been determined based
upon the fair value at the grant date for awards under the plan consistent with
the methodology prescribed under Statement of Financial Accounting Standard No.
123, Accounting for Stock-Based Compensation, the Company's net loss in 1998
would have increased by approximately $560,000. The effect of applying SFAS No.
123 on the net loss as stated above is not necessarily representative of the
effects on reported net income (loss) for future years due to, among other
things, (1) the vesting period of the stock options and (2) additional stock
options that may be granted in future years.
The fair value of each option grant is estimated on the date of grant using the
minimum value model with the following assumptions used for grants in 1998:
dividend yield of 0%; risk-free interest rate of 6%; and expected life of the
option term of 10 years.
Employee Stock Purchase Plan
UDI adopted an Employee Stock Purchase Plan (the "ESPP"). Under the ESPP,
certain employees are provided the opportunity to purchase shares of UDI's
common stock at its estimated fair value. Certain of these purchases were
eligible for financing provided by UDI. Related loans totaling $1.3 million,
including interest at 7.5%, is due in five years. Under the plan, 739,624
shares, representing 4% of UDI shares outstanding at December 31, 1998, were
sold at a price of $10 per share.
11. Income Taxes
The provision for income taxes for the year ended December 31, 1996, the nine
months ended September 30, 1997, and the year ended December 31, 1998 was solely
for federal income taxes payable by the Company's Foreign Sales Corporation
("FSC") subsidiary. The FSC paid income taxes amounting to $1.8 million, $1.1
million, and $3.3 million during the year ended December 31, 1996, the nine
months ended September 30, 1997, and the year ended December 31, 1998,
respectively.
F-21
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
----------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 41,823 $ 42,224
Net operating loss carryforwards 8,583 111,110
Depreciation 3,800 22,496
Other 1,290 7,302
----------------------
55,496 183,132
Deferred tax liabilities:
Intangibles, accrued compensation, and benefits (40,597) (109,634)
Other (9,101)
----------------------
(40,597) (118,735)
----------------------
Net deferred tax asset 14,899 64,397
Valuation allowance (14,899) (64,397)
----------------------
Net deferred taxes on balance sheet $ -- $ --
======================
</TABLE>
The net deferred tax asset at December 31, 1997 and 1998 has been offset by a
valuation allowance. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the temporary differences become deductible and
subject to any limitations applied to the use of carryforward tax attributes.
The Company has approximately $277.8 million in net operating loss carryforwards
which expire at varying dates through 2018.
F-22
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
To reduce the impact of changes in interest rates on its floating rate debt, the
Company entered into a three-year interest rate swap agreement that expires in
October 2000 for a notional amount of $160 million. A swap agreement is a
contract to exchange floating rate interest payments for fixed rate payments
periodically over the term of the agreement without the exchange of the
underlying notional amount. The notional amount is used to measure the interest
to be paid or received and does not represent the amount of exposure to credit
loss.
The agreement entitles the Company to pay a base interest rate amount of 5.75%,
in return for the right to receive a floating interest rate which is based on
the three-month LIBOR as of the quarterly measurement date. In the event the
three-month LIBOR at the measurement date exceeds 6.99% the base interest rate
is adjusted to the then effective LIBOR up to a maximum rate of 9%. The net cash
amounts paid or received on the agreement are accrued and recognized as an
adjustment to interest expense.
The fair value of interest rate instruments are the estimated amounts the
Company would have to pay to terminate the agreement, taking into account the
current interest rates and the creditworthiness of the parties to the agreement.
At December 31, 1998, the termination value of the swap (i.e., the fair value)
was $2.4 million.
The carrying amount of the Company's financial instruments included in current
assets and current liabilities approximates their fair value due to their short-
term nature. At December 31, 1997, the fair market value of the Company's long-
term debt was estimated to be $459.8 million and $201.0 million for the senior
credit facility (including the seller note) and subordinated debt, respectively.
At December 31, 1998, the fair market value of the Company's long-term debt was
estimated to be $307.0 million and $202.0 million for the senior credit facility
and subordinated debt, respectively.
13. Significant Customer and Export Sales
Sales to various agencies of the U.S. Government aggregated $819.9 million,
$625.5 million, $203.1 million and $968.3 million during the year ended December
31, 1996, the nine months ended September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998, respectively.
At December 31, 1997 and 1998, trade accounts receivable from the U.S.
Government totaled $71.3 million and $50.8 million, respectively.
F-23
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Export sales, including sales to foreign governments transacted through the U.S.
Government, were $194.2 million, $264.5 million, $89.1 million and $230.3 during
the year ended December 31, 1996, the nine months ended September 30, 1997, the
three months ended December 31, 1997 and the year ended December 31, 1998,
respectively.
14. Related Party Transactions
Through September 30, 1997, UDLP contracted with FMC for various administrative
and support services. These services included computer services, systems and
programming, data communications, employee relocation support, payroll
processing, insurance and general management support. During the year ended
December 31, 1996 and the nine months ended September 30, 1997, UDLP paid $35.2
million and $22.3 million, respectively, to FMC for their support.
UDLP also leased office and manufacturing facilities in San Jose, California
from FMC. Under the lease agreement monthly rent payments were comprised of
fixed base rent plus depreciation on the facilities. Fixed base rent was $2.0
million per year through September 30, 1997. During the year ended December 31,
1996 and the nine months ended September 30, 1997, UDLP incurred rent amounting
to $3.7 million and $2.6 million, respectively, under this lease.
A new lease was entered into upon the acquisition of UDLP by the Company. Under
the new lease, the fixed base rent is $4.0 million per year for five facilities.
The lease expired for one facility on March 31, 1998. The leases on the
remaining four facilities expire October 1, 2001.
Sales of inventory to FMC during 1996 amounted to $1.1 million, respectively.
Management believes that such transactions were consummated on terms
substantially similar to those that would arise in transactions with third
parties.
Through September 30, 1997, the Company invested its excess cash balances with
FMC. Interest on these funds was earned based on the average monthly cost of
FMC's U.S. dollar revolver-related short-term borrowings for such month.
Interest on all loans to FMC totaled $1.8 million and $1.7 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
F-24
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Upon the acquisition of UDLP by the Company in 1997, Carlyle was paid $4.5
million, which was included in the transaction costs for advisory services
related to the placement of the Senior and Senior Subordinated financing.
Additionally, during 1998 Carlyle provided consulting assistance in development
of management operating policies and procedures, for which the Company incurred
a current charge to operations of $2.0 million. The management agreement
between the Company and Carlyle requires an annual fee of $2.0 million for
various management services. During the three months ended December 31, 1997 and
the year ended December 31, 1998, the Company recorded $0.5 million and $2.0
million of charges relating to these services.
15. Restructuring
During the third quarter of 1998, the Company approved a restructuring plan
designed to rationalize production and lower costs at the Armament Systems
Division's Fridley, Minnesota facility. The plan calls for shifting a
significant portion of production and final assembly to other Company sites and
outsourcing certain other operations. The Company recorded a charge of $36.2
million for estimated employee termination expenses, acceleration of recognition
for benefit costs that were curtailed, and charges for impaired assets. This
charge will not significantly impact operating funds as it mostly represents
either asset write-offs or costs that will be provided for out of an overfunded
pension plan. The Company anticipates the restructuring activity will be
complete in December 1999 with the final relocation of production to another
site.
16. Employees' Thrift Plan
Substantially all of the Company's employees are eligible to participate in
defined contribution savings plans designed to comply with the requirements of
the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k)
of the Internal Revenue Code. Charges against income for matching contributions
to the plans were $7.7 million, $7.1 million, $1.4 million and $8.1 million in
the year ended December 31, 1996, the nine months ended September 30, 1997, the
three months ended December 31, 1997, and the year ended December 31, 1998,
respectively.
F-25
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
United Defense Industries, Inc.
We have audited the accompanying consolidated balance sheets of United Defense
Industries, Inc. (a wholly owned subsidiary of Iron Horse Investors, L.L.C.) and
subsidiaries as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1998 and the three months ended December 31, 1997. We have
also audited the consolidated statements of operations, partners' capital, and
cash flows of United Defense, L.P. (predecessor) and subsidiaries for the nine
months ended September 30, 1997 and the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Defense
Industries, Inc. and its subsidiaries at December 31, 1997 and 1998 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1998 and the three months ended December 31, 1997, and the
consolidated results of operations and cash flows of United Defense, L.P. and
its subsidiaries for the nine months ended September 30, 1997 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
January 29, 1999
Washington D.C.
F-26
<PAGE>
United Defense Industries, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31
1997 1998
------------------------
<S> <C> <C>
Assets
Current assets:
Cash and marketable securities $ 35,623 $ 85,520
Trade receivables 94,847 64,395
Inventories (Note 4) 330,373 254,343
Other current assets 6,998 4,255
------------------------
Total current assets 467,841 408,513
Property, plant and equipment, net (Note 5) 198,909 122,721
Intangible assets, net (Note 6) 433,048 330,024
Prepaid pension cost (Note 7) 139,431 123,912
Other assets 6,854 4,571
------------------------
Total assets $1,246,083 $ 989,741
========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade and other $ 93,641 $ 88,497
Accrued and other liabilities 71,002 75,832
Advanced payments 261,401 258,395
Current portion of long-term debt (Note 8) 12,000 16,643
------------------------
Total current liabilities 438,044 439,367
Long-term liabilities:
Long-term debt, net of current portion (Note 8) 647,800 490,343
Accrued pension cost (Note 7) 7,108 12,807
Accrued postretirement benefit cost (Note 7) 3,290 1,803
Other liabilities 13,100 22,630
------------------------
Total liabilities 1,109,342 966,950
Commitments and contingencies (Notes 8, and 9)
Stockholders' equity:
Common stock; $.01 par value, 400,000 and 20,000,000 shares
authorized, 17,300,000 and 18,039,624 shares issued and
outstanding at December 31, 1997 and 1998, respectively 173 180
Additional paid-in-capital 172,827 180,216
Stockholder loans - (1,339)
Accumulated deficit (36,259) (156,266)
------------------------
Total stockholders' equity 136,741 22,791
------------------------
Total liabilities and stockholders' equity $1,246,083 $ 989,741
========================
</TABLE>
See accompanying notes.
F-27
<PAGE>
United Defense Industries, Inc.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
----------------------------------||----------------------------
(UDLP) ||
<S> <C> <C> || <C> <C>
Revenue: ||
Sales $1,029,333 $913,925 || $342,627 $1,217,555
||
Costs and expenses: ||
Cost of sales 820,845 754,977 || 324,123 1,099,291
Selling, general and ||
administrative expenses 128,455 91,413 || 34,947 177,449
Research and development 12,853 12,096 || 4,558 13,021
----------------------------------||----------------------------
Total costs and expenses 962,153 858,486 || 363,628 1,289,761
||
Earnings related to investments ||
in foreign affiliates 31,916 13,521 || 432 6,208
----------------------------------||----------------------------
||
Income (loss) from operations 99,096 68,960 || (20,569) (65,998)
||
Other income (expense): ||
Interest expense - - || (15,622) (52,155)
Interest income 1,933 1,456 || - 1,396
Miscellaneous, net - - || (68) -
----------------------------------||----------------------------
Total other income (expense) 1,933 1,456 || (15,690) (50,759)
----------------------------------||----------------------------
||
Income before income taxes 101,029 70,416 || (36,259) (116,757)
||
Provision for income taxes (Note 7) 2,859 1,523 || - 3,250
----------------------------------||----------------------------
||
Net income (loss) $ 98,170 $ 68,893 || $(36,259) $ (120,007)
==================================||============================
</TABLE>
See accompanying notes.
F-28
<PAGE>
United Defense Industries, Inc.
Consolidated Statements of
Partners' Capital and Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Additional
Partners' Common Paid-in Stockholder Accumulated
(UDLP) Capital Stock Capital Loans Deficit Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 156,433 - - - - $ 156,433
Distributions (74,965) - - - - (74,965)
Net income for the year
ended December 31, 1996 98,170 - - - - 98,170
--------------------------------------------------------------------------------------
Balance at December 31, 1996 179,638 - - - - 179,638
Distributions (114,409) - - - - (114,409)
Liabilities transferred from
FMC (3,120) - - - - (3,120)
Net income for the nine
months ended
September 30, 1997 68,893 - - - - 68,893
--------------------------------------------------------------------------------------
Balance at
September 30, 1997 $ 131,002 - - - - $ 131,002
======================================================================================
===================================================================================================================
Balance at October 1, 1997 - $ - $ - $ $ - $
Issuance of common stock - 173 172,827 - - 173,000
Net loss for the three
months ended December 31,
1997 - - - - (36,259) (36,259)
--------------------------------------------------------------------------------------
Balance at December 31, 1997 - 173 172,827 - (36,259) 136,741
Issuance of common stock - 7 7,389 (1,339) - 6,057
Net loss for the year ended
December 31, 1998 - - - - (120,007) (120,007)
--------------------------------------------------------------------------------------
Balance at December 31, 1998 - $180 $180,216 $(1,339) $(156,266) $ 22,791
======================================================================================
</TABLE>
See accompanying notes.
F-29
<PAGE>
United Defense Industries, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
------------------------------------||-----------------------------
(UDLP) ||
<S> <C> <C> || <C> <C>
Operating activities ||
Net income (loss) $ 98,170 $ 68,893 || $ (36,259) $(120,007)
Adjustments to reconcile net income (loss) to cash ||
provided by operating activities: ||
Depreciation 26,327 19,331 || 20,660 83,153
Amortization 12,667 9,673 || 16,263 94,806
Restructuring costs (7,778) -- || -- --
Other 519 (4,039) || 9,001 5,291
Changes in assets and liabilities: ||
Trade receivables 13,446 7,600 || (13,335) 30,452
Inventories (113,453) 15,546 || 92,875 76,030
Other current assets 5,144 (745) || (2,187) 1,636
Prepaid pension cost (6,120) (8,783) || (2,736) 15,519
Accounts payable, trade and other (26,579) (14,585) || 17,639 (5,144)
Advanced payments 64,714 15,082 || (12,671) (3,006)
Accrued and other liabilities 9,702 11,626 || (16,717) 14,360
Accrued pension cost 7,876 5,428 || 1,403 5,699
Accrued postretirement benefit cost (3,543) (2,247) || (1,878) (1,487)
------------------------------------||-----------------------------
Cash provided by operating activities 81,092 122,780 || 72,058 197,302
||
Investing activities ||
Capital spending (22,396) (23,722) || (15,893) (24,020)
Disposal of property, plant and equipment 4,543 6,938 || 3,170 7,298
Short-term investment with FMC Corporation 10,853 19,497 || -- --
Purchase of business (net of $11,107 cash acquired) -- -- || (838,893) --
Adjustment to purchase price of business -- -- || -- 16,074
------------------------------------||-----------------------------
Cash (used in) provided by investing activities (7,000) 2,713 || (851,616) (648)
||
Financing activities ||
Partner distributions (74,965) (114,409) ||
Payments on long-term debt -- -- || (47,200) (152,814)
Payments for financing and transaction costs -- -- || (28,726) --
Proceeds from issuance of long-term debt -- -- || 707,000 --
Proceeds from sale of common stock -- -- || 173,000 6,057
------------------------------------||-----------------------------
Cash (used in) provided by financing activities (74,965) (114,409) || 804,074 (146,757)
------------------------------------||-----------------------------
(Decrease) increase in cash and marketable ||
securities (873) 11,084 || 24,516 49,897
||
Cash and marketable securities at beginning of ||
period 896 23 || 11,107 35,623
------------------------------------||-----------------------------
Cash and marketable securities at end of period $ 23 $ 11,107 || $ 35,623 $ 85,520
====================================||=============================
</TABLE>
See accompanying notes.
F-30
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
1. Basis of Presentation
United Defense Industries, Inc. (the "Company") is a subsidiary of Iron Horse
Investors, L.L.C. ("Iron Horse") and is organized under the laws of the state of
Delaware and was formed for the primary purpose of facilitating the acquisition
of United Defense, L.P. ("UDLP") by Iron Horse. Iron Horse is owned by an
investment group led by the Carlyle Group ("Carlyle"). On October 6, 1997, the
Company acquired 100% of the partnership interests of UDLP from FMC Corporation
("FMC") and Harsco Corporation ("Harsco") (the "Sellers"). As a result of
adjustments to the carrying value of assets and liabilities pursuant to this
transaction (see Note 3), the financial position and results of operations for
periods subsequent to the acquisition are not comparable to UDLP amounts.
The Company designs, develops and manufactures various tracked armored combat
vehicles and a wide spectrum of weapons delivery systems for the armed forces of
the United States and nations around the world. Approximately 30% of the
Company's employees are covered by collective bargaining agreements.
The financial statements include the accounts of the Company and its
subsidiaries. Prior to the acquisition, the financial statements include the
accounts of UDLP and its subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes,
in particular, estimates of contract cost and revenues used in the earnings
recognition process. Actual results could differ from those estimates.
Cash and Marketable Securities
Cash and marketable securities consist of investments with initial maturities of
three months or less.
F-31
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is provided
principally on the sum-of-the-years digits and straight-line methods over
estimated useful lives of the assets (land improvements--twenty years;
buildings--twenty to thirty-five years; and machinery and equipment--two to
twelve years).
Maintenance and repairs are expensed as incurred. Expenditures that extend the
useful life of property, plant and equipment or increase its productivity are
capitalized and depreciated.
Long-lived Assets, Including Intangible Assets and Goodwill
The Company evaluates on a quarterly basis its long-lived assets to be held and
used, including certain identifiable intangible assets and goodwill, to
determine whether any events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company bases its
evaluation on such impairment indicators as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors exist that
indicate that the carrying amount of the asset may not be recoverable, the
Company would use an estimate of the undiscounted value of expected future
operating cash flows to determine whether the asset is recoverable and measure
the amount of the impairment based on the difference between the carrying amount
of the asset and its estimated fair value.
Investments in Affiliated Companies
The investment in a majority owned foreign joint venture in Turkey is carried at
cost since there is uncertainty regarding the ability to control the venture or
to repatriate earnings. Income is recognized as dividends are received.
Dividends received net of amounts accrued for taxes and future obligations were
$28.1 million for the year ended December 31, 1996, $5.3 million for the nine
months ended September 30, 1997, $0 for the three months ended December 31,
1997, and $4.6 million for the year ended December 31, 1998.
F-32
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
UDLP accounted for its investment in a foreign joint venture in Saudi Arabia at
cost through 1995 because of uncertainties as to the long-term prospects for
this venture. In 1996, consistent with a significant expansion of the venture's
business and positive long-term prospects for the business, UDLP changed from
the cost to the equity method. The impact on UDLP's results of operations was
not material. Equity in earnings from this venture was $3.8 million for the
year ended December 31, 1996, $8.2 million for the nine months ended
September 30, 1997, $0.4 million for the three months ended December 31, 1997,
and $1.6 million for the year ended December 31, 1998.
Advanced Payments
Advanced payments by customers for deposits on orders not yet billed and
progress payments on contracts-in-progress are recorded as current liabilities.
Revenue and Profit Recognition for Contracts-in-Progress
The Company recognizes sales on most production contracts as deliveries are made
or accepted. Gross margin on sales is based on the estimated margin to be
realized over the life of the related contract. Sales under cost reimbursement
contracts for research, engineering, prototypes, repair and maintenance and
certain other contracts are recorded when funded, as costs are incurred and
include estimated fees in the proportion that costs incurred to date bear to
total estimated costs. Changes in estimates for sales and profits are
recognized in the period in which they are determinable using the cumulative
catch-up method. Claims are considered in the estimated contract performance at
such time as realization is probable. Any anticipated losses on contracts
(i.e., cost of sales exceeds sales) are charged to operations as soon as they
are determinable.
During 1996, UDLP recognized a $14.3 million increase in gross profit as a
result of a settlement with the U.S. government on the cost of a component
supplied by the U.S. government on a group of related contracts. Gross profit
for the nine months ended September 30, 1997 includes approximately $13.5
million of noncash charges for changes in estimated contract profitability
related to contractual issues with customers and other matters resulting from
the periodic reassessment of the estimated profitability of contracts in
progress.
F-33
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation
Provided the option price is not less than fair value of the common stock at the
date an option is granted, the Company records no compensation expense in its
consolidated statements of operations. See Note 10 for the pro forma effect on
operating results had the Company recorded compensation expense for the fair
value of stock options.
Income Taxes
As a limited partnership, income earned by UDLP passed to its partners and was
taxable at that level, except for taxes payable on the income of UDLP's Foreign
Sales Corporation ("FSC") subsidiary.
As a corporation, the Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws expected to be
effective when these differences reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. Business Purchase
On October 5, 1997, the Company acquired 100% of the partnership interests of
UDLP and certain other related business assets of FMC. The purchase price
including expenses was $864 million after an adjustment of $16 million agreed to
during 1998. The Company financed the acquisition through a cash equity
investment of $173 million and debt (see Note 8). The acquisition was accounted
for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired in the
amount of $733 million was allocated to inventory; property, plant and
equipment; other tangible assets; and intangible assets based on management's
estimate of their fair values. The excess purchase price over the fair value of
the net assets acquired was allocated to goodwill.
F-34
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The operating results of UDLP are presented in the consolidated statements of
operations since the date of acquisition. The unaudited pro forma results below
assume the acquisition occurred at January 1, 1997 (in thousands):
Year ended
December 31, 1997
-----------------------
Sales $1,260,000
Net loss (140,000)
The unaudited pro forma net loss for 1997 adjusts the historical results of
operations for interest expense and the effects of amortization of the increased
basis of assets subsequent to the acquisition. The total interest expense and
purchase accounting impact on the pro forma statement of operations was
approximately $60 million and $190 million, respectively, for the year ended
December 31, 1997. The unaudited pro forma combined results of operations are
not necessarily indicative of the actual results that would have occurred had
the acquisition been consummated at January 1, 1997 or of future operations
under the ownership and management of the Company.
4. Inventories
At October 1, 1997, the Company valued inventory at its estimated fair value in
connection with the application of purchase accounting pursuant to the
acquisition of the partnership by the Company (see Note 3). At December 31,
1998, the majority of the Company's inventories are recorded at cost determined
on a last-in, first-out ("LIFO") basis. Inventory costs include manufacturing
overhead.
The current replacement cost of LIFO inventories exceeded their recorded values
by approximately $5.2 million at December 31, 1998. At December 31, 1998, $25
million of non-production inventories are recorded at actual cost.
F-35
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------------
<S> <C> <C>
Buildings $ 33,467 $ 38,213
Machinery and equipment 165,289 160,788
Land and improvements 7,737 7,802
Construction in progress 13,076 7,500
--------------------------
219,569 214,303
Less: Accumulated depreciation (20,660) (91,582)
--------------------------
Net property, plant and equipment $198,909 $122,721
==========================
</TABLE>
Depreciation expense for UDLP was $26.3 million and $19.3 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. Depreciation expense was $ 20.7 million for the three months
ended December 31, 1997 and $83.2 million for the year ended December 31, 1998.
6. Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------------
<S> <C> <C>
Software and other intangibles $ 67,715 $ 75,200
Firm business and ongoing programs 225,103 225,103
Goodwill 140,833 125,130
Deferred restructuring costs 15,660 -
--------------------------
449,311 425,433
Less: accumulated amortization (16,263) (95,409)
--------------------------
Net intangible assets $433,048 $330,024
==========================
</TABLE>
F-36
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The Company's software and other intangibles are being amortized over their
estimated useful lives on a straight-line basis over three to five years. The
excess of purchase cost over the fair value of the net assets acquired
(goodwill) and other specifically identifiable assets related to the Company's
contracts and programs that resulted from the application of purchase accounting
for the acquisition of UDLP are being amortized over periods of up to thirty
years.
Amortization expense, which is recorded on a straight-line basis or other
methods based on revenues of related contracts or programs, was $12.7 million
for the year ended December 31, 1996, $9.7 million for the nine months ended
September 30, 1997, $16.3 million for the three months ended December 31, 1997,
and $94.8 million for the year ended December 31, 1998.
In October 1994, UDLP entered into an Advance Agreement with the U.S. Department
of Defense. Under the terms of the Agreement, UDLP was permitted to defer
certain costs associated with consolidation and restructuring of its ground
systems businesses. Costs deferred were allocated ratably to contracts with the
Department of Defense for thirty-six months beginning January 1, 1996.
7. Pensions and Other Postretirement Benefits
Substantially all of the Company's domestic employees are covered by retirement
plans. Plans covering salaried employees provide pension benefits based on
years of service and compensation. Plans covering hourly employees generally
provide benefits of stated amounts for each year of service. The Company's
funding policy is to make contributions based on the projected unit credit
method and to limit contributions to amounts that are currently deductible for
tax purposes.
Substantially all of the Company's employees are also covered by postretirement
health care and life insurance benefit programs. Employees generally become
eligible to receive benefits under these plans after they retire when they meet
minimum retirement age and service requirements. The cost of providing most of
these benefits is shared with retirees. The Company has reserved the right to
change or eliminate these benefit plans.
F-37
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The change in benefit obligation and plan assets of the plans and prepaid or
accrued pension and postretirement costs recognized in the balance sheets at
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1997 1998 1997 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $269,659 $348,199 $56,154 $52,992
Service cost 10,561 11,751 1,201 1,382
Interest cost 22,250 27,017 3,889 3,515
Net benefits paid, including settlements (13,750) (22,289) (3,934) (4,330)
Actuarial (gain) loss 55,487 61,576 (4,318) 1,236
Special termination benefits and
curtailments 3,992 16,397 - -
-----------------------------------------------------------
Benefit obligation at end of year $348,199 $442,651 $52,992 $54,795
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1997 1998 1997 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Change in plan assets
Fair value of plan assets at beginning
of year $384,210 $480,522 $38,630 $49,702
Assets transferred from Sellers 12,415 4,469 - -
Actual return on plan assets 97,317 82,668 10,025 12,830
Employer contributions 330 2,633 4,981 2,210
Net benefits paid, including settlements (13,750) (22,289) (3,934) (4,330)
-----------------------------------------------------------
Fair value of plan assets at end of year $480,522 $548,003 $49,702 $60,412
===========================================================
</TABLE>
F-38
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1997 1998 1997 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Funded status $132,323 $105,352 $(3,290) $ 5,617
Unrecognized actuarial (gain) loss - 1,626 - (7,420)
Unrecognized prior service cost - 4,127 - -
------------------------------------------------
Net amount recognized $132,323 $111,105 $(3,290) $(1,803)
================================================
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid pension cost $139,431 $123,912 - -
Accrued pension cost (7,108) (12,807) - -
Accrued postretirement benefit cost - - $(3,290) $(1,803)
------------------------------------------------
Net amount recognized $132,323 $111,105 $(3,290) $(1,803)
================================================
</TABLE>
The following table summarizes the assumptions used in the determination of net
pension and postretirement benefit costs and benefit obligations for the year
ended December 31, 1996, the nine months ended September 30, 1997, the three
months ended December 31, 1997, and the year ended December 31, 1998:
<TABLE>
<CAPTION>
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
--------------------------------||----------------------------
Weighted-average assumptions ||
<S> <C> <C> || <C> <C>
Discount rate 8.00% 8.00% || 7.00% 6.50%
Expected return on plan assets 9.62% 9.62% || 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% || 4.00% 3.50%
</TABLE>
F-39
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The following tables show the components of the net periodic benefit cost (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits
----------------
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
---------------------------------||-----------------------------
<S> <C> <C> || <C> <C>
Service cost $ 9,191 $ 7,286 || $ 3,275 $ 11,751
Interest cost 19,826 16,309 || 5,941 27,017
Expected return on plan assets (32,330) (27,721) || (10,512) (43,080)
Net amortization and recognized losses 4,513 1,172 || - 703
Special termination benefits and ||
curtailments 1,600 3,992 || - 27,500
---------------------------------||-----------------------------
Net periodic benefit cost (income) $ 2,800 $ 1,038 || $ (1,296) $ 23,891
=================================||=============================
</TABLE>
<TABLE>
<CAPTION>
Postretirement Benefits
------------------------
Year Nine months || Three months Year
ended ended || ended ended
December 31, September 30, || December 31, December 31,
1996 1997 || 1997 1998
---------------------------------||----------------------------
<S> <C> <C> || <C> <C>
Service cost $ 1,174 $ 901 || $ 300 $ 1,382
Interest cost 4,159 2,985 || 898 3,515
Expected return on plan assets (3,065) (2,761) || (1,076) (4,422)
Net amortization and recognized losses (870) (1,043) || - -
---------------------------------||-----------------------------
Net periodic benefit cost $ 1,398 $ 82 || $ 122 $ 475
=================================||=============================
</TABLE>
Pension special termination benefits and curtailments cost relates to various
early retirement incentive and involuntary workforce reduction programs related
to the Company's downsizing and consolidation of operations.
The projected benefit obligation and fair value of plan assets for the pension
plan with projected benefit obligations in excess of plan assets were $234.9
million and $206.3 million, respectively, at December 31, 1998 and $149.3
million and $142.2 million, respectively, at December 31, 1997.
F-40
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5% for 2001 and remain at that level thereafter. Assumed
health care cost trend rates have an effect on the amounts reported for the
postretirement health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
-------------- -------------
<S> <C> <C>
Effect on total of service and interest cost components $ 222 $ (178)
Effect on the postretirement benefit obligation $2,059 $(1,685)
</TABLE>
8. Long-term Debt
Borrowings under long-term debt arrangements are as follows:
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------
<S> <C> <C>
Senior credit facility $409,800 $306,986
Senior subordinated notes 200,000 200,000
Seller note 50,000 -
--------------------
659,800 506,986
Less: current portion 12,000 16,643
--------------------
$647,800 $490,343
====================
</TABLE>
Senior Credit Facility
In October 1997, the Company entered into a senior credit facility that included
$495 million of term loan facilities and a $230 million revolving credit
facility. Outstanding borrowings are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------
<S> <C> <C>
Term loan facilities $397,800 $306,986
Revolving credit facility 12,000 -
--------------------
$409,800 $306,986
====================
</TABLE>
F-41
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The term loan facilities bear interest at variable rates with a weighted average
rate of 8.35% and 6.75% at December 31, 1997 and 1998, respectively. These
loans are due through 2006 and provide for quarterly principal payments.
The revolving credit facility provides for loans and letters of credit and
matures in 2003. The Company has outstanding letters of credit under the
facility of $107 million at December 31, 1998. There was $123 million available
under the revolving credit facility at December 31, 1998. The revolving credit
facility bears interest at variable rates with a weighted average rate of 8.21%
at December 31, 1997. The Company is obligated to pay a fee of 0.25% on the
unused revolving credit facility.
Amounts outstanding under the senior credit facility are secured by a lien on
all the assets of the Company and its domestic subsidiaries and by a pledge of
all the stock of the Company and its domestic subsidiaries and two-thirds of the
stock of certain of the Company's foreign subsidiaries and joint ventures.
Mandatory prepayments and reductions of outstanding principal amounts are
required upon the occurrence of certain events. The senior credit facility
contains customary covenants restricting the incurrence of debt, encumbrances on
and sales of assets, limitations on mergers and certain acquisitions,
limitations on changes in control, provision for the maintenance of certain
financial ratios, and various other financial covenants and restrictions.
Senior Subordinated Notes
In October 1997, the Company issued $200 million of senior subordinated notes.
The senior subordinated notes are unsecured, bear interest at 8.75% payable
semiannually, and mature in 2007. The payment of principal and interest is
subordinated in right of payment to all senior debt.
The subordinated notes are not redeemable other than in connection with a public
equity offering or a change in control prior to November 2002, at which time the
notes may be redeemed at a premium, initially at 104.375% of the principal
amount. The subordinated notes have customary covenants for subordinated debt
facilities including the right to require repurchase upon a change in control,
restrictions on payment of dividends, and restrictions on the acquisition of
equity interests by the Company.
F-42
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Seller Note
In October 1997, the Company issued a $50 million note to former partners of
UDLP. Interest was payable quarterly at 8.75%. The seller note was paid in
full during 1998.
Annual Maturities
Annual maturities of long-term debt for the five years are as follows (in
thousands):
Year ended December 31,
-----------------------
1999 $ 16,643
2000 23,086
2001 23,086
2002 23,086
2003 23,085
Thereafter 398,000
------------
Total $506,986
============
Cash paid for interest for the three months ended December 31, 1997 and for the
year ended December 31, 1998 was $2.9 million and $45.4 million, respectively.
9. Commitments and Contingencies
Operating Leases
The Company leases office space, plants and facilities, and various types of
manufacturing, data processing and transportation equipment. Rent expense for
the year ended December 31, 1996, the nine months ended September 30, 1997, the
three months ended December 31, 1997, and the year ended December 31, 1998 was
$12.9 million, $11.7 million, $6.4 million and $13.5 million, respectively.
Minimum future rentals under noncancellable leases are estimated to be $10.3
million in 1999, $11.0 million in 2000, $10.3 million in 2001, $9.6 million in
2002, $9.9 million in 2003, and $7.7 million thereafter.
F-43
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Legal Proceedings
Alliant Techsystems Inc. ("Alliant"), a subcontractor to UDLP in connection with
the Paladin howitzer prime contract, has filed suit against UDLP and its former
owners. Alliant seeks damages in an unspecified amount on breach of contract
and other theories. The dispute arises out of a U.S. Army-directed termination
for convenience in 1996 of certain subcontract work, which, until the time of
termination, had been performed by Alliant, and was thereafter replaced by
subcontract work performed another subcontractor. Management does not believe
that Alliant's suit will have a material adverse impact on the Company.
The Company is also a defendant in two so-called qui tam cases filed under the
U.S. Civil False Claims Act (the "FCA") by present or former employees of the
Company's Armament Systems Division in Fridley, Minnesota. The FCA, among other
things, permits individuals to seek recovery, including treble damages and
additional civil penalties, of amounts which under certain circumstances have
been improperly claimed from the government by its contractors, and provides
that such plaintiffs may personally collect 15-30% of any recovery obtained.
Each case primarily alleges that the Company improperly obtained payment under
various government contracts by supplying components which did not comply with
applicable technical specifications. The Department of Justice has declined to
intervene in either case. The Company has moved to dismiss one case and has
filed an answer denying the material allegations in the other case. Management
does not believe the suits will have a material adverse impact on the Company.
The Company is subject to other claims and suits arising in the ordinary course
of its operations. In the opinion of management, the ultimate resolution of any
other current pending legal proceedings will not have a material effect on the
Company's financial position or results of operations.
Environmental Matters
The Company spends certain amounts annually to maintain compliance with
environmental laws and to remediate contamination. Operating and maintenance
costs associated with environmental compliance and prevention of contamination
at the Company's facilities are a normal, recurring part of operations, are not
significant relative to total operating costs or cash flows, and are generally
allowable as contract costs under the Company's contracts with the U.S.
government (Allowable Costs).
As with compliance costs, a significant portion of the Company's expenditures
for remediation at its facilities consists of Allowable Costs. Management
believes that it has sufficient reserves to
F-44
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
cover remediation costs that are not allowable costs under its U.S. government
contracts (Non-Allowable Costs). In addition, pursuant to the terms of the
acquisition of UDLP, the Sellers are required to reimburse the Company for 75%
of certain remediation costs relating to operations prior to the acquisition
that are Non-Allowable Costs.
The Company has reflected a liability for the gross amount of environmental
remediation costs which it expects to be liable for after giving effect to
reimbursement under government contracts. The Company has recorded an asset for
the amounts expected to be reimbursed by the Sellers under the terms of the
acquisition agreement.
10. Stockholders' Equity
Stock Split
In April 1998, the Company's board of directors approved an increase in the
number of authorized common stock shares to 20 million (par value $.01) and
authorized a 173 for 1 stock split. Accordingly, all references in the
financial statements to number of shares and related amounts have been restated
to reflect the stock split.
Common Stock Options
During 1998, the Company adopted the 1998 Stock Option Plan (the "Option Plan")
under which 1,500,000 shares of common stock were reserved for issuance. The
options generally vest over a period of 10 years; however, vesting may be
accelerated over 5 years if certain targets related to earnings and cash flow
are met.
Common stock options activity is as follows:
Year ended
December 31, 1998
-----------------------
Options outstanding at beginning of year -
Options granted 1,432,000
Options canceled -
Options exercised -
-----------------------
Options outstanding at end of year 1,432,000
=======================
Options exercisable at end of year 106,200
=======================
F-45
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
All options were granted at $10 per share during the year ended December 31,
1998 and had an estimated grant date fair value of $4.51 per option.
Had compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under the plan consistent with
the methodology prescribed under Statement of Financial Accounting Standard No.
123, Accounting for Stock-Based Compensation, the Company's net loss in 1998
would have increased by approximately $560,000. The effect of applying SFAS No.
123 on the net loss as stated above is not necessarily representative of the
effects on reported net income (loss) for future years due to, among other
things, (1) the vesting period of the stock options and (2) additional stock
options that may be granted in future years.
The fair value of each option grant is estimated on the date of grant using the
minimum value model with the following assumptions used for grants in 1998:
dividend yield of 0%; risk-free interest rate of 6%; and expected life of the
option term of 10 years.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (the "ESPP"). Under the
ESPP, certain employees are provided the opportunity to purchase shares the
Company's common stock at its estimated fair value. Certain of these purchases
were eligible for financing provided by the Company. Related loans including
interest at 7.5%, is due in five years. Under the plan, 739,624 shares, were
sold at a price of $10 per share.
11. Income Taxes
The provision for income taxes for the year ended December 31, 1996, the nine
months ended September 30, 1997, and the year ended December 31, 1998 was solely
for federal income taxes payable by the Company's Foreign Sales Corporation
("FSC") subsidiary. The FSC paid income taxes amounting to $1.8 million, $1.1
million, and $3.3 million during the year ended December 31, 1996, the nine
months ended September 30, 1997, and the year ended December 31, 1998,
respectively.
F-46
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1998
----------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 41,823 $ 42,224
Net operating loss carryforwards 8,583 111,110
Depreciation 3,800 22,496
Other 1,290 7,302
----------------------
55,496 183,132
Deferred tax liabilities:
Intangibles, accrued compensation, and benefits (40,597) (109,634)
Other -- (9,101)
----------------------
(40,597) (118,735)
----------------------
Net deferred tax asset 14,899 64,397
Valuation allowance (14,899) (64,397)
----------------------
Net deferred taxes on balance sheet $ -- $ --
======================
</TABLE>
The net deferred tax asset at December 31, 1997 and 1998 has been offset by a
valuation allowance. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the temporary differences become deductible and
subject to any limitations applied to the use of carryforward tax attributes.
The Company has approximately $277.8 million in net operating loss carryforwards
which expire at varying dates through 2018.
F-47
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
To reduce the impact of changes in interest rates on its floating rate debt, the
Company entered into a three-year interest rate swap agreement that expires in
October 2000 for a notional amount of $160 million. A swap agreement is a
contract to exchange floating rate interest payments for fixed rate payments
periodically over the term of the agreement without the exchange of the
underlying notional amount. The notional amount is used to measure the interest
to be paid or received and does not represent the amount of exposure to credit
loss.
The agreement entitles the Company to pay a base interest rate amount of 5.75%,
in return for the right to receive a floating interest rate which is based on
the three-month LIBOR as of the quarterly measurement date. In the event the
three-month LIBOR at the measurement date exceeds 6.99% the base interest rate
is adjusted to the then effective LIBOR up to a maximum rate of 9%. The net cash
amounts paid or received on the agreement are accrued and recognized as an
adjustment to interest expense.
The fair value of interest rate instruments are the estimated amounts the
Company would have to pay to terminate the agreement, taking into account the
current interest rates and the creditworthiness of the parties to the agreement.
At December 31, 1998, the termination value of the swap (i.e., the fair value)
was $2.4 million.
The carrying amount of the Company's financial instruments included in current
assets and current liabilities approximates their fair value due to their short-
term nature. At December 31, 1997, the fair market value of the Company's long-
term debt was estimated to be $459.8 million and $201.0 million for the senior
credit facility (including the seller note) and subordinated debt, respectively.
At December 31, 1998, the fair market value of the Company's long-term debt was
estimated to be $307.0 million and $202.0 million for the senior credit facility
and subordinated debt, respectively.
13. Significant Customer and Export Sales
Sales to various agencies of the U.S. Government aggregated $819.9 million,
$625.5 million, $203.1 million and $968.3 million during the year ended December
31, 1996, the nine months ended September 30, 1997, the three months ended
December 31, 1997, and the year ended December 31, 1998, respectively.
At December 31, 1997 and 1998, trade accounts receivable from the U.S.
Government totaled $71.3 million and $50.8 million, respectively.
F-48
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Export sales, including sales to foreign governments transacted through the U.S.
Government, were $194.2 million, $264.5 million, $89.1 million and $230.3
million during the year ended December 31, 1996, the nine months ended September
30, 1997, the three months ended December 31, 1997 and the year ended December
31, 1998, respectively.
14. Related Party Transactions
Through September 30, 1997, UDLP contracted with FMC for various administrative
and support services. These services included computer services, systems and
programming, data communications, employee relocation support, payroll
processing, insurance and general management support. During the year ended
December 31, 1996 and the nine months ended September 30, 1997, UDLP paid $35.2
million and $22.3 million, respectively, to FMC for their support.
UDLP also leased office and manufacturing facilities in San Jose, California
from FMC. Under the lease agreement monthly rent payments were comprised of
fixed base rent plus depreciation on the facilities. Fixed base rent was $2.0
million per year through September 30, 1997. During the year ended December 31,
1996 and the nine months ended September 30, 1997, UDLP incurred rent amounting
to $3.7 million and $2.6 million, respectively, under this lease.
A new lease was entered into upon the acquisition of UDLP by the Company. Under
the new lease, the fixed base rent is $4.0 million per year for five facilities.
The lease expired for one facility on March 31, 1998. The leases on the
remaining four facilities expire October 1, 2001.
Sales of inventory to FMC during 1996 amounted to $1.1 million, respectively.
Management believes that such transactions were consummated on terms
substantially similar to those that would arise in transactions with third
parties.
Through September 30, 1997, the Company invested its excess cash balances with
FMC. Interest on these funds was earned based on the average monthly cost of
FMC's U.S. dollar revolver-related short-term borrowings for such month.
Interest on all loans to FMC totaled $1.8 million and $1.7 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
F-49
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Upon the acquisition of UDLP by the Company in 1997, Carlyle was paid $4.5
million, which was included in the transaction costs for advisory services
related to the placement of the Senior and Senior Subordinated financing.
Additionally, during 1998 Carlyle provided consulting assistance in development
of management operating policies and procedures, for which the Company incurred
a current charge to operations of $2.0 million. The management agreement
between the Company and Carlyle requires an annual fee of $2.0 million for
various management services. During the three months ended December 31, 1997 and
the year ended December 31, 1998, the Company recorded $0.5 million and $2.0
million of charges relating to these services.
15. Restructuring
During the third quarter of 1998, the Company approved a restructuring plan
designed to rationalize production and lower costs at the Armament Systems
Division's Fridley, Minnesota facility. The plan calls for shifting a
significant portion of production and final assembly to other Company sites and
outsourcing certain other operations. The Company recorded a charge of $36.2
million for estimated employee termination expenses, acceleration of recognition
for benefit costs that were curtailed, and charges for impaired assets. This
charge will not significantly impact operating funds as it mostly represents
either asset write-offs or costs that will be provided for out of an overfunded
pension plan. The Company anticipates the restructuring activity will be
complete in December 1999 with the final relocation of production to another
site.
16. Employees' Thrift Plan
Substantially all of the Company's employees are eligible to participate in
defined contribution savings plans designed to comply with the requirements of
the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k)
of the Internal Revenue Code. Charges against income for matching contributions
to the plans were $7.7 million, $7.1 million, $1.4 million and $8.1 million in
the year ended December 31, 1996, the nine months ended September 30, 1997, the
three months ended December 31, 1997, and the year ended December 31, 1998,
respectively.
F-50
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
<PAGE>
ITEM 10: Directors and Executive Officers
--------------------------------
The following table sets forth certain information with respect to the
members of the Board of Directors and the executive officers of the Company.
Executive officers of the Company are chosen by the Board of Directors and serve
at its discretion. The Board of Directors maintains an Executive Committee, a
Compensation Committee, and an Audit and Ethics Committee. Bill Conway and
Allan Holt serve as President and Chairman, respectively, of Iron Horse and
Peter Clare, Daniel D'Aniello and David Rubenstein have each been Managing
Directors of The Carlyle Group for the past five years. Officers of Iron Horse
receive no compensation for their position.
<TABLE>
<CAPTION>
Years with
Name Position Age Co./1/
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William E. Conway, Jr. Chairman 49 ------
- ---------------------------------------------------------------------------------------------------------
Frank C. Carlucci Director 68 ------
- ---------------------------------------------------------------------------------------------------------
Peter J. Clare Director 33 ------
- ---------------------------------------------------------------------------------------------------------
Allan M. Holt Director 47 ------
- ---------------------------------------------------------------------------------------------------------
Robert M. Kimmitt Director 51 ------
- ---------------------------------------------------------------------------------------------------------
J.H. Binford Peay, III Director 58 ------
- ---------------------------------------------------------------------------------------------------------
John M. Shalikashvili Director 62 ------
- ---------------------------------------------------------------------------------------------------------
Thomas W. Rabaut Director, President, Chief Executive Officer 50 21
- ---------------------------------------------------------------------------------------------------------
Francis Raborn Director, Vice President & Chief Financial Officer 55 21
- ---------------------------------------------------------------------------------------------------------
David V. Kolovat Vice President, General Counsel & Secretary 54 10
- ---------------------------------------------------------------------------------------------------------
Arthur L. Roberts Vice President, General Manager-International Division 58 31
- ---------------------------------------------------------------------------------------------------------
Frederick M. Strader Vice President, General Manager-Armament Systems Div. 46 18
- ---------------------------------------------------------------------------------------------------------
Dennis A. Wagner, III Vice President, Business Development & Marketing 48 17
- ---------------------------------------------------------------------------------------------------------
Peter C. Woglom Vice President, General Manager-Ground Systems Division 54 25
- ---------------------------------------------------------------------------------------------------------
</TABLE>
William E. Conway, Jr. was elected as a Director of the Company in
1997. He has been a Managing Director of The Carlyle Group, a Washington, DC-
based private merchant bank, since 1987. Mr. Conway was Senior Vice President
and Chief Financial Officer of MCI Communications Corporation from 1984 until
1987, and was a Vice President and Treasurer of MCI from 1981 to 1984. Mr.
Conway presently serves on the Board of Directors of Global Crossing Ltd.,
Howmet International, Inc., Nextel Communications, Inc., and several privately
held companies.
Frank C. Carlucci was elected as a Director of the Company in 1997. He
is Chairman of The Carlyle Group, a Washington, DC-based private merchant bank.
Prior to joining The Carlyle Group in 1989, Mr. Carlucci served as Secretary of
Defense from 1987-1989. Previously, he had served as President Reagan's
National Security Advisor in 1987. Mr. Carlucci serves on the following boards:
Ashland, Inc.; IRI International Corporation; Kaman Corporation; Neurogen
Corporation; Northern Telecom Limited; The Quaker Oats Company; SunResorts,
Ltd., NV; Texas Biotechnology Corporation; Pharmacia & Upjohn, Inc.; and the
Board of Trustees for the RAND Corporation.
Peter J. Clare was elected as a Director of the Company in 1997. He is
currently a Managing Director with The Carlyle Group, a Washington, DC-based
private merchant bank which he joined in 1992. Mr. Clare was previously with
First City Capital, a private investment group. From 1987 to 1989, he worked in
the mergers and acquisitions and merchant banking groups at Prudential-Bache.
Mr. Clare currently serves on the boards of several privately-held companies.
- ---------------------------------------------
/1/ Includes the Company and its predecessors.
30
<PAGE>
Allan M. Holt was elected as a Director of the Company in 1997. He is
a Managing Director of The Carlyle Group, a Washington, DC-based private
merchant bank which he joined in 1991. Mr. Holt was previously with Avenir
Group, a private investment and advisory group, and from 1984 to 1987 was
Director of Planning and Budgets at MCI Communications Corporation, which he
joined in 1982. Mr. Holt currently serves on the boards of several privately-
held companies.
Robert M. Kimmitt was elected as a Director of the Company in 1998. He
has been a partner in the law firm of Wilmer, Cutler and Pickering since 1997.
He specializes in international transactions in regulated industries, especially
defense, aerospace, telecommunications and banking. Mr. Kimmitt was a Managing
Director of Lehman Brothers from 1993 to 1997. Mr. Kimmitt served as American
Ambassador to Germany from 1991 to 1993. Previously, he has served as Under
Secretary of State for Political Affairs, General Counsel to the Treasury
Department, and a member of the National Security Council Staff. Mr. Kimmitt
serves on the boards of Allianz Life Insurance Company of North America, Big
Flower Holdings, Inc., Mannesmann AG and Siemens AG.
J. H. Binford Peay, III was elected as a Director of the Company in
1997. General Peay is a career U.S. Army officer who attained the rank of
General and retired from the Army on October 1, 1997. He is the former
Commander-In-Chief of the U.S. Central Command (1994-1997), and also served as
Vice Chief of Staff, United States Army (1993-1994). Prior to serving as Vice
Chief of Staff, he was Deputy Chief of Staff for Operations and Plans,
Department of the Army and Senior Army Member, U.S. Military Committee, United
Nations, and was Commanding General, 101st Airborne Division (Air Assault) at
Ft. Campbell, Kentucky (1989 to 1991). General Peay serves as a Director of
MPRI, Trustee of George C. Marshall Foundation and a Trustee of Virginia
Military Institute Foundation.
John M. Shalikashvili was elected as Director of the Company in June
1998. He currently is a visiting professor to the Center for International
Security at Stanford University. Previously, General Shalikashvili was a career
U.S. Army officer who attained the rank of General and retired from the Army in
September 1997. He was appointed the 13th Chairman of the Joint Chiefs of Staff
on October 25, 1993. Prior major commands were Supreme Allied Commander, Europe
(SACEUR) and Commander-In-Chief, United States European Command, Commander
Operation PROVIDE COMFORT (the relief operation that returned hundreds of
thousands of Kurdish refugees to Northern Iraq), Deputy Commander-In-Chief,
United States Army, Europe and Seventh Army, and Commander of the 9th Infantry
Division (Motorized). The General was born in Warsaw, Poland on June 27, 1936.
General Shalikashvili serves on the board of L3 Company.
Thomas W. Rabaut has been President and Chief Executive Officer of UDLP
since its formation in 1994. Before joining UDLP, Mr. Rabaut worked at FMC
since 1977 and held several executive positions, including General Manager of
FMC's Steel Products Division from 1986 to 1988, Operations Director and then
Vice President and General Manager of FMC's Ground Systems Division from 1988 to
1993, and General Manager of FMC's Defense Systems Group, overseeing operations
in the U.S., Turkey, Pakistan, and Saudi Arabia from 1993 to 1994. In 1994, he
was also elected Vice President of FMC. Mr. Rabaut graduated from the U.S.
Military Academy at West Point and from the Harvard Business School.
Francis Raborn was elected as a Director of the Company in 1997. He
has been Vice President and Chief Financial Officer of UDLP since its formation
in 1994, with responsibility for financial,
31
<PAGE>
contract, administrative and government compliance matters. Mr. Raborn joined
FMC in 1977, and held a variety of financial and accounting positions, including
Controller of FMC's Defense Systems Group from 1985 to 1993, and Controller of
FMC's Special Products Group from 1979 to 1985. Mr. Raborn received a B.S. in
Economics from the University of Pennsylvania's Wharton School and an MBA from
UCLA.
David V. Kolovat has been Vice President and General Counsel of UDLP
since its formation in 1994. He has also served as FMC's Associate General
Counsel in charge of defense business legal affairs from 1988 until consummation
of the Acquisition. Mr. Kolovat served as Vice President and General Counsel of
Premisys, Inc., from 1986 to 1988, during which Premisys was acquired by Pacific
Telesis Corporation, and from 1984 to 1986 as Vice President and General Counsel
of Robot Defense Systems, Inc. Mr. Kolovat received his undergraduate degree
from the University of Iowa, and his law degree from Stanford Law School.
Arthur L. Roberts has been Vice President and General Manager-
International Division of UDLP since its formation in 1994. His
responsibilities include management of joint ventures in Turkey and Saudi Arabia
and development of new co-production programs. Prior to joining UDLP, Mr.
Roberts was General Manager of FMC's Defense Systems International Division
since 1993. Mr. Roberts held a number of positions at FMC since 1967, including
management of the Turkey joint venture program from its initial proposal in 1988
through 1992. Mr. Roberts holds a Bachelor's Degree in Mechanical Engineering
from Yale University and an MBA from Harvard Business School.
Frederick M. Strader has been Vice President and General Manager-
Armament Systems Division of UDLP since May 1994. Prior to joining UDLP, Mr.
Strader was Division Manager of FMC's Agricultural Machinery Division from
October 1992 to May 1994, and Manager of FMC's Strategic Planning Group from
September 1991 to October 1992. Prior thereto, he held a number of operations,
planning and financial positions at the Steel Products Division of FMC. Mr.
Strader received his BA Degree from Ripon College and his MBA Degree from the
Wharton School at the University of Pennsylvania.
Dennis A. Wagner, III has been Vice President, Business Development and
Marketing of UDLP since its formation in 1994 with responsibility for the
development and coordination of world-wide strategies for the design,
manufacture, and sale of combat vehicles. Mr. Wagner joined FMC's Defense
Systems Group in 1982 and held a number of marketing and management positions,
including Division General Manager of FMC's Steel Products Division from 1989 to
1994 and Program Director for the M113 family of vehicles from 1987 to 1989.
Mr. Wagner received a BS in General Engineering from the U.S. Military Academy
and an MBA in Finance from the University of Detroit.
Peter C. Woglom has been Vice President and General Manager-Ground
Systems Division of UDLP since 1994. Prior thereto, he held a number of line
and executive positions at FMC after joining FMC in 1973, including Vice
President and General Manager of FMC's Ground Systems Division from 1993 to
1994, and Vice President and Director, Business Strategies and Initiatives for
FMC's Defense Systems Group from 1990 to 1993. Mr. Woglom received BSCE and
Master of Engineering Degrees from Cornell University and an MBA from the
University of Pittsburgh.
32
<PAGE>
ITEM 11: Executive Compensation
----------------------
The following table sets forth information with respect to the
compensation paid by the Company for services rendered for the year ended
December 31, 1998 to the Chief Executive Officer and to each of the four other
most highly compensated executive officers of the Company (the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------------- -----------------------------------------
Awards Payouts
----------------------------- ---------
Other Restricted Securities All Other
Name and Annual Stock Underlying LTIP Compen-
Principal Salary Bonus Compen- Award(s) Options Payouts sation
Position Year ($)(1) ($) sation($) (2) ($) (3) (#) ($) ($) (4)
- --------------------- ---- --------- --------- --------------- ------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas W. Rabaut 1998 363,197 393,082 0 0 200,000 0 0
President & CEO 1997 311,238 436,213 0 0 0 0 0
1996 297,632 444,103 0 0 0 0 0
Peter C. Woglom 1998 250,525 239,922 0 0 100,000 0 0
Vice President, 1997 226,578 139,028 0 0 0 0 0
General Manager 1996 217,618 142,572 0 284,500 (5) 0 0 0
- Ground Systems
Francis Raborn 1998 216,354 211,083 0 0 100,000 0 0
Vice President & 1997 163,120 123,237 0 0 0 0 0
CFO 1996 146,182 170,791 0 0 0 0 0
Frederick M. Strader 1998 213,456 168,420 0 0 100,000 0 0
Vice President, 1997 183,708 245,195 0 0 0 0 0
General Manager 1996 173,513 266,690 0 213,375 (5) 0 0 0
- Armament
Systems
Arthur L. Roberts 1998 192,272 166,927 0 0 65,000 0 0
Vice President 1997 167,281 189,278 0 0 0 0 0
General Manager 1996 165,222 233,160 0 0 0 0 0
International
</TABLE>
(1) Includes matching contributions under the Company's 401(k) plan for
salaried employees.
(2) Amounts of less than $50,000 or 10% of the Named Executive Officer's
compensation are excluded.
(3) There are no Company Restricted Stock Awards.
(4) There were no other compensation awards.
(5) These were shares of restricted stock of FMC pursuant to FMC plans prior to
the Acquisition.
33
<PAGE>
Directors Compensation
- ----------------------
The three outside directors (Messrs. Peay, Kimmitt and Shalikashvili)
are paid annual retainers of $25,000 for all services rendered. There are no
other fees paid for attendance at meetings, etc. These three directors may
elect to receive their annual retainer in cash, options to purchase Company
stock, or a combination. The Company does not maintain a medical, dental, or
retirement benefits plan for these directors. The remaining directors are
employed either by The Carlyle Group or the Company and are not separately
compensated for their service as directors.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of the Board of Directors is a standing
committee charged with the responsibilities, subject to full Board approval, of
establishing, periodically re-evaluating and (as appropriate) adjusting, and
administering policies concerning compensation of management personnel,
including the CEO and all of the Company's other executive officers. The
Compensation Committee was established in 1998 and Messrs. Peay and Clare serve
on the Committee. Mr. Clare is a member of The Carlyle Group, which is the
majority stockholder of the Company.
By virtue of his position as President and Chief Executive Officer,
Mr. Rabaut has been invited to attend all meetings of the Compensation
Committee, but he is not a voting member.
Retirement Plan
- ---------------
Each Named Executive Officer is covered under the UDLP Salaried
Employees' Retirement Plan (the "Pension Plan") and the UDLP Excess Pension Plan
(the "Excess Plan") described below. The following table shows the estimated
annual pension benefits under such plans for the specified compensation and
years of service.
A portion of the retirement benefits for service prior to 1986,
computed under the Pension Plan, is payable from annuity contracts maintained by
Aetna Life Insurance Company.
34
<PAGE>
Pension Plan Table
------------------
<TABLE>
<CAPTION>
Estimated Annual Retirement Benefits
For years of Service Indicated
-------------------------------------------------------------
Final Average
Earnings 15 Years 20 Years 25 Years 30 Years 35 Years
- ----------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 31,415 $ 41,887 $ 52,359 $ 62,831 $ 73,303
250,000 53,915 71,887 89,859 107,831 125,803
350,000 76,415 101,887 127,359 152,831 178,303
450,000 98,915 131,887 164,859 197,831 230,803
550,000 121,415 161,887 202,359 242,831 283,303
650,000 143,915 191,887 239,859 287,831 335,803
900,000 200,165 266,887 333,609 400,331 467,053
1,150,000 256,415 341,887 427,359 512,831 598,303
1,300,000 290,165 386,887 483,609 580,331 677,053
1,450,000 323,915 431,887 539,859 647,831 755,803
</TABLE>
Compensation included in the final average earnings for the pension
benefit computation includes base annual salary and annual bonuses, but excludes
payments for most other compensation. Unreduced retirement pension benefits are
calculated pursuant to the Pension Plan's benefit formula as an individual life
annuity payable at age 65. Benefits may also be payable as a joint and survivor
annuity or a level income option. Final average earnings in the above table
means the average of covered remuneration for the highest 60 consecutive
calendar months out of the 120 calendar months immediately preceding retirement.
Benefits applicable to a number of years of service or final average earnings
different from those in the above table are equal to the sum of (A) 1 percent of
allowable Social Security Covered Compensation ($31,128) for a participant
retiring at age 65 in 1998 times years of credited service and (B) 1.5 percent
of the difference between final average earnings and allowable Social Security
Covered Compensation times years of credited service. ERISA limits the annual
benefits that may be paid from a tax-qualified retirement plan. Accordingly, as
permitted by ERISA, the Company has adopted the excess plan to maintain total
benefits upon retirement at the levels shown in the table. Messrs. Rabaut,
Woglom, Strader, Raborn and Roberts currently have 21, 25, 18, 21 and 31 years
of service under the Pension Plan, respectively.
The Company also maintains the Supplemental Thrift and Savings Plan
designed to provide select employees a benefit equal to the benefit the
participant would receive under the 401(k) plan if the Code and such plan did
not require the exclusion of compensation above a certain level. All Named
Executive Officers are eligible to participate in the Supplemental Thrift and
Savings Plan.
Severance Arrangements
- ----------------------
In June 1997, the Company entered into executive compensation
agreements with fourteen management employees, including each Named Executive
Officer. These agreements generally provide that in the event the executive's
employment is terminated by the company other than for "cause" or by the
executive with "good reason" (each as defined therein) within two years
following a "sale of the company" (as defined therein) including the
Acquisition, the executive will be entitled to (i) a payment equal to a multiple
(ranging from one to three) of the executive's base pay and target
35
<PAGE>
bonus; (ii) Company-paid outplacement services; and (iii) the right to continue
to participate in the Company's health, life and accidental death and
dismemberment and long-term disability benefits plan for one year (or three
years in the case of Mr. Rabaut) at the rates in effect for active employees.
The Company also maintains a severance plan that generally covers most
salaried and non-union hourly employees, and provides severance payments in the
event of the employee's involuntary termination of employment due to a reduction
in force. Severance payments are calculated as a percentage (up to 100%
maximum) of base pay.
Stock Option Plan
- -----------------
The Company adopted an option plan for key employees (including the
Named Executive Officers) of the Company, pursuant to which options to purchase
an aggregate of approximately 8% of the Company's fully-diluted common stock at
the Closing Date were granted, subject to vesting requirements based on
performance and/or length of service after the options were granted.
The table below shows information on grants of stock options in 1998.
The Company made those grants under the 1998 Stock Option Plan to the officers
named in the Summary Compensation Table. The Company does not have a Stock
Appreciation Rights Plan.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Or Base
Granted In Fiscal Price Expiration Grant Date Present
Name # Year ($/Sh) Date Value ($) (1)
--------------------- ---------- ---------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Thomas W. Rabaut - 200,000 14 10.00 July 24, 2008 902,000
President & Chief Executive Officer
Peter C. Woglom - 100,000 7 10.00 July 24, 2008 451,000
Vice President/General Manager
Ground Systems Division
Frederick M. Strader - 100,000 7 10.00 July 24, 2008 451,000
Vice President/General Manager
Armament Systems Division
Francis Raborn - 100,000 7 10.00 July 24, 2008 451,000
Vice President & Chief Financial
Officer
Arthur L. Roberts - 65,000 4 10.00 July 24, 2008 293,150
Vice President/General Manager
International Division
</TABLE>
- ------------------
(1) The fair value of each option grant is estimated on the date of grant using
the minimum value model with the following assumptions used for grants in 1998:
dividend yield of 0%; risk-free interest rate of 6%; and expected life of the
option term of 10 years.
36
<PAGE>
Aggregated Options Exercised in 1998
------------------------------------
Shown below is information with respect to exercised options to
purchase the Company's common stock awarded to the Named Executive Officers and
the value and number of unexercised options held at December 31, 1998 by such
Named Executive Officers.
AGGREGATED OPTIONS EXERCISED IN 1998
------------------------------------
AND OPTION VALUES AT 12/31/98
-----------------------------
<TABLE>
<CAPTION>
Shares Value Number of Securities
Acquired on ----- Underlying Unexercised Value of Unexercised
Name Exercise Realized Options Options
---- --------------- ------------ -------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
TW Rabaut 0 0 10,000 190,000 0 0
PC Woglom 0 0 10,000 90,000 0 0
FM Strader 0 0 10,000 90,000 0 0
F Raborn 0 0 10,000 90,000 0 0
AL Roberts 0 0 6,500 58,500 0 0
</TABLE>
37
<PAGE>
Item 12: Principal Stockholders
- --------------------------------
The following table sets forth certain information regarding the
beneficial ownership of the common stock of the Company by each person known by
the Company to be the owner of 5% or more of the common stock of the Company, by
each person who is a Director or Named Executive Officer of the Company and by
all Directors and Executive Officers of the Company as a group:
<TABLE>
<CAPTION>
Percentage of All
Beneficial Owner(1) Number of Shares Outstanding Shares
<S> <C> <C>
TCG Holdings, L.L.C. (2)(3) 17,300,000 96%
William E. Conway, Jr. (3) (5) 100,000 *
Allan M. Holt (3)(5) 25,000 *
Peter J. Clare (3)(5) 20,000 *
Frank C. Carlucci (3)(5) 20,000 *
Robert M. Kimmitt (4) 5,000 *
J. H. Binford Peay, III (4) 0 *
John M. Shalikashvili (4) 0 *
Thomas W. Rabaut (4) 10,000 *
Francis Raborn (4) 75,000 *
David V. Kolovat (4) 31,428 *
Arthur L. Roberts (4) 34,000 *
Frederick M. Strader (4) 20,000 *
Dennis A. Wagner, III (4) 5,000 *
Peter C. Woglom (4) 10,000 *
All Directors and Executive Officers as a Group (14) 355,428 2%
</TABLE>
- -----------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
Except as otherwise indicated, each beneficial owner has the sole power to vote,
as applicable, and to dispose of all Units owned by such beneficial owner.
(2) Iron Horse Investors, L.L.C. is the record owner of 17,300,000 shares of the
Company's common stock. Carlyle Partners II, L.P., a Delaware limited
partnership, Carlyle Partners III, L.P., a Delaware limited partnership, Carlyle
International Partners II, L.P., a Cayman Islands limited partnership, Carlyle
International Partners III, L.P., a Cayman Islands limited partnership, and
certain additional partnerships formed by Carlyle (collectively, the "Investment
Partnerships") and certain investors with respect to which TC Group, L.L.C. or
an affiliate exercises investment discretion and management constitute all of
the members of Iron Horse. TC Group, L.L.C. is the sole general partner of the
Investment Partnerships, and TCG Holdings, L.L.C., a Delaware limited liability
company, is the sole managing member of TC Group, L.L.C. William E. Conway, Jr.,
Daniel A. D'Aniello, and David M. Rubenstein, as the managing members of TCG
Holdings, L.L.C. may be deemed to share beneficial ownership of the shares shown
as beneficially owned by TCG Holdings, L.L.C. Such persons disclaim such
beneficial ownership.
(3) The address of such person is c/o The Carlyle Group, 1001 Pennsylvania
Avenue, NW, Washington, DC 20004.
(4) The address of such person is c/o United Defense Industries, Inc., 1525
Wilson Boulevard, Suite 700, Arlington, Virginia 22209-2411.
(5) Individual also owns an interest in Iron Horse through Carlyle UDLP
Partners, L.P.
*Denotes less than 1% beneficial ownership.
38
<PAGE>
ITEM 13. Certain Transactions
Concurrently with the closing of the Acquisition, the Company entered into
a management agreement (the "Management Agreement") with TCG Holdings, L.L.C.
(or another affiliate of Carlyle) for certain management and financial advisory
services and oversight to be provided to the Company and its subsidiaries. The
Management Agreement provides for the payment to Carlyle of an annual management
fee of $2.0 million. In 1997, Carlyle received a fee of $4.5 million from the
Company as payment for arranging the coordination and the financing of the
Acquisition. In 1998, Carlyle received an additional fee of $2.0 million for
designing and implementing certain management benefit plans such as a program
for management equity ownership and stock options. In addition, the Company
may retain Carlyle or any third party for the provision of certain corporate
administrative services or transactional services on terms and conditions to be
agreed upon including fees for assisting the Company with the future
acquisitions, dispositions, financing transactions and other similar
transactions.
The Company also employed Wilmer, Cutler & Pickering in 1998 to provide
legal and other advice. Robert M. Kimmitt, a director of the Company, is a
partner with Wilmer, Cutler & Pickering. Payments to the firm totaled $132,000
in 1998.
39
<PAGE>
ITEM 14. Exhibits and Financial Data Schedule
(a) The index of the financial statements has been included with Item 8.
(b) Reports on Form 8-K filed in the fourth quarter of 1998
None.
(c) Index of Exhibits. See below.
(d) Financial Statement Schedules.
None required.
EXHIBIT INDEX
Exhibit Description
Number -----------
------
+2.1 Purchase Agreement dated as of August 25, 1997 among FMC
Corporation, Harsco Corporation, Harsco UDLP Corporation and Iron
Horse Acquisition Corp. (a copy of the schedules to this agreement
will be furnished supplementally upon request of the Commission).
++2.2 Supplemental Agreement No. 1 to Purchase Agreement dated as of
August 25, 1997 among FMC Corporation, Harsco Corporation, Harsco
UDLP Corporation and Iron Horse Acquisition Corp.
+3.1a Certificate of Incorporation of Iron Horse Acquisition Corp.
(n/k/a) United Defense Industries, Inc.
+3.1b Certificate of Amendment of Certificate of Incorporation Before
Payment of Any Part of the Capital of Iron Horse Acquisition Corp.
(n/k/a United Defense Industries, Inc.)
+3.1c Certificate of Amendment of the Certificate of Incorporation of
United Defense Industries, Inc.
++++3.1d Certificate of Amendment of the Certificate of Incorporation of
United Defense Industries, Inc.
+3.2 By-laws of United Defense Industries, Inc.
+3.3 Certificate of Incorporation of UDLP Holdings Corp.
+3.4 By-laws of UDLP Holdings Corp.
+3.5 Amended and Restated Agreement of Limited Partnership of United
Defense, L.P.
+3.6 Certificate of Amendment to Certificate of Limited Partnership of
United Defense, L.P.
+3.7 Certificate of Formation of Iron Horse Investors, L.L.C.
+3.8 Limited Liability Company Agreement of Iron Horse Investors, L.L.C.
+4.1 Indenture dated as of October 6, 1997 among United Defense
Industries, Inc., United Defense, L.P., UDLP Holdings Corp. and
Norwest Bank Minnesota, National Association
+4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2007
(included in Exhibit 4.1 hereto)
+4.3 Purchase Agreement dated October 1, 1997 among United Defense
Industries, Inc., UDLP Holdings Corp., Iron Horse Investors,
L.L.C., United Defense, L.P., Lehman Brothers Inc., BT Alex. Brown
Incorporated and Chase Securities Inc.
+4.4 Registration Rights Agreement dated as of October 6, 1997 among
United Defense Industries, Inc., United Defense, L.P., UDLP
Holdings Corp., Iron Horse Investors, L.L.C., Lehman Brothers Inc.,
BT Alex. Brown Incorporated and Chase Securities Inc.
++4.5 Credit Agreement dated as of October 6, 1997 among Iron Horse
Investors, L.L.C., United Defense Industries, Inc., various lending
institutions party thereto, Citicorp USA, Inc. and Lehman
Commercial Paper Inc. as Documentation Agents, and Bankers Trust
Company as Administrative Agent and as Syndication Agent
<PAGE>
++++4.7 Form of Stockholders Agreement, by and among Iron Horse Investors,
L.L.C., United Defense Industries, Inc. and each other holder of
Common Stock.
++++4.8 Stockholders Agreement, dated as of July 22, 1998, by and between
Iron Horse Investors, L.L.C., United Defense Industries, Inc., the
UDLP Non-Qualified Trust and United Defense, L.P.
++++4.9 UDLP Amended and Restated Supplemental Retirement and Savings Plan.
(1)
++++4.10 United Defense Stock Option Plan. (1)
++++4.11 Form of Option Contract. (1)
++++4.12 United Defense Industries, Inc. Equity Purchase Plan. (1)
++10.1 Lease Agreement dated as of June 1, 1994 among Calhoun Economic
Development Council and United Defense, L.P.
++10.2 Facilities contract number DAAC67-93-C-0021 dated April 21, 1993
among FMC Corporation and LetterKenney Army Depot for the use of
the government owned facility located at Building 56 and 4 acres of
land on LetterKenney Army Depot, Chambersburg, PA 17201.
Assignment of rights from FMC Corporation to United Defense, L.P.
accomplished by modification P00001.
++10.3 Sub-Lease Agreement among the Louisville/Jefferson County
Development Authority, Inc. and United Defense, L.P., as amended by
that certain First Amendment to Sublease of Real and Personal
Property Agreement among the Louisville/Jefferson County
Development Authority, Inc. and United Defense, L.P.
++10.4 Facilities contract number N00024-93-E-8521, dated November 16,
1992 among United Defense, L.P., Armament Systems Divisions and the
U.S. Government Naval Sea Systems Command for the use of the
government owned facility located at 4800 East River Road,
Minneapolis, MN 55459.
++10.5 Lease Agreement dated January 22, 1996 among Lewis F. Holmes III
and United Defense, L.P.
++10.6 Lease Agreement dated November 1, 1993 among Brier Hill Steel
Company, Inc. and Harsco Corporation, as amended by that certain
Lease Novation Agreement among Harsco Corporation, Brier Hill Steel
Company, Inc. and United Defense, L.P. and by that certain Lease
Modification dated June 17, 1996 among United Defense, L.P. and
Brier Hill Steel Company, Inc.
++10.7 Lease Agreements dated June 1, 1989 among The Equitable Life
Assurance Society of the United States and FMC Corporation
(Buildings A and C).
++10.8 Lease Agreement dated May 23, 1979 among Devcon Investment Co. and
FMC Corporation, as amended by Amendment No. 1 to Lease dated
November 25, 1985 among Santa Clara Property Associates, as
successor to the original lessor and FMC Corporation, as amended by
Amendment to Lease dated February 9, 1987 among Santa Clara
Property Associates and FMC Corporation, as amended by Third
Amendment to Lease dated September 6, 1996 among California State
Teachers' Retirement System, as Successor-In-Interest to the lessor
and FMC Corporation.
10.9 Intentionally Deleted.
++10.10 Lease Agreement dated February 16, 1984 among John Arrillaga,
Trustee, Richard T. Peery, Trustee and FMC Corporation, as amended
by Amendment to Lease dated February 9, 1987 among Santa Clara
Property Associates, as successor landlord and FMC Corporation, as
amended by the Second Amendment to Lease dated September 6, 1996
among California Teachers' Retirement System as successor landlord
and FMC Corporation.
+10.11 Transition Services Agreement dated as of October 6, 1997 among FMC
Corporation, United Defense, L.P. and United Defense Industries,
Inc.
+10.12 Technology and Environmental Services Agreement dated as of October
6, 1997 among FMC Corporation and United Defense Industries, Inc.
+10.13 Amended and Restated Lease Agreement dated as of October 6, 1997
among FMC Corporation and United Defense, L.P.
<PAGE>
+10.14 Amended and Restated Harsco Intellectual Property Agreement dated
as of October 6, 1997 among Harsco Corporation and United Defense,
L.P.
+10.15 Amended and Restated FMC Intellectual Property Agreement dated as
of October 6, 1997 among FMC Corporation and United Defense, L.P.
+10.16 Management Agreement dated October 6, 1997 among United Defense
Industries, Inc., United Defense, L.P. and TC Group Management,
L.L.C.
+++10.17 Professional Service Agreement with J.H. Binford Peay, III. (1)
+++10.18 Professional Service Agreement with John M. Shalikashvili. (1)
*10.19 Professional Service Agreement with Robert M. Kimmitt. (1)
+++10.20 Executive Compensation Agreement with Thomas W. Rabaut. (1)
+++10.21 Executive Compensation Agreement with Arthur L. Roberts. (1)
+++10.22 Executive Compensation Agreement with Frederick M. Strader. (1)
+++10.23 Executive Compensation Agreement with Peter C. Woglom. (1)
+++10.24 Executive Compensation Agreement with David V. Kolovat. (1)
*10.25 Executive Compensation Agreement with Francis Raborn. (1)
*10.26 Executive Compensation Agreement with Dennis A. Wagner, III. (1)
+21.1 Subsidiaries of United Defense Industries, Inc.
*23.1 Consent of Ernst & Young LLP, Independent Auditors
*27.1 Financial Data Schedule
*27.2 Financial Data Schedule
* Filed herewith.
(1) Management agreement or compensation plan.
+ Incorporated by reference to the exhibits in the Company's
Registration Statement on Form S-4 (333-43619) filed with the
Securities and Exchange Commission on December 22, 1997.
++ Incorporated by reference to the exhibits in the Company's Amendment
No. 1 to Form S-4 (333-43619) filed with the Securities and Exchange
Commission February 6, 1998.
+++ Incorporated by reference to exhibits to the Company's Report on
Form 10-Q for the quarter ended June 30, 1998.
++++ Incorporated by reference to the exhibits in the Company's
Registration Statement on Form S-8 (333-60207) filed with the
Securities and Exchange Commission on July 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant and each Co-Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Francis Raborn
-------------------
Francis Raborn
Chief Financial Officer and
Principal Financial and Accounting Officer
of the Registrant and each Co-Registrant
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and each Co-Registrant in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Thomas W. Rabaut President, Chief Executive March 19, 1999
- --------------------------- Officer and Director of
Thomas W. Rabaut United Defense Industries,
Inc. ("UDI") and UDLP
Holdings Corp. (for UDLP
Holdings Corp. itself and as
the corporate general
partner of United
Defense, L.P.)
/s/ Francis Raborn Director of UDI and UDLP March 19, 1999
- --------------------------- Holdings Corp. (for
Francis Raborn UDLP Holdings Corp. itself
and as the corporate
general partner of
United Defense, L.P.)
/s/ William E. Conway, Jr. Chairman of the Board of March 19, 1999
- --------------------------- UDI
William E. Conway, Jr.
/s/ Frank C. Carlucci Director of UDI March 19, 1999
- ---------------------------
Frank C. Carlucci
/s/ Peter J. Clare Director of UDI March 19, 1999
- ---------------------------
Peter J. Clare
/s/ Allan M Holt Director of UDI March 19, 1999
- --------------------------- and Chairman
Allan M. Holt of Iron Horse
Investors, L.L.C.
/s/ Robert M. Kimmitt Director of UDI March 19, 1999
- ---------------------------
Robert M. Kimmitt
/s/ J.H. Binford Peay, III Director of UDI March 19, 1999
- ---------------------------
J.H. Binford Peay, III
/s/ John M. Shalikashvili Director of UDI March 19, 1999
- ---------------------------
John M. Shalikashvili
/s/ David V. Kolovat Director of UDLP March 19, 1999
- --------------------------- Holdings Corp. (for UDLP
David V. Kolovat Holdings Corp. itself
and as the corporate
general partner of United
Defense, L.P.)
/s/ Robert N. Sankovich Director of UDLP March 19, 1999
- --------------------------- Holdings Corp. (for UDLP
Robert N. Sankovich Holdings Corp. itself
and as the corporate general
partner of United Defense,
L.P.)
<PAGE>
EXHIBIT 10.19
- ----------------
United Defense
- ----------------
Professional Services Agreement
This Professional Services Agreement ("Agreement") dated as of the 15th day of
March 1998, is entered into by and between United Defense Industries, Inc., a
Delaware corporation having a place of business at 1525 Wilson Boulevard, Suite
700, Arlington, VA 22209 (hereinafter referred to as the "Company") and Robert
M. Kimmitt, having his principal office at 2445 M Street, NW, Washington, DC
20037-1420 (hereinafter referred to as "Director"). United Defense desires the
services of Director and Director desires to perform such services. In
consideration of the mutual covenants contained herein, the parties agree as
follows:
1. Statement of Work
Commencing on the date first herein written, Director shall perform the services
for United Defense as specifically directed by the authorized representative(s)
of United Defense as are described below:
(a) Serve as member of the Board of Directors of the Company, and if
requested by the Company, one or more of its affiliates.
(b) Provide additional services as requested by the Company.
2. Payment
(a) In consideration of such services, subject to the terms and conditions of
this Agreement, and as Director's sole and entire compensation under or in
relation to this Agreement. United Defense shall pay Director compensation as
follows:
(i) At the outset of the first year only of service as a Director
hereunder, the grant of a non-qualified option to purchase one thousand
(1,000) shares of the Company's common stock ("UDII Stock") at ten dollars
($10.00) per share, vesting immediately, and subject to further terms as
more fully set forth in a Stock Option Agreement (the "Option Agreement")
to be provided to Director by the Company, and (ii) for each year of
service as a Director hereunder, at Director's election, either
twenty-five thousand dollars ($25,000) in cash or a further non-qualified
option to purchase additional shares of (UDII Stock (the "Additional
Option") in the amount and at the price specified in the remainder of this
paragraph. For each year of service hereunder in which Director elects in
favor of the Additional Option, (i) the number of shares available under
the option shall consist of four (4) times the figure produced by dividing
$25,000 by the per-share value of UDII Stock (the "Share Value"), and (ii)
the exercise price shall be the Share Value. The Share Value applicable to
an Additional Option shall be the most recent figure established by the
Company as of the commencement of the year for which Director elects such
option, and the Additional Option shall be subject to further terms as
more fully set forth in the Option Agreement. For 1998, the Share Value is
ten dollars ($10.00), and thus the Additional Option, if elected by
Director, shall be for ten thousand (10,000) shares of UDII Stock at an
exercise price often dollars ($10.00) per share. For each year of service
hereunder in which Director elects in favor of the Additional Option,
Director's entitlement to exercise the same shall vest in four equal
quarterly installments.
(b) Payment of fees under this Agreement shall be made within thirty (30) days
of receipt by United Defense of invoices submitted by Director from time to time
as appropriate, but not more frequently than monthly, which invoices are to be
supported by a written summary of the work actually performed and the time
expended thereon by the Director during such billing period. United Defense
shall also reimburse Director for its reasonable out-of-pocket expenses
incurred, requested or authorized by United Defense. Reimbursements of expenses
hereunder will
<PAGE>
be made on the basis of itemized statements submitted by Director, which
statements are to include actual bills, receipts, invoices or other evidence of
expenditures.
(c) Time spent in travel shall not be deemed to be time spent in connection with
this Agreement except to the extent that work is actually performed during
travel periods. Director shall comply with United Defense's travel policies,
except as otherwise agreed by United Defense in writing. Director shall not
incur any expense on behalf of United Defense except as contemplated by
paragraph 2 above or upon the prior written approval of United Defense.
From time to time upon request by United Defense, Director shall permit audit of
Director's compliance with the terms of this Agreement by United Defense
employees and/or representatives of any Governmental agencies to which United
Defense is or may be accountable. Any consulting work and related expenses which
do not accord with applicable laws, regulations, United Defense standards of
conduct or the terms of this Agreement, shall not be reimbursed.
3. Inventions and Data
(a) The term "subject invention" as used in this Agreement means any invention,
discovery, improvement, design, idea or suggestion, whether or not patentable,
conceived and/or first actually reduced to practice by Director, whether acting
alone or jointly with others, in the course of or as a result of any work for
United Defense. The term "subject data" as used in this Agreement means any
writings, sound recordings, pictorial reproductions, drawings or other graphic
representation and works of any similar nature, whether or not copyrightable,
which are prepared by Director, whether acting alone or jointly with others, in
the course of or as a result of any work for United Defense.
(b) All subject inventions and subject data are and shall remain the property of
United Defense, its successors or assigns, or its nominees, whether or not
United Defense obtains patent or copyright protection thereon. Director shall
(i) promptly disclose all subject inventions and subject data to United Defense;
(ii) assist United Defense upon request to procure and/or maintain patents,
copyrights and trade secrets throughout the world on said inventions and data;
and (iii) assist United Defense to record the existence of the right, title and
interest to said inventions and data in United Defense, at United Defense's
expense, including the execution of documents sought or required by United
Defense or any Governmental agency.
4. Confidential Treatment of Information
(a) Director shall not, either during or after the term of this Agreement,
directly or indirectly publish or disclose to any third party any information
(including but not limited to subject inventions or subject data) pertaining in
any way to the business of United Defense, its customers or suppliers, which is
developed, acquired or derived from association with United Defense, unless
United Defense gives written authorization to do so. Such information shall not
be used apart from United Defense business without written approval of United
Defense. Such prohibition against disclosure to others shall not apply to
information after it is clearly disclosed to the public by United Defense in
writing.
(b) Drawings, sketches and any other tangible material made or obtained by
Director from or for United Defense shall be turned over to United Defense in a
timely manner and shall not be removed from United Defense's premises without
the written permission of United Defense. If written permission is given to
remove any such material, the material shall be promptly returned to United
Defense upon completion of the work for United Defense or at any earlier time
requested by United Defense.
5. Work for Others
While engaged by the Company hereunder, Director shall not act as a consultant
for others regarding any matter in which any such other's interest is legally or
financially adverse to that of United Defense. Director represents and warrants
that Director has disclosed in writing to United Defense all other clients and
any work which may represent a conflict of interest with respect to the work to
be performed for United Defense under this Agreement.
2
<PAGE>
Director shall, during the term hereof, advise United Defense prior to entering
into any agreement with any other entity or performing any other work which may
result in such a conflict of interest, and further shall, during the term
hereof, not enter into any such agreement or perform any other such work without
the prior written approval of United Defense.
6. Term and Termination
Unless earlier terminated in accordance with this Section 6, this Agreement
shall expire in 52 weeks following the date first above written. Additionally,
the term of this Agreement may be extended for one or more successive one-year
periods by written agreement of the parties. Whether during the original term or
any extension thereof, this Agreement may be terminated by either party at any
time (i) without cause, by giving not less than one (1) week's prior written
notice to the other, or (ii) upon breach by the other party, by the aggrieved
party's giving not less than ten (10) days' prior written notice, stating the
nature of such breach.
7. Information Provided
Director represents and warrants as to any information in any form which
Director may provide to United Defense that (i) Director has the lawful right to
provide such information to United Defense without breach of any law,
regulation, contract obligation or duty of employment and that United Defense
may receive and use such information without incurring any liability or
obligation to any other person or entity, and (ii) that any information provided
to United Defense which may have been obtained directly by Director or from any
other person or entity was obtained without violation of any law, regulation,
contract obligation, proprietary right or duty of employment. Director shall
indemnify, defend and hold harmless United Defense (including its employees,
officers and directors) from any damages and claims arising out of or related to
any breach by Director of such representations and warrants.
8. Compliance with Laws
(a) Director represents and warrants that (i) Director is and shall remain
familiar with all applicable laws and regulations relating to gratuities,
bribery, kickbacks, conflicts of interest, classified information and political
activity, (ii) no principal or relative of any principal of Director is a U.S.
Government official other than as expressly disclosed in writing by Director
prior to the date of this Agreement as first set forth above; and (iii) no U.S.
Government official has any beneficial interest in Director nor in any
compensation payable to Director by United Defense. Director shall report to
United Defense all contacts with U.S. Government employees and officials during
which United Defense matters are discussed. Director shall strictly comply with
all applicable statutes and regulations in the conduct of Director's work for
United Defense (including the law described in subparagraph (b) below) and shall
indemnify, defend and hold United Defense (including its employees, officers and
directors) harmless from any failure of the Director to do so.
(b) Director represents and warrants that, throughout the term of this
Agreement, Director (i) shall remain familiar with federal law regarding
procurement integrity (41 U.S.C. Paragraph 423) and regulations issued
thereunder, hereafter collectively referred to as the "Law"), (ii) will comply
with the Law in all respects, and (iii) shall not be a "procurement official" on
any procurement for which United Defense as a "competing contractor" (as such
terms are defined in the Law). Director shall promptly execute the procurement
integrity certification attached hereto, shall re-execute such certification
annually or as otherwise requested by United Defense, and shall provide to
United Defense such other cooperation as United Defense may require to comply
with the Law, insofar as United Defense's compliance is affected by Director's
performance under or acts in relation to this Agreement.
9 Standards of Conduct
Director acknowledges receipt of a copy of the Business Conduct Guidelines and
Code of Ethics and shall comply with the standards of conduct set forth for
United Defense employees therein, and shall promptly complete and return to
United Defense the Letter of Certification appended to the Business Conduct
Guidelines.
3
<PAGE>
10. Report of Violations
Director shall report to the appropriate United Defense manager or to United
Defense's Ethics Hot Line number at (888) 912-2112, any request by any United
Defense employee to obtain any information or perform any other act under this
Agreement in a manner which would violate any applicable law, regulation,
contract obligation, duty of employment or United Defense standard of conduct.
Director is requested similarly to report any observed violation of law or
regulation by any United Defense personnel. All such reports will be handled on
a confidential basis and may be made anonymously, if appropriate.
11. Miscellaneous
(a) This Agreement contains the entire agreement of the parties with respect to
the subject matter hereof and supersedes any prior or contemporaneous
representation, warrants, understanding or agreement, written or oral, regarding
such subject matter. This Agreement shall not be deemed to create any
partnership, joint venture or enterprise or employment relationship between the
parties and Director shall have no authority to act in the name of or to
obligate United Defense in any way to third parties. Director shall diligently
make and perform all appropriate tax reports and filings as an independent
contractor and shall make all payments in such capacity required to federal,
state and local tax authorities, including but not limited to, income and social
security taxes; and Director shall indemnify and hold United Defense harmless
from and against any claim for taxes, interest and/or penalties, however
denominated, made by taxing authorities in respect to Director's activities
under or related to this Agreement.
(b) This Agreement shall be construed in accordance with and governed by the
laws of the State of Virginia and the United States of America.
(c) In the event any term or provision hereof is held to be invalid or
unenforceable by final judgment of any court of competent jurisdiction, such
term or provision shall thereupon be severed from this Agreement and the
remainder of the terms and provisions hereof shall remain in full force and
effect.
In Witness Whereof, the parties hereto have executed this Agreement.
Director:
Robert M. Kimmitt
---------------------------------------------------
(Typed or printed name and title of signer)
/s/ Robert M. Kimmitt
---------------------------------------------------
(Signature)
Tax Identification No. (SSN or EIN): ###-##-####
United Defense, L.P.:
/s/ Thomas W. Rabaut
---------------------------------------------------
(Signature)
Thomas W. Rabaut, President & CEO
---------------------------------------------------
(Typed or printed name and title of signer)
4
<PAGE>
Resolution Authorizing
Stock Option Grants to
Independent Directors
WHEREAS, on March 26, 1998 the Board of Directors adopted a resolution reserving
shares of the Corporation's $.001 per value common stock ("Stock") for use under
a stock option plan for the Corporation's Directors, officers, and other key
employees;
WHEREAS, on June 26, 1998 the Board of Directors adopted a resolution creating a
Compensation Committee from among its members and authorizing such Committee to
adopt a stock option plan;
WHEREAS, on July 25, 1998 the Compensation Committee adopted a resolution
approving and adopting the United Defense Stock Option Plan (the "Plan") in the
form attached to such resolution;
WHEREAS, the Plan permits the grant of stock options to employees and directors
of the Corporation, but reserves to the Board of Directors the power to grant
options to the Corporation's independent Directors and the power to specify the
terms and conditions upon which any such options may be granted; and
WHEREAS, the Board of Directors has determined that the business interest of the
Corporation would be furthered by granting stock options to its independent
Directors, thereby further aligning the interests of such personnel with the
Corporation and its stockholders;
NOW THEREFORE BE IT RESOLVED, that options shall be granted under the Plan to
each of the Corporation's independent Directors, presently consisting of Robert
M. Kimmitt, Gen. J.H. Binford Peay, III (USA Ret.), and Gen. John M.
Shalikashvili (USA Ret.), in the following amounts and pricing: (i) upon an
independent Director's having been initially engaged as such, the grant of a
nonqualified option to purchase one thousand (1,000) shares of Stock under the
Plan at an exercise price of ten dollars ($10.00) per share, such option to vest
and become exercisable immediately upon grant; and (ii) for each year of service
as a Director of this Corporation, such Director may elect to receive as
compensation, in lieu of the $25,000 cash compensation, the grant of an
equivalent value in nonqualified options, to he computed as four times the
figure produced by dividing $25,000 by the per-share exercise price as most
recently specified by the Corporation, which price for any year of directorial
service commencing prior to the date of this resolution shall be ten dollars
($10.00) per share, and which options shall vest and become exercisable in equal
quarterly installments during the pertinent year of such Director's service;
RESOLVED FURTHER, that any and all letters of engagement to such independent
Directors heretofore signed by any officer of this Corporation be and the same
hereby are approved and ratified;
<PAGE>
2
RESOLVED FURTHER, that the terms and conditions upon which options are granted
to the Corporation's independent Directors shall be as set forth in the form of
Stock Option Agreement attached to these minutes as Exhibit E;
RESOLVED FURTHER, that the officers of the Corporation be, and each of them
hereby is, authorized and empowered (acting in the name and on behalf of the
Corporation) to execute, deliver, and perform all such documents, instruments,
and certificates and take such further actions as may be necessary, appropriate,
advisable, or desirable to effectuate any or all of the foregoing resolutions,
and any and all actions heretofore or hereafter taken by such authorized officer
(and any person acting on behalf of or under the direction of such authorized
officer) in furtherance of the objectives set forth in this resolution and all
transactions related thereto, are hereby authorized, approved, ratified, and
confirmed in all respects.
<PAGE>
EXHIBIT 10.25
UNITED DEFENSE, L.P.
June 30, 1997
Francis "Buzz" Raborn
Re: Executive Compensation Agreement
Dear Buzz:
This Letter Agreement serves to confirm the discussion between Larry
D. Brady and you ("Executive") concerning the decision of the Board of Directors
of FMC Corporation ("FMC" or the "General Partner"), the general partner of
United Defense, L.P. (the "Company"), to (i) solicit potential buyers for a
possible sale of the outstanding general partner interests, or outstanding
general partner and limited partner interests, of the Company (a "Sale of the
Company") and (ii) to consider a spin-off of the Company in a transaction or
series of related transactions pursuant to which the stockholders of FMC would
become the holders of FMC's equity interests in the Company as a result of a
distribution of such interests (a "Spin-Off"). Each of a Sale of the Company and
a Spin-Off are referred to herein as a "Transaction." In connection with such
decision, the Company hereby agrees with Executive, effective as of the date
written above, to the following terms and conditions set forth in this Letter
Agreement.
1. Compensation Arrangements. In consideration of Executive's agreement to
cooperate with the General Partner in pursuing a Transaction and to
fulfill Executive's other obligations set forth in this Letter Agreement,
Executive shall be entitled to receive the payments and benefits described
below:
(a) Performance Incentive: If a Transaction is consummated, Executive
shall be entitled to a bonus (the "Performance Incentive Bonus") of
$150,000 payable 30 days after the consummation of such Transaction
(the "Final Transaction Date"); provided, however, that (i) the
Performance Incentive Bonus shall not be payable if, prior to the
Final Transaction Date, Executive's employment with the Company is
voluntarily terminated without Good Reason or is involuntarily
terminated for Cause and (ii) the Performance Incentive Bonus shall
be payable if Executive's employment is voluntarily terminated with
Good Reason or involuntarily terminated not for Cause prior to the
Final Transaction Date. Notwithstanding the foregoing and paragraph
1(b) below, both the Performance Incentive Bonus and the Premium
Incentive Bonus (as defined in such paragraph 1(b)) shall be payable
if Executive voluntarily terminates his employment prior to the
Final Transaction Date in order to accept an offer of employment
from FMC.
(b) Premium Incentive: If a Sale of the Company is consummated (but not
a Spin-Off), Executive shall be entitled to a bonus (the "Premium
Incentive Bonus") in an amount ranging from $0 to $150,000 based on
the price obtained for such Sale of the Company and Executive's
contribution to the process of consummating such Sale of
<PAGE>
the Company, as determined by Larry D. Brady and Thomas W. Rabaut in
their sole discretion. Any Premium Incentive Bonus shall be payable
30 days after the Final Transaction Date; provided, however, that
(i) the Premium incentive Bonus shall not be payable if, prior to
the Final Transaction Date, Executive's employment with the Company
is voluntarily terminated without Good Reason or is involuntarily
terminated for Cause and (ii) the Premium Incentive Bonus shall be
payable if Executive is voluntarily terminated with Good Reason or
involuntarily terminated not for Cause prior to the Final
Transaction Date.
(c) Severance Pay: Subject to consummation of a Sale of the Company (but
not a Spin-Off), if Executive is terminated by the Company not for
Cause, or if Executive voluntarily terminates his employment with
the Company with Good Reason, at any time after the Final
Transaction Date up to and including the two-year anniversary of the
Final Transaction Date, Executive shall be entitled to receive from
the Company the following:
(i) An amount equal to Executive's annualized base salary in
effect at the effective time of such termination plus an
amount equal to Executive's (A) earned and unused and (B)
accrued vacation pay through the effective time of such
termination plus an amount calculated to provide Executive
with $150,000 on an after-tax basis.
(ii) An amount equal to the greater of (A) Executive's target bonus
established for the plan period commencing January 1, 1997 and
(B) Executive's target bonus established for the plan period
commencing in the year of such termination.
(iii) A continuation of the welfare benefits of health care
(including dental insurance coverage), life and accidental
death and dismemberment and long-term disability insurance
coverage for one full year after the effective time of such
termination. These benefits shall be provided to Executive at
the same premium cost, and at the same coverage level, as in
effect as of the effective time of such termination. However,
in the event the premium cost and/or level of coverage shall
change for all employees of the Company, or for management
employees with respect to supplemental benefits, the cost
and/or coverage level, as applicable, shall change for
Executive in a corresponding manner.
(iv) Executive outplacement assistance in accordance with FMC's
customary practices for persons in Executive's employment
position from the outplacement firm employed by FMC as of the
effective time of such termination.
-2-
<PAGE>
(v) If applicable, the Company will provide or cause to be
provided to Executive supplemental pension benefits equal to
the difference between the pension benefits actually payable
under the Company and/or FMC pension plan applicable to
Executive and the pension benefits which would have been
payable had Executive accrued employment service through the
age of 55 prior to receipt of pension benefits.
Executive shall also be entitled to receive severance benefits under
this paragraph 1(c) upon voluntary termination of employment with
the Company prior to the Final Transaction Date if the buyer of
partnership interests of the Company ("Buyer") indicates in writing
to FMC prior to the Final Transaction Date that Buyer intends to
cause the Company to terminate Executive following the Final
Transaction Date, unless Executive accepts an offer of employment
with FMC prior to the Final Transaction Date. A liquidation or
dissolution of the Company in connection with a Sale of the Company
or as part of the integration of the operations of the Company and
Buyer shall not be deemed to involve a termination of Executive for
purposes of this paragraph 1(c), but in such event this paragraph
1(c) is intended to apply to and be binding on the successor of the
Company.
(d) FMC 1995 Management Incentive Plan:
(i) Bonus Performance Incentive Award. Whether or not Executive
completes the Three-Year Period (as defined in the FMC 1995
Management Incentive Plan (the "MIP")) ending December 31,
1997 as an employee of the Company, Executive shall receive a
BPI Award (as defined below) with respect to such Three-Year
Period based on the greater of the at-target performance and
the actual performance of the Company for such Three-Year
Period. Such BPI Award shall be reduced by the amount of the
draw against such BPI Award previously paid to Executive and,
as so reduced, shall be payable at the time when FMC makes
payment of the BPI Awards to other participants in the MIP.
For purposes of this Letter Agreement, the term "BPI Award"
shall mean a Three-Year Incentive Award within the meaning of
the MIP.
(ii) Annual Performance Incentive Award. Whether or not Executive
completes the calendar year ending December 31, 1997 as an
employee of the Company, Executive shall receive an annual
performance incentive award with respect to such period based
on a review of Executive's performance during such period.
Such annual performance incentive award shall be payable at
the time when FMC makes payment of the annual performance
incentive awards to other participants in the MIP.
-3-
<PAGE>
(e) Equity Incentive Awards: Notwithstanding any contrary term contained
in any applicable FMC stock option plan (the "Option Plan") or any
applicable stock option agreement, but subject to the approval of
the Compensation and Organization Committee of the Board of
Directors of FMC or any other appropriate committee, Executive shall
have the right to exercise any outstanding stock options granted to
him under the Option Plan that are vested as of the Final
Transaction Date within the earlier of (A) two years from the Final
Transaction Date and (B) the scheduled expiration date of such
options under the Option Plan and the applicable stock option
agreements.
2. Obligations of Executive:
(a) Nondisclosure of Transaction Matters. Except as required by any
court or governmental entity, Executive agrees not to disclose or
discuss with any person (regardless of any termination of this
Letter Agreement or any determination by FMC to no longer pursue a
Transaction) the existence or terms of this Letter Agreement, the
fact that a Transaction is being considered, the terms or conditions
of a Transaction or the status of any Transaction discussions or
negotiations; provided, however, that (i) Executive shall be free to
consult with the other officers of the Company or with his or their
legal counsel, accountants and financial advisors in connection with
this Letter Agreement and any Transaction; and (ii) Executive shall
be free to disclose and discuss such matters in connection with any
Transaction as authorized by FMC officials leading FMC's efforts in
connection with any such Transaction.
(b) Executive Cooperation in Transaction Efforts. Executive agrees to
cooperate with the partners of the Company in their respective
efforts to negotiate and close a Transaction, regardless of whether
Executive or any other member of the management of the Company
("Management") becomes a participant in such Transaction. Without
limiting the generality of the foregoing, (i) Executive shall not
take any action which could be reasonably expected to give
Management or any investors who propose to participate with
Management in a Transaction an advantage over other potential
participants in such Transaction or any alternative Transaction;
(ii) Executive shall make himself available at FMC's request from
time to time to answer questions and provide information to
potential participants in a Transaction, which shall be done in a
manner consistent with the policies, procedures and guidelines
established by FMC; and (iii) Executive shall otherwise promote any
Transaction consistent with his duty to act in the best interest of
the Company and shall continue his flanctional responsibilities and
assist FMC in connection with the negotiation and consummation of
any such Transaction, consistent with Executive's demonstrated
capabilities.
(c) Representations and Warranties Relating to any Transaction.
Executive understands that FMC and/or the limited partner of the
Company may decide to make certain
-4-
<PAGE>
representations and warranties relating to the business and
operations of the Company to participants in a Transaction under the
terms of the definitive agreements with such participants (the
"Definitive Agreements") Executive agrees that, prior to the
execution of the Definitive Agreements and prior to the closing of
any such Transaction, Executive will (i) review all such
representations and warranties and (ii) certify in writing to FMC
and/or the limited partner of the Company (the "Certificate") (A)
that Executive knows of no material misstatement or omission
contained in such representations and warranties or (B) that
Executive has identified to FMC and/or the limited partner of the
Company in writing any material misstatements or omissions contained
in such representations and warranties. Executive understands and
acknowledges that such certification is customary in connection with
transactions such as such Transaction and that FMC will rely on such
certification in executing the Definitive Agreement and in closing
such Transaction.
3. No Contract of Employment. This Letter Agreement is not a contract of
employment. Nothing expressed or implied in this Letter Agreement shall
create any right or duty of Executive's continued employment by FMC or the
Company, and the Company reserves all rights to terminate Executive's
employment at any time for or not for Cause, subject to the provisions
hereof.
4. Certain Definitions.
(a) The term "Cause" as used herein shall mean (i) Executive's willful
and continued failure to substantially perform his duties with the
Company (other than any such failure resulting from disability or
occurring after issuance by Executive of a notice of termination
with Good Reason), after a written demand for substantial
performance is delivered to Executive that specifically identifies
the manner in which the Company believes that Executive has
willfully failed to substantially perform his duties, and after
Executive has failed to resume substantial performance of his duties
on a continuous basis within thirty (30) calendar days of receiving
such demand, (ii) the commission by Executive of an act of fraud,
misappropriation, embezzlement or any other act involving moral
turpitude or constituting a felony, or (iii) the commission by
Executive of any act of dishonesty which injures the Company, any
partner of the Company or Buyer, as the case may be.
(b) The term "Good Reason" as used herein shall mean the occurrence of
one or more of the following events without Executive's consent: (i)
Executive's base salary as of the date hereof is reduced for any
reason by more than 5% other than as a result of the termination of
Executive's employment or (ii) after the Final Transaction Date,
Executive's employment with the Company is not on terms comparable
to Executive's employment with the Company as of the date hereof in
terms of compensation, responsibility and authority. Executive shall
notify the Company within 15 days after Executive knows of the
occurrence of any event within the
-5-
<PAGE>
meaning of clauses (i) or (ii) above and the Company may cure any
such event and notify Executive thereof within 15 days of the
Company's receipt of Executive's notice. Within 15 days after
expiration of such 15-day period, Executive must voluntarily
terminate his employment with the Company in order to be entitled to
benefits hereunder.
5. General Provisions: It is expressly understood and agreed: (i) that all of
the terms and conditions of the compensation plans described in paragraph
1 above are to remain in full force and effect as applied to Executive and
(ii) that, except as specifically modified by this Letter Agreement, any
payments and distributions made pursuant to paragraph 1 above are in lieu
of any other payments which would otherwise be due under the same
compensation plan for the same relevant time period. It is further
understood and agreed that the following provisions shall apply to this
Letter Agreement:
(a) Irreparable Harm. Executive acknowledges and agrees that the failure
of Executive to comply with any of the terms of paragraph 2 will
irreparably harm the Company and that money damages would not
adequately compensate them for such harm. Thus, Executive agrees
that, in addition to any other remedies that the Company may have
hereunder or otherwise, the Company shall be entitled to injunctive
or other equitable relief to restrain any breach by Executive of
such terms, and further that the Company shall be entitled to apply
for such relief in any court of competent jurisdiction without the
posting of a bond or any other security.
(b) Assignment. Neither this Letter Agreement nor any of the rights,
interests or obligations hereunder may be assigned by Executive.
This Letter Agreement may be assigned by the Company and is intended
to be binding on any successor to the Company.
(c) Governing Law. This Letter Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois
without reference to the choice of law principles thereof
(d) Parol Integration. The rights and benefits granted pursuant to this
Letter Agreement are in addition to, and not in lieu of, any rights
and other benefits to which Executive may be entitled.
(e) Arbitration. Each of Executive and the Company hereby irrevocably
agree that, except as provided in paragraph 5(a), any dispute
arising out of or relating in any way to this Letter Agreement shall
be settled solely by arbitration in the City of Chicago, Illinois to
be administered by the American Arbitration Association in
accordance with its then prevailing rules.
(f) Status of Payments. No payments made to Executive by the Company
pursuant to this Letter Agreement (other than with respect to the
MIP) shall be deemed to be
-6-
<PAGE>
pensionable income or compensation for purposes of Executive's
rights under the FMC and/or Company pension plan applicable to
Executive.
* * * * *
-7-
<PAGE>
If you agree that the foregoing correctly sets forth the agreement
between us, please sign the enclosed copy of this Letter Agreement in the space
indicated below and return it to the Company.
Very truly yours,
UNITED DEFENSE, L.P.
By: FMC Corporation
Its: General Partner
By: /s/ Thomas W. Rabaut
------------------------------
Its: Vice President
------------------------------
Agreed to as of the day and
year first written above:
/s/ Francis Raborn
- -----------------------------
Francis "Buzz" Raborn
7/6/97
- -----------------------------
Date of Signature
-8-
<PAGE>
To: F. "Buzz" Raborn
Re: Amendment to Executive Compensation Agreement
Dear Buzz:
In connection with the Letter Agreement dated as of June 30, 1997, between you
("Executive") and United Defense L.P. (the "Company"), the Company desires, in
order to more fully realize the objectives of the Letter Agreement, to amend the
same to clarify certain additional aspects of your compensation not addressed or
only partially addressed therein, as follows:
FMC Stock Option Plan: Certain options have been granted to you in connection
with such plan (the "Option Plan") under one or more stock option agreements
which, among other things, ordinarily subject the right of exercise to the
condition precedent that Executive shall have been continuously employed by the
Company or one of its affiliates between the grant date for such options and
December 31, 1997. Regarding such options, the condition regarding such period
of continuous employment shall be deemed fully satisfied if Executive remains
continuously employed from the grant date until the earlier of December 31, 1997
or the Final Transaction Date.
Any terms not separately defined above shall have the same definitions set forth
In the Letter Agreement.
If you are in agreement with the foregoing, please execute both originals of
this Amendment, keep one original for your records, and return the other
original to the Company, whereupon the Letter Agreement shall become amended in
the manner set forth above.
Very truly yours,
UNITED DEFENSE, L.P.
By FMC Corporation, acting as
General Partner of United
Defense, L.P., and acting for
itself regarding the Option Plan
By: Thomas W. Rabaut
-------------------------------
Its: Vice President
-------------------------------
Accepted and agreed to as of the
date and year first written above
/s/ F. Raborn
- -----------------------------
F. "Buzz" Raborn
7/22/97
- -----------------------------
Date of Signature
<PAGE>
EXHIBIT 10.26
UNITED DEFENSE, L.P.
June 30, 1997
Dennis Wagner
Re: Executive Compensation Agreement Dear Dennis:
This Letter Agreement serves to confirm the discussion between Larry
D. Brady and you ("Executive") concerning the decision of the Board of Directors
of FMC Corporation ("FMC" or the "General Partner"), the general partner of
United Defense, L.P. (the "Company"), to (i) solicit potential buyers for a
possible sale of the outstanding general partner interests, or outstanding
general partner and limited partner interests, of the Company (a "Sale of the
Company") and (ii) to consider a spin-off of the Company in a transaction or
series of related transactions pursuant to which the stockholders of FMC would
become the holders of FMC's equity interests in the Company as a result of a
distribution of such interests (a "Spin-Off"). Each of a Sale of the Company and
a Spin-Off are referred to herein as a "Transaction." In connection with such
decision, the Company hereby agrees with Executive, effective as of the date
written above, to the following terms and conditions set forth in this Letter
Agreement.
1. Compensation Arrangements. In consideration of Executive's agreement to
cooperate with the General Partner in pursuing a Transaction and to
fulfill Executive's other obligations set forth in this Letter Agreement,
Executive shall be entitled to receive the payments and benefits described
below:
(a) Performance Incentive: If a Transaction is consummated, Executive
shall be entitled to a bonus (the "Performance Incentive Bonus") of
$150,000 payable 30 days after the consummation of such Transaction
(the "Final Transaction Date"); provided, however, that (i) the
Performance Incentive Bonus shall not be payable if, prior to the
Final Transaction Date, Executive's employment with the Company is
voluntarily terminated without Good Reason or is involuntarily
terminated for Cause and (ii) the Performance Incentive Bonus shall
be payable if Executive's employment is voluntarily terminated with
Good Reason or involuntarily terminated not for Cause prior to the
Final Transaction Date. Notwithstanding the foregoing and paragraph
1(b) below, both the Performance Incentive Bonus and the Premium
Incentive Bonus (as defined in such paragraph 1(b)) shall be payable
if Executive voluntarily terminates his employment prior to the
Final Transaction Date in order to accept an offer of employment
from FMC.
(b) Premium Incentive: If a Sale of the Company is consummated (but not
a Spin-Off), Executive shall be entitled to a bonus (the "Premium
Incentive Bonus") in an amount ranging from $0 to $150,000 based on
the price obtained for such Sale of the Company and Executive's
contribution to the process of consummating such Sale of
<PAGE>
the Company, as determined by Larry D. Brady and Thomas W. Rabaut in
their sole discretion. Any Premium Incentive Bonus shall be payable
30 days after the Final Transaction Date; provided, however, that
(i) the Premium Incentive Bonus shall not be payable if, prior to
the Final Transaction Date, Executive's employment with the Company
is voluntarily terminated without Good Reason or is involuntarily
terminated for Cause and (ii) the Premium Incentive Bonus shall be
payable if Executive is voluntarily terminated with Good Reason or
involuntarily terminated not for Cause prior to the Final
Transaction Date.
(c) Severance Pay: Subject to consummation of a Sale of the Company (but
not a Spin-Off), if Executive is terminated by the Company not for
Cause, or if Executive voluntarily terminates his employment with
the Company with Good Reason, at any time after the Final
Transaction Date up to and including the two-year anniversary of the
Final Transaction Date, Executive shall be entitled to receive from
the Company the following:
(i) An amount equal to Executive's annualized base salary in
effect at the effective time of such termination plus an
amount equal to Executive's (A) earned and unused and (B)
accrued vacation pay through the effective time of such
termination.
(ii) An amount equal to the greater of (A) Executive's target bonus
established for the plan period commencing January 1, 1997 and
(B) Executive's target bonus established for the plan period
commencing in the year of such termination.
(iii) A continuation of the welfare benefits of health care
(including dental insurance coverage), life and accidental
death and dismemberment and long-term disability insurance
coverage for one full year after the effective time of such
termination. These benefits shall be provided to Executive at
the same premium cost, and at the same coverage level, as in
effect as of the effective time of such termination. However,
in the event the premium cost and/or level of coverage shall
change for all employees of the Company, or for management
employees with respect to supplemental benefits, the cost
and/or coverage level, as applicable, shall change for
Executive in a corresponding manner.
(iv) Executive outplacement assistance in accordance with FMC's
customary practices for persons in Executive's employment
position from the outplacement firm employed by FMC as of the
effective time of such termination.
Executive shall also be entitled to receive severance benefits under
this paragraph 1(c) upon voluntary termination of employment with
the Company prior to the Final Transaction Date if the buyer of
partnership interests of the Company ("Buyer") indicates in writing
to FMC prior to the Final Transaction Date that Buyer intends
<PAGE>
to cause the Company to terminate Executive following the Final
Transaction Date, unless Executive accepts an offer of employment
with FMC prior to the Final Transaction Date. A liquidation or
dissolution of the Company in connection with a Sale of the Company
or as part of the integration of the operations of the Company and
Buyer shall not be deemed to involve a termination of Executive for
purposes of this paragraph 1(c), but in such event this paragraph
1(c) is intended to apply to and be binding on the successor of the
Company.
(d) FMC 1995 Management Incentive Plan:
(i) Bonus Performance Incentive Award. Whether or not Executive
completes the Three-Year Period (as defined in the FMC 1995
Management Incentive Plan (the "MIP")) ending December 31,
1997 as an employee of the Company, Executive shall receive a
BPI Award (as defined below) with respect to such Three-Year
Period based on the greater of the at-target performance and
the actual performance of the Company for such Three-Year
Period. Such BPI Award shall be reduced by the amount of the
draw against such BPI Award previously paid to Executive and,
as so reduced, shall be payable at the time when FMC makes
payment of the BPI Awards to other participants in the MIP.
For purposes of this Letter Agreement, the term "BPI Award"
shall mean a Three-Year Incentive Award within the
meaning of the MIP.
(ii) Annual Performance Incentive Award. Whether or not Executive
completes the calendar year ending December 31, 1997 as an
employee of the Company, Executive shall receive an annual
performance incentive award with respect to such period based
on a review of Executive's performance during such period.
Such annual performance incentive award shall be payable at
the time when FMC makes payment of the annual performance
incentive awards to other participants in the MIP.
(e) Equity Incentive Awards: Notwithstanding any contrary term contained
in any applicable FMC stock option plan (the "Option Plan") or any
applicable stock option agreement, but subject to the approval of
the Compensation and Organization Committee of the Board of
Directors of FMC or any other appropriate committee, Executive shall
have the right to exercise any outstanding stock options granted to
him under the Option Plan that are vested as of the Final
Transaction Date within the earlier of (A) two years from the Final
Transaction Date and (B) the scheduled expiration date of such
options under the Option Plan and the applicable stock option
agreements.
2. Obligations of Executive:
(a) Nondisclosure of Transaction Matters. Except as required by any
court or governmental entity, Executive agrees not to disclose or
discuss with any person (regardless of any termination of this
Letter Agreement or any determination by
<PAGE>
FMC to no longer pursue a Transaction) the existence or terms of
this Letter Agreement, the fact that a Transaction is being
considered, the terms or conditions of a Transaction or the status
of any Transaction discussions or negotiations; provided, however,
that (i) Executive shall be free to consult with the other officers
of the Company or with his or their legal counsel, accountants and
financial advisors in connection with this Letter Agreement and any
Transaction; and (ii) Executive shall be free to disclose and
discuss such matters in connection with any Transaction as
authorized by FMC officials leading FMC's efforts in connection with
any such Transaction.
(b) Executive Cooperation in Transaction Efforts. Executive agrees to
cooperate with the partners of the Company in their respective
efforts to negotiate and close a Transaction, regardless of whether
Executive or any other member of the management of the Company
("Management") becomes a participant in such Transaction. Without
limiting the generality of the foregoing, (i) Executive shall not
take any action which could be reasonably expected to give
Management or any investors who propose to participate with
Management in a Transaction an advantage over other potential
participants in such Transaction or any alternative Transaction;
(ii) Executive shall make himself available at FMC's request from
time to time to answer questions and provide information to
potential participants in a Transaction, which shall be done in a
manner consistent with the policies, procedures and guidelines
established by FMC; and (iii) Executive shall otherwise promote any
Transaction consistent with his duty to act in the best interest of
the Company and shall continue his functional responsibilities and
assist FMC in connection with the negotiation and consummation of
any such Transaction, consistent with Executive's demonstrated
capabilities.
(c) Representations and Warranties Relating to any Transaction.
Executive understands that FMC and/or the limited partner of the
Company may decide to make certain representations and warranties
relating to the business and operations of the Company to
participants in a Transaction under the terms of the definitive
agreements with such participants (the "Definitive Agreements").
Executive agrees that, prior to the execution of the Definitive
Agreements and prior to the closing of any such Transaction,
Executive will (i) review all such representations and warranties
and (ii) certify in writing to FMC and/or the limited partner of the
Company (the "Certificate") (A) that Executive knows of no material
misstatement or omission contained in such representations and
warranties or (B) that Executive has identified to FMC and/or the
limited partner of the Company in writing any material misstatements
or omissions contained in such representations and warranties.
Executive understands and acknowledges that such certification is
customary in connection with transactions such as such Transaction
and that FMC will rely on such certification in executing the
Definitive Agreement and in closing such Transaction.
3. No Contract of Employment. This Letter Agreement is not a contract of
employment. Nothing expressed or implied in this Letter Agreement shall
create any right or duty of
<PAGE>
Executive's continued employment by FMC or the Company, and the Company
reserves all rights to terminate Executive's employment at any time for or
not for Cause, subject to the provisions hereof.
4. Certain Definitions.
(a) The term "Cause" as used herein shall mean (i) Executive's willful
and continued failure to substantially perform his duties with the
Company (other than any such failure resulting from disability or
occurring after issuance by Executive of a notice of termination
with Good Reason), after a written demand for substantial
performance is delivered to Executive that specifically identifies
the manner in which the Company believes that Executive has
willfully failed to substantially perform his duties, and after
Executive has failed to resume substantial performance of his duties
on a continuous basis within thirty (30) calendar days of receiving
such demand, (ii) the commission by Executive of an act of fraud,
misappropriation, embezzlement or any other act involving moral
turpitude or constituting a felony, or (iii) the commission by
Executive of any act of dishonesty which injures the Company, any
partner of the Company or Buyer, as the case may be.
(b) The term "Good Reason" as used herein shall mean the occurrence of
one or more of the following events without Executive's consent: (i)
Executive's base salary as of the date hereof is reduced for any
reason by more than 5% other than as a result of the termination of
Executive's employment or (ii) after the Final Transaction Date,
Executive's employment with the Company is not on terms comparable
to Executive's employment with the Company as of the date hereof in
terms of compensation, responsibility and authority. Executive shall
notify the Company within 15 days after Executive knows of the
occurrence of any event within the meaning of clauses (i) or (ii)
above and the Company may cure any such event and notify Executive
thereof within 15 days of the Company's receipt of Executive's
notice. Within 15 days after expiration of such 15-day period,
Executive must voluntarily terminate his employment with the Company
in order to be entitled to benefits hereunder.
5. General Provisions: It is expressly understood and agreed: (i) that all of
the terms and conditions of the compensation plans described in paragraph
1 above are to remain in full force and effect as applied to Executive and
(ii) that, except as specifically modified by this Letter Agreement, any
payments and distributions made pursuant to paragraph 1 above are in lieu
of any other payments which would otherwise be due under the same
compensation plan for the same relevant time period. It is further
understood and agreed that the following provisions shall apply to this
Letter Agreement:
(a) Irreparable Harm. Executive acknowledges and agrees that the failure
of Executive to comply with any of the terms of paragraph 2 will
irreparably harm the Company and that money damages would not
adequately compensate them for such harm. Thus, Executive agrees
that, in addition to any other remedies that the Company may have
hereunder or otherwise, the Company shall be entitled to injunctive
or other
<PAGE>
equitable relief to restrain any breach by Executive of such terms,
and further that the Company shall be entitled to apply for such
relief in any court of competent jurisdiction without the posting of
a bond or any other security.
(b) Assignment. Neither this Letter Agreement nor any of the rights,
interests or obligations hereunder may be assigned by Executive.
This Letter Agreement may be assigned by the Company and is intended
to be binding on any successor to the Company.
(c) Governing Law. This Letter Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois
without reference to the choice of law principles thereof.
(d) Parol Integration. The rights and benefits granted pursuant to this
Letter Agreement are in addition to, and not in lieu of, any rights
and other benefits to which Executive may be entitled.
(e) Arbitration. Each of Executive and the Company hereby irrevocably
agree that, except as provided in paragraph 5(a), any dispute
arising out of or relating in any way to this Letter Agreement shall
be settled solely by arbitration in the City of Chicago, Illinois to
be administered by the American Arbitration Association in
accordance with its then prevailing rules.
(f) Status of Payments. No payments made to Executive by the Company
pursuant to this Letter Agreement (other than with respect to the
MIP) shall be deemed to be pensionable income or compensation for
purposes of Executive's rights under the FMC and/or Company pension
plan applicable to Executive.
* * * * *
<PAGE>
If you agree that the foregoing correctly sets forth the agreement
between us, please sign the enclosed copy of this Letter Agreement in the space
indicated below and return it to the Company.
Very truly yours,
UNITED DEFENSE, L.P.
By: FMC Corporation
Its: General Partner
By:/s/ Thomas W. Rabaut
----------------------------------
Its: Vice President
----------------------------------
Agreed to as of the day and
year first written above:
/s/ Dennis A. Wagner
- ---------------------------------
Dennis Wagner
2 July 1997
- ---------------------------------
Date of Signature
<PAGE>
To: Dennis A. Wagner
Re: Amendment to Executive Compensation Agreement
Dear Dennis:
In connection with the Letter Agreement dated as of June 30, 1997, between you
("Executive") and United Defense L.P. (the "Company"), the Company desires, in
order to more fully realize the objectives of the Letter Agreement, to amend the
same to clarify certain additional aspects of your compensation not addressed or
only partially addressed therein, as follows:
FMC Stock Option Plan: Certain options have been granted to you in connection
with such plan (the "Option Plan") under one or more stock option agreements
which, among other things, ordinarily subject the right of exercise to the
condition precedent that Executive shall have been continuously employed by the
Company or one of its affiliates between the grant date for such options and
December 31, 1997. Regarding such options, the condition regarding such period
of continuous employment shall be deemed fully satisfied if Executive remains
continuously employed from the grant date until the earlier of December 31, 1997
or the Final Transaction Date.
Any terms not separately defined above shall have the same definitions set forth
in the Letter Agreement.
If you are in agreement with the foregoing, please execute both originals of
this Amendment, keep one original for your records, and return the other
original to the Company, whereupon the Letter Agreement shall become amended in
the manner set forth above.
Very truly yours,
UNITED DEFENSE, L.P.
By FMC Corporation, acting as
General Partner of United
Defense, L.P., and acting for
itself regarding the Option Plan
By: /s/ Thomas W. Rabaut
--------------------
Its: Vice President
--------------------
Accepted and agreed to as of the
date and year first written above
/s/ Dennis A. Wagner
- --------------------------------
Dennis A. Wagner
28 Jul 97
- --------------------------------
Date of Signature
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-60207) pertaining to the UDLP Amended and Restated Supplemental
Retirement and Savings Plan, the United Defense Stock Option Plan, and the
United Defense Industries, Inc. Employee Equity Purchase Plan of our report
dated January 29, 1999, with respect to the consolidated financial statements of
United Defense Industries, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1998.
/s/ Ernst & Young LLP
Washington D.C.
March 24, 1999
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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