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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1999
REGISTRATION NO. 333-70125
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
L-3 COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
3812, 3663, 3679
(Primary Standard Industrial
Classification Code Number)
13-3937434
(I.R.S. Employer
Identification Number)
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
CHRISTOPHER C. CAMBRIA
L-3 COMMUNICATIONS HOLDINGS, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-------------------
COPIES TO:
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VINCENT PAGANO JR. KIRK A. DAVENPORT
SIMPSON THACHER & BARTLETT LATHAM & WATKINS
425 LEXINGTON AVENUE 885 THIRD AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 455-2000 (212) 906-1200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
-------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1999
PROSPECTUS
9,250,000 SHARES
[GRAPHIC OMITTED]
L-3 COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
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L-3 Communications Holdings, Inc. is offering 3,500,000 shares. Selling
stockholders, including affiliates of Lehman Brothers, are offering
5,750,000 shares. Of the 9,250,000 shares being offered, 7,400,000 shares
are initially being offered in the United States and Canada and 1,850,000
shares are initially being offered outside the United States and Canada.
After this offering is completed, affiliates of Lehman Brothers will own
approximately 26.0% of the outstanding shares of our common stock.
The shares are listed on the New York Stock Exchange under the symbol "LLL".
The last reported sales price of our shares on the New York Stock Exchange on
February 3, 1999 was $43.25 per share.
Investing in the shares involves risks. Risk Factors begin on page 9.
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PER SHARE TOTAL
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Public Offering Price ............................ $ $
Underwriting Discount ............................ $ $
Proceeds to L-3 Communications Holdings .......... $ $
Proceeds to Selling Stockholders ................. $ $
</TABLE>
L-3 Communications Holdings has also granted the underwriters the right to
purchase up to an additional 1,387,500 shares within 30 days to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
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LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
C.E. UNTERBERG, TOWBIN
, 1999
<PAGE>
Photographs of L-3's products, including the aviation recorder, cockpit
display, Narda catalog, dipping sonar, secure terminal equipment, telemetry
system, satellite transmission systems, explosive detection systems, human
patient simulator and fixed wireless loop equipment.
L-3 Communications
L-3 is well positioned for the future
Experienced management team Strong performance record
Favorable business mix Solid financial structure
Positive industry dynamics Emerging commercial technologies
Leading market positions
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TABLE OF CONTENTS
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PAGE
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Available Information .......................... i
Prospectus Summary ............................. 1
Risk Factors ................................... 9
Use of Proceeds ................................ 18
Dividend Policy ................................ 18
Capitalization ................................. 19
Price Range of Common Stock .................... 19
Unaudited Pro Forma Condensed
Consolidated Financial Information .......... 20
Selected Financial Information ................. 31
Management's Discussion and Analysis of
Results of Operations and Financial
Condition ................................... 33
Business ....................................... 46
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Certain Relationships and Related
Transactions ................................ 68
Management ..................................... 70
Principal and Selling Stockholders ............. 79
Description of Capital Stock ................... 80
Description of Certain Indebtedness ............ 81
Shares Eligible for Future Sale ................ 86
Certain United States Federal Tax
Considerations .............................. 88
Underwriting ................................... 90
Legal Matters .................................. 93
Experts ........................................ 93
Index to Financial Statements .................. F-1
</TABLE>
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock,
including stabilizing bids, syndicate covering transactions or the imposition
of penalty bids. For a discussion of these activities, see "Underwriting".
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC" or
the "Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of common stock offered by this prospectus.
This prospectus, which is a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement. For
further information about us and our common stock, you should refer to the
Registration Statement. This prospectus summarizes material provisions of
contracts and other documents to which we refer you. Since the prospectus may
not contain all of the information that you may find important, you should
review the full text of these documents. We have included copies of these
documents as exhibits to our Registration Statement.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as a consequence we
file reports and other information with the Commission. The Registration
Statement and our other SEC filings can be inspected and copied at the Public
Reference Section of the Commission located at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549 and at regional public reference
facilities maintained by the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials,
including copies of all or any portion of the Registration Statement, can be
obtained from the Public Reference Section of the Commission at prescribed
rates. Such materials are also available on the Commission's home page on the
Internet (http://www.sec.gov). In addition, our public filings are also
available for inspection at the office of the New York Stock Exchange (the
"NYSE"), 20 Broad Street, New York, New York 10005.
i
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PROSPECTUS SUMMARY
This summary highlights selected information from this document and does
not contain all of the information you need to consider before investing in the
common stock. You should carefully read this entire prospectus. Unless
otherwise indicated, the information in this prospectus assumes that the
underwriters' over-allotment option will not be exercised. In this prospectus,
"Holdings" refers to L-3 Communications Holdings, Inc. and "the Company",
"L-3", "L-3 Communications", "we", "us" and "our" refer to Holdings and its
subsidiaries, including L-3 Communications Corporation, a wholly owned
subsidiary of Holdings. References to pro forma statement of operations data
reflect: (1) our acquisitions of the Ocean Systems business of AlliedSignal
Inc., the business of ILEX Systems, Inc., the Satellite Transmission Systems
division of California Microwave, Inc. and SPD Technologies, Inc.
(collectively, the "1998 Acquisitions"); (2) our purchase of our ten initial
business units (the "Predecessor Company") from Lockheed Martin Corporation in
1997 (the "L-3 Acquisition"); (3) L-3 Communications Corporation's May 1998
debt offering, our initial public offering (the "IPO") of common stock and the
amendment of L-3 Communications Corporation's bank credit facilities to
increase available borrowings (collectively, the "Financing Transactions"); and
(4) L-3 Communications Corporation's December 1998 debt offering and the
application of its net proceeds (the "Notes Offering"), as if they had occurred
on January 1, 1997. The pro forma balance sheet data reflect the Notes Offering
as if it had occurred on September 30, 1998. The pro forma data do not give
effect to this offering or any of our other acquisitions, including the
acquisition of Microdyne Corporation.
THE COMPANY
L-3 Communications is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. We produce
secure, high data rate communication systems, microwave components, avionics
and ocean systems and telemetry, instrumentation and space products. These
systems and products are critical elements of virtually all major
communication, command and control, intelligence gathering and space systems.
Our systems and specialized products are used to connect a variety of airborne,
space, ground- and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our customers include the U.S. department of
defense, certain U.S. government intelligence agencies, major aerospace and
defense contractors, foreign governments and commercial customers. For the
twelve-month period ended September 30, 1998, we had pro forma sales of
$1,139.7 million, pro forma EBITDA (as defined in footnote 8 under "Selected
Financial Information") of $148.4 million, pro forma net income of $26.5
million and pro forma diluted earnings per common share of $0.93. Our funded
backlog as of September 30, 1998 was $813.8 million. These results reflect
internal growth and the execution of our strategy of acquiring businesses that
complement or extend our product lines.
Our business areas employ proprietary technologies and capabilities and
have leading positions in their respective primary markets. We have organized
our operations into two primary business areas: Secure Communication Systems
and Specialized Communication Products. For the twelve-month period ended
September 30, 1998, the Secure Communication Systems business area generated
approximately $481.5 million of pro forma sales and $61.2 million of pro forma
EBITDA, and the Specialized Communication Products business area generated
$658.2 million of pro forma sales and $87.2 million of pro forma EBITDA. In
addition, we are seeking to expand our products and technologies in commercial
markets as we discuss under "--Emerging Commercial Products" below.
SECURE COMMUNICATION SYSTEMS. We are the established leader in secure,
high data rate communications for military and other U.S. government
reconnaissance and surveillance applications. Our Secure Communication Systems
operations are located in Salt Lake City, Utah, Camden,
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New Jersey and Shrewsbury, New Jersey. These operations are predominantly cost
plus, sole source contractors supporting long-term programs for the U.S. armed
forces and classified customers.
Our major secure communication programs and systems include:
o secure data links for airborne, satellite, ground- and sea-based
remote platforms for information collection, command and control and
dissemination to users in real time;
o strategic and tactical signal intelligence systems that detect,
collect, identify, analyze and disseminate information and related
support contracts for military and intelligence efforts;
o secure telephone, fax and network equipment and encryption
management;
o communication software support services to military and related
government intelligence markets; and
o communications systems for surface and undersea platforms and manned
space flights.
We believe that we have developed virtually every high bandwidth data link
that is currently used by the military for surveillance and reconnaissance. We
are also a leading supplier of communication software support services to
military and related government intelligence markets. In addition to these core
government programs, we are capitalizing on our technology base by expanding
into related commercial communication equipment markets. For instance, we are
applying our high data rate communications and archiving technology to the
medical image archiving market and our wireless communication expertise to
develop local wireless loop telecommunications equipment for the last mile
interconnect.
SPECIALIZED COMMUNICATION PRODUCTS. This business area encompasses three
product categories:
Microwave Components. We are the preeminent worldwide supplier of
commercial off-the-shelf, high-performance microwave components and frequency
monitoring equipment. Our microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. We also provide
state-of-the-art, space- qualified communication components including channel
amplifiers and frequency filters for the commercial communications satellite
market serving major military and commercial frequencies, including Ka band.
Approximately 79% of Microwave Components sales for the nine-month period ended
September 30, 1998 were made to commercial customers, including Loral Space &
Communications, Ltd., Motorola, Inc., Lucent Technologies Inc., AT&T Corp. and
Lockheed Martin Corporation ("Lockheed Martin").
Avionics and Ocean Products. Avionics and Ocean Products include our
aviation recorders, display systems, antenna systems, acoustic undersea warfare
systems and naval power distribution, conditioning, switching and protection
equipment for naval ships and submarines. We are the world's leading
manufacturer of commercial cockpit voice and flight data recorders (known as
"black boxes"). These recorders are sold under the Fairchild brand name both to
aircraft manufacturers and to the world's major airlines for their existing
fleets of aircraft. Our aviation recorders are also installed on military
transport aircraft throughout the world. We provide military and high-end
commercial displays for use in military aircraft. We also manufacture high
performance surveillance and precision millimeter wave antennas and related
equipment for U.S. Air Force, U.S. Army and U.S. Navy aircraft and are the
leading supplier of ground-based radomes. We are one of the world's leading
product suppliers of acoustic undersea warfare systems and airborne dipping
sonar systems to the U.S. and over 20 foreign navies. We are the only fully
integrated, full-line provider of qualified turnkey electrical power delivery
and management systems for U.S. Navy surface ships and submarines.
Telemetry, Instrumentation and Space Products. Our Telemetry,
Instrumentation and Space Products operations develop and manufacture
commercial off-the-shelf, real-time data collection and transmission products
and components for missile, aircraft and space-based electronic systems. These
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products are used to gather flight data and other critical information and
transmit it from air or space to the ground. Telemetry products are also used
for range safety and training applications to simulate battlefield situations.
We are also a leading global satellite communications systems provider offering
systems and services used in the satellite transmission of voice, video and
data through earth stations for uplink and downlink terminals. We provide
global satellite communications systems and services to customers that include
foreign post, telephone and telegraph administrations, domestic and
international prime communications infrastructure contractors,
telecommunications and satellite service providers, broadcasters and
media-related companies, government agencies and large corporations. We also
provide commercial, off-the-shelf satellite control software, telemetry,
tracking and control ("TT&C"), mission processors and software engineering
services to the worldwide military, civilian and commercial satellite markets.
EMERGING COMMERCIAL PRODUCTS. Building upon our core technical expertise
and capabilities, we are seeking to expand into several closely aligned
commercial business areas and applications. Emerging Commercial Products
currently include the following four niche markets:
o medical archiving and simulation systems;
o local wireless loop telecommunications equipment;
o airport security equipment; and
o information network security.
A majority of these commercial products were developed based on technology
used in our military businesses with relatively small additional expense. We
are applying our technical capabilities in high data rate communications and
archiving technology developed in our Secure Communication Systems business
area to the medical image archiving market together with the General Electric
Company's medical systems business. Based on secure, high data rate
communication technology also developed in our Secure Communication Systems
business area, we have developed local wireless loop telecommunications
equipment that is primarily designed for emerging market countries and rural
areas where voice and data communication infrastructure is inadequate or does
not exist. We have completed the development phase for the local wireless loop
telecommunications equipment and have begun deliveries. In addition, the
Federal Aviation Administration awarded us a development contract for next
generation airport security equipment for explosive detection. On November 23,
1998, we received FAA certification for our eXaminer 3DX (Trade Mark) 6000
system which is the only second-generation system to receive certification and
the only system to generate full, three-dimensional images of all objects in a
piece of baggage. To capitalize on commercial opportunities for the information
security technologies we developed in our Secure Communication Systems business
area, we have also created a new subsidiary focusing on developing and
marketing secure information and communication systems for commercial clients.
This subsidiary acquired a network security software product through a
majority-owned joint venture. We released the third generation of this network
security software, Expert(TM) 3.0, on November 9, 1998. Taken together, revenues
generated from our Emerging Commercial Products have not yet been material to
us.
BUSINESS STRATEGY
We have successfully integrated the business units we acquired from
Lockheed Martin and enhanced our operating efficiency by reducing overhead
expenses and reorganizing our facilities. These efforts resulted in
improvements in sales, profitability and obtaining competitive contracts. We
have used and intend to continue to use our market position, diverse program
base and favorable mix of cost plus to fixed price contracts to enhance our
profitability and to establish L-3 as the premier merchant supplier of
communication systems and products to the major prime contractors in the
aerospace/defense industry as well as the U.S. government. Our strategy to
continue to achieve our objectives includes:
3
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o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. Due to our strong
relationships with prime contractors and our independent status, we intend to
grow by expanding our share of current programs, by participating in new
programs and by positioning L-3 Communications as the desired merchant supplier
to more than one bidder on prime contract bids.
o SUPPORT CUSTOMER REQUIREMENTS. We will continue to align our research
and development, manufacturing and new business efforts to complement our
customers' requirements, and we will provide state-of-the-art products in order
to maintain and expand current customer relationships as well as to create new
ones.
o ENHANCE OPERATING MARGINS. We intend to continue to enhance our
operating margins by reducing overhead expenses and increasing productivity.
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. Our proprietary
technical capabilities have placed us at or near the top market position in
most of our key business areas. We intend to use these capabilities and make
substantial investments in research and development, technical and
manufacturing resources to strengthen our market positions as well as to pursue
commercial opportunities in other areas.
o MAINTAIN DIVERSIFIED BUSINESS MIX. We will maintain our favorable mix
of predictable profitability (typical of cost plus contracts) and higher margin
(typical of fixed price contracts) businesses together with our significant
sole source follow-on business and attractive customer profile.
o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. We intend to
continue to selectively acquire businesses which (1) have significant market
position in their business areas, (2) offer products that complement and/or
extend our existing products, (3) demonstrate positive future growth prospects
and (4) are accretive to our earnings in the first year of our ownership.
ACQUISITION STRATEGY
Since our formation in April 1997, we have actively pursued our
acquisition strategy. Since completing the L-3 Acquisition, we have purchased
twelve additional businesses for an aggregate cash purchase price including
assumed debt and expenses, net of cash acquired, of approximately $534.0
million, subject to certain post-closing adjustments, and in certain cases
additional consideration based on post-closing performance. We consider and
execute strategic acquisitions on an ongoing basis and may be evaluating
acquisitions or engaged in acquisition negotiations at any given time. We have
reached agreement on or are in discussions regarding a number of potential
acquisition opportunities and expect to use our bank credit facilities to fund
these transactions if we proceed with them. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources".
RECENT DEVELOPMENTS
SPD Technologies, Inc. On August 13, 1998, we acquired all of the
outstanding common stock of SPD Technologies, Inc. ("SPD") for $230.0 million
in cash, subject to certain post-closing adjustments. SPD is the leading
supplier to the U.S. Navy for subsystems that manage, control, distribute,
protect and condition electrical power in surface ships and submarines. SPD's
major products include electronic solid state protection products, switchgear,
high-speed transfer switches, fault isolation units, frequency converters and
inverters, voltage transformers and uninterruptible power supply systems. SPD's
products are installed in every nuclear submarine, aircraft carrier and surface
platform operated by the U.S. Navy. SPD also provides shipboard communications
and control as well as support service for installed products. This acquisition
was financed using cash from operations and borrowings under our bank credit
facilities.
Microdyne Corporation. On December 3, 1998, we signed an agreement to
acquire all of the outstanding common stock of Microdyne Corporation
("Microdyne") for approximately $90.0 million
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in cash, including the repayment of Microdyne's debt. For the fiscal year ended
September 30, 1998, Microdyne reported actual revenues of $58.3 million,
operating income of $1.3 million and net income of $0.3 million. On a pro forma
basis, including acquisitions Microdyne made during its 1998 fiscal year as if
they had occurred at the beginning of its fiscal year, Microdyne's revenues
would have been $73.5 million, operating income would have been $3.6 million
and net income would have been $0.9 million. Microdyne's actual earnings before
interest, taxes, depreciation and amortization for the recent fiscal year was
$2.9 million. Pro forma earnings before interest, taxes, depreciation and
amortization would have been $11.1 million before non-recurring charges of $5.1
million primarily for the write-off of acquired in-process research and
development costs. Pursuant to the acquisition agreement, one of our
subsidiaries has purchased 91.9% of the common stock of Microdyne in a cash
tender offer. We expect to complete the merger of Microdyne with this
subsidiary in early 1999. Microdyne is a leading global developer and
manufacturer of aerospace telemetry receivers, secure communications and
technical support services, including specialized telemetry high-frequency
radios used in aerospace and satellite communications for data gathering and
analysis. Microdyne also provides products for the government and commercial
signal intelligence markets and support and repair services for electronic
products companies. Microdyne's aerospace telemetry products will enable us to
provide integrated solutions to our space customers' requirements for command,
control, telemetry and tracking. The purchase of shares of Microdyne common
stock was financed using available cash and borrowings under our bank credit
facilities. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AND YEAR ENDED DECEMBER 31,
1998
On February 1, 1999, we reported our results of operations for the three
months ended and year ended December 31, 1998. For the three months ended
December 31, 1998, we reported sales, operating income, net income and diluted
earnings per common share of $328.7 million, $36.7 million, $13.9 million and
$0.48, respectively, bringing our sales, operating income, net income and
diluted earnings per common share for the year ended December 31, 1998 to
$1,037.0 million, $100.3 million, $32.6 million, and $1.26, respectively. We
reported EBITDA of $50.4 million and $140.7 million, respectively, for the
three months ended and year ended December 31, 1998. Our funded backlog at
December 31, 1998 was $855.9 million reflecting funded orders of $1,057.0 for
the year ended December 31, 1998.
HISTORY
Holdings was formed in April 1997 by Mr. Frank C. Lanza, the former
President and Chief Operating Officer of Loral Corporation ("Loral"), Mr.
Robert V. LaPenta, the former Senior Vice President and Controller of Loral,
Lehman Brothers Capital Partners III, L.P. and its affiliates (the "Lehman
Partnership") and Lockheed Martin to acquire (1) nine business units previously
purchased by Lockheed Martin as part of its acquisition of Loral in April 1996
and (2) one business unit, Communication Systems -- East (formerly known as
Communication Systems -- Camden), purchased by Lockheed Martin as part of its
acquisition of the aerospace business of General Electric Company in April
1993. In May 1998, we successfully completed the IPO, raising net proceeds of
$139.5 million. We raised net proceeds of $173.8 million in a concurrent debt
offering. In December 1998, we raised net proceeds of $193.7 million in the
Notes Offering.
The Company's executive offices are located at 600 Third Avenue, New York,
New York, 10016, and the telephone number at that address is 212-697-1111.
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THE OFFERING
The Company and the selling stockholders, including affiliates of Lehman
Brothers Inc., one of the Underwriters, are offering 7,400,000 shares for sale
in the United States and Canada and 1,850,000 shares for sale outside the
United States and Canada.
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Common stock offered by the Company:
in the United States and Canada .............. 2,800,000 shares
outside the United States and Canada ......... 700,000 shares
----------------
Total ..................................... 3,500,000 shares
Common stock offered by the selling
stockholders:
in the United States and Canada .............. 4,600,000 shares
outside the United States and Canada ......... 1,150,000 shares
----------------
Total ..................................... 5,750,000 shares
Common stock outstanding after this
offering ...................................... 30,902,429 shares(1)
Use of proceeds ................................ We intend to use our net proceeds from this offering
to repay any existing indebtedness under our bank
credit facilities and for general corporate purposes,
including potential acquisitions. We will not receive
any of the proceeds from the shares being sold by the
selling stockholders. See "Use of Proceeds".
NYSE symbol .................................... LLL
Risk factors ................................... You should carefully consider the information set
forth in "Risk Factors" and all other information set
forth in this prospectus before investing in our
common stock.
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(1) Assumes no exercise of the over-allotment option by the underwriters and
excludes an aggregate of 3,775,200 shares of common stock reserved for
issuance under the 1997 Stock Option Plan. See "Management--Executive
Compensation" and "--Stock Option Plan".
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SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA AND HISTORICAL FINANCIAL DATA
The summary unaudited pro forma data as of September 30, 1998, for the
nine months ended September 30, 1998 and 1997 and for the year ended December
31, 1997 have been derived from, and should be read in conjunction with, the
unaudited pro forma condensed consolidated financial statements included
elsewhere in this prospectus. The unaudited pro forma condensed statement of
operations and other data reflect the L-3 Acquisition, the 1998 Acquisitions,
the Financing Transactions and the Notes Offering as if such transactions had
occurred on January 1, 1997. The unaudited pro forma condensed balance sheet
data reflect the Notes Offering as if it had occurred on September 30, 1998.
The summary historical consolidated (combined) financial data as of and
for the nine months ended December 31, 1997 and the years ended December 31,
1996, 1995 and 1994 and the three months ended March 31, 1997 have been derived
from the audited financial statements for the respective periods. The summary
historical consolidated (combined) financial data as of and for the nine months
ended September 30, 1998 have been derived from the unaudited condensed
consolidated financial statements of the Company. In the opinion of the
Company's management, such unaudited financial statements reflect all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the results of operations and financial position as
of the date of and for the period presented. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of results
for the full year. The unaudited pro forma condensed financial information may
not be indicative of the financial position and results of operations of the
Company that actually would have occurred had the Transactions (as defined
later in this prospectus) been in effect on the dates indicated or the
financial position and results of operations that may be obtained in the
future.
The summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated (Combined) Financial Statements of the Company
(Predecessor Company (as defined later in this prospectus)) and the Combined
Financial Statements of the Loral Acquired Businesses (as defined later in this
prospectus) and the unaudited pro forma condensed consolidated financial
information included elsewhere herein. Prior to April 1, 1996, the Predecessor
Company was only comprised of Communication Systems -- East.
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COMPANY
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PRO FORMA NINE NINE
NINE MONTHS ENDED PRO FORMA MONTHS MONTHS
SEPTEMBER 30, YEAR ENDED ENDED ENDED
------------------------- DECEMBER 31, SEPTEMBER 30, DEC. 31,
1998 1997 1997 1998(1) 1997(2)
------------- ----------- -------------- --------------- ----------------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ...................................... $ 834.5 $ 758.7 $ 1,063.9 $ 708.3 $ 546.5
Operating income ........................... 70.0 49.1 82.0 63.6 51.5(5)
Interest expense, net(6) ................... 44.8 44.8 59.8 32.9 28.5
Provision (benefit) for income taxes(6) 10.1 (0.6) 5.8 12.0 10.7
Net income (loss) .......................... 15.1 4.9 16.4 18.7 12.3(5)
Earnings (loss) per common share
Basic ..................................... $ 0.55 $ 0.18 $ 0.61 $ 0.78 $ 0.62(5)
Diluted ................................... 0.53 0.18 0.59 0.75 0.61(5)
Weighted average common shares
outstanding
Basic ..................................... 27.4 26.9 26.9 23.9 20.0
Diluted ................................... 28.6 27.6 27.7 25.0 20.0
BALANCE SHEET DATA (AT PERIOD END):
Working capital ............................ $ 178.8 $ 141.0 $ 131.8
Total assets ............................... 1,241.3 1,196.3 703.4
Long-term debt ............................. 605.0 560.0 392.0
Invested equity ............................
Shareholders' equity ....................... 294.8 294.8 113.7
OTHER DATA:
EBITDA(7) .................................. $ 102.5 $ 80.4 $ 126.3 $ 90.3 $ 78.1
Net cash from (used in) operating
activities ................................ 48.2 73.9
Net cash (used in) investing activities..... (417.8) (457.8)
Net cash from (used in) financing
activities ................................ 297.9 461.4
Depreciation expense ....................... 17.7 17.7 24.0 15.6 13.3
Amortization expense ....................... 14.8 13.6 20.3 11.1 8.9
Capital expenditures ....................... 14.8 15.6 23.0 12.7 11.9
Ratio of:
EBITDA to cash interest
expense(8)(9) ............................ 2.6x 2.3x
Net debt to EBITDA(9)(10) ................. 3.8x 4.4x
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<CAPTION>
PREDECESSOR COMPANY
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THREE
MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, -----------------------------------
1997 1996(3) 1995(4) 1994(4)
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(in millions, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ...................................... $158.9 $543.1 $ 166.8 $ 218.9
Operating income ........................... 7.9 43.7 4.7 8.4
Interest expense, net(6) ................... 8.4 24.2 4.5 5.5
Provision (benefit) for income taxes(6) (0.2) 7.8 1.2 2.3
Net income (loss) .......................... (0.3) 11.7 (1.0) 0.6
Earnings (loss) per common share
Basic .....................................
Diluted ...................................
Weighted average common shares
outstanding
Basic .....................................
Diluted ...................................
BALANCE SHEET DATA (AT PERIOD END):
Working capital ............................ $ 98.8 $ 21.1 $ 19.3
Total assets ............................... 593.3 228.5 233.3
Long-term debt .............................
Invested equity ............................ 473.6 194.7 199.5
Shareholders' equity .......................
OTHER DATA:
EBITDA(7) .................................. $ 15.7 $ 71.8 $ 16.3 $ 19.9
Net cash from (used in) operating
activities ................................ (16.3) 30.7 9.3 21.8
Net cash (used in) investing activities..... (4.3) (298.0) (5.5) (3.7)
Net cash from (used in) financing
activities ................................ 20.6 267.3 (3.8) (18.1)
Depreciation expense ....................... 4.5 14.9 5.5 5.4
Amortization expense ....................... 3.3 13.2 6.1 6.1
Capital expenditures ....................... 4.3 13.5 5.5 3.7
Ratio of:
EBITDA to cash interest
expense(8)(9) ............................
Net debt to EBITDA(9)(10) .................
</TABLE>
(Footnotes on the following page)
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- ---------
(1) Includes the results of operations of the 1998 Acquisitions from their
respective effective dates of acquisition.
(2) Reflects the L-3 Acquisition effective April 1, 1997.
(3) Reflects ownership of Loral's Communication Systems -- West and
Specialized Communication Products businesses commencing April 1, 1996.
(4) Reflects ownership of Communication Systems -- East by Lockheed Martin
effective April 1, 1993.
(5) Includes a nonrecurring, noncash compensation charge of $4.4 million
($0.22 per share) related to the initial capitalization of the Company,
effective April 1, 1997.
(6) For periods prior to April 1, 1997, interest expense and income tax
(benefit) provision were allocated from Lockheed Martin.
(7) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt issuance
costs) and the nonrecurring, noncash compensation charge of $4.4 million
($0.22 per share) recorded effective April 1, 1997. EBITDA is not a
substitute for operating income, net income and cash flow from operating
activities as determined in accordance with generally accepted accounting
principles as a measure of profitability or liquidity. EBITDA is presented
as additional information because management believes it to be a useful
indicator of the Company's ability to meet debt service and capital
expenditure requirements.
(8) For purposes of this computation, cash interest expense consists of pro
forma interest expense less amortization of deferred debt issuance costs.
(9) The ratios at September 30, 1998 are based on the results of operations
for the twelve-month period ended September 30, 1998. The pro forma ratios
at September 30, 1998 have been calculated by adding the pro forma EBITDA
and pro forma cash interest expense for the nine months ended September
30, 1998 and the three months ended December 31, 1997. For purposes of
computing pro forma EBITDA for the three months ended December 31, 1997,
pro forma operating income, depreciation expense and amortization expense
would have been $32.9 million, $6.3 million and $6.7 million,
respectively. Pro forma cash interest expense for the twelve-month period
ended September 30, 1998 and the year ended December 31, 1997 would have
been $56.1 million.
(10) Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
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RISK FACTORS
You should carefully consider the following risks as well as the other
information contained in this prospectus before investing in shares of common
stock.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT
We incurred substantial indebtedness in connection with our acquisitions.
If the Notes Offering had occurred on September 30, 1998, we would have had
$605.0 million of indebtedness outstanding on September 30, 1998, none of which
would have been senior debt (excluding outstanding letters of credit), and our
ratio of pro forma earnings to pro forma fixed charges would have been 1.5 to
1.0. In the future we may borrow more money, subject to limitations imposed by
our debt agreements.
Based upon our current level of operations and anticipated improvements,
we believe that our cash flow from operations, together with proceeds from this
offering and amounts we are able to borrow under our bank credit facilities,
will be adequate to meet our anticipated requirements for working capital,
capital expenditures, research and development expenditures, program and other
discretionary investments, interest payments and scheduled principal payments
for the foreseeable future, at least for the next three years. Our ability to
make scheduled payments of principal and interest on our indebtedness and to
refinance our indebtedness depends on our future performance. We do not have
complete control over our future performance because it is subject to economic,
financial, competitive, regulatory and other factors affecting the defense
industry. It is possible that in the future our business may not generate
sufficient cash flow from operations to allow us to service our debt and make
necessary capital expenditures. If this situation occurs, we may have to sell
assets, restructure debt or obtain additional equity capital. We cannot be sure
that we would be able to do so or do so without additional expense. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition".
Our level of indebtedness may have important consequences on your
investment in the common stock. These consequences include:
o requiring a substantial portion of our cash flow from operations to
be used to pay interest and principal on our debt and therefore be
unavailable for other purposes including capital expenditures,
research and development and other investments;
o limiting our ability to obtain additional financing in the future;
o incurring higher interest expense in the event of increases in
interest rates on our borrowings which have variable interest rates;
o heightening our vulnerability to downturns in our business or in the
general economy and restricting us from making acquisitions,
introducing new technologies and products or exploiting business
opportunities; and
o limiting our ability to borrow additional funds, dispose of assets or
pay cash dividends. Failure to comply with such covenants could
result in an event of default which, if not cured or waived, could
have a material adverse effect on our financial position and results
of operations due to financial and restrictive covenants.
See "Description of Certain Indebtedness".
OUR ACQUISITION STRATEGY INVOLVES CERTAIN RISKS
We intend to acquire companies which complement our business. We cannot
assure you, however, that we will be able to identify acquisition candidates on
commercially reasonable terms or at all. If we make additional acquisitions, we
also cannot be sure that any anticipated benefits will actually be realized.
Likewise, we cannot be sure that we will be able to obtain additional financing
for acquisitions. Such additional financing could be restricted by the terms of
our debt agreements.
The process of integrating acquired operations, including our recent
acquisitions, into our existing operations may result in unforeseen operating
difficulties and may require significant financial and
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managerial resources that would otherwise be available for the ongoing
development or expansion of our existing operations. Possible future
acquisitions by L-3 could result in the incurrence of additional debt,
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, all of which could materially adversely affect our financial
condition and operating results. We consider and execute strategic acquisitions
on an ongoing basis and may be evaluating acquisitions or engaged in
acquisition negotiations at any given time. We have reached agreement or are in
discussions regarding a number of potential acquisition opportunities and
expect to use borrowings under our bank credit facilities to fund these
transactions if we proceed with them. If all of these potential acquisitions
were consummated, they would require us to use all or substantially all of our
currently available borrowing capacity in 1999 and perhaps seek additional
borrowing capacity. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources".
WE RELY ON A SMALL NUMBER OF SIGNIFICANT CUSTOMERS
Our sales come mainly from contracts with agencies of, and contractors to,
the U.S. government. For the nine-month period ended September 30, 1998, we had
approximately 300 contracts each with value exceeding $1.0 million for the U.S.
government. Pro forma sales for the nine-month period ended September 30, 1998
to the U.S. government, including sales through prime contractors, were $608.1
million, representing approximately 73% of our corresponding sales. Our largest
U.S. government program, a cost plus, sole source contract for support of the
U-2 program of the defense department, contributed approximately 7% of pro
forma sales for the nine-month period ended September 30, 1998. No other
program represented more than 5% of our pro forma sales for the nine-month
period ended September 30, 1998. The loss of all or a substantial portion of
sales to the U.S. government would have a material adverse effect on our income
and cash flow. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Business -- Government Contracts".
Our sales for the nine-month period ended September 30, 1998 to Lockheed
Martin were $51.1 million or approximately 7% of our total sales. The loss of
all or a substantial portion of such sales to Lockheed Martin would have a
material adverse effect on our income and cash flow.
OUR GOVERNMENT CONTRACTS ENTAIL CERTAIN RISKS
The reduction in the U.S. defense budget in the early 1990s has caused
most defense-related government contractors to experience declining revenues,
increased pressure on operating margins and, in certain cases, net losses. Our
businesses taken as a whole have experienced a substantial decline in sales
during this period. A significant decline in U.S. military expenditures in the
future could materially adversely affect our sales and earnings. The loss or
significant cutback of a large program in which we participate could also
materially adversely affect our future sales and earnings and thus our ability
to meet our financial obligations.
Companies engaged primarily in supplying defense-related equipment and
services to government agencies are subject to certain business risks peculiar
to the defense industry. These risks include the ability of the U.S. government
to:
o suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
o terminate existing contracts;
o audit our contract-related costs and fees, including allocated
indirect costs; and
o control and potentially prohibit the export of our products.
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All of our U.S. government contracts can be terminated by the U.S.
government either for its convenience or if the contractor defaults.
Termination for convenience provisions provide only for our recovery of costs
incurred or committed, settlement expenses and profit on work completed prior
to termination. Termination for default provisions provide for the contractor
to be liable for excess costs incurred by the U.S. government in procuring
undelivered items from another source. In addition to the right of the U.S.
government to terminate, U.S. government contracts are conditioned upon the
continuing approval by Congress of the necessary spending. Congress usually
appropriates funds for a given program on a fiscal-year basis even though
contract performance may take more than one year. Consequently, at the
beginning of a major program, the contract is usually partially funded, and
additional monies are normally committed to the contract only if, as and when
appropriations are made by Congress for future fiscal years. Foreign defense
contracts generally contain similar provisions relating to termination at the
convenience of the government.
The U.S. government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. government may adjust our contract-related
costs and fees, including allocated indirect costs. In addition, under U.S.
government purchasing regulations, some of our costs, including certain
financing costs, goodwill, portions of research and development costs, and
certain marketing expenses may not be reimbursable under U.S. government
contracts. Further, as a government contractor, we are subject to
investigation, legal action and/or liability that would not apply to a
commercial company.
We are also subject to risks associated with the following:
o the frequent need to bid on programs in advance of the completion of
their design (which may result in unforeseen technological
difficulties and/or cost overruns);
o the substantial time and effort required for relatively unproductive
design and development;
o design complexity and rapid obsolescence; and
o the constant need for design improvement.
We obtain many of our U.S. government contracts through a competitive bidding
process. We cannot assure you that we will continue to win competitively
awarded contracts or that awarded contracts will generate sufficient sales to
result in profitability for L-3. See "Business -- Major Customers" and
"-- Government Contracts".
In addition to these U.S. government contract risks, many of our products
and systems require licenses from U.S. government agencies for export from the
United States, and some of our products are not permitted to be exported. We
cannot be sure of our ability to gain any licenses required to export our
products, and failure to receive required licenses could materially reduce our
ability to sell our products outside the United States.
OUR FIXED PRICE CONTRACTS ENTAIL CERTAIN RISKS
We provide our products and services primarily through fixed price or cost
plus contracts. Fixed price contracts constituted approximately 71% of our pro
forma sales for the nine-month period ended September 30, 1998. We record sales
and profits on our long-term fixed price contracts by using the
percentage-of-completion methods of accounting. As a result, revisions made to
our estimates of revenues and profits are reflected in the period in which the
conditions that require such revisions become known and can be estimated. The
risks of long-term fixed price contracts include the difficulty of forecasting
costs and schedules, contract revenues that are related to performance in
accordance with contract specifications and the possibility of obsolescence in
connection with long-term procurements. Failure to anticipate technical
problems, estimate costs accurately or control costs during performance of a
fixed price contract may reduce our profitability or cause a loss. Although we
believe that adequate provisions for losses for our fixed price contracts are
reflected in our financial statements, as required under U.S. generally
accepted accounting principles, we cannot assure you that these estimates and
provisions are adequate or that losses on fixed price contracts will not occur
in the future.
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OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE
The rapid change of technology is a key feature of the communication
equipment industry for defense applications and in general. To succeed in the
future, we will need to design, develop, manufacture, assemble, test, market
and support new products and enhancements on a timely and cost-effective basis.
Historically, our technology has been developed through customer-sponsored
research and development as well as from internally-funded research and
development. We cannot guarantee that we will continue to maintain comparable
levels of research and development. See "Business -- Research and Development".
In the past we have allocated substantial funds to capital expenditures and
programs and other investments. This practice will continue to be required in
the future. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition". Even so, we cannot assure you that we will
successfully identify new opportunities and continue to have the needed
financial resources to develop new products in a timely or cost-effective
manner. At the same time, products and technologies developed by others may
render our products and systems obsolete or non-competitive.
OUR ENTRY INTO COMMERCIAL BUSINESS IS RISKY
Our revenues mainly have come from business with the U.S. defense
department and other government agencies. In addition to continuing to pursue
this major market area, we will continue applying our technical capabilities
and expertise to related commercial markets. Some of our commercial products,
such as local wireless loop telecommunications equipment, medical image
archiving equipment, airport security equipment and commercial information
security products, have only recently been introduced. As such, these new
products are subject to certain risks and may require us to:
o develop and maintain marketing, sales and customer support
capabilities;
o secure sales and customer support capabilities;
o obtain certification;
o respond to rapid technological advances; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in the commercial market may require
significant resources including capital and management time. In addition, our
efforts to sell certain commercial products, particularly our wireless
telecommunications equipment products, may depend to a significant degree on
the efforts of independent distributors or satellite communication service
providers, in some of whom we have made an equity investment. We can give no
assurance that these distributors or service providers will be able to market
successfully our equipment or their services or that we will be able to realize
a return on our investment in them. We cannot assure our success in addressing
these risks or in developing these commercial business opportunities.
WE OPERATE IN A COMPETITIVE INDUSTRY
The communications equipment industry for defense applications and as a
whole is highly competitive. The defense industry has experienced substantial
consolidation due to declining defense budgets and increasing pressures for
cost reductions. We expect that the U.S. defense department's increased use of
commercial off-the-shelf products and components in military equipment will
encourage new competitors to enter the market. In addition, the consolidation
of the industry has resulted in delays in contract funding and awards and
significant pricing pressures. We also expect that competition for original
equipment manufacturer business will increase due to the emergence of merchant
suppliers. Our ability to compete for defense contracts largely depends on the
following factors:
o the effectiveness and innovations of our research and development
programs;
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o our ability to offer better performance than our competitors at a
lower cost to the U.S. government; and
o the readiness of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, programs are sole source or work directed by the U.S.
government to a single supplier. In such cases, other suppliers who may be able
to compete for the programs involved can only enter or reenter the market if
the U.S. government chooses to reopen the particular program to competition.
Many of our competitors are larger than us and have substantially greater
financial and other resources than we have. See "Business -- Competition".
WE DEPEND ON KEY PERSONNEL
Our future success depends to a significant degree upon the continued
contributions of our management, including Messrs. Lanza and LaPenta, and our
ability to attract and retain other highly qualified management and technical
personnel. We do not maintain any key person life insurance policies for
members of our management. Messrs. Lanza and LaPenta have invested
approximately $18.0 million and currently own approximately 12.4% of the
capital stock of L-3. We have entered into employment agreements with Messrs.
Lanza and LaPenta. See "Management -- Employment Agreements". We face
competition for management and technical personnel from other companies and
organizations. Failure to attract and retain such personnel would damage our
prospects. See "Management -- Directors and Executive Officers".
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION
Our operations are subject to various federal, state and local
environmental laws and regulations relating to the discharge, storage,
treatment, handling, disposal and remediation of certain materials, substances
and wastes used in our operations. We continually assess our obligations and
compliance with these requirements. We believe that our operations are in
substantial compliance with all applicable environmental laws and permits. We
do not expect any material unbudgeted expenditures to remain in compliance with
applicable environmental laws and regulations.
In connection with the purchase of the Company from Lockheed Martin, we
assumed certain environmental liabilities related to events or activities
occurring prior to the purchase. Lockheed Martin has agreed to retain all
environmental liabilities for all facilities no longer used by us and to
indemnify us fully for such liabilities. Lockheed Martin has also agreed, for
the first eight years following April 1997, to pay 50% of all costs incurred by
us above those reserved for our balance sheet at April 1997 relating to certain
environmental liabilities assumed by us. For the seven years thereafter,
Lockheed Martin has agreed to pay 40% of certain reasonable operation and
maintenance costs relating to any environmental remediation projects undertaken
in the first eight years. Two of the facilities acquired from Lockheed Martin
will require ongoing remediation due to environmental contamination. In
November 1997, we sold one such facility located in Sarasota, Florida, while
retaining a leasehold interest in a portion of that facility, to Dames &
Moore/Brookhill LLC, which agreed to assume responsibility for further
remediation of the Sarasota site. We believe that we have established adequate
reserves for the potential costs associated with the assumed environmental
liabilities. However, we cannot assure you that any costs incurred will be
reimbursable from the U.S. government or covered by Lockheed Martin under the
terms of the acquisition agreement or that our environmental reserves will be
sufficient.
OUR BACKLOG OF ORDERS COULD BE TERMINATED
We currently have a backlog of orders, mainly under contracts with the
U.S. government. The U.S. government may unilaterally modify or terminate these
contracts. Accordingly, most of our backlog could be modified or terminated by
the U.S. government. We cannot assure you that our backlog will result in
revenues. Further, we cannot be sure that the margins on any contract included
in backlog that does become revenue will be profitable.
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WE HAVE PENSION PLAN LIABILITIES
We have assumed certain liabilities relating to defined benefit pension
plans for present and former employees and retirees of certain businesses which
we acquired. Prior to the L-3 Acquisition, Lockheed Martin received a letter
from the Pension Benefit Guaranty Corporation (the "PBGC"), which requested
information regarding the transfer of these pension plans and indicated that
the PBGC believed certain of these pension plans were underfunded using the
PBGC's actuarial assumptions. These assumptions resulted in a larger liability
for accrued benefits than the assumptions used for financial reporting under
Statement of Financial Accounting Standards No. 87 ("FASB 87"). The PBGC
underfunding is related to the Communication Systems -- West and Aviation
Recorders pension plans (the "Subject Plans"). As of September 30, 1998 we
calculated the net funding position of these plans and believe them to be:
o overfunded by approximately $4.8 million under the assumptions set
forth in the Employee Retirement Income Security Act of 1974, as
amended;
o underfunded by approximately $28.4 million under FASB 87 assumptions;
and
o underfunded by as much as $70.4 million under PBGC assumptions.
L-3 Communications Corporation, Lockheed Martin and the PBGC entered into
certain agreements dated as of April 30, 1997 in which Lockheed Martin gave a
commitment to the PBGC with regard to the Subject Plans and L-3 Communications
Corporation gave certain assurances to Lockheed Martin regarding these plans.
In connection with these agreements, Lockheed Martin has the option, upon 45
days prior written notice after the occurrence of certain triggering events, to
cause us to transfer sponsorship of the Subject Plans to it if Lockheed Martin
has concluded that the liabilities of the Subject Plans would increase
unreasonably. L-3 Communications Corporation has funded and acted in accordance
with the terms of our agreement with Lockheed Martin. As a result of a decrease
in the PBGC-mandated discount rate and the resulting increase in the underlying
liability, a triggering event has occurred. L-3 Communications Corporation has
notified Lockheed Martin of this fact. Lockheed Martin has informed us that it
has no present intention to exercise its right to cause L-3 Communications
Corporation to transfer sponsorship of the Subject Plans. If Lockheed Martin
did assume sponsorship of the Subject Plans, it would be primarily liable for
the costs associated with funding these plans or any costs associated with the
termination of the Subject Plans, but L-3 Communications Corporation would be
required to reimburse Lockheed Martin for these costs. See "Business -- Pension
Plans". To date, the impact on pension expense and funding requirements
resulting from this arrangement has not been significant. However, should
Lockheed Martin assume sponsorship of the Subject Plans or if these plans were
terminated, the impact of any increased pension expenses or funding
requirements could be material to us.
WE HAVE DISCRETION OVER THE USE OF FUNDS RAISED IN THE OFFERING
As described in "Use of Proceeds", we intend to use the net proceeds of
this offering to repay a substantial portion of our existing indebtedness under
our bank credit facilities. Upon repayment, our borrowing capacity under our
bank credit facilities will be restored and we will have wide discretion over
the use of any funds subsequently reborrowed under our bank credit facilities.
We have borrowed approximately $50 million under our bank credit facilities to
fund the acquisition of Microdyne.
OUR DEBT AGREEMENTS CONTAIN RESTRICTIONS
Our debt agreements contain a number of significant provisions that, among
other things, restrict our ability to:
o sell assets;
o incur more indebtedness;
o repay certain indebtedness;
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o pay dividends;
o make certain investments or acquisitions;
o repurchase or redeem capital stock;
o engage in mergers or consolidations; and
o engage in certain transactions with subsidiaries and affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or engage in other business activities that may be in our
interest. In addition, certain of our debt agreements also require us to
maintain compliance with certain financial ratios, including total consolidated
earnings before interest, taxes, depreciation and amortization to total
consolidated cash interest expense and net debt to total consolidated earnings
before interest, taxes, depreciation and amortization, and to limit our capital
expenditures. Our ability to comply with these ratios and limits may be
affected by events beyond our control. A breach of any of these agreements or
our inability to comply with the required financial ratios or limits could
result in a default under those debt agreements. In the event of any such
default, the lenders under those debt agreements could elect to:
o declare all debt outstanding, accrued interest and fees to be due and
payable;
o require us to apply all of our available cash to repay the debt; and
o prevent us from making debt service payments on other debt.
If we were unable to repay any such borrowings when due, the lenders under
our bank credit facilities could proceed against their collateral, which
includes a first priority lien on substantially all of our assets and a first
priority security interest in all of our capital stock and the capital stock of
our subsidiaries. If the indebtedness under the existing debt agreements were
to be accelerated, we cannot assure you that our assets would be sufficient to
repay such indebtedness in full. See "Description of Certain Indebtedness".
THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS
Certain of the matters discussed concerning our operations, economic
performance and financial condition, including in particular, the likelihood of
our success in developing and expanding our business and the realization of
sales from backlog, include forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates" and similar expressions are
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, we can give no assurance that their goals will be
achieved.
OUR YEAR 2000 COMPLIANCE EFFORTS WILL REQUIRE SUBSTANTIAL RESOURCES AND FAILURE
BY US OR CERTAIN THIRD PARTIES TO BE YEAR 2000 COMPLIANT POSES CERTAIN RISKS
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Because our business units operate
autonomously, each business unit has undertaken an effort to identify and
mitigate Year 2000 issues in their information systems, products, facilities,
suppliers and customers. Our Year 2000 compliance efforts are a composite of
our business units' individual Year 2000 compliance efforts coordinated through
a company-wide program instituted to oversee, guide and track our business
units' individual Year 2000 compliance efforts and to facilitate communications
between business units regarding Year 2000 compliance methods. Our business
operations are also dependent on the Year 2000 readiness of our customers and
infrastructure suppliers in areas such as utilities, communications,
transportation and other services.
Each business unit has appointed a Year 2000 project manager who oversees
a team responsible for performing its Year 2000 efforts in four phases:
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o first, to define, identify and list possible sources of Year 2000
issues, including internal systems and products and services sold to
customers;
o second, to analyze and determine the nature and extent of Year 2000
issues and to develop project plans to address those issues;
o third, to implement and execute project plans to fix or replace
non-compliant items, as appropriate, based upon the anticipated risk
and its importance; and
o fourth, to commence and complete testing, continue monitoring
readiness and prepare necessary contingency plans.
The progress of this program is monitored at each business unit with
oversight by management. This oversight includes periodic reviews as well as
visits to each business unit to monitor progress
with the plans. Management plans to have completed the first three phases of
the program for a substantial majority of mission-critical systems within L-3
by the end of March 1999 and to have nearly all significant information
systems, products and facilities in the final phase of the program by mid-1999.
Our total costs associated with our internal Year 2000 compliance efforts
are estimated to be $16.2 million, including $7.1 million of costs which may be
capitalized with the remaining costs expensed as incurred. We have incurred
approximately $6.6 million of such costs to date. Substantially all of the
remaining estimated costs are expected to be incurred in 1999. We cannot assure
you that our Year 2000 compliance efforts will be successful or that we will
not incur substantial costs as a result of failure of our customers or
suppliers to be Year 2000 compliant or as a result of failures of installed
products produced by us or for any other reason.
L-3'S OWNERSHIP IS CONCENTRATED
After this offering, the Lehman Partnership will own 26.0% of the
outstanding voting stock of L-3 (or 24.8% if the underwriters' over-allotment
option is exercised in full). As a result of such ownership and its significant
voting power with respect to actions requiring stockholder approval, the Lehman
Partnership will have the power to influence the business and affairs of L-3.
The concentrated ownership of L-3 may:
o prevent L-3 from being acquired in a transaction not supported by its
principal stockholders;
o discourage a proposed merger or tender offer or make it more
difficult to complete; and
o prevent a successful proxy contest.
See "Ownership of Capital Stock".
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY
A number of factors could cause the market price of our common stock to
fluctuate substantially including:
o quarterly operating results of L-3 or other similar companies;
o changes in general conditions in the economy, the financial markets
or the defense industry;
o natural disasters;
o changes in earnings estimates or recommendations by research
analysts; and
o other developments affecting us or our competitors.
In recent years, the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. See "Underwriting".
A NUMBER OF SHARES ARE OR WILL BE AVAILABLE FOR FUTURE SALE
As of December 31, 1998, there were 27,402,429 shares of common stock
outstanding. After this offering, certain holders of shares of common stock
issued prior to this offering will be entitled to the
16
<PAGE>
registration rights described below, at the expense of L-3. Such shares may
also be sold under Rule 144 of the Securities Act, depending on how long they
have been held and subject to restrictions in the case of shares held by
affiliates of L-3. We cannot predict the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the common stock. Sales of substantial amounts of common stock
(including shares issued upon the exercise of stock options), or the perception
that such sales could occur, may lower the market price for the common stock.
Messrs. Lanza and LaPenta, Lockheed Martin and the Lehman Partnership who,
after this offering, will hold in the aggregate 14,471,142 shares of common
stock, for a period of 270 days after the date of this prospectus, and
Holdings, for a period of 180 days after the date of this prospectus, have
agreed, that they will not, without the prior written consent of Lehman
Brothers Inc., dispose of any shares of common stock or securities exercisable
or exchangeable for common stock or enter into any derivative transaction with
a similar effect. The restrictions described in this paragraph do not apply to:
o the sale of common stock to the underwriters in this offering;
o the issuance by Holdings of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security outstanding
on the date of this prospectus;
o transactions by any person other than Holdings relating to shares of
common stock or other securities acquired in the market after the
completion of this offering; or
o the ability of Messrs. Lanza and LaPenta to sell up to an aggregate
of 300,000 shares beginning 30 days after the completion of this
offering.
Pursuant to a stockholders agreement, Messrs. Lanza and LaPenta, Lockheed
Martin, the Lehman Partnership and certain other existing stockholders have the
right, under certain circumstances and subject to certain conditions, to
require Holdings to register their shares of common stock under the Securities
Act. Lockheed Martin has three demand registration rights (two of which the
Company must pay for), the Lehman Partnership has four (three of which the
Company must pay for) and Mr. Lanza and Mr. LaPenta each have one (which the
Company must pay for). In addition, each of these shareholders may include a
certain portion of their shares (at the Company's expense) in a registration
which Holdings initiates.
CERTAIN FACTORS MAY DELAY OR PREVENT A CHANGE OF CONTROL TRANSACTION
Certain provisions of Delaware corporate law and of our charter and
by-laws, in addition to the concentration of ownership in the Lehman
Partnership and Lockheed Martin, may have the effect of discouraging a third
party from trying to acquire L-3. Moreover, these factors could delay or
prevent a transaction or a change in control of L-3 under circumstances that
could otherwise give the holders of common stock the opportunity to sell their
shares for a premium. Certain provisions of Delaware corporate law and of the
Company's charter and by-laws have the effect of making it more difficult to
acquire control of L-3 in a transaction that the board of directors has not
approved. These provisions include the three-class board of directors and the
ability to issue preferred stock. See "Description of Capital Stock".
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $145.1 million ($203.0 million if the underwriters'
over-allotment option is exercised in full) based on the closing price per
share of the common stock on February 3, 1999 of $43.25 and after deducting
underwriting discounts and commissions and other estimated offering expenses.
The Company intends to use the net proceeds of this offering to repay any
existing indebtedness under the Senior Credit Facilities (as defined later in
this prospectus) and for general corporate purposes, including potential
acquisitions. The borrowings under the Senior Credit Facilities were used by
the Company to fund in part the L-3 Acquisition and the 1998 Acquisitions. The
weighted average interest rate under the Senior Credit Facilities was 7.331% at
September 30, 1998. Amounts repaid under the Senior Credit Facilities will be
available to be reborrowed by the Company from time to time for, among other
reasons, general corporate purposes or to finance future acquisitions. See
"Risk Factors--We Have Discretion Over the use of Funds Raised in the
Offering". Affiliates of the underwriters are lenders under the Senior Credit
Facilities and will receive a portion of the net proceeds of this offering in
repayment of amounts outstanding thereunder. See "Description of Certain
Indebtedness -- Senior Credit Facilities". The Company will not receive any of
the proceeds from the shares being sold by the selling stockholders.
DIVIDEND POLICY
Holdings currently intends to retain its earnings to finance future growth
and, therefore, does not anticipate paying any cash dividends on its common
stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of Holdings and its subsidiaries and such
other facts as the Board of Directors of Holdings may consider, including any
contractual or statutory restrictions on Holdings' ability to pay dividends.
Moreover, Holdings is a holding company and its ability to pay dividends is
dependent upon receipt of dividends, distributions, advances, loans or other
cash transfers from L-3 Communications Corporation. Certain outstanding debt
instruments of L-3 Communications Corporation limit its ability to pay
dividends or other distributions on its common stock or to make advances, loans
or other cash transfers to Holdings. See "Description of Certain Indebtedness".
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998, on a pro forma basis to give effect to the Notes Offering,
as if it had occurred on September 30, 1998 ("Pro Forma before Offering") and
as adjusted to give effect to this offering and the application of its net
proceeds (based on the closing price per share of the common stock on February
3, 1999 of $43.25 and assuming that the underwriters' over-allotment option is
not exercised) as if it had occurred on September 30, 1998. See "Use of
Proceeds" and "Unaudited Pro Forma Condensed Consolidated Financial
Information".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------
PRO FORMA BEFORE AS
ACTUAL OFFERING ADJUSTED
---------- ------------------ ------------
(in millions)
<S> <C> <C> <C>
Cash and cash equivalents ................................ $ 5.7 $ 43.5 $ 188.6
====== ====== ========
Current portion of long-term debt ........................ $ -- $ -- $ --
Senior Credit Facilities(1) .............................. 155.0 -- --
10 3/8% Senior Subordinated Notes due May 1, 2007 ........ 225.0 225.0 225.0
8 1/2% Senior Subordinated Notes due May 15, 2008 ........ 180.0 180.0 180.0
8% Senior Subordinated Notes due August 1, 2008 .......... -- 200.0 200.0
------ ------ --------
Total debt ............................................. $560.0 $605.0 $ 605.0
------ ------ --------
Shareholders' equity
Common stock ............................................ $ 0.3 $ 0.3 $ 0.3
Additional paid-in-capital .............................. 272.2 272.2 417.3
Retained earnings ....................................... 31.0 31.0 31.0
Equity adjustments ...................................... (8.7) (8.7) (8.7)
------ ------ --------
Total shareholders' equity ............................. 294.8 294.8 439.9
------ ------ --------
Total capitalization ................................... $854.8 $899.8 $1,044.9
====== ====== ========
</TABLE>
- ----------
(1) Borrowings under the Senior Credit Facilities outstanding as of September
30, 1998 were repaid with the proceeds of the Notes Offering.
Availability under the Senior Credit Facilities at any given time is
$385.0 million (subject to compliance with covenants), less the amount of
outstanding borrowings and outstanding letters of credit (which amounted
to $58.0 million at December 31, 1998).
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the NYSE under the symbol "LLL". The
following table sets forth, for each of the quarterly periods indicated since
the IPO, the high and low closing prices of the common stock as reported on the
NYSE.
<TABLE>
<CAPTION>
YEAR HIGH LOW
- ---------------------------------------------------------- --------- ---------
<S> <C> <C>
1998
Second Quarter (commencing May 19, 1998) ......... $32.50 $26.63
Third Quarter .................................... 39.69 31.19
Fourth Quarter ................................... 48.19 34.94
</TABLE>
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma statement of operations data gives
effect to the following transactions (collectively, the "Transactions") as if
they had occurred on January 1, 1997: (i) the Notes Offering in which L-3
Communications Corporation sold $200.0 million of 8% Senior Subordinated Notes
due August 1, 2008 (the "December 1998 Notes"), the net proceeds of which
amounted to $192.8 million after debt issuance costs; (ii) the Company's
purchase of all of the outstanding stock of SPD and the acquisitions by the
Company of the assets of the Ocean Systems business ("Ocean Systems") of Allied
Signal, Inc., the assets of ILEX Systems, Inc. ("ILEX") and the assets of the
Satellite Transmission Systems division ("STS") of California Microwave, Inc.
(collectively, the "1998 Acquisitions"); (iii) the L-3 Acquisition; and (iv)
the IPO, the net proceeds of which amounted to $139.5 million and the sale by
L-3 Communications Corporation of $180.0 million of 8 1/2% Senior Subordinated
Notes due May 15, 2008 (the "May 1998 Notes"), the net proceeds of which
amounted to $173.8 million after debt issuance costs, and the amendment of L-3
Communications Corporation's Senior Credit Facilities to increase the available
borrowings under the bank credit facilities to $385.0 million (collectively,
the "Financing Transactions"). The pro forma balance sheet data gives effect to
the Notes Offering as if it had occurred on September 30, 1998. The pro forma
financial information is based on (i) the unaudited condensed consolidated
financial statements of the Company as of September 30, 1998 and for the nine
months then ended and the six months ended September 30, 1997, (ii) the
consolidated statement of operations of the Company for the nine months ended
December 31, 1997, (iii) the combined statement of operations of the
Predecessor Company for the three months ended March 31, 1997 and (iv) the
statements of operations of the 1998 Acquisitions for the year ended December
31, 1997 and the nine months ended September 30, 1997 and for the periods from
January 1, 1998 to the respective dates of acquisition, using the purchase
method of accounting and the assumptions and adjustments in the accompanying
notes to the unaudited pro forma condensed consolidated financial statements.
The pro forma results do not give effect to this offering or to any of the
Company's other acquisitions, including the acquisition of Microdyne.
The pro forma adjustments are based upon preliminary estimates of purchase
prices and the related purchase price allocations for the 1998 Acquisitions.
Actual adjustments will be based on final appraisals and other analyses of fair
values which are in process. Management does not expect that differences
between the preliminary and final allocations will have a material impact on
the Company's pro forma financial position or results of operations. The pro
forma statement of operations does not reflect any cost savings that management
of the Company believes would have resulted had the Transactions occurred on
January 1, 1997. The pro forma financial information should be read in
conjunction with (i) the unaudited condensed (combined) consolidated financial
statements of the Company as of September 30, 1998, for the nine months ended
September 30, 1998 and the six months ended September 30, 1997, (ii) the
audited consolidated financial statements of SPD for the year ended December
31, 1997, (iii) the unaudited condensed consolidated statements of operations
of SPD for the six months ended June 30, 1998, (iv) the audited consolidated
(combined) financial statements of the Company and the Predecessor Company as
of December 31, 1997 and for the nine months ended December 31, 1997 and the
three months ended March 31, 1997, (v) the audited financial statements of STS
for the year ended June 30, 1997, (vi) the unaudited condensed financial
statements of STS as of December 31, 1997 and for the six months ended December
31, 1997 and 1996, (vii) the audited consolidated financial statements of ILEX
for the year ended December 31, 1997, and (viii) the audited combined financial
statements of Ocean Systems for the year ended December 31, 1997 all of which
are included elsewhere herein in this prospectus. The unaudited pro forma
condensed financial information may not be indicative of the financial position
and results of operations of the Company that actually would have occurred had
the Transactions been in effect on the dates indicated or the financial
position and results of operations that may be obtained in the future.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------
NOTES OFFERING
COMPANY ADJUSTMENTS(9) PRO FORMA
----------- ---------------- ----------
(in millions)
<S> <C> <C> <C>
ASSETS
Currents assets:
Cash and cash equivalents ............................ $ 5.7 $37.8 $ 43.5
Contracts in process ................................. 345.8 -- 345.8
Other current assets ................................. 24.9 -- 24.9
-------- ----- --------
Total current assets ............................... 376.4 37.8 414.2
-------- ----- --------
Property, plant and equipment, net .................... 117.2 -- 117.2
Intangibles, primarily cost in excess of net assets
acquired, net of amortization ........................ 608.4 -- 608.4
Other assets .......................................... 94.3 7.2 101.5
-------- ----- --------
Total assets ........................................ $1,196.3 $45.0 $1,241.3
======== ===== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term debt .................... $ -- $ -- $ --
Accounts payable and accrued expenses ................ 128.2 -- 128.2
Customer advances and amounts in excess of
costs incurred ..................................... 58.6 -- 58.6
-----
Other current liabilities ............................ 48.6 -- 48.6
-------- ----- --------
Total current liabilities .......................... 235.4 -- 235.4
-------- ----- --------
Pension, postretirement benefits and other
liabilities ........................................ 106.1 -- 106.1
Long-term debt ....................................... 560.0 45.0 605.0
Shareholders' equity ................................. 294.8 -- 294.8
-------- ----- --------
Total liabilities and shareholders' equity ......... $1,196.3 $45.0 $1,241.3
======== ===== ========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1998
ACQUISITIONS
1998 PRO FORMA
COMPANY ACQUISITIONS(2)(3) ADJUSTMENTS(4)
--------- -------------------- ----------------
(in millions, except per share amounts)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ............................................. $708.3 $126.2 $ --
Costs and expenses ................................ 644.7 117.6 2.2
------ ------ ---------
Operating income (loss) ......................... 63.6 8.6 (2.2)
Interest and investment income (expense). ......... 2.3 -- --
Interest expense .................................. 35.2 5.1 --
------ ------ ---------
Income (loss) before income taxes ............... 30.7 3.5 (2.2)
Income tax expense (benefit) ...................... 12.0 1.6 (0.9)(10)
------ ------ ---------
Net income (loss) ............................... $ 18.7 $ 1.9 $ (1.3)
====== ====== =========
EARNINGS PER COMMON SHARE(11):
Basic ............................................ $ 0.78
======
Diluted .......................................... 0.75
======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING(11):
Basic ............................................ 23.9
======
Diluted .......................................... 25.0
======
<CAPTION>
FINANCING NOTES
TRANSACTIONS(6)(7) OFFERING(8) PRO FORMA
-------------------- ----------------- ----------
(in millions, except per share amounts)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ............................................. $ -- $ -- $834.5
Costs and expenses ................................ -- -- 764.5
--------- --------- ------
Operating income (loss) ......................... -- -- 70.0
Interest and investment income (expense). ......... (2.3) -- --
Interest expense .................................. 0.8 3.7 44.8
--------- --------- ------
Income (loss) before income taxes ............... (3.1) (3.7) 25.2
Income tax expense (benefit) ...................... (1.2)(10) (1.4)(10) 10.1
--------- --------- ------
Net income (loss) ............................... $ (1.9) $ (2.3) $ 15.1
========= ========= ======
EARNINGS PER COMMON SHARE(11):
Basic ............................................ $ 0.55
======
Diluted .......................................... 0.53
======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING(11):
Basic ............................................ 3.5 27.4
========= ======
Diluted .......................................... 3.6 28.6
========= ======
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
COMPANY THREE
SIX MONTHS MONTHS PRO FORMA
ENDED ENDED ADJUSTMENTS PRO FORMA
SEPTEMBER 31, MARCH 31, L-3 L-3
1997 1997(1) ACQUISITION(1) ACQUISITION
--------------- ------------ ---------------- -------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $342.8 $158.9 $ (1.8) $499.9
Costs and expenses .............. 314.2 151.0 (7.6) 457.6
------ ------ ------- ------
Operating income (loss)........ 28.6 7.9 5.8 42.3
Interest and investment
income (expense) ............... 0.5 -- -- 0.5
Interest expense ................ 19.7 8.4 1.5 29.6
------ ------ ------- ------
Income (loss) before
income taxes ................. 9.4 (0.5) 4.3 13.2
Income tax expense (benefit)..... 5.4 (0.2) -- 5.2
------ ------ ------- ------
Net income (loss) ............. $ 4.0 $ (0.3) $ 4.3 $ 8.0
====== ====== ======= ======
EARNINGS PER COMMON
SHARE(11):
Basic .......................... $ 0.20 $ 0.40
====== ======
Diluted ........................ 0.20 0.40
====== ======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(11):
Basic .......................... 20.0 20.0
====== ======
Diluted ........................ 20.0 20.0
====== ======
<CAPTION>
1998
ACQUISITIONS
1998 PRO FORMA FINANCING NOTES PRO
ACQUISITIONS(2)(3)(5) ADJUSTMENTS(4) TRANSACTIONS(6)(7) OFFERING(8) FORMA
----------------------- ---------------- -------------------- ----------------- ---------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $ 258.8 $ -- $ -- $ -- $758.7
Costs and expenses .............. 248.5 3.5 -- -- 709.6
------- --------- --------- --------- ------
Operating income (loss)........ 10.3 (3.5) -- -- 49.1
Interest and investment
income (expense) ............... 0.1 -- (0.6) -- --
Interest expense ................ 3.0 -- 8.5 3.7 44.8
------- --------- --------- --------- ------
Income (loss) before
income taxes ................. 7.4 (3.5) (9.1) (3.7) 4.3
Income tax expense (benefit)..... 0.5(10) (1.4)(10) (3.5)(10) (1.4)(10) (0.6)
---------- --------- --------- --------- ------
Net income (loss) ............. $ 6.9 $ (2.1) $ (5.6) $ (2.3) $ 4.9
========== ========= ========= ========= ======
EARNINGS PER COMMON
SHARE(11):
Basic .......................... $ 0.18
======
Diluted ........................ 0.18
======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(11):
Basic .......................... 6.9 26.9
========= ======
Diluted ........................ 7.6 27.6
========= ======
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
COMPANY THREE
NINE MONTHS MONTHS PRO FORMA
ENDED ENDED ADJUSTMENTS PRO FORMA
DECEMBER 31, MARCH 31, L-3 L-3
1997 1997(1) ACQUISITION(1) ACQUISITION
-------------- ------------ ---------------- -------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $546.5 $158.9 $ (1.8) $703.6
Costs and expenses .............. 495.0 151.0 (7.6) 638.4
------ ------ ------- ------
Operating income (loss)........ 51.5 7.9 5.8 65.2
Interest and investment
income (expense) ............... 1.4 -- -- 1.4
Interest expense ................ 29.9 8.4 1.5 39.8
------ ------ ------- ------
Income (loss) before
income taxes ................. 23.0 (0.5) 4.3 26.8
Income tax expense (benefit)..... 10.7 (0.2) -- 10.5
------ ------ ------- ------
Net income (loss) ............. $ 12.3 $ (0.3) $ 4.3 $ 16.3
====== ====== ======= ======
EARNINGS PER COMMON
SHARE(11):
Basic .......................... $ 0.62 $ 0.82
====== ======
Diluted ........................ 0.61 0.82
====== ======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(11):
Basic .......................... 20.0 20.0
====== ======
Diluted ........................ 20.0 20.0
====== ======
<CAPTION>
1998
ACQUISITIONS
1998 PRO FORMA FINANCING NOTES PRO
ACQUISITIONS(2)(3)(5) ADJUSTMENTS(4) TRANSACTIONS(6)(7) OFFERING(8) FORMA
----------------------- ---------------- -------------------- ----------------- -----------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales ........................... $360.3 $ -- $ -- $ -- $1,063.9
Costs and expenses .............. 338.5 5.0 (4) -- -- 981.9
------ --------- --------- --------- --------
Operating income (loss)........ 21.8 (5.0) -- -- 82.0
Interest and investment
income (expense) ............... (0.1) -- (1.3) -- --
Interest expense ................ 5.4 -- 9.7 4.9 59.8
------ --------- --------- --------- --------
Income (loss) before
income taxes ................. 16.3 (5.0) (11.0) (4.9) 22.2
Income tax expense (benefit)..... 3.4 (1.9)(10) (4.3)(10) (1.9)(10) 5.8
------ --------- --------- --------- --------
Net income (loss) ............. $ 12.9 $ (3.1) $ (6.7) $ (3.0) $ 16.4
====== ========= ========= ========= ========
EARNINGS PER COMMON
SHARE(11):
Basic .......................... $ 0.61
========
Diluted ........................ 0.59
========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING(11):
Basic .......................... 6.9 26.9
========= ========
Diluted ........................ 7.7 27.7
========= ========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following facts and assumptions were used in determining the pro forma
effect of the Transactions.
1. The Company's historical financial statements reflect the results of
operations of the Company since the effective date of the L-3 Acquisition,
April 1, 1997, and the Predecessor Company's historical financial
statements reflect the results of operations of the Predecessor Company
for the three months ended March 31, 1997. The adjustments made to the pro
forma statement of operations for the six months ended September 30, 1997
and for the year ended December 31, 1997, relating to the L-3 Acquisition
are: (a) the elimination of $1.8 million of sales and $1.8 million of
costs and expenses related to the Hycor business which was acquired as
part of the L-3 Acquisition and which has been accounted for as "net
assets of acquired business held for sale"; (b) a reduction to costs and
expenses of $0.8 million to record amortization expenses on the excess of
the L-3 Acquisition purchase price over net assets acquired of $303.2
million over 40 years, net of the reversal of amortization expenses of
intangibles included in the Predecessor Company historical financial
statements; (c) a reduction to costs and expenses of $0.6 million to
record estimated pension cost on a separate company basis net of the
reversal of the allocated pension cost included in the Predecessor Company
historical financial statements; (d) a net increase to interest expense of
$1.5 million, comprised of a $0.2 million allocated interest expense
reduction related to the Hycor business and a net $1.7 million increase,
reflecting pro forma interest expense of $10.2 million based on actual
borrowings of $400.0 million and the effective cost of borrowing rate
incurred by the Company to finance the L-3 Acquisition less interest
expense of approximately $8.5 million included in the historical financial
statements of the Predecessor Company; and (e) the reversal of a $4.4
million noncash compensation charge related to the initial capitalization
of the Company included in the Company's historical results of operations
effective April 1, 1997 which was nonrecurring in nature. A statutory
(federal, state and foreign) tax rate of 39.0% was assumed on these pro
forma adjustments except for adjustment (e), where no tax effect has been
reflected.
2. On August 13, 1998, the Company acquired 100% of the stock of SPD for $230.0
million of cash, subject to adjustment based on closing adjusted net
assets, as defined. For purposes of the pro forma financial information an
estimated purchase price of $241.1 million, including expenses (net of
cash acquired of $0.2 million) was assumed reflecting the contract price
of $230.0 million and an estimated purchase price adjustment of $11.0
million based on the estimated closing adjusted net assets of SPD. On
February 5, 1998, the Company purchased the assets of STS for $27.0
million of cash subject to adjustment based on final closing net assets.
For purposes of the pro forma financial information an estimated purchase
price of $26.2 million including expenses (net of cash acquired of $0.5
million) was assumed reflecting the contract price of $27.0 million and an
estimated purchase price reduction of $1.0 million based on the estimated
closing net assets of STS. On March 4, 1998, the Company purchased
substantially all the assets of ILEX for $51.9 million of cash, subject to
adjustment based on closing net assets plus additional consideration
contingent upon post-acquisition performance of ILEX. For purposes of the
pro forma financial information an estimated purchase price of $51.5
million, including expenses (net of cash acquired of $2.4 million) was
assumed reflecting the contract price of $51.9 million and a purchase
price adjustment of $1.2 million based on final closing net assets, On
March 30, 1998, the Company purchased the assets of Ocean Systems for
$68.6 million of cash including expenses.
The aggregate purchase prices including expenses, net of cash acquired, for
the 1998 Acquisitions of $387.4 million were financed with $142.3 million
of the net proceeds from the Financing Transactions (see Note 6 below),
$155.0 million of borrowings under the Senior Credit Facilities and $90.1
million of cash from operations. The 1998 Acquisitions are all included in
the Company's historical balance sheet as of September 30, 1998.
25
<PAGE>
3. The pro forma statements of operations include the following historical
financial data for the 1998 Acquisitions:
The pro forma statement of operations for the nine months ended September
30, 1998 includes the following historical data for the 1998 Acquisitions.
<TABLE>
<CAPTION>
OCEAN 1998
SPD(a) STS(b) ILEX(b) SYSTEMS(c) ACQUISITIONS
-------- ---------- --------- ------------ -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales ............................................ $105.5 $ 2.3 $4.5 $13.9 $126.2
Costs and expenses ............................... 94.4 5.9 4.4 12.9 117.6
------ ------ ---- ----- ------
Operating income (loss) ......................... 11.1 (3.6) 0.1 1.0 8.6
Interest and investment income (expense) ......... -- -- -- -- --
Interest expense ................................. 5.0 -- -- 0.1 5.1
------ ------ ---- ----- ------
Income (loss) before income taxes . ............. 6.1 (3.6) 0.1 0.9 3.5
Income tax (benefit) provision . ................. 2.2 (1.0) -- 0.4 1.6
------ ------ ---- ----- ------
Net income (loss) ............................... $ 3.9 $ (2.6) $0.1 $ 0.5 $ 1.9
====== ====== ==== ===== ======
</TABLE>
- ----------
(a) Represents historical results of operations for the six-month
period ended June 30, 1998. These results of operations exclude a
pre-tax nonrecurring noncash compensation charge of approximately
$22.1 million related to the acceleration of the vesting date for
all outstanding stock options of SPD caused by the Company's
acquistion of SPD.
(b) Represents historical results of operations for the one-month
period ended January 31, 1998.
(c) Represents historical results of operations for the three-month
period ended March 31, 1998.
The pro forma statement of operations for the nine months ended September
30, 1997 includes the following historical data for the 1998 Acquisitions.
<TABLE>
<CAPTION>
OCEAN 1998
SPD(a) STS ILEX SYSTEMS ACQUISITIONS
-------- ---------- -------- --------- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales ............................................ $125.2 $ 39.9 $46.6 $ 47.1 $258.8
Costs and expenses ............................... 106.8 45.0 40.6 56.1 248.5
------ ------ ----- ------ ------
Operating income (loss) ......................... 18.4 (5.1) 6.0 (9.0) 10.3
Interest and investment income (expense) ......... -- -- -- 0.1 0.1
Interest expense ................................. 2.7 -- -- 0.3 3.0
------ ------ ----- ------ ------
Income (loss) before income taxes ............... 15.7 (5.1) 6.0 (9.2) 7.4
Income tax (benefit) provision . ................. 4.9 (1.4) 0.6 (3.6) 0.5
------ ------ ----- ------ ------
Net income (loss) ............................... $ 10.8 $ (3.7) $ 5.4 $ (5.6) $ 6.9
====== ====== ===== ====== ======
</TABLE>
- ----------
(a) Represents the historical results of operations of SPD for the
nine months ended September 30, 1997 plus the historical results
of operations of Power Paragon, Inc. ("PPI") for the six months
ended June 30, 1997. See Note 5.
26
<PAGE>
The pro forma statement of operations for the year ended December 31, 1997
includes the following historical data for the 1998 Acquisitions. Such data
have been derived from each entity's historical financial statements
included elsewhere herein.
<TABLE>
<CAPTION>
OCEAN 1998
SPD(a) STS(b) ILEX SYSTEMS ACQUISITIONS
-------- ---------- -------- --------- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales ............................................ $169.9 $ 53.9 $ 63.5 $ 73.0 $360.3
Costs and expenses ............................... 142.2 61.7 55.9 78.7 338.5
------ ------ ------ ------ ------
Operating income (loss) ........................ 27.7 (7.8) 7.6 (5.7) 21.8
Interest and investment income (expense) ......... -- -- (0.2) 0.1 (0.1)
Interest expense ................................. 4.9 -- -- 0.5 5.4
------ ------ ------ ------ ------
Income (loss) before income taxes .............. 22.8 (7.8) 7.4 (6.1) 16.3
Income tax (benefit) provision . ................. 7.4 (2.1) 0.5 (2.4) 3.4
------ ------ ------ ------ ------
Net income (loss) .............................. $ 15.4 $ (5.7) $ 6.9 $ (3.7) $ 12.9
====== ====== ====== ====== ======
</TABLE>
- ----------
(a) Represents the historical results of operations of SPD for the
year ended December 31, 1997 plus the historical results of
operations of PPI for the six months ended June 30, 1997. See
Note 5.
(b) Represents the historical results of operations for the fiscal
year ended June 30, 1997 plus the six-month period ended December
31, 1997 minus the six-month period ended December 31, 1996.
4. The aggregate estimated excess of purchase price, including expenses, over
the estimated fair value of net assets acquired related to the 1998
Acquisitions of $302.7 million is comprised of $205.1 million, $38.6
million and $59.0 million, respectively, for SPD, ILEX and Ocean Systems,
and is being amortized over 40 years resulting in a charge of $7.6 million
per annum. Based upon preliminary estimates of fair value, the acquisition
of STS resulted in no goodwill being recorded since the purchase price was
equal to the fair value of net assets acquired. The preliminary purchase
price allocation for SPD also includes an adjustment of $5.0 million to
intangible assets to reflect the estimated value of acquired identifiable
intangibles which are being amortized over 15 years resulting in a change
of $0.3 million per annum.
Adjustments to costs and expenses in the pro forma statements of operations
relating to the 1998 Acquisitions were comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
--------------------- DECEMBER 31,
1998 1997 1997
--------- --------- -------------
(in millions)
<S> <C> <C> <C>
(a) Amortization expense of estimated intangibles,
primarily purchase cost in excess of net assets
acquired ............................................. $ 3.4 $ 5.9 $ 7.9
(b) Elimination of goodwill amortization expense included
in the historical financial statements for the 1998
Acquisitions ......................................... (1.4) (3.0) (3.7)
(c) Estimated rent expense on the Sylmar facility of
Ocean Systems which was not acquired by L-3
Communications ....................................... 0.3 0.9 1.1
(d) Elimination of depreciation expense on buildings and
improvements on the Sylmar facility of Ocean Systems
which was not acquired by L-3 Communications ......... (0.1) (0.3) (0.3)
------ ------ ------
Total increase to costs and expenses ................ . $ 2.2 $ 3.5 $ 5.0
====== ====== ======
</TABLE>
The preliminary purchase price allocations for SPD and Ocean Systems include
estimated increases to contracts in process of $2.0 million and $3.4
million, respectively, related to valuing certain work-in-process and
finished goods inventory at their fair values. In addition, the
preliminary purchase price allocation for Ocean Systems includes an
estimated $5.1 million adjustment relating to a reduction of contracts in
process resulting from valuing acquired contracts in process at contract
price, less the estimated cost to complete and an allowance for normal
profit margin on the Company's effort to complete such contracts. The
non-recurring charges to income resulting from the above mentioned
contracts in process adjustment are not material to the pro forma
statement of operations. The effects on the balance sheet of these
adjustments are included in the historical balance sheet of the Company
as of September 30, 1998.
27
<PAGE>
5. On June 30, 1997, SPD acquired all of the outstanding stock of PPI and
subsidiaries. The PPI acquisition was financed principally by SPD bank
borrowings. SPD accounted for the PPI acquisition as a purchase and the
results of operations of PPI are included in the consolidated SPD
historical financial statements from the date of acquisition. The
adjustments related to SPD's financing of its PPI acquisition and the
related purchase price allocation are included in the pro forma
adjustments discussed in Notes 4 and 6.
The pro forma statement of operations for the nine months ended September
30, 1997 includes the following data for SPD and PPI.
<TABLE>
<CAPTION>
PPI SPD
SIX MONTHS NINE MONTHS
SPD ENDED ENDED
HISTORICAL JUNE 30, 1997 SEPTEMBER 30, 1997
------------ --------------- -------------------
(in millions)
<S> <C> <C> <C>
Sales ............................................ $85.3 $39.9 $125.2
Costs and expenses ............................... 71.5 35.3 106.8
----- ----- ------
Operating income. ............................... 13.8 4.6 18.4
Interest and investment income (expense) ......... -- -- --
Interest expense ................................. 2.6 0.1 2.7
----- ----- ------
Income before income taxes . .................... 11.2 4.5 15.7
Income tax provision . ........................... 3.9 1.0 4.9
----- ----- ------
Net income ...................................... $ 7.3 $ 3.5 $ 10.8
===== ===== ======
</TABLE>
The pro forma statement of operations for the year ended December 31, 1997
includes the following data for SPD and PPI.
<TABLE>
<CAPTION>
PPI
SIX MONTHS SPD
SPD ENDED YEAR ENDED
HISTORICAL JUNE 30, 1997 DECEMBER 31, 1997
------------ --------------- ------------------
(in millions)
<S> <C> <C> <C>
Sales ............................................ $130.0 $39.9 $169.9
Costs and expenses ............................... 106.9 35.3 142.2
------ ----- ------
Operating income. ............................... 23.1 4.6 27.7
Interest and investment income (expense) ......... -- -- --
Interest expense ................................. 4.8 0.1 4.9
------ ----- ------
Income before income taxes . .................... 18.3 4.5 22.8
Income tax provision . ........................... 6.4 1.0 7.4
------ ----- ------
Net income ...................................... $ 11.9 $ 3.5 $ 15.4
====== ===== ======
</TABLE>
6. The Financing Transactions included (i) the proceeds from the sale by
Holdings of 6.9 million shares of its common stock in the IPO for $22 per
share or $139.5 million, after underwriting discounts and commissions and
expenses of $12.3 million, (ii) the sale by L-3 Communications Corporation
of the May 1998 Notes, whose proceeds amounted to $173.8 million after
debt issuance costs of $6.2 million and (iii) the amendment of L-3
Communications Corporation's Senior Credit Facilities to increase the
borrowings available thereunder to $385.0 million from $200.0 million. The
net proceeds from the Financing Transactions of $313.3 million have been
used to (i) prepay all $171.0 million of borrowings outstanding under the
term loan facilities and (ii) finance $142.3 million of the aggregate
purchase prices of the 1998 Acquisitions (see Note 2 above). The IPO and
the sale of the May 1998 Notes were completed on May 22, 1998 and the
amendment to the Senior Credit Facilities was completed on August 19,
1998. The effect of the Financing Transactions is included in the
Company's historical balance sheet as of September 30, 1998.
7. Adjustments to the pro forma statements of operations for the Financing
Transactions include the elimination of historical interest income of $2.3
million, $0.6 million and $1.3 million for the nine months ended September
30, 1998 and 1997 and the year ended December 31, 1997, respectively, to
reflect the use of cash on hand to partially finance the aggregate
purchase price of the 1998 Acquisitions.
28
<PAGE>
Assuming the Financing Transactions were completed on January 1, 1997, pro
forma interest expense for the nine months ended September 30, 1998 and
1997 and the year ended December 31, 1997 would have increased by $0.8
million, $8.5 million and $9.7 million, respectively. The details of
interest expense, after the Financing Transactions follow:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997
------------------- ------------------- -------------
(in millions)
<S> <C> <C> <C>
Interest on the 1997 Notes (as defined later in
this prospectus) (10.375% on $225.0 million)........ $17.5 $17.5 $23.3
Interest on the May 1998 Notes (8.50% on
$180.0 million)..................................... 11.5 11.5 15.3
Interest on borrowings under Senior Credit
Facilities (8.0% on $155.0 million)................. 9.3 9.3 12.4
Commitment fee of 0.4% on unused portion
of Senior Credit Facilities (0.4% on
$203.3 million)..................................... 0.6 0.6 0.9
Amortization of deferred debt issuance costs ........ 2.2 2.2 3.0
----- ----- -----
Total pro forma interest expense .................... $41.1 $41.1 $54.9
===== ===== =====
</TABLE>
8. Assuming the Notes Offering was completed on January 1, 1997, pro forma
interest expense after the Financing Transactions for the nine months
ended September 30, 1998 and 1997 and the year ended December 31, 1997
would have increased by $3.7 million, $3.7 million and $4.9 million,
respectively. The details of pro forma interest expense, after the Notes
Offering follow:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997
------------------- ------------------- -------------
(in millions)
<S> <C> <C> <C>
Interest on the 1997 Notes (10.375% on
$225.0 million)..................................... $17.5 $17.5 $23.3
Interest on the May 1998 Notes (8.50% on
$180.0 million)..................................... 11.5 11.5 15.3
Interest on the December 1998 Notes (8.0% on
$200.0 million)..................................... 12.0 12.0 16.0
Commitment fee of 0.4% on unused portion of
Senior Credit Facilities (0.4% on
$358.3 million)..................................... 1.0 1.0 1.5
Amortization of deferred debt issuance costs ........ 2.8 2.8 3.7
----- ----- -----
Total pro forma interest expense .................... $44.8 $44.8 $59.8
===== ===== =====
</TABLE>
The Notes Offering was completed on December 11, 1998. The pro forma
statements of operations do not reflect interest income on the $43.5
million pro forma cash balance at September 30, 1998 after the Notes
Offering.
9. The pro forma adjustments for the Notes Offering to the balance sheet as of
September 30, 1998, include (i) a net increase to long-term debt of $45.0
million reflecting the $200.0 million of December 1998 Notes issued in the
Notes Offering, and the repayment of $155.0 million of borrowings
outstanding under the Senior Credit Facilities with the net proceeds of
the December 1998 Notes, (ii) an increase of $7.2 million to other assets
representing the bond discount of $0.6 million and underwriting discounts
and commissions and other estimated expenses associated with the Notes
Offering of $6.6 million which will be deferred and amortized to interest
expense over the term of the December 1998 Notes and (iii) an increase to
cash and cash equivalents of $37.8 million representing the remaining net
proceeds after the repayment of the borrowings outstanding under the
Senior Credit Facilities and the payment of the bond discount,
underwriting discounts and commissions and other estimated expenses
associated with the Notes Offering.
10. The pro forma adjustments were tax-effected, as appropriate, using a
statutory (federal, state and foreign) tax rate of 39.0%.
29
<PAGE>
11. Pro forma basic earnings per common share are computed based upon the
weighted-average shares of common stock outstanding. Pro forma diluted
earnings per common stock are computed based upon: (a) the weighted
average shares of common stock and potential common stock outstanding, to
the extent the potential common stock is not anti-dilutive, giving effect
to the IPO; and (b) an assumed average market price of common stock for
all periods between January 1, 1997 and December 31, 1997 of $22.00 per
share based on the IPO price and of $28.64 per share for the nine months
ended September 30, 1998 based on the IPO price of $22.00 for the period
January 1, 1998 to May 19, 1998 (the date of the IPO) and actual average
market prices of Holdings' common stock for the period May 20, 1998 to
September 30, 1998, were used for the assumed purchase of common shares
for treasury.
30
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected unaudited pro forma data as of September 30, 1998, for the
nine months ended September 30, 1998 and 1997 and for the year ended December
31, 1997 have been derived from, and should be read in conjunction with, the
unaudited pro forma condensed consolidated financial statements included
elsewhere in this prospectus. The unaudited pro forma condensed statement of
operations and other data reflect the L-3 Acquisition, the 1998 Acquisitions,
the Financing Transactions and the Notes Offering as if such transactions had
occurred on January 1, 1997. The unaudited pro forma condensed balance sheet
data reflect the Notes Offering as if it had occurred on September 30, 1998.
The selected consolidated (combined) financial data as of December 31,
1997, 1996 and 1995 and for the nine months ended December 31, 1997, the three
months ended March 31, 1997 and the years ended December 31, 1996, 1995 and
1994 have been derived from the audited financial statements for the respective
periods. The selected historical consolidated (combined) financial data as of
and for the periods ended September 30, 1998, December 31, 1993 and March 31,
1993 have been derived from the unaudited financial statements of the Company
(Predecessor Company). In the opinion of management, such unaudited financial
statements reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the results of operations and
financial position as of the date of and for the period presented. The results
of operations for the nine months ended September 30, 1998 may not be
indicative of results for the full year. The unaudited pro forma condensed
financial information may not be indicative of the financial position and
results of operations of the Company that actually would have occurred had the
Transactions been in effect on the dates indicated or the financial position
and results of operations that may be obtained in the future.
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated (Combined) Financial Statements of the Company
(Predecessor Company) and the Loral Acquired Businesses and the unaudited pro
forma condensed consolidated financial information included elsewhere herein.
Prior to April 1, 1996, the Predecessor Company was only comprised of
Communication Systems -- East.
<TABLE>
<CAPTION>
COMPANY
-------------------------------------------------------------------
PRO FORMA NINE NINE
NINE MONTHS ENDED PRO FORMA MONTHS MONTHS
SEPTEMBER 30, YEAR ENDED ENDED ENDED
---------------------- DECEMBER 31, SEPTEMBER 30, DEC. 31,
1998 1997 1997 1998(1) 1997(2)
------------ --------- -------------- --------------- -------------
(in millions except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ........................... $ 834.5 $758.7 $ 1,063.9 $ 708.3 $ 546.5
Operating income ................ 70.0 49.1 82.0 63.6 51.5(6)
Interest expense, net(7) . ..... 44.8 44.8 59.8 32.9 28.5
Provision (benefit) for
income taxes(7) ................ 10.1 (0.6) 5.8 12.0 10.7
Net income (loss) ............... 15.1 4.9 16.4 18.7 12.3(6)
Earnings (loss) per
common share
Basic .......................... $ 0.55 $ 0.18 $ 0.61 $ 0.78 $ 0.62(5)
Diluted ........................ 0.53 0.18 0.59 0.75 0.61(5)
Weighted average
common shares
outstanding
Basic .......................... 27.4 26.9 26.9 23.9 20.0
Diluted ........................ 28.6 27.6 27.7 25.0 20.0
BALANCE SHEET DATA (AT
PERIOD END):
Working capital ................. $ 178.8 $ 141.0 $ 131.8
Total assets .................... 1,241.3 1,196.3 703.4
Long-term debt .................. 605.0 560.0 392.0
Invested equity .................
Shareholders' equity ............ 294.8 294.8 113.7
OTHER DATA:
EBITDA(8) ....................... $ 102.5 $ 80.4 $ 126.3 $ 90.3 $ 78.1
Net cash from
(used in) operating
activities ..................... 48.2 73.9
Net cash (used in)
investing activities ........... (417.8) (457.8)
Net cash from
(used in) financing
activities ..................... 297.9 461.4
Depreciation expense ............ 17.7 17.7 24.0 15.6 13.3
Amortization expense ............ 14.8 13.6 20.3 11.1 8.9
Capital expenditures ............ 14.8 15.6 23.0 12.7 11.9
Ratio of:
EBITDA to cash
interest
expense(9)(10) ................ 2.6x 2.3x
Net debt to
EBITDA(10)(11) ................ 3.8x 4.4x
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------------------
THREE NINE THREE
MONTHS MONTHS MONTHS
ENDED YEAR ENDED DECEMBER 31, ENDED ENDED
MARCH 31, ------------------------------- DEC.31, MARCH 31,
1997 1996(3) 1995(4) 1994(4) 1993(4) 1993(5)
----------- ----------- --------- --------- --------- ----------
(in millions except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ........................... $ 158.9 $ 543.1 $166.8 $ 218.9 $200.0 $67.8
Operating income ................ 7.9 43.7 4.7 8.4 12.4 5.1
Interest expense, net(7) . ..... 8.4 24.2 4.5 5.5 4.1
Provision (benefit) for
income taxes(7) ................ (0.2) 7.8 1.2 2.3 3.8 2.0
Net income (loss) ............... (0.3) 11.7 (1.0) 0.6 4.5 3.1
Earnings (loss) per
common share
Basic ..........................
Diluted ........................
Weighted average
common shares
outstanding
Basic ..........................
Diluted ........................
BALANCE SHEET DATA (AT
PERIOD END):
Working capital ................. $ 98.8 $ 21.1 $ 19.3 $ 24.7 $22.8
Total assets .................... 593.3 228.5 233.3 241.7 93.5
Long-term debt ..................
Invested equity ................. 473.6 194.7 199.5 202.0 59.9
Shareholders' equity ............
OTHER DATA:
EBITDA(8) ....................... $ 15.7 $ 71.8 $ 16.3 $ 19.9 $ 23.4 $ 7.0
Net cash from
(used in) operating
activities ..................... (16.3) 30.7 9.3 21.8
Net cash (used in)
investing activities ........... (4.3) (298.0) (5.5) (3.7)
Net cash from
(used in) financing
activities ..................... 20.6 267.3 (3.8) (18.1)
Depreciation expense ............ 4.5 14.9 5.5 5.4 6.1 1.8
Amortization expense ............ 3.3 13.2 6.1 6.1 4.9 0.1
Capital expenditures ............ 4.3 13.5 5.5 3.7 2.6 0.8
Ratio of:
EBITDA to cash
interest
expense(9)(10) ................
Net debt to
EBITDA(10)(11) ................
</TABLE>
(Footnotes on following page)
31
<PAGE>
- ---------
(1) Includes the results of operations of the 1998 Acquisitions from their
respective effective dates of acquisition.
(2) Reflects the L-3 Acquisition effective April 1, 1997.
(3) Reflects ownership of Loral's Communication Systems -- West and
Specialized Communication Products businesses commencing April 1, 1996.
(4) Reflects ownership of Communication Systems -- East by Lockheed Martin
effective April 1, 1993.
(5) Reflects ownership of Communications Systems -- East by GE Aerospace. The
amounts shown herein include only those amounts as reflected in the
financial records of Communications Systems -- East.
(6) Includes a nonrecurring, noncash compensation charge of $4.4 million
($0.22 per share) related to the initial capitalization of the Company,
effective April 1, 1997.
(7) For periods prior to April 1, 1997, interest expense and income tax
(benefit) provision were allocated from Lockheed Martin.
(8) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt issuance
costs) and the nonrecurring, noncash compensation charge of $4.4 million
($0.22 per share) recorded on April 1, 1997. EBITDA is not a substitute
for operating income, net income and cash flow from operating activities
as determined in accordance with generally accepted accounting principles
as a measure of profitability or liquidity. EBITDA is presented as
additional information because management believes it to be a useful
indicator of the Company's ability to meet debt service and capital
expenditure requirements.
(9) For purposes of this computation, cash interest expense consists of pro
forma interest expense excluding amortization of deferred debt issuance
costs.
(10) The ratios at September 30, 1998 are based on the results of operations
for the twelve-month period ended September, 1998. The pro forma ratios at
September 30, 1998 have been calculated by adding the pro forma EBITDA and
pro forma cash interest expense for the nine months ended September 30,
1998 and the three months ended December 31, 1997. For purposes of
computing pro forma EBITDA for the three months ended December 31, 1997,
pro forma operating income, depreciation expense and amortization expense
would have been $32.9 million, $6.3 million and $6.7 million,
respectively. Pro forma cash interest expense for the twelve-month period
ended September 30, 1998 and the year ended December 31, 1997 both would
have been $56.1 million.
(11) Net debt is defined as long-term debt plus current portion of long-term
debt less cash and cash equivalents.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products including secure,
high data rate communication systems, microwave components, avionics and ocean
systems, telemetry, instrumentation and space products. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. The Company's systems
and specialized products are used to connect a variety of airborne, space,
ground-and sea-based communication systems and are incorporated into the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. The Company's customers include the United States
department of defense (the "DoD"), selected United States government (the
"Government") intelligence agencies, major aerospace/defense prime contractors,
foreign governments and commercial customers.
All domestic government contracts and subcontracts of the Company are
subject to audit and various cost controls, and include standard provisions for
termination for the convenience of the Government. Multi-year Government
contracts and related orders are subject to cancellation if funds for contract
performance for any subsequent year become unavailable. Foreign government
contracts generally include comparable provisions relating to termination for
the convenience of the relevant foreign government.
The defense industry has undergone significant changes precipitated by
ongoing federal budget pressures and new roles and missions to reflect changing
strategic and tactical threats. Since the mid-1980's, the overall U.S. defense
budget has declined in real dollars. In response, the DoD has focused its
resources on enhancing its military readiness, joint operations and the
value-added capability of digital command and control communications by
incorporating advanced electronics to improve the performance, reduce operating
costs and extend the life expectancy of its existing and future platforms. The
emphasis on system interoperability, force multipliers and providing
battlefield commanders with real-time data is increasing the electronics
content of nearly all of the major military procurement and research programs.
As a result, the DoD's budget for communications and defense electronics is
expected to grow.
ACQUISITION HISTORY/RECENT DEVELOPMENTS
The Company was formed to acquire substantially all of the assets of (i)
nine business units previously purchased by Lockheed Martin as part of its
acquisition of Loral in April 1996 (the "Loral Acquired Businesses") which
include eight business units of Loral ("Specialized Communications Products")
and one business unit purchased by Loral as part of its acquisition of the
Defense Systems business of Unisys Corporation ("Unisys") in May 1995
("Communications System -- West"), and (ii) one business unit purchased by
Lockheed Martin as part of its acquisition of the aerospace business of General
Electric Company in April 1993 ("Communication Systems -- East"). Collectively,
the Loral Acquired Businesses and Communications Systems -- East comprise the
"Predecessor Company" or "Businesses".
During the first quarter of 1998, the Company purchased the assets of
Ocean Systems for $67.5 million of cash, the assets of ILEX for $51.9 million
of cash, subject to adjustment based on closing net assets and additional
consideration based on post-acquisition performance of ILEX, and the assets of
STS for $27.0 million in cash, subject to adjustment based upon closing net
assets.
SPD Technologies, Inc. On August 13, 1998, the Company acquired all of the
outstanding common stock of SPD for $230.0 million in cash, subject to certain
post-closing adjustments. SPD is the major supplier to the United States Navy
for subsystems that manage, control, distribute, protect and condition
electrical power in surface ships and submarines. SPD's major products include
electronic solid state protection products, switchgear, high-speed transfer
switches, fault isolation units, frequency converters and inverters, voltage
transformers and uninterruptible power supply systems. SPD's products are
installed in every nuclear submarine, aircraft carrier and surface platform
operated by the United States Navy. SPD also provides shipboard communications
and control as well as support service for installed products. The acquisition
was financed using cash from operations and borrowings under the Senior Credit
Facilities.
33
<PAGE>
Other Acquisitions. Additionally, during the nine months ended September
30, 1998, the Company purchased five other companies for an aggregate purchase
price of $24.8 million of cash, before adjustments, as appropriate, based on
closing date net assets and additional consideration based on post-acquisition
performance. The historical impact of these five other acquisitions
individually or in the aggregate was not material to the results of operations
or financial position of the Company.
On November 12, 1998, L-3 Communications acquired all of the outstanding
stock of DBS Microwave, Inc. ("DBS") for $13.0 million of cash, of which $3.0
million was paid prior to September 30, 1998, subject to adjustment based on
closing net assets, as defined. The acquisition was financed with borrowings
under the Senior Credit Facilities.
On December 17, 1998, L-3 Communications acquired all of the outstanding
stock of Electrodynamics Inc. from Carpenter Technology Corporation for $21.5
million in cash, subject to adjustment based on closing net assets, as defined.
The acquisition was financed by cash on hand and with borrowings under the
Senior Credit Facilities.
Microdyne Corporation. On December 3, 1998, the Company signed an
agreement to acquire all of the outstanding common stock of Microdyne for
approximately $90.0 million in cash, including the repayment of Microdyne's
debt. Pursuant to the acquisition agreement, a subsidiary of L-3 Communications
has purchased 91.9% of the common stock of Microdyne in a cash tender offer. We
expect to complete the merger of Microdyne with this subsidiary in early 1999.
Microdyne is a leading global developer and manufacturer of aerospace telemetry
receivers, secure communications and technical support services, including
specialized telemetry high-frequency radios used in aerospace and satellite
communications for data gathering and analysis. Microdyne also provides
products for the government and commercial signal intelligence markets and
support and repair services for electronic products companies. Microdyne's
aerospace telemetry products will enable us to provide integrated solutions to
our space customers' requirements for command, control, telemetry and tracking.
The purchase of shares of Microdyne common stock was financed using available
cash and borrowings under the Senior Credit Facilities. See "--Liquidity and
Capital Resources".
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Consolidated (Combined)
Financial Statements and the notes thereto included in this prospectus, which
reflect the Company's results of operations from the effective date of the L-3
Acquisition, April 1, 1997, and also include the results of operations of SPD,
Ocean Systems, ILEX and STS from the respective effective dates of each of
those acquisitions. Accordingly, the results of operations presented below
exclude the results of operations of the 1998 Acquisitions for periods prior to
their effective dates.
The financial statements also reflect the results of operations of the
Predecessor Company for the three months ended March 31, 1997 and the years
ended December 31, 1996 and 1995, which include the results of operations of
the Loral Acquired Businesses beginning on April 1, 1996, the effective date of
that acquisition by the Predecessor Company. The results of operations for the
year ended December 31, 1996 include the results of operations of the Loral
Acquired Businesses for the nine months from April 1, 1996 to December 31,
1996. The results of operations for the year ended December 31, 1995 and the
period from January 1 to March 31, 1996 only comprise the results of operations
of Communications Systems -- East. Accordingly, changes between (i) the nine
months ended September 30, 1998 and the nine months ended September 30, 1997,
(ii) the year ended December 31, 1997 and the year ended December 31, 1996 and
(iii) the year ended December 31, 1996 and the year ended December 31, 1995 are
significantly affected by the timings of the 1998 Acquisitions, L-3 Acquisition
and Loral Acquired Businesses acquisition. Furthermore, operating
34
<PAGE>
income of the Company and the Predecessor Company are not directly comparable
between periods indicated as a result of the effects of valuation of assets and
liabilities recorded in accordance with Accounting Principles Board Opinion No.
16 ("APB 16") by the Company and the Predecessor Company for the purchase
accounting of the L-3 Acquisition and Loral Acquired Businesses acquisition.
Interest expense and income taxes expense for the periods are also not
comparable and the impact of interest expense and income tax expense on the
Company is discussed below.
The results of operations of the Predecessor Company for the three months
ended March 31, 1997 and the years ended December 31, 1996 and 1995, include
certain costs and expenses allocated by Lockheed Martin for corporate office
expenses based primarily on the allocation methodology prescribed by government
regulations pertaining to government contractors. Interest expense was
allocated based on Lockheed Martin's actual weighted average consolidated
interest rate applied to the portion of the beginning of the year invested
equity deemed to be financed by consolidated debt based on Lockheed Martin's
debt to equity ratio on such date. The provision (benefit) for income taxes was
allocated to the Predecessor Company as if it were a separate taxpayer,
calculated by applying statutory rates to reported pre-tax income after
considering items that do not enter into the determination of taxable income
and tax credits related to the Predecessor Company. Also, pension and
post-employment benefit costs were allocated based on employee headcount.
Accordingly, the results of operations and financial position hereinafter of
the Predecessor Company may not be the same as would have occurred had the
Predecessor Company been an independent entity.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
The results of operations for the nine months ended September 30, 1997
(the "1997 Nine-Month Period") were obtained by combining, without adjustment,
the historical results of operations of the Predecessor Company for the three
months ended March 31, 1997 with the historical results of operations of the
Company for the six-month period ended September 30, 1997. Changes between
periods for the nine months ended September 30, 1998 (the "1998 Nine-Month
Period") and the 1997 Nine-Month Period are affected by the timing of the L-3
Acquisition and the 1998 Acquisitions.
The following table sets forth selected income statement data for the
Company and the Predecessor Company for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------
PREDECESSOR
COMPANY COMPANY COMPANY
NINE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1998 1997 1997 COMBINED
--------------- --------------- ------------- ---------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales ............................................ $ 708.3 $ 342.8 $ 158.9 $ 501.7
------- ------- ------- -------
Operating income ................................. 63.6 28.6 7.9 36.5
Interest expense, net ............................ 32.9 19.2 8.4 27.6
Income tax expense (benefit) ..................... 12.0 5.4 (0.2) 5.2
------- ------- ------- -------
Net income (loss) ................................ $ 18.7 $ 4.0 $ (0.3) $ 3.7
======= ======= ======= =======
Earnings per share:
Basic ........................................... $ 0.78
Diluted ......................................... $ 0.75
Weighted average shares outstanding:
Basic ........................................... 23.9
Diluted ......................................... 25.0
Depreciation and amortization expenses included in
operating income ................................ $ 26.7 $ 17.5 $ 7.8 $ 25.3
EBITDA(1) ........................................ $ 90.3 $ 46.1 $ 15.7 $ 61.8
</TABLE>
- ----------
(1) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs)
and the nonrecurring, noncash compensation charge. EBITDA is not a
substitute for operating income, net income or cash flows from operating
activities as determined in accordance with generally accepted accounting
principles as a measure of profitability or liquidity. EBITDA is
presented as additional information because the Company believes it to be
a useful indicator of the Company's ability to meet debt service and
capital expenditure requirements.
35
<PAGE>
Sales increased by $206.6 million to $708.3 million for the 1998
Nine-Month Period from $501.7 million for the 1997 Nine-Month Period. Operating
income for the 1998 Nine-Month Period increased by $27.1 million to $63.6
million from $36.5 million in the 1997 Nine-Month Period. Net income increased
by $15.0 million to $18.7 million from $3.7 million in the 1997 Nine-Month
Period.
The 1998 Acquisitions contributed sales of $166.1 million to the 1998
Nine-Month Period. The remaining increase during the 1998 Nine-Month Period was
primarily attributable to an increase in production and shipments on the CHBDL,
Raptor and UAV programs and increased sales volumes on STE, aviation recorders,
display systems and RF safety and monitoring products, partially offset by
lower sales volume on commercial telecommunications products. Sales for the
1997 Nine-Month Period also included $1.8 million of sales from the Hycor
business which was sold in 1997 (see Note 6 to the Consolidated (Combined)
Financial Statements as of December 31, 1997).
Operating income as a percentage of sales ("operating margin") increased
to 9.0% for the 1998 Nine-Month Period from 7.3% for the 1997 Nine-Month
Period. The increase in operating income for the 1998 Nine-Month Period is
principally attributable to (i) improved margins on sales of space
communications and military communication systems, aviation recorders and
display systems and increased sales volume on higher margin RF safety and
monitoring products, partially offset by lower sales volume on commercial
telecommunications products and lower margins from the STS acquired business,
(ii) the negative impact on operating income for the 1997 Nine-Month Period
from the non-recurring, noncash compensation charge of $4.4 million ($0.22 per
share) recorded effective April 1, 1997, related to the initial capitalization
of the Company and (iii) losses incurred during the 1997 Nine-Month Period by
the Predecessor Company on three programs at Communication Systems -- East. The
1998 Acquisitions contributed $10.1 million of operating income to the 1998
Nine-Month Period. Excluding the non-recurring, noncash compensation charge,
operating margin for the 1997 Nine-Month Period was 8.2%.
EBITDA for the 1998 Nine-Month Period increased by $28.5 million to $90.3
million from $61.8 million in the 1997 Nine-Month Period. EBITDA as a
percentage of sales ("EBITDA margin") increased to 12.7% for the 1998
Nine-Month Period from 12.3% for the 1997 Nine-Month Period. The increases in
EBITDA and EBITDA margin were primarily attributable to the items affecting the
trends in operating income between the 1998 Nine-Month Period and the 1997
Nine-Month Period discussed above, excluding the non-recurring, noncash
compensation charge which is not included in EBITDA.
Interest expense, net for the Company for the 1998 Nine-Month Period was
$32.9 million, compared to $27.6 million in the 1997 Nine-Month Period for the
Company and the Predecessor Company combined. The increase was attributable to
higher average outstanding debt balances during the 1998 Nine-Month Period,
partially offset by higher interest income for the 1998 Nine-Month Period.
The effective income tax rate of the Company for the 1998 Nine-Month
Period was 39.1%, reflecting the estimated effective income tax rate for the
year ended December 31, 1998. The effective tax rate for the 1997 Nine-Month
Period for the Company and the Predecessor Company combined was 58.0%, and was
significantly impacted by the $4.4 million ($0.22 per share) non-recurring,
noncash compensation charge recorded effective April 1, 1997 and the
Predecessor Company's amortization of costs in excess of net assets acquired
for the three months ended March 31, 1997, both of which were not deductible
for income tax purposes.
36
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following table sets forth selected statement of operations data for
the Company and the Predecessor Company for the periods indicated.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------- ----------------------------------------------------------------
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31,
1997 1996 1997 1996 1996
-------------- -------------- -------------- -------------- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Sales ................................. $546.5 $501.9 $158.9 $ 41.2 $543.1
Costs and expenses .................... 490.6 459.9 151.0 39.5 499.4
Noncash compensation charge ........... 4.4 -- -- -- --
Operating income ...................... 51.5 42.0 7.9 1.7 43.7
Interest expense, net ................. 28.5 22.2 8.4 2.0 24.2
Income (loss) before income taxes ..... 23.0 19.8 (0.5) (0.3) 19.5
Income tax provision (benefit) ........ 10.7 7.6 (0.2) 0.2 7.8
Net income (loss) ..................... 12.3 12.2 (0.3) (0.5) 11.7
</TABLE>
Sales for the nine months ended December 31, 1997 as compared to the
corresponding period in 1996 increased by $44.6 million, of which $30.5 million
is attributable to the Loral Acquired Businesses and $14.1 million to
Communication Systems -- East. The increase in sales is attributable to
increased volume in sales of microwave components, CHBDL, UAV programs, F-14
display system contract, power supplies and P3-C Repair Depot.
Operating income for the nine months ended December 31, 1997 as compared
to the corresponding period in 1996 increased by $9.5 million. The net increase
was comprised of increases of $5.8 million attributable to the Loral Acquired
Businesses and $8.1 million to Communication Systems -- East, partially offset
by a nonrecurring, noncash compensation charge of $4.4 million ($0.22 per
share) recorded effective April 1, 1997, related to the initial capitalization
of L-3. The increase in operating income for the nine months ended December 31,
1997 is attributable to increased sales, improved operating performance on
sales of aviation recorders, passive microwave components and display systems,
the GEMnet product-line and P3-C Repair Depot sales, partially offset by $3.3
million of cost of sales related to ongoing certification efforts for the
Company's Explosive Detection System ("EDS") contract and lower sales volume on
the U-2 Program.
Sales and operating income for the three months ended March 31, 1997
increased by $117.7 million and $6.2 million, respectively, as compared to the
corresponding period in 1996. The increases are attributable to the acquisition
of the Loral Acquired Businesses, offset by losses incurred on three programs
by Communication Systems -- East.
Sales and operating income of the Hycor business which was sold in 1997
for the three months ended March 31, 1997 and the year ended December 31, 1996
were $1.8 million and $0.0 million and $7.5 million and $0.3 million,
respectively (see Note 6 to the Consolidated (Combined) Financial Statements).
Interest expense, net for the nine months ended December 31, 1997 was
$28.5 million representing interest expense on the Company's outstanding
borrowings (see Note 8 to Consolidated (Combined) Financial Statements as of
December 31, 1997), and amortization of debt issuance costs, less interest
income of $1.4 million. Interest expense for the three months ended March 31,
1997 and the prior period was $8.4 million and $24.2 million, respectively, and
was allocated to the Predecessor Company by applying Lockheed Martin's weighted
average consolidated interest rate to the portion of the Predecessor Company's
invested equity account deemed to be financed by Lockheed Martin's consolidated
debt. The increase in interest expense reflects the Company's higher interest
rates on its third party debt, as compared to the interest rate utilized to
calculate interest expense by the Predecessor Company.
The income tax provision for the nine months ended December 31, 1997
reflects the Company's effective income tax rate of 46.5%, which was
significantly impacted by the noncash compensation charge of $4.4 million which
is not deductible for income tax purposes. For the three months ended March 31,
1997 and in the prior period, income taxes were allocated to the Predecessor
Company by
37
<PAGE>
Lockheed Martin and the effective income tax rate was significantly impacted by
amortization of costs in excess of net assets acquired, which were not
deductible for income tax purposes. See Note 11 to Consolidated (Combined)
Financial Statements as of December 31, 1997.
SUPPLEMENTAL ANALYSIS OF ANNUAL RESULTS OF OPERATIONS OF THE COMPANY AND THE
PREDECESSOR COMPANY
As noted above, the Company's financial statements reflect operations
since the effective date of the L-3 Acquisition, April 1, 1997, and the results
of operations for the year ended December 31, 1996 represent the results of
operations of the Predecessor Company, and include the results of operations of
the Loral Acquired Businesses beginning on April 1, 1996, the effective date of
that acquisition. Accordingly, changes between periods for the year ended
December 31, 1997 to the year ended December 31, 1996 of the Predecessor
Company are significantly affected by the timing of these acquisitions. To
enable investors to better assess the trends in the results of operations and
to facilitate comparisons, the following presentation of results of operations
for the year ended December 31, 1997 were obtained by aggregating, without
adjustment, the historical results of operations of the Predecessor Company for
the period from January 1, 1997 through March 31, 1997 with the historical
results of operations of the Company for the nine months period from April 1,
1997 through December 31, 1997 (together the "1997 period"), and the results of
operations for the year ended December 31, 1996 were obtained by aggregating,
without adjustments, the historical results of operations of the Predecessor
Company for the year ended December 31, 1996 with the historical results of
operations of the Loral Acquired Businesses for the period from January 1, 1996
through March 31, 1996 (together the "1996 period"). All the historical results
were derived from the audited financial statements for respective periods
included herein.
The following table sets forth historical selected statement of operations
data for the Company, Predecessor Company and the Loral Acquired Businesses for
the periods indicated and the related calendar year results of operation data
derived therefrom.
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR LORAL ACQUIRED
COMPANY COMPANY COMPANY BUSINESSES
-------------- -------------- ------------- ---------------
NINE MONTHS THREE MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, 1997 DECEMBER 31, MARCH 31, 1996
1997 1997 PERIOD 1996 1996 PERIOD
-------------- -------------- --------- ------------- --------------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales ...................... $546.5 $158.9 $705.4 $543.1 $132.2 $675.3
Costs and expenses ......... 490.6 151.0 641.6 499.4 124.4 623.8
Noncash compensation
charge .................... 4.4 -- 4.4 -- -- --
------ ------ ------ ------ ------ ------
Operating income ........... $ 51.5 $ 7.9 $ 59.4 $ 43.7 $ 7.8 $ 51.5
====== ====== ====== ====== ====== ======
EBITDA ..................... $ 78.1 $ 15.7 $ 93.8 $ 71.8 $ 12.8 $ 84.6
====== ====== ====== ====== ====== ======
</TABLE>
Sales for the 1997 period increased to $705.4 million from $675.3 million
for the 1996 period. Operating income increased to $59.4 million in the 1997
period from $51.5 million in the 1996 period. Operating income is not directly
comparable between the periods as a result of the effects of valuation of
assets and liabilities in accordance with Accounting Principles Opinion No. 16.
The sales increase in the 1997 period was primarily attributable to sales
of the Loral Acquired
Businesses which increased by $18.1 million to $531.4 million in the 1997
period as compared to $513.3 million in the 1996 period. This sales increase
was primarily attributable to increased sales volume on E2-C antenna program,
the E2-C and F-14 display systems and passive microwave components, additional
production and shipments on CHBDL and UAV programs, and partially offset by
lower sales volume on the U-2 Program. Additionally, sales of Communication
Systems -- East increased by $12.0 million to $174.0 million in the current
period from $162.0 million in the 1996 period, and were primarily attributable
to increased sales of power supplies, the GEMnet product line and the P3-C
Repair Depot.
Operating income increased by $7.9 million or 15.3% to $59.4 million in
the 1997 period from $51.5 million in the 1996 period. Operating margin
increased to 8.4% in the 1997 period as compared
38
<PAGE>
to 7.6% in the 1996 period. The increase in operating income was largely
attributable to cost reductions, increased sales volume of the Loral Acquired
Businesses and operating improvements at Communications Systems -- East.
Operating income for the 1997 period also included (i) a nonrecurring, noncash
compensation charge of $4.4 million ($0.22 per share) recorded effective April
1, 1997, related to the initial capitalization of L-3 and (ii) fourth quarter
cost of sales of $3.3 million related to on-going certification efforts for the
Company's EDS contract. Excluding the noncash compensation charge and the EDS
costs, operating income would have been $67.1 million for the 1997 period and
operating margin would have been 9.5%.
EBITDA for the 1997 period increased by $9.2 million to $93.8 million from
$84.6 million for the 1996 period. EBITDA margin increased to 13.3% for the
1997 period from 12.5% for the 1996 period. The increases in EBITDA and EBITDA
margin were attributable to the items affecting the trends in operating income
between the 1997 period and 1996 period discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table sets forth selected statement of operations data for
the Predecessor Company for the periods indicated.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
--------- ---------
(in millions)
<S> <C> <C>
Sales .............................. $543.1 $166.8
Costs and expenses ................. 499.4 162.1
Operating income ................... 43.7 4.7
Net interest expense ............... 24.2 4.5
Income before income taxes ......... 19.5 0.2
Income tax provision ............... 7.8 1.2
Net income (loss) .................. 11.7 (1.0)
</TABLE>
The results of operations of the Loral Acquired Businesses are reflected
in the results of operations of the Predecessor Company beginning on April 1,
1996, the effective date of that acquisition by Lockheed Martin. During 1996,
sales increased to $543.1 million from $166.8 million in 1995. Operating income
increased to $43.7 million compared with $4.7 million in 1995. Net income
increased to $11.7 million as compared to a net loss of $1.0 million in 1995.
The Loral Acquired Businesses contributed $13.6 million to net income for the
year ended December 31, 1996.
The sales increase in 1996 was attributable to the sales of the Loral
Acquired Businesses which contributed $381.1 million of the increase. Sales of
Communication Systems -- East decreased in 1996 by $4.8 million as compared to
1995 primarily due to lower volume on Aegis power supplies and SIGINT system
production, partially offset by Local Management Device/Key Processor
("LMD/KP") production startup.
The increase in 1996 operating income was largely attributable to the
Loral Acquired Businesses, which contributed $36.9 million of the increase.
Communication Systems -- East operating income in 1996 increased $2.2 million
primarily due to improved operating performance on the Shipboard Telephone
Communications ("STC-2") program partially offset by increased costs on the
Space Station contract. Operating margin increased to 8.0% from 2.8%. This
increase is attributable to the improvement in Communication Systems -- East
noted above, higher contract margins and operating improvements in the Loral
Acquired Businesses.
Allocated interest expense increased to $24.2 million in 1996 from $4.5
million in 1995 due primarily to the acquisition of the Loral Acquired
Businesses, which was assumed to be fully financed by debt, coupled with a
higher debt-to-equity ratio used in the allocation for Communication Systems --
East. See Note 9 to Consolidated (Combined) Financial Statements.
The effective income tax rate declined to 40% in 1996 as compared to 681%
in 1995. The 1995 effective rate was significantly impacted by non-deductible
amortization of costs in excess of net assets acquired. As a percentage of
income subject to tax, such amortization declined significantly in 1996.
39
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1998, the Senior Credit Facilities were
amended to add the Revolving 364 Day Credit Facility (as defined later in this
prospectus) of $185.0 million to the existing Revolving Credit Facility (as
defined later in this prospectus) of $200.0 million. The Revolving 364 Day
Credit Facility expires 364 days after the closing of the amendment, at which
time L-3 Communications Corporation may (i) request that the creditors extend
it for one additional 364-day period or (ii) exercise an option to convert any
or all of the borrowings outstanding thereunder into term loans which amortize
over a two-year period beginning March 31, 2001, and must be paid in full no
later than March 31, 2003.
The Revolving 364 Day Credit Facility together with L-3 Communications
Corporation's Revolving Credit Facility, increased borrowings available to L-3
Communications Corporation, before reductions for outstanding letters of
credit, to $385.0 million. At September 30, 1998, available borrowings under
the Revolving Credit Facility and Revolving 364 Day Credit Facility were
$28.3 million and $175.0 million, respectively, after reductions for
outstanding borrowings of $145.0 million and $10.0 million, respectively, and
outstanding letters of credit drawn against the Revolving Credit Facility of
approximately $26.7 million. After giving effect to the Notes Offering,
available borrowings under the Senior Credit Facilities at September 30, 1998
on a pro forma basis would have been $385.0 million, before reductions for
outstanding letters of credit.
The Senior Credit Facilities, the December 1998 Notes, the May 1998 Notes
and the 1997 Notes contain financial covenants, which remain in effect so long
as any amount is owed or any commitment to lend exists thereunder by L-3
Communications Corporation. The financial covenants under the Senior Credit
Facilities require that (i) L-3 Communications Corporation's debt ratio, as
defined therein, be less than or equal to 5.00 for the quarter ended September
30, 1998, and that the maximum allowable debt ratio thereafter decline over
time to less than or equal to 3.25 for the quarters ending September 30, 2002
and thereafter and (ii) L-3 Communications Corporation's interest coverage
ratio, as defined therein, be at least 2.00 for the quarter ended September 30,
1998 and that the interest coverage ratio thereafter increase over time to at
least 3.00 for any fiscal quarters ending September 30, 2002 and thereafter. As
of September 30, 1998, L-3 Communications Corporation had been in compliance
with these covenants at all times.
The Company has a substantial amount of indebtedness. Based upon the
current level of operations, management believes that the Company's cash flow
from operations, together with available borrowings under the Senior Credit
Facilities, will be adequate to meet its anticipated requirements for working
capital, capital expenditures, research and development expenditures, program
and other discretionary investments, interest payments and scheduled principal
payments for the foreseeable future including at least the next three years.
There can be no assurance, however, that the Company's business will continue
to generate cash flow at or above current levels or that currently anticipated
improvements will be achieved. If the Company is unable to generate sufficient
cash flow from operations in the future to service its debt, it may be required
to sell assets, reduce capital expenditures, refinance all or a portion of its
existing debt or obtain additional financing. The Company's ability to make
scheduled principal payments, to pay interest on or to refinance its
indebtedness depends on its future performance and financial results, which, to
a certain extent, are subject to general conditions in or affecting the defense
industry and to general economic, political, financial, competitive,
legislative and regulatory factors beyond its control. There can be no
assurance that sufficient funds will be available to enable the Company to
service its indebtedness, including the 1997 Notes, the May 1998 Notes and the
December 1998 Notes, or make necessary capital expenditures and program and
discretionary investments.
The Company has reached agreement or is in discussions regarding a number
of potential acquisition opportunities and expects to use the Senior Credit
Facilities to fund these transactions if the Company proceeds with them. If all
of these potential acquisitions were consummated, they would require the
Company to use all or substantially all of its currently available borrowing
capacity, and perhaps seek additional borrowing capacity, in 1999. See "Risk
Factors--Our Acquisition Strategy Involves Certain Risks" and "--We Have
Discretion Over the use of Funds Raised in the Offering".
40
<PAGE>
L-3 Communications Corporation's indebtedness under the Senior Credit
Facilities is guaranteed by many of its subsidiaries and by Holdings. The
payment of principal and premium, if any, and interest on the 1997 Notes and
May 1998 Notes and principal and premium or liquidated damages, if any, and
interest on the December 1998 Notes is unconditionally guaranteed, on an
unsecured senior subordinated basis, jointly and severally, by many of L-3
Communications Corporation's subsidiaries, all of which are wholly-owned
subsidiaries.
To mitigate risks associated with changing interest rates on certain of
its debt, the Company entered into interest rate cap and floor contracts (the
"interest rate agreements"). The Company manages exposure to counterparty
credit risk by entering into the interest rate agreements only with major
financial institutions that are expected to perform fully under the terms of
such agreements. Cash payments to (from) the Company and the counterparties are
made at the end of the quarter to the extent due under the terms of the
interest rate agreements. Such payments are recorded as adjustments to interest
expense. The initial costs of the interest rate agreements are capitalized as
deferred debt issuance costs and amortized into interest expense. The impact of
the interest rate agreements on interest expense was not material for the nine
months ended September 30, 1998 or for the nine months ended December 31, 1997.
See Note 10 to the Consolidated (Combined) Financial Statements.
BALANCE SHEET
The increases from December 31, 1997 to September 30, 1998 in contracts in
process, other current assets, property, plant and equipment, net of
accumulated depreciation and amortization, intangibles, customer advances,
other current liabilities, and pension and post-retirement benefits of $178.6
million, $13.7 million, $34.2 million, $310.9 million, $24.1 million, $21.1
million, and $56.3 million, respectively, are principally related to the
acquired businesses. The increase in other assets of $9.1 million is primarily
attributable to debt issuance costs incurred in connection with the May 1998
Notes and amendments to the Senior Credit Facilities which have been deferred
and are being amortized over the terms of underlying debt.
Working capital increased by $9.2 million to $141.0 million at September
30, 1998 from $131.8 million at December 31, 1997. Working capital, adjusted to
exclude cash and the current portion of long term debt, increased by $76.0
million from December 31, 1997 to September 30, 1998 and was primarily
attributable to the working capital of the acquired businesses. The Company's
current ratio at September 30, 1998 decreased to 1.6:1 compared with 2.0:1 at
December 31, 1997. The Company's current ratio at December 31, 1997 remained
constant at 2.0:1 as compared to the Predecessor Company's current ratio at
December 31, 1996.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company for the Periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------
PREDECESSOR
COMPANY COMPANY COMPANY
NINE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 MARCH 31, 1997 COMBINED
-------------------- -------------------- ---------------- -----------
(in millions)
<S> <C> <C> <C> <C>
Net cash from (used in) operating
activities ..................................... $ 48.2 $ 56.4 $ (16.3) $ 40.1
Net cash (used in) investing activities ......... (417.8) (479.0) (4.3) (483.3)
Net cash from financing activities .............. 297.9 462.4 20.6 483.0
</TABLE>
NET CASH FROM (USED IN) OPERATING ACTIVITIES: Cash from operating
activities of the Company for the nine months ended September 30, 1998 was
$48.2 million. Earnings after adjustment for non-cash items and deferred income
taxes provided $58.8 million and uses of cash for net changes in operating
assets and liabilities, net of amounts acquired was $10.6 million.
41
<PAGE>
Net cash from operating activities for the nine months ended September 30,
1997 was $40.1 million. Earnings after adjustment for noncash items and
deferred income taxes provided $35.3 million. Changes in operating assets and
liabilities, consisting primarily of increases in accrued employment costs and
accrued interest and decreases in accounts payable and other current
liabilities, all attributable to timings of payments contributed $4.8 million.
NET CASH (USED IN) INVESTING ACTIVITIES: Cash used in investing activities
for the nine months ended September 30, 1998 was $417.8 million and consisted
primarily of $412.5 million, net of cash acquired, paid by the Company for
acquisitions of businesses. The Company typically makes capital expenditures
related primarily to improvement of manufacturing facilities and equipment. The
Company expects that its capital expenditures for 1998 will be approximately
$27.0 million.
Cash used in investing activities for the nine months ended September 30,
1997 was $483.3 million and consisted primarily of $470.7 million paid by the
Company for the L-3 Acquisition.
NET CASH FROM FINANCING ACTIVITIES: For the nine months ended September
30, 1998, the Company's cash from financing activities was $297.9 million.
On May 19, 1998, Holdings sold 6.9 million shares of its common stock in
the IPO representing 25.2% of Holdings' common stock. The net proceeds from the
IPO amounted to $139.5 million after underwriting discounts and commissions and
expenses of $12.3 million. Concurrent with the IPO, L-3 Communications
Corporation sold $180.0 million in aggregate principal amount of the May 1998
Notes, whose net proceeds amounted to $173.8 million after debt issuance costs
of $6.2 million. The combined net proceeds from the IPO and the May 1998 Notes
of $313.3 million were used to (i) prepay all $171.0 million of borrowings
outstanding under the Term Loan Facilities (as defined), (ii) repay $67.8
million of then outstanding borrowings under the Revolving Credit Facility
which were primarily made to finance the Ocean Systems acquisition and (iii)
partially finance the SPD acquisition. During the third quarter of 1998, the
Company also made borrowings, net of repayments, under the Senior Credit
Facilities of $155.0 million primarily to partially finance the SPD
acquisition.
Cash from financing activities of the Company was $483.0 million for the
nine months ended September 30, 1997, and was primarily due to the debt
incurred and proceeds from the issuance of common stock related to the initial
capitalization of the Company and the financing of the L-3 Acquisition. Cash
from financing activities also included $20.6 million of advances from Lockheed
Martin to the Predecessor Company. Prior to the L-3 Acquisition, the
Predecessor Company participated in the Lockheed Martin cash management system,
under which all cash was received and all payments were made by Lockheed
Martin. For purposes of the statement of cash flows, all transactions with
Lockheed Martin were deemed to have been settled in cash at the time they were
recorded by the Predecessor Company.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEARS ENDED DECEMBER 31, 1996 AND
1995
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
-------------- -------------- ---------------------
YEAR
NINE MONTHS THREE MONTHS COMBINED ENDED
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------
1997 1997 1997 1996 1995
-------------- -------------- ------------- ----------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Net cash from (used in) operating activities ......... $ 73.9 $ (16.3) $ 57.6 $ 30.7 $ 9.3
Net cash (used in) investing activities .............. (457.8) (4.3) (462.1) (298.0) (5.5)
Net cash from (used in) financing activities ......... 461.4 20.6 482.0 267.3 (3.8)
</TABLE>
NET CASH FROM (USED IN) OPERATING ACTIVITIES: Cash provided by operating
activities for the year ended December 31, 1997 was $57.6 million. Earnings
after adjustment for non-cash items and deferred income taxes provided $57.9
million, and uses of cash for net changes in operating assets and liabilities
was $0.3 million.
42
<PAGE>
Cash provided by operating activities of the Predecessor Company was $30.7
million in 1996 and $9.3 million in 1995. The increase of $21.4 million in 1996
was due primarily to the impact of the Loral Acquired Businesses which were
acquired by Lockheed Martin effective April 1, 1996. Earnings after adjustment
for non-cash items provided $36.7 million, offset by changes in other operating
assets and liabilities. Without the Loral Acquired Businesses, cash provided by
operating activities for Communication Systems--East increased to $13.7 million
in 1996, 46% over 1995.
NET CASH (USED IN) INVESTING ACTIVITIES: Cash used in investing
activities for the year ended December 31, 1997 was $462.1 million and
consisted primarily of $466.3 million paid by the Company for the L-3
Acquisition and capital expenditures of $16.2 million, partially offset by
proceeds from the sale of the Company's Sarasota, Florida property of
approximately $9.5 million and cash received from Lockheed Martin of $12.2
million in connection with the Company's assumption of obligations under the
contract for the U.S. Army's Command and Control Vehicle ("C2V") Mission Module
Systems ("MMS").
During the year ended December 31, 1996, $287.8 million was paid by the
Predecessor Company for the acquisition of the Loral Acquired Businesses. See
Note 4 to the Consolidated (Combined) Financial Statements.
All transactions between the Businesses and Lockheed Martin have been
accounted as settled in cash at the time such transactions were recorded by the
Businesses. Accordingly, in 1996, cash flows reflect the purchase of the Loral
Acquired Businesses.
NET CASH FROM (USED IN) FINANCING ACTIVITIES: Cash from financing
activities was $482.0 million for the year ended December 31, 1997, and was
primarily from the debt incurred and proceeds from the issuance of common stock
which were issued to finance the L-3 Acquisition.
The Company was initially capitalized and the related L-3 Acquisition was
funded by a combination of equity of $125.0 million and debt of $400.0 million
aggregating $525.0 million. The equity of $125.0 million was comprised of $80.0
million in cash contributed by the Lehman Partnership and Senior Management and
a $45.0 million retained interest by Lockheed Martin representing partial
consideration to Lockheed Martin for its sale of the Predecessor Company to the
Company. In connection with the L-3 Acquisition, L-3 Communications Corporation
entered into a $275.0 million credit facility consisting of $175.0 million of
term loans (the "Term Loan Facilities") and a $100.0 million revolving credit
facility (initially, and as amended, the "Revolving Credit Facility"). The
initial debt balance of $400.0 million consisted of $175.0 million of
borrowings under the Term Loan Facilities and the sale of $225.0 million of
10 3/8% Senior Subordinated Notes of L-3 Communications Corporation (the "1997
Notes") due May 1, 2007.
Prior to the L-3 Acquisition, the Predecessor Company participated in the
Lockheed Martin cash management system, under which all cash was received and
all payments were made by Lockheed Martin. For purposes of the statements of
cash flows, all transactions with Lockheed Martin were deemed to have been
settled in cash at the time they were recorded by the Predecessor Company. Net
cash from (used in) financing activities of the Predecessor Company for the
three months ended March 31, 1997 and the years ended December 31, 1996 and
1995, were approximately $20.6 million, $267.3 million and ($3.8) million,
respectively, and represent advances from (repayments to) Lockheed Martin, the
Predecessor Company's parent company.
BACKLOG
The Company's funded backlog September 30, 1998 was $813.8 million,
compared with $516.9 million at December 31, 1997 and the Predecessor Company's
funded backlog at December 31, 1996 of $542.5 million. Funded orders, on a pro
forma basis, for the Company for 1997 were $711.5 million. The Predecessor
Company's funded orders for 1996 were $619.5 million. It is expected that
approximately 72% of the backlog at September 30, 1998 will be recorded as
sales over the next twelve-month period. However, there can be no assurance
that the Company's backlog will become revenues in any particular period, if at
all. See "Risk Factors -- Our Backlog of Orders Could be Terminated".
Approximately 70% of the total backlog at September 30, 1998 was directly or
indirectly for defense contracts for end use by the Government. Approximately
$687.7 million of total backlog
43
<PAGE>
at September 30, 1998 was directly or indirectly for U.S. and foreign
government defense contracts, and approximately $15.0 million of total backlog
was directly or indirectly for U.S. and foreign government non-defense
contracts. Foreign customers accounted for approximately $176.3 million of the
total backlog.
RESEARCH AND DEVELOPMENT
Research and development, including bid and proposal costs ("R&D costs"),
sponsored by the Company on a pro forma basis for the nine-month period ended
September 30, 1998 was $43.5 million. Pro forma R&D costs sponsored by the
Company were $53.0 million for the year ended December 31, 1997, and $53.7
million for the year ended December 31, 1996. R&D costs sponsored by the
Predecessor Company were $12.0 million, $36.5 million and $9.8 million for the
three months ended March 31, 1997 and the years ended December 31, 1996 and
1995, respectively. The Loral Acquired Businesses sponsored R&D costs of $5.6
million for the three months ended March 31, 1996 and $21.4 million for the
year ended December 31, 1995. Accordingly, the Company, Predecessor Company and
the Loral Acquired Businesses, in the aggregate, sponsored R&D costs of $40.9
million, $42.1 million and $31.2 million, respectively, for the years ended
December 31, 1997, 1996 and 1995. Customer-funded research and development was
$117.1 million in 1997, as compared with $153.5 million for 1996. The decrease
in customer-funded research and development in 1997 is due primarily to
research and development programs existing in 1996 which moved into the
production phase during 1997.
CONTINGENCIES
See Note 9 to the Unaudited Condensed Consolidated (Combined) Financial
Statements as of September 30, 1998 and Note 13 to the Consolidated (Combined)
Financial Statements as of December 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosure about Segments of an Enterprise and Related Information". SFAS No.
131 establishes accounting standards for the way that public enterprises report
information about operating segments and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS
No. 132 revises employers' disclosures about pension and other postretirement
benefits plans. It does not change the measurement or recognition of those
plans. It standardizes the disclosure requirements for pensions and other
postretirements benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when SFAS No. 87
"Employers' Accounting for Pensions", SFAS No. 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits" and SFAS No. 106 "Employers Accounting for Postretirement Benefits
Other Than Pensions" were issued. SFAS 132 suggests combined formats for
presentation of pension and other postretirement benefits disclosures. The
Company is currently evaluating the impact, if any, of SFAS No. 131 and SFAS
No. 132.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which
provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact, if any, of
SOP 98-5.
In September 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative
44
<PAGE>
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is currently
evaluating the impact, if any, of SFAS No. 133 which is effective for all
quarters of fiscal years beginning after September 15, 1999.
INFLATION
The effect of inflation on the Company's sales and earnings has not been
significant. Although a majority of the Company's sales are made under
long-term contracts, the selling prices of such contracts, established for
deliveries in the future, generally reflect estimated costs to be incurred in
these future periods. In addition, some contracts provide for price adjustments
through escalation clauses.
YEAR 2000 COMPLIANCE
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Because the Company's business
units operate autonomously, each business unit has undertaken an effort to
identify and mitigate Year 2000 issues in their information systems, products,
facilities, suppliers and customers. The Company's Year 2000 compliance efforts
are a composite of its business units' individual Year 2000 compliance efforts,
coordinated through a company-wide program instituted to oversee, guide and
track its business units' Year 2000 compliance efforts and to facilitate
company-wide communications regarding Year 2000 compliance methods.
Each business unit has appointed a Year 2000 project manager who oversees
a team responsible for performing its Year 2000 efforts in four phases: (i)
define, identify and inventory possible sources of Year 2000 issues, including
internal systems and products and services sold to customers; (ii) analyze and
determine the nature and extent of Year 2000 issues and develop project plans
to address those issues; (iii) implement and execute project plans to remediate
or replace non-compliant items, as appropriate, based upon assessed risk and
priority; and (iv) commence and complete testing, continue monitoring readiness
and prepare necessary contingency plans. The progress of this program is
monitored at each business unit with oversight by Corporate Management. This
oversight includes periodic reviews as well as visits to each business unit to
monitor progress with the plans. Management plans to complete the first three
phases of the program for a substantial majority of critical systems within the
Company by the end of March 1999 and to have nearly all significant information
systems, products and facilities in the final phase of the program by mid-1999.
The total costs associated with the Company's Year 2000 efforts are
estimated to be $16.2 million, including $7.1 million of capitalizable costs
with the remaining costs expensed as incurred. The Company has incurred
approximately $6.6 million of such costs to date. Substantially all of the
remaining estimated costs are expected to be incurred in 1999.
The Company believes that the decentralized nature of its systems and its
Year 2000 efforts reduce the risk that its operations will be interrupted by
the failure of any individual internal critical system to be Year 2000
compliant by the end of 1999. The Company's business operations are also
dependent on the Year 2000 readiness of its customers and infrastructure
suppliers in areas such as utilities, communications, transportation and other
services. In those environments, there could be instances of failure that could
cause disruptions in business transaction processes of the Company. The
likelihood and effects of failures in infrastructure systems and in the
customer and supply chains cannot be estimated, but such a failure could
potentially result in a material adverse impact on results of operations,
liquidity or financial position of the Company. The Company continues to
attempt to assess the Year 2000 compliance and readiness of its material
third-party suppliers and customers. Such attempts include written inquiries as
to their Year 2000 certification of compliance. As indicated above, contingency
plans for suppliers, customers and critical systems impacted by Year 2000
issues will be developed in the fourth quarter. These estimates and projections
could change as work progresses.
45
<PAGE>
BUSINESS
References to pro forma financial data reflect the L-3 Acquisition, the
1998 Acquisitions, the Financing Transactions and the Notes Offering as if they
had occurred on January 1, 1997. The pro forma data do not give effect to this
offering or to any of the Company's other acquisitions, including the
acquisition of Microdyne Corporation.
COMPANY OVERVIEW
L-3 Communications is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. We produce
secure, high data rate communication systems, microwave components, avionics
and ocean systems and telemetry, instrumentation and space products. These
systems and products are critical elements of virtually all major
communication, command and control, intelligence gathering and space systems.
Our systems and specialized products are used to connect a variety of airborne,
space, ground- and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our customers include the U.S. department of
defense, certain U.S. government intelligence agencies, major aerospace and
defense contractors, foreign governments and commercial customers. For the
twelve-month period ended September 30, 1998, we had pro forma sales of
$1,139.7 million, pro forma EBITDA of $148.4 million, pro forma net income of
$26.5 million and pro forma diluted earnings per common share of $0.93. Our
funded backlog as of September 30, 1998 was $813.8 million. These results
reflect internal growth and the execution of our strategy of acquiring
businesses that complement or extend our product lines.
Our business areas employ proprietary technologies and capabilities and
have leading positions in their respective primary markets. We have organized
our operations into two primary business areas: Secure Communication Systems
and Specialized Communication Products. For the twelve-month period ended
September 30, 1998, the Secure Communication Systems business area generated
approximately $481.5 million of pro forma sales and $61.2 million of pro forma
EBITDA, and the Specialized Communication Products business area generated
$658.2 million of pro forma sales and $87.2 million of pro forma EBITDA. In
addition, we are seeking to expand our products and technologies in commercial
markets as we discuss under "--Emerging Commercial Products" below.
SECURE COMMUNICATION SYSTEMS. We are the established leader in secure,
high data rate communications for military and other U.S. government
reconnaissance and surveillance applications. Our Secure Communication Systems
operations are located in Salt Lake City, Utah, Camden, New Jersey and
Shrewsbury, New Jersey. These operations are predominantly cost plus, sole
source contractors supporting long-term programs for the U.S. armed forces and
classified customers. Our major secure communication programs and systems
include:
o secure data links for airborne, satellite, ground- and sea-based
remote platforms for information collection, command and control and
dissemination to users in real time;
o strategic and tactical signal intelligence systems that detect,
collect, identify, analyze and disseminate information and related
support contracts for military and intelligence efforts;
o secure telephone, fax and network equipment and encryption
management;
o communication software support services to military and related
government intelligence markets; and
o communications systems for surface and undersea platforms and manned
space flights.
We believe that we have developed virtually every high bandwidth data link
that is currently used by the military for surveillance and reconnaissance. We
are also a leading supplier of communication software support services to
military and related government intelligence markets. In addition to these core
government programs, we are capitalizing on our technology base by expanding
into related commercial communication equipment markets. For instance, we are
applying our high data rate communications and archiving technology to the
medical image archiving market and our wireless communication expertise to
develop local wireless loop telecommunications equipment for the last mile
interconnect.
46
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS. This business area encompasses three
product categories:
Microwave Components. We are the preeminent worldwide supplier of
commercial off-the-shelf, high-performance microwave components and frequency
monitoring equipment. Our microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. We also provide
state-of-the-art, space- qualified communication components including channel
amplifiers and frequency filters for the commercial communications satellite
market serving all frequencies, including Ka band. Approximately 79% of
Microwave Components sales for the nine-month period ended September 30, 1998
were made to commercial customers, including Loral Space & Communications,
Ltd., Motorola, Inc., Lucent Technologies Inc., AT&T Corp. and Lockheed Martin.
Avionics and Ocean Products. Avionics and Ocean Products include our
aviation recorders, display systems, antenna systems, acoustic undersea warfare
systems and naval power distribution, conditioning, switching and protection
equipment for naval ships and submarines. We are the world's leading
manufacturer of commercial cockpit voice and flight data recorders (known as
"black boxes"). These recorders are sold under the Fairchild brand name both to
aircraft manufacturers and to the world's major airlines for their existing
fleets of aircraft. Our aviation recorders are also installed on military
transport aircraft throughout the world. We provide military and high-end
commercial displays for use in military aircraft. We also manufacture high
performance surveillance and precision millimeter wave antennas and related
equipment for U.S. Air Force, U.S. Army and U.S. Navy aircraft and are the
leading supplier of ground-based radomes. We are one of the world's leading
product suppliers of acoustic undersea warfare systems and airborne dipping
sonar systems to the U.S. and over 20 foreign navies. We are the only fully
integrated, full-line provider of qualified turnkey electrical power delivery
and management systems for U.S. Navy surface ships and submarines.
Telemetry, Instrumentation and Space Products. Our Telemetry,
Instrumentation and Space Products operations develop and manufacture
commercial off-the-shelf, real-time data collection and transmission products
and components for missile, aircraft and space-based electronic systems. These
products are used to gather flight data and other critical information and
transmit it from air or space to the ground. Telemetry products are also used
for range safety and training applications to simulate battlefield situations.
We are also a leading global satellite communications systems provider offering
systems and services used in the satellite transmission of voice, video and
data through earth stations for uplink and downlink terminals. We provide
global satellite communications systems and services to customers that include
foreign post, telephone and telegraph administrations, domestic and
international prime communications infrastructure contractors,
telecommunications and satellite service providers, broadcasters and
media-related companies, government agencies and large corporations. We also
provide commercial, off-the-shelf satellite control software and software,
TT&C, mission processors and software engineering services to the worldwide
military, civilian and commercial satellite markets.
EMERGING COMMERCIAL PRODUCTS. Building upon our core technical expertise
and capabilities, we are seeking to expand into several closely aligned
commercial business areas and applications. Emerging Commercial Products
currently include the following four niche markets:
o medical archiving and simulation systems;
o local wireless loop telecommunications equipment;
o airport security equipment; and
o information network security.
A majority of these commercial products were developed based on technology
used in our military businesses with relatively small additional expense. We
are applying our technical capabilities in high data rate communications and
archiving technology developed in our Secure Communication Systems business
area to the medical image archiving market together with the General Electric
Company's medical systems business. Based on secure, high data rate
communication technology also
47
<PAGE>
developed in our Secure Communication Systems business area, we have developed
local wireless loop telecommunications equipment that is primarily designed for
emerging market countries and rural areas where voice and data communication
infrastructure is inadequate or does not exist. We have completed the
development phase for the local wireless loop telecommunications equipment and
have begun deliveries. In addition, the Federal Aviation Administration (the
"FAA") awarded us a development contract for next generation airport security
equipment for explosive detection. On November 23, 1998, we received FAA
certification for our eXaminer 3DX (Trade Mark) 6000 system which is the only
second generation system to receive certification and the only system to
generate full, three-dimensional images of all objects in a piece of baggage.
To capitalize on commercial opportunities for the information security
technologies we developed in our Secure Communications Systems business area,
we have also created a new subsidiary focusing on developing and marketing
secure information and communication systems for commercial clients. This
subsidiary acquired a network security software product through a
majority-owned joint venture. We released the third generation of this network
security software, Expert(TM) 3.0, on November 9, 1998. Taken together, revenues
generated from our Emerging Commercial Products have not yet been material to
us.
48
<PAGE>
The Company's systems and products are summarized in the following tables:
SECURE COMMUNICATION SYSTEMS
(PRO FORMA SALES FOR THE TWELVE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998: $481.5 MILLION)
<TABLE>
<CAPTION>
SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
<S> <C> <C>
HIGH DATA RATE COMMUNICATIONS
o Wideband data links and ground o High performance, wideband secure o Used on aircraft, naval ships,
terminals communication links for interoperable unmanned aerial vehicles and
tactical battlefield data satellites for relaying of
communication and reconnaissance intelligence and reconnaissance
information
SATELLITE COMMUNICATION TERMINALS
o Ground-based satellite o Interoperable, transportable ground o Provide remote personnel with
communication terminals and terminals for remote data links to communication links to distant forces
payloads distant segments via commercial or
military satellites
SPACE COMMUNICATION AND SATELLITE CONTROL
o Satellite communication and o On-board satellite external o International Space Station; Earth
tracking systems communications, video systems, solid Observing Satellite; Landsat-7; Space
state recorders and ground support Shuttle; and National Oceanic and
equipment Atmospheric Administration weather
satellites
o Satellite command and control o Software integration, test and o Air Force satellite control network
sustainment and support maintenance support for Air Force and Titan IV launch system
satellite control network;
engineering support for satellite
launch systems
MILITARY COMMUNICATIONS
o Shipboard communication systems o Internal and external communications o Shipboard voice communications systems
(radio room) for ships and submarines for Aegis cruisers and destroyers and
fully automated Integrated Radio Room
(IRR) for ship-to-ship communications
on Trident submarines
o Digital battlefield communications o Communications on the move for o Communication systems for U.S. Army
tactical battlefield C(2)V
o Communication software support o Value-added, critical software o ASAS, JSTARS, and GUARDRAIL
services support for C(3)I systems
INFORMATION SECURITY SYSTEMS
o Secure Telephone Unit (STU o Secure and non-secure voice, data and o Office and battlefield secure and
III)/Secure Terminal Equipment video communication utilizing ISDN non-secure communication for armed
(STE) and ATM commercial network services, intelligence and security
technologies agencies
o Local management device/key o Provides electronic key material o User authorization and recognition and
processor (LMD/KP) accounting, system management and message encryption for secure
audit support functions for secure communication
data communication encryption
o Information processing systems o Custom designed strategic and o Classified military and national
tactical signal intelligence systems agency intelligence efforts
that detect, collect, identify,
analyze and disseminate information
and related support contracts
</TABLE>
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SPECIALIZED COMMUNICATION PRODUCTS
(PRO FORMA SALES FOR THE TWELVE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998: $658.2 MILLION)
<TABLE>
<CAPTION>
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
<S> <C> <C> <C>
MICROWAVE COMPONENTS (CATALOG)
o Passive components, switches and o Radio transmission, switching and o Broad-band and narrow-band commercial
wireless assemblies conditioning; antenna and base station applications (PCS, cellular, SMR, and
testing and monitoring paging infrastructure) sold under the
Narda brand name; and broad-
band military applications
o Safety products o Radio frequency (RF) monitoring and o Monitor cellular base station and
measurement for safety industrial RF emissions frequency
monitoring
o Semiconductors (diodes, capacitors) o Radio frequency switches, limiters, o Various industrial and military end
voltage control, oscillators, harmonic uses, including commercial satellites,
generators avionics and specialty communication
products
o Satellite and wireless components o Satellite transponder control, channel o China Sat, PanAmSat, Telstar, Sirius,
(channel amplifiers, transceivers, and frequency separation Tempo, Tiros, Milstar, GPS and LandSat
converters, filters and multiplexers)
o Amplifiers and amplifier based o Automatic Test Equipment (ATE), o LEO satellites, ground stations, LMDS,
components (amplifiers, up/down military EW, ground and space MMDS, military EW and ATE
converters and Ka assemblies) communications
AVIONICS AND OCEAN PRODUCTS
Aviation Recorders
o Solid state crash resistant cockpit o Voice recorders continuously record o Installed on business and commercial
voice and flight data recorders most recent 30-120 minutes of voice and aircraft and certain military
sounds from cockpit and aircraft transport aircraft; sold to both
inter-communications. Flight data aircraft OEMs and airlines under the
recorders record the last 25 hours of Fairchild brand name
flight parameters
o Solid state video recorders o Reconnaissance platforms o New product
Antenna Products
o Ultra-wide frequency and advanced radar o Surveillance; radar detection o F-15, F-16, F-18, E-2C, P-3, C-130,
antenna systems and rotary joints B-2, AWACS, Apache, Cobra, Mirage
(France), Maritime Patrol (U.K.) and
Tornado (U.K.)
o Precision antenna systems serving major o Antennas for high frequency, millimeter o Various military and commercial
military and commercial frequencies, satellite communications programs and customers
including Ka band scientific astronomy
o Ground based radomes o Protective shields for antennas against o FAA, weather radar and military
weather applications
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SPECIALIZED COMMUNICATION PRODUCTS
(CONTINUED)
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
Display Products
o Cockpit and mission display systems and o High performance, ruggedized flat panel o E-2C, V-22, F-14, F-117, E-6B, C-130,
controls and cathode ray tube displays and AWACS, JSTARS S-3 and AH-64
processors
Ocean Products
o Airborne dipping sonar systems o Submarine detection and localization o SH-60, SH-2/3, AB-212, EH-101 and Lynx
Helicopters
o Submarine and surface ship towed arrays o Submarine and surface ship detection o SSN, SSBN, DDG-963, and FFG-7
and localization
o Torpedo defense systems o Torpedo detection and jamming o SSN, SSBN and DDG-963
o Mine countermeasure systems o Coastal and route survey o MCDV (Canada)
o Naval and commercial power delivery and o Switching, distribution and protection, o All naval combatants; submarines,
switching products as well as frequency and voltage surface ships and aircraft carriers
conversion -Trident, 688, NSSN, DDG51, CG49,
DD963 and Nimitz -class CVN
o Commercial transfer switches, UPS o Production and maintenance of systems o FAA, financial institutions and rail
systems and power products and high-speed switches for power transportation
interruption prevention for computer
systems
o Shipboard communications and controls o Design, develop and manufacture of ship o CVN, NSSN
control and interior communications
equipment
o Ship electrical repair and overhaul o Repair, installation, overhaul and o All naval combatants
testing services for USN shipboard
electrical, electronic and ordinance
systems
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
Airborne, Ground and Space Telemetry
o Aircraft, missile and satellite o Real time data acquisition, o JSF, F-15, F-18, F-22, Comanche,
telemetry and instrumentation systems measurement, processing, simulation, Nimrod (U.K.), Tactical Hellfire,
distribution, display and storage for Titan, EELV, A2100, ATHENA, ARTEMIS
flight testing and ICO
o Training range telemetry systems o Training ranges and test ranges o Combat simulation and tests
Space Products
o Global satellite communications systems o Satellite transmission of voice, video o Rural telephony or private networks,
supplier and data direct to home uplinks, satellite news
gathering and wideband applications
o Safe and arms processor o Weapons o Hellfire, Javeline
</TABLE>
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<PAGE>
INDUSTRY OVERVIEW
The defense industry has undergone significant changes precipitated by
ongoing federal budget pressures and new roles and missions to reflect changing
strategic and tactical threats. Since the mid-1980's, the overall U.S. defense
budget has declined in real dollars. In response, the DoD had focused its
resources on enhancing its military readiness, joint operations and digital
command and control communications capabilities by incorporating advanced
electronics to improve the performance, reduce operating cost and extend the
life expectancy of its existing and future platforms. The emphasis on system
interoperability, force multipliers and providing battlefield commanders with
real-time data is increasing the electronics content of nearly all of the major
military procurement and research programs. As a result, the DoD's budget for
communications and defense electronics is expected to grow.
The industry has also undergone dramatic consolidation resulting in the
emergence of three dominant prime system contractors (The Boeing Company
("Boeing"), Lockheed Martin and Raytheon Company ("Raytheon")). One outgrowth
of this consolidation among the remaining major prime contractors is their
desire to limit purchases of products and sub-systems from one another.
However, there are numerous essential products, components and systems that are
not economical for the major prime contractors to design, develop or
manufacture for their own internal use which creates opportunities for merchant
suppliers such as L-3. As the prime contractors continue to evaluate their core
competencies and competitive position, focusing their resources on larger
programs and platforms, the Company expects the prime contractors to continue
to exit non-strategic business areas and procure these needed elements on more
favorable terms from independent, commercially oriented merchant suppliers.
Recent examples of this trend include divestitures of certain non-core
defense-related businesses by AlliedSignal Inc. ("AlliedSignal"), Lockheed
Martin and Raytheon.
The prime contractors' focus on cost control is also driving increased use
of commercial off-the-shelf products for upgrades of existing systems and in
new systems. The Company believes the prime contractors will continue to be
under pressure to reduce their costs and will increasingly seek to focus their
resources and capabilities on major systems, turning to commercially oriented
merchant suppliers to produce sub-systems, components and products. Going
forward, successful merchant suppliers will use their resources to complement
and support, rather than compete with the prime contractors. L-3 anticipates
the relationship between the major prime contractors and their primary
suppliers will, as in the automotive and commercial aircraft industry, develop
into critical partnerships encompassing increasingly greater outsourcing of
non-core products and systems by the prime contractors to their key merchant
suppliers and increasing supplier participation in the development of future
programs. Early involvement in the upgrading of existing systems and the design
and engineering of new systems incorporating these outsourced products will
provide merchant suppliers, including the Company, with a competitive advantage
in securing new business and provide the prime contractors with significant
cost reduction opportunities through coordination of the design, development
and manufacturing processes.
BUSINESS STRATEGY
Management has successfully integrated the business units of Lockheed
Martin it acquired in the L-3 Acquisition and enhanced the Company's operating
efficiency through reduced overhead expenses and facility rationalization.
These efforts resulted in improvements in sales, profitability and competitive
contract award win rates. Going forward, L-3 intends to leverage its market
position, diverse program base and favorable mix of cost plus to fixed price
contracts to enhance its profitability and to establish itself as the premier
merchant supplier of communication systems and products to the major prime
contractors in the aerospace/defense industry as well as the Government. The
Company's strategy to continue to achieve its objectives includes:
o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. Management has developed
strong relationships with virtually all of the prime contractors, the DoD
and other major government agencies, enabling L-3 to identify business
opportunities and anticipate customer needs. As an independent merchant
supplier, the Company anticipates its growth will be driven by expanding
its share of
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existing programs and by participating in new programs. Management
identifies opportunities where it believes it will be able to use its
strong relationships to increase its business presence and allow its
customers to reduce their costs. The Company also expects to benefit from
increased outsourcing by prime contractors who in the past may have limited
their purchases to captive suppliers and who are now expected to view L-3's
capabilities on a more favorable basis given its status as an independent
company. L-3's independent status positions it to be the desired merchant
supplier to multiple bidders on prime contract bids. As an example of the
Company's merchant supplier strategy, L-3 equipment is included in all
three prime contractor bids for the Airborne Standoff Radar ("ASTOR")
program in the United Kingdom and both prime contractor bids for the DoD's
Joint Air Surface Standoff Missile ("JASSM") program.
o SUPPORT CUSTOMER REQUIREMENTS. A significant portion of L-3's sales
are derived from high-priority, long-term programs and from programs for
which the Company has been the incumbent supplier, and in many cases acted
as the sole provider, over many years. Approximately 60% of the Company's
total pro forma sales of $834.5 million for the nine-month period ended
September 30, 1998 were generated from sole source contracts. L-3's
customer satisfaction and excellent performance record are evidenced by its
performance-based award fees exceeding 89% on average over the past two
years. Management believes prime contractors will increasingly award
long-term, sole source, outsourcing contracts to the merchant supplier they
believe is most capable on the basis of quality, responsiveness, design,
engineering and program management support as well as cost. Reflecting
L-3's strong competitive position, the Company has experienced a contract
award win rate on a pro forma basis for the nine-month period ended
September 30, 1998 in excess of 59% on new competitive contracts for which
it competes and in excess of 90% on contracts for which it is the
incumbent. The Company intends to continue to align its research and
development, manufacturing and new business efforts to complement its
customers' requirements and provide state-of-the-art products.
o ENHANCE OPERATING MARGINS. Since the L-3 Acquisition in April 1997,
management has reduced corporate administrative expenses and facilities
costs, increased sales and improved competitive contract award win rates.
Enhancement of operating margins was primarily due to efficient management
and elimination of significant corporate expense allocations which existed
prior to the L-3 Acquisition. Pro forma EBITDA (excluding the 1998
Acquisitions) as a percentage of sales improved from 12.5% in 1996 to 13.4%
in 1997. Management intends to continue to enhance its operating
performance by reducing overhead expenses, continuing consolidation and
increasing productivity.
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. L-3 has developed
strong, proprietary technical capabilities that have enabled it to capture
a number one or two market position in most of its key business areas,
including secure, high data rate communications systems, solid state
aviation recorders, telemetry, instrumentation and space products, advanced
antenna systems and high performance microwave components. For the period
from January 1, 1996 to September 30, 1998, the Company, on a pro forma
basis, has invested over $150.0 million in Company-sponsored independent
research and development, including bid and proposal costs, in addition to
making substantial investments in its technical and manufacturing
resources. Further, the Company has a highly skilled workforce including
approximately 2,500 engineers. Management is applying the Company's
technical expertise and capabilities into several closely aligned
commercial business areas and applications, such as medical imaging archive
management, wireless telephony and airport security equipment and will
continue to explore other similar commercial opportunities.
o MAINTAIN DIVERSIFIED BUSINESS MIX. The Company enjoys a diverse
business mix with a limited program exposure, a favorable balance of cost
plus and fixed price contracts, a significant sole source follow-on
business and an attractive customer profile. The Company's largest program,
representing approximately 7% of $834.5 million pro forma sales for the
nine-month period ended September 30, 1998, is a long-term, sole source,
cost plus contract for the U-2 Program. No other program represented more
than 5% of pro forma sales for the nine-month period ended
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<PAGE>
September 30, 1998. Further, the Company's pro forma sales mix of contracts
for the nine-month period ended September 30, 1998 was 29% cost plus and
71% fixed price, providing the Company with a favorable mix of predictable
profitability (cost plus) and higher margin (fixed price) business. L-3
also enjoys an attractive customer mix of defense and commercial business,
with DoD related sales accounting for 68% and commercial and federal
(non-DoD) sales accounting for approximately 32% of pro forma sales of
$834.5 million for the nine-month period ended September 30, 1998. The
Company intends to leverage this favorable business profile to expand its
merchant supplier business base.
o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent industry
consolidation has essentially eliminated traditional middle-tier
aerospace/defense companies. This level of consolidation is now beginning
to draw the concern of the DoD and federal anti-trust regulators. In 1997
and 1998, a number of merchant supplier companies were sold: the Computing
Devices International division of Ceridian to General Dynamics Corp.
("General Dynamics"), Kaman Sciences Corp. ("Kaman Sciences") to ITT
Industries, Inc. ("ITT"), BDM International, Inc. ("BDM") to TRW Inc.
("TRW"), TASC Inc., a subsidiary of Primark Corporation, to Litton
Industries, Inc. ("Litton") and Tracor, Inc. to GEC Marconi, a unit of The
General Electric Company, p.l.c. As a result, the Company anticipates that
the consolidation of the smaller participants in the defense industry will
create attractive complementary acquisition candidates for L-3 in the
future as these companies continue to evaluate their core competencies and
competitive position. L-3 intends to enhance its existing product base
through internal research and development efforts as well as selective
acquisitions and add new products to its product base through acquisitions
in areas synergistic with L-3's present technology. The Company seeks to
acquire potential targets with the following criteria: (i) significant
market position in its business area, (ii) product offerings which
complement and/or extend those of L-3 and (iii) positive future growth and
earnings prospects.
ACQUISITION STRATEGY
Since L-3's formation in April 1997, the Company has actively pursued its
acquisition strategy. Since completing the L-3 Acquisition, the Company has
purchased twelve additional businesses for an aggregate cash purchase price
including assumed debt and expenses, net of cash acquired, of approximately
$534.0 million, subject to certain post-closing adjustments, and in certain
cases additional consideration based on post-closing performance. The Company
considers and executes strategic acquisitions on an ongoing basis and may be
evaluating acquisitions or engaged in acquisition negotiations at any given
time. The Company has reached agreement on or is in discussions regarding a
number of potential acquisition opportunities and expects to use its bank
credit facilities to fund these transactions if it proceeds with them. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources".
RECENT DEVELOPMENTS
SPD Technologies, Inc. On August 13, 1998, the Company acquired all of the
outstanding common stock of SPD for $230.0 million in cash, subject to certain
post-closing adjustments. SPD is the leading supplier to the U.S. Navy for
subsystems that manage, control, distribute, protect and condition electrical
power in surface ships and submarines. SPD's major products include electronic
solid state protection products, switchgear, high-speed transfer switches,
fault isolation units, frequency converters and inverters, voltage transformers
and uninterruptible power supply systems. SPD's products are installed in every
nuclear submarine, aircraft carrier and surface platform operated by the U.S.
Navy. SPD also provides shipboard communications and control as well as support
service for installed products. This acquisition was financed using cash from
operations and borrowings under the Company's bank credit facilities.
Microdyne Corporation. On December 3, 1998, the Company signed an
agreement to acquire all of the outstanding common stock of Microdyne for
approximately $90.0 million in cash, including the repayment of Microdyne's
debt. For the fiscal year ended September 30, 1998, Microdyne reported actual
revenues of $58.3 million, operating income of $1.3 million and net income of
$0.3 million. On
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a pro forma basis, including acquisitions Microdyne made during its 1998 fiscal
year as if they had occurred at the beginning of its fiscal year, Microdyne's
revenues would have been $73.5 million, operating income was $3.6 million and
net income was $0.9 million. Microdyne's actual earnings before interest,
taxes, depreciation and amortization for the recent fiscal year was $2.9
million. Pro forma earnings before interest, taxes, depreciation and
amortization would have been $11.1 million before non-recurring charges of $5.1
million primarily for the write-off of acquired in-process research and
development costs. Pursuant to the acquisition agreement, one of the Company's
subsidiaries has purchased 91.9% of the common stock of Microdyne in a cash
tender offer. We expect to complete the merger of Microdyne with this
subsidiary in early 1999. Microdyne is a leading global developer and
manufacturer of aerospace telemetry receivers, secure communications and
technical support services, including specialized telemetry high-frequency
radios used in aerospace and satellite communications for data gathering and
analysis. Microdyne also provides products for the government and commercial
signal intelligence markets and support and repair services for electronic
products companies. Microdyne's aerospace telemetry products will enable us to
provide integrated solutions to our space customers' requirements for command,
control, telemetry and tracking. The purchase of shares of Microdyne common
stock was financed using available cash and borrowings under the Senior Credit
Facilities. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources".
HISTORY
Holdings was formed in April 1997 by Mr. Frank C. Lanza, the former
President and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the
former Senior Vice President and Controller of Loral (collectively, "Senior
Management"), the Lehman Partnership and Lockheed Martin to carry-out the L-3
Acquisition. In May 1998, Holdings successfully completed the IPO, raising net
proceeds of $139.5 million. L-3 Communications Corporation raised net proceeds
of $173.8 million in a concurrent debt offering. In December 1998, L-3
Communications Corporation raised net proceeds of $193.7 million in the Notes
Offering.
PRODUCTS AND SERVICES
SECURE COMMUNICATION SYSTEMS
L-3 is a leader in communication systems for high performance intelligence
collection, imagery processing and ground, air, sea and satellite
communications for the DoD and other government agencies. The Salt Lake City
operation provides secure, high data rate, real-time communication systems for
surveillance, reconnaissance and other intelligence collection systems. The
Camden operation designs, develops, produces and integrates communication
systems and support equipment for space, ground and naval applications. The
Shrewsbury operation provides communication software support services to
military and related government intelligence markets. Product lines of the
Secure Communication Systems business include high data rate communications
links, satellite communications ("SATCOM") terminals, Navy vessel communication
systems, space communications and satellite control systems, signal
intelligence information processing systems, information security systems,
tactical battlefield sensor systems and commercial communication systems.
o HIGH DATA RATE COMMUNICATIONS
The Company is a technology leader in high data rate, covert,
jam-resistant microwave communications in support of military and other
national agency reconnaissance and surveillance applications. L-3's product
line covers a full range of tactical and strategic secure point-to-point and
relay data transmission systems, products and support services that conform to
military and intelligence specifications. The Company's systems and products
are capable of providing battlefield commanders with real time, secure
surveillance and targeting information and were used extensively by U.S. armed
forces in the Persian Gulf war.
During the 1980s, largely based on its prior experience with command and
control guidance systems for remotely-piloted vehicles, L-3 developed its
current family of strategic and tactical data
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links, including its Modular Interoperable Data Link ("MIDL") systems and
Modular Interoperable Surface Terminals ("MIST"). MIDL and MIST technologies
are considered virtual DoD standards in terms of data link hardware. The
Company's primary focus is spread spectrum communication (based on CDMA
technology), which involves transmitting a data signal with a high rate noise
signal so as to make it difficult to detect by others, and then re-capturing
the signal and removing the noise. The Company's data links are capable of
providing information at over 200 Mb/s.
L-3 provides these secure high band width products to the U.S. Air Force,
Navy, Army and various Government agencies, many through long-term sole source
programs. The scope of these programs include air-to-ground, air-to-air,
ground-to-air and satellite communications. Government programs include: U-2
Support Program, Common High-Band Width Data Link ("CHBDL"), Battle Group
Passive Horizon Extension System ("BGPHES"), Light Airborne Multi-Purpose
System ("LAMPS"), TriBand SATCOM Subsystem ("TSS"), major unmanned aerial
vehicle ("UAV") programs and Direct Air-Satellite Relay ("DASR").
o SATELLITE COMMUNICATION TERMINALS
L-3 provides ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals to
communicate with commercial, military and international satellites. These
terminals provide remote personnel with anywhere, anytime effective
communication capability and provide communications links to distant forces.
The Company's TriBand SATCOM Subsystem ("TSS") employs a 6.25 meter tactical
dish with a single point feed that provides C, Ku and X band communication to
support the U.S. Army. The Company also offers an 11.3 meter dish which is
transportable on two C-130 aircraft. The SHF Portable Terminal System ("PTS")
is a lightweight (28 lbs.), manportable terminal, which communicates through
DSCS, NATO or SKYNET satellites and brings unprecedented connectivity to small
military tactical units and mobile command posts. L-3 delivered 14 of these
terminals for use by NATO forces in Bosnia.
o SPACE COMMUNICATIONS AND SATELLITE CONTROL
Continuing L-3's tradition of providing communications for every manned
U.S. space flight since Mercury, the Company is currently designing and testing
three communication subsystems for the International Space Station ("ISS").
These systems will control all ISS radio frequency ("RF") communications and
external video activities. The Company also provides solid-state recorders and
memory units for data capture, storage, transfer and retrieval for space
applications. The standard NASA tape recorder, which was developed and produced
by the Company, has completed over four million hours of service without a
mission failure. Current programs include recorders for the National Oceanic &
Atmospheric Administration ("NOAA") weather satellites, the Earth Observing
Satellite ("EOS"), AM spacecraft and Landsat-7 Earth-monitoring spacecraft. The
Company also provides space and satellite system simulation, satellite
operations and computer system training, depot support, network engineering,
resource scheduling, launch system engineering, support, software integration
and test through cost-plus contracts with the U.S. Air Force.
o MILITARY COMMUNICATIONS
The Company provides integrated, computer controlled switching systems for
the interior and exterior voice and data needs of today's Navy military
vessels. The Company's products include Integrated Voice Communication Systems
("IVCS") for Aegis cruisers and destroyers and the Integrated Radio Room
("IRR") for Trident class submarines, the first computer controlled
communications center in a submarine. These products integrate the intercom,
tactical and administrative communications network into one system accessing
various types of communication terminals throughout the ship. The Company's
MarCom 2000 secure digital switching system is in development for the Los
Angeles class attack submarine and provides an integrated approach to the
specialized voice and data communications needs of a shipboard environment for
internal and external communications, command and control and air traffic
control. The Company also offers on-board, high data rate communications
systems which provide a data link for carrier battle groups which are
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interoperable with the U.S. Air Force's surveillance/ reconnaissance terminal
platforms. The Company provides the US Army's Command and Control Vehicle
("C2V") Mission Module Systems ("MMS"). MMS provides the "communications on the
move" capability needed for the digital battlefield by packaging advanced
communications into a modified Bradley Fighting Vehicle. The Company is a
proven supplier of superior technological expertise to the DoD, including its
contractors and related government intelligence agencies.
o INFORMATION SECURITY SYSTEMS
The Company has produced more than 100,000 secure telephone units ("STU
III") which are in use today by the U.S. Armed Forces to provide secure
telephone capabilities for classified confidential communication over public
commercial telephone networks. The Company has begun producing the
next-generation digital, ISDN-compatible STE. STE provides clearer voice and
thirteen-times faster data/fax transmission capabilities than the STU III. STE
also supports secure conference calls and secure video teleconferencing. STE
uses a CryptoCard security system which consists of a small, portable,
cryptographic module mounted on a PCMCIA card holding the algorithms, keys and
personalized credentials to identify its user for secure communications access.
The Company also provides LMD/KP which is the workstation component of the
Government's Electronic Key Management System ("EKMS"), the next generation of
information security systems. EKMS is the Government system to replace current
"paper" secret keys used to secure government communications with "electronic"
secret keys. LMD/KP is the component of the EKMS which produces and distributes
the electronic keys. L-3 also develops specialized strategic and tactical
SIGINT systems to detect, acquire, collect, and process information derived
from electronic sources. These systems are used by classified customers for
intelligence gathering and require high speed digital signal processing and
high density custom hardware designs.
SPECIALIZED COMMUNICATION PRODUCTS
MICROWAVE COMPONENTS
L-3 is the preeminent worldwide supplier of commercial off-the-shelf, high
performance RF microwave components, assemblies and instruments supplying the
wireless communications, industrial and military markets. The Company is also a
leading provider of state-of-the-art space-qualified commercial satellite and
strategic military RF products and millimeter amplifier based products. L-3
sells many of these components under the well-recognized Narda brand name and
through a comprehensive catalog of standard, stocked hardware. L-3 also sells
its products through a direct sales force and an extensive network of market
representatives. Specific catalog offerings include wireless products,
electro-mechanical switches, power dividers and hybrids, couplers/detectors,
attenuators, terminations and phase shifters, isolators and circulators,
adapters, control products, sources, mixers, waveguide components, RF safety
products, power meters/monitors and custom passive products. The Company
operates from three principal sites, one in Hauppauge, New York ("Narda East")
and two in Sacramento, California, ("Narda West" and "DBS").
Narda East represents approximately 60% of L-3's microwave sales volume,
offering high performance microwave components, networks and instruments to the
wireless, industrial and military communications markets. Narda East's products
can be divided into three major categories: passive components, higher level
wireless assemblies/monitoring systems and safety instruments.
Passive components are generally purchased in narrow frequency
configurations by wireless original equipment manufacturers and service
providers. Similar components are purchased in wide frequency configurations by
first-tier military equipment suppliers. Commercial applications for Narda
components are primarily in cellular or PCS base stations. Narda also
manufactures higher level assemblies for wireless base stations and the paging
industry. These products include communication antenna test sets, devices that
monitor reflected power to determine if a cellular base station antenna is
working and whether the base station radios are operating at peak power levels.
Military applications include general procurement for test equipment or
electronic surveillance and
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countermeasure systems. Safety products are instruments which are used to
measure the level of non-ionizing radiation in a given area, i.e., from an
antenna, test set or other emitting source, and determine whether human
exposure limits are within federal standards.
Narda West designs and manufactures state-of-the-art space-qualified and
wireless components. Space qualified components include channel amplifiers,
linearizers and diplexers/multiplexers, which are used to separate various
signals and direct them to the appropriate other sections of the payload. Narda
West's primary areas of focus are communications satellite payload products.
Channel amplifiers and linearizers constitute Narda West's main satellite
products. Channel amplifiers amplify the weak signals received from earth
stations by a factor of 1 million, and then drive the power amplifier tubes
that broadcast the signal back to earth. These products are sold to satellite
manufacturers and offer lower cost, lower weight and improved performance as
compared to in-house alternatives. On a typical satellite, for which there are
20 to 50 channel amplifiers, Narda West's channel amplifiers offer cost savings
of up to 60% (up to $1 million per satellite) and decrease launch weight by up
to 25 kilograms. Linearizers, used either in conjunction with a channel
amplifier or by themselves, pre-distort a signal to be transmitted back to
earth before it enters a Traveling Wave Tube ("TWT") for amplification. This
pre-distortion is exactly the opposite of the distortion created at peak power
by the TWT and, consequently has a cancellation effect that keeps the signal
linear over a much larger power band of the tube. This significantly increases
the useful output power of the TWT and consequent terrestrial coverage from the
satellite.
Narda West products include wireless microwave components for cellular and
PCS base station applications. These products include filters used to transmit
and receive channel separation as well as ferrite components which isolate
certain microwave functions, thereby preventing undesired signal interaction.
Other products include a wide variety of high reliability power splitters,
combiners and filters for spacecraft and launch vehicles, such as LLV, Tiros,
THAAD, Mars Surveyor, Peacekeeper, Galileo, Skynet, Cassini, Milstar, Space
Shuttle, LandSat, FltSatCom, GPS, GPS Block IIR, IUS, ACE, SMEX and certain
classified programs. The balance of the operation's business involves wideband
filters used for electronic warfare applications.
DBS designs and manufactures both broad and narrow band amplifiers and
amplifier-based products in the microwave and millimeter wave frequencies.
These amplifiers are used as low-noise, high-gain components in defense and
communications applications. These devices can be narrow band for communication
needs or broadband for electronic warfare. DBS has an extensive offering of
amplifier designs allowing it to rapidly respond to unique requirements from
its marketplace.
DBS offers standard packaged amplifiers for use in various automated test
equipment and system applications. It is also developing higher-level
assemblies for specific military applications in which the amplifier serves as
the cornerstone component. For future growth, DBS is at the forefront of
technology in both the design and manufacturing of millimeter range ((greater
than or equal to) 20GHz) amplifier products for use in emerging communication
applications such as back haul radios, LMDS and ground terminals for LEOS.
Further, DBS is starting to penetrate the space qualified communications market
with designs applicable to many LEO communication satellite needs.
AVIONICS AND OCEAN PRODUCTS
o AVIATION RECORDERS
L-3 manufactures commercial solid-state crash-protected aviation recorders
("black boxes") under the Fairchild brand name, and has delivered over 40,000
flight recorders to airplane manufacturers and airlines around the world.
Recorders are mandated and regulated by various worldwide agencies for
commercial airlines and a large portion of business aviation aircraft.
Management anticipates growth opportunities in Aviation Recorders as a result
of the current high level of orders for new commercial aircraft. Expansion into
the military market shows continued growth opportunities. L-3 Recorders were
recently selected for installation on the fleet of the Royal Australian Air
Force and Royal Australian Army transport aircraft and are currently being
installed on the U.S. Navy C-9 aircraft. There are two types of recorders: (i)
the Cockpit Voice Recorder ("CVR") which records the
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last 30 to 120 minutes of crew conversation and ambient sounds from the cockpit
and (ii) the Flight Data Recorder ("FDR") which records the last 25 hours of
aircraft flight parameters such as speed, altitude, acceleration, thrust from
each engine and direction of the flight in its final moments. Recorders are
highly ruggedized instruments, designed to absorb the shock equivalent to that
of an object traveling at 268 knots stopping in 18 inches, fire resistant to
1,100 degrees centigrade and pressure resistant to 20,000 feet undersea for 30
days. Management believes that the Company has the leading worldwide market
position for CVR's and FDR's.
o ANTENNA PRODUCTS
Under the Randtron brand name, L-3 produces high performance antennas
designed for surveillance, high-resolution, ultra-wide frequency bands,
detection of low radar cross section ("LRCS") targets, LRCS installations,
severe environmental applications and polarization diversity. L-3's main
antenna product is a sophisticated 24-foot diameter antenna operational on all
E-2C aircraft. This airborne antenna consists of a 24-foot rotating aerodynamic
radome containing a UHF surveillance radar antenna, IFF antenna and forward and
aft auxiliary antennas. Production of this antenna began in the early 1980s,
and production is planned beyond 2000 for the E-2C, P-3 and C-130 AEW aircraft.
The replacement for this antenna is a very adaptive radar currently under
development for introduction early in the next decade. L-3 also produces
broad-band antennas for a variety of tactical aircraft and rotary joints for
the AWAC's and E-2C's antenna. Randtron has delivered over 2,000 aircraft sets
of antennas and has a current backlog through 1999. L-3 is a leading supplier
of ground-based radomes. Radomes are designed to enclose an antenna system as a
protective shield against the environment as well as to accentuate the
performance of an antenna system. Radomes are used to enclose antenna systems
used for air traffic control, weather radar, defense and scientific purposes.
o DISPLAY PRODUCTS
L-3 specializes in the design, development and manufacture of ruggedized
display system solutions for military and high-end commercial applications.
L-3's current product lines include cathode ray tubes ("CRTs"), the Actiview
family of active matrix liquid crystal displays ("AMLCD"), and a family of high
performance Display Processing systems. L-3 manufactures flat-panel displays
that are used on platforms such as E-2C, F-117, and the LCAC (Landing Craft Air
Cushion) vehicle. Recent new contracts for flat-panel displays include the
SH-60J helicopter and the C-130 Senior Scout. L-3 also manufactures CRT
displays for the E-2C Hawkeye, V-22 Osprey, and F-14 Tomcat and electronics
used in aircraft anti-lock braking systems.
o OCEAN PRODUCTS
The Company is one of the world's leading suppliers of acoustic undersea
warfare systems, having designed, manufactured and supported a broad range of
compact, lightweight, high performance acoustic systems for navies around the
world for over forty years. This experience spans a wide range of platforms,
including helicopters, submarines and surface ships, that employ the Company's
sonar systems and countermeasures.
SPD is the world's leading provider of state-of-the-art, mission-critical
electronics and electrical power delivery products, systems and subsystems, as
well as communications and control systems for the U.S. Navy and many domestic
and international customers. In addition, SPD provides communications
subsystems and electrical products for transportation and utilities businesses.
SPD's four business units are: SPD Electrical Systems, which is the leading
U.S. manufacturer of military power delivery systems and components focused on
switching, distribution and protection providing engineering design and
development, manufacturing and overhaul and repair services; Power Paragon,
which is one of the world's leading providers of high technology electrical
power distribution, control and conversion systems focused on frequency and
voltage conversion for military and commercial applications; Henschel, which is
the leading designer, developer, and manufacturer of ship control and
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interior communications equipment; and Pac Ord, which is the only combat
systems overhaul and repair contractor, which services the U.S. Naval Fleet on
a national basis with locations in San Diego, Norfolk and Jacksonville.
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
The Company is a leader in component products and systems used in
telemetry and instrumentation for airborne applications such as satellites,
aircraft, UAVs, launch vehicles, guided missiles, projectiles and targets.
Telemetry involves the collection of data from these platforms, its
transmission to ground stations for analysis, and its further dissemination or
transportation to another platform. A principal use of this telemetry data is
to measure as many as 1,000 different parameters of the platform's operation
(in much the same way as a flight data recorder on an airplane measures various
flight parameters) and transmit this data to the ground.
Additionally, for satellite platforms, the equipment also acquires the
command uplink that controls the satellite and transmits the necessary data for
ground processing. In these applications, high reliability of components is
crucial because of the high cost of satellite repair and the length of
uninterrupted service required. Telemetry also provides the data to terminate
the flight of missiles and rockets under errant conditions and/or at the end of
a mission. Telemetry and command/control products are currently provided on
missile programs such as AMRAAM, ASRAAM, AIM-9X, JASSM, JDAM, FOTT, ATACMS and
PAC-3, as well as satellite programs such as GPS BLK IIF, GLOBALSTAR,
EARTHWATCH, SBIRS, LUNAR PROSPECTOR, MTSAT, ARTEMIS and Hughes ICO.
o AIRBORNE, GROUND AND SPACE TELEMETRY
The Company provides airborne equipment and data link systems to gather
critical information and to process, format and transmit it to the ground
through communication data links from a communications satellite, spacecraft,
aircraft and/or missile. These products are available in both COTS and custom
configurations and include software and software engineering services. Major
customers are the major defense contractors who manufacture aircraft, missiles,
warheads, launch vehicles, munitions and bombs. Ground instrumentation activity
occurs at the ground station where the serial stream of combined data is
received and decoded in real-time, as it is received from the airborne
platform. Data can be encrypted and decrypted during this process, an
additional expertise that the Company offers. The Company recently introduced
the NeTstar satellite ground station, which collapses racks of satellite RF
receivers, demodulators and related units into a PC.
o SPACE PRODUCTS
L-3 offers value-added solutions that require complex product integration,
rich software content and comprehensive support to its customers. The Company
focuses on the following niches within the satellite ground segment equipment
market: telephony, video broadcasting and multimedia. The Company's customers
include foreign PTT's, domestic and international prime communications
infrastructure contractors, telecommunications or satellite service providers,
broadcasters and media-related companies.
EMERGING COMMERCIAL PRODUCTS
o MEDICAL ARCHIVING AND SIMULATION SYSTEMS
The Company markets jointly with GE Medical Systems GEMnet (Trade Mark) ,
a cardiac image management and archive system through an exclusive reseller
arrangement with GE Medical Systems. GEMnet (Trade Mark) eliminates the use of
cinefilm in a cardiac catheterization laboratory by providing a direct digital
connection to the laboratory. The system provides for acquisition, display,
analysis and short- and long-term archive of cardiac patient studies, providing
significant cost savings and process improvements to the hospital. The Company
is an exclusive reseller of EchoNet (Trade Mark) pursuant to a
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reseller arrangement with Heartlab, Inc. EchoNet (Trade Mark) is a digital
archive management and review system designed specifically for the
echocardiology profession. The system accepts digital echocardiology studies
from a variety of currently available ultrasound systems, manages the studies,
making them available on a network, and allows the physicians and technicians
to become more productive. EchoNet (Trade Mark) is a trademark of Heartlab,
Inc. GEMnet (Trade Mark) is a trademark of GE.
The Company has approximately a one-third equity ownership interest in
Medical Education Technologies, Inc. ("METI"). METI is a medical technology
company engaged in the development, manufacture and sale of Human Patient
Simulators ("HPS"). The HPS is a computerized system with a life-like mannequin
that reacts to medical treatments and interventions similar to a human being.
Originally oriented to the anesthesiology training and education domain, METI
has expanded into cardiology, critical care, trauma care, allied health care,
military medicine and continuing medical education. METI's target customers for
its HPS include medical schools throughout the world, colleges with registered
nursing programs, community colleges and state, local and volunteer emergency
medical service organizations.
o WIRELESS LOOP TELECOMMUNICATIONS EQUIPMENT
The Company is applying its wireless communication expertise to introduce
local wireless loop telecommunications equipment using a synchronous Code
Division Multiple Access technology ("CDMA") supporting terrestrial and space
based, fixed and mobile communication services. The system's principal targeted
customer base is emerging market countries and rural areas where existing
telecommunications infrastructure is inadequate or non-existent. The Company's
system will have the potential to interface with low earth orbit ("LEO") PCS
systems such as Globalstar, Iridium and/or any local public telephone network.
The Company expects to manufacture for sale certain of the infrastructure
equipment. The Company intends to pursue joint ventures with third parties for
service and distribution capabilities. The Company has entered into product
distribution agreements with Granger Telecom Ltd. for distribution in parts of
Africa, the Middle East and the United Kingdom, and with Unisys for
distribution in parts of Mexico and South America. This same technology is also
being introduced into the Ellipso "big LEO" program to provide the key
communications capability in the ground and user segments. In this program, the
Company will provide the CDMA processing equipment in the Ground Control
Segment and the Ellipso user terminals, both fixed and mobile.
o AIRPORT SECURITY EQUIPMENT
The FAA has awarded the Company a development contract for next generation
airport security equipment for explosive detection. L-3 has teamed with
Analogic Corporation and GE to design and produce an explosive detection system
("EDS") utilizing a dual energy computer tomography ("CT") X-ray system. L-3's
EDS system, the eXaminer 3DX (Trade Mark) 6000, will analyze the contents of
checked baggage at airports for a wide-range of explosive material as specified
by the FAA. On November 23, 1998, L-3 received FAA certification for its
eXaminer 3DX (Trade Mark) 6000 system which is the only second- generation
system to receive certification and the only system to generate full,
three-dimensional images of all objects in a piece of baggage. The eXaminer 3DX
(Trade Mark) 6000 has been certified at 500 bags per hour but eventually will
be capable of inspecting baggage at an average of 675 bags per hour, which will
allow screening of passenger-checked baggage for a large body aircraft, such as
a Boeing 747, in approximately 40 minutes. It can be installed as a stand-alone
unit in a conveyor system or in a mobile van.
o INFORMATION NETWORK SECURITY
The Company is applying its information security capabilites developed at
Communication Systems--East to the commercial markets through the formation of
a new subsidiary, L-3 Communications Secure Information Technology, Inc. ("L-3
Secure Information Technology"). Through a majority-owned joint venture ("L-3
Network Security"), L-3 Secure Information Technology acquired a network
security software business from Trident Data Systems, which retained a minority
interest in L-3 Network Security.
In early November 1998, L-3 Network Security announced the release of its
third-generation network security software, Expert (Trade Mark) 3.0, which
automates the sophisticated network risk analysis
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process. This software was first developed for the U.S. Air Force and is now
used by leading corporations, consulting firms and government agencies. Expert
(Trade Mark) 3.0 allows network administrators and business managers to
measure and manage information risk by first automatically mapping a user's
network, compiling a database of all systems, applications and services --
including unauthorized modems. Expert (Trade Mark) 3.0's risk algorithms then
quantify the amount of risk present in all parts of the network and analyze the
likelihood of various insider and outsider threats, linking these threats to
actual vulnerabilities present on the network. Expert (Trade Mark) 3.0's
databases contain virtually all publicly known computer vulnerabilities,
researched and verified by L-3's full-time security team. A comprehensive
vulnerability report is provided by Expert (Trade Mark) 3.0, which permits
users to quantify risk measures and to formulate a basis for information
security policy.
MAJOR CUSTOMERS
The Company's sales are predominantly derived from contracts with agencies
of, and prime contractors to, the Government. Various Government customers
exercise independent purchasing decisions. Sales to the Government generally
are not regarded as constituting sales to one customer. Instead, each
contracting entity is considered to be a separate customer. On a pro forma
basis, for the nine-month period ended September 30, 1998 the Company had
approximately 300 contracts with a value exceeding $1 million. Pro forma sales
to the Government for the nine-month period ended September 30, 1998, including
sales through prime contractors, were $608.1 million. The Company's largest
program is a long-term, sole source cost plus support contract for the U-2
program which contributed pro forma sales for the nine-month period ended
September 30, 1998 of approximately 7%. No other program represented more than
5% of such pro forma sales for the nine-month period ended September 30, 1998.
Sales to Lockheed Martin for the nine-month period ended September 30, 1998
were $51.1 million or approximately 7% of total sales.
RESEARCH AND DEVELOPMENT
The Company employs scientific, engineering and other personnel to improve
its existing product lines and to develop new products and technologies in the
same or related fields. As of September 30, 1998, the Company employed
approximately 2,500 engineers (of whom more than 18% hold advanced degrees).
The pro forma amounts of research and development performed under
customer-funded contracts and Company-sponsored research projects, including
bid and proposal costs, for the nine-month period ended September 30, 1998 were
$166.8 million.
COMPETITION
The Company's ability to compete for defense contracts depends to a large
extent on the effectiveness and innovativeness of its research and development
programs, its ability to offer better program performance than its competitors
at a lower cost to the Government customer, and its readiness in facilities,
equipment and personnel to undertake the programs for which it competes. In
some instances, programs are sole source or work directed by the Government to
a single supplier. In such cases, there may be other suppliers who have the
capability to compete for the programs involved, but they can only enter or
reenter the market if the Government should choose to reopen the particular
program to competition. Approximately 60% of the Company's $834.5 million pro
forma sales for the nine-month period ended September 30, 1998 were related to
sole source contracts.
The Company experiences competition from industrial firms and U.S.
government agencies, some of which have substantially greater resources than
the Company. These competitors include: AlliedSignal, Cubic Corporation, Eaton
Corporation, Globecomm Systems Inc., Harris Corporation, Hughes, Motorola,
Scientific-Atlanta, Inc., Thomson Marconi Sonar Ltd., Titan Corporation and TRW
Inc. A majority of the sales of the Company is derived from contracts with the
Government and its prime contractors, and such contracts are awarded on the
basis of negotiations or competitive bids. Management does not believe any one
competitor or a small number of competitors is dominant in any of the business
areas of the Company. Management believes the Company will continue to be able
to compete successfully based upon the quality and cost competitiveness of its
products and services.
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PATENTS AND LICENSES
Although the Company owns some patents and has filed applications for
additional patents, it does not believe that its operations depend upon its
patents. In addition, the Company's Government contracts generally license it
to use patents owned by others. Similar provisions in the Government contracts
awarded to other companies make it impossible for the Company to prevent the
use by other companies of its patents in most domestic work.
BACKLOG
As of September 30, 1998, the Company's pro forma funded backlog was
approximately $813.8 million. This backlog provides management with a useful
tool to project sales and plan its business on an on-going basis; however, no
assurance can be given that the Company's backlog will become revenues in any
particular period or at all. Funded backlog does not include the total contract
value of multi-year, cost-plus reimbursable contracts, which are funded as
costs are incurred by the Company. Funded backlog also does not include
unexercised contract options which represent the amount of revenue which would
be recognized from the performance of contract options that may be exercised by
customers under existing contracts and from purchase orders to be issued under
indefinite quantity contracts or basic ordering agreements. Overall,
approximately 72% of the Company's September 30, 1998 funded backlog is
expected to be shipped over the next twelve-month period. Our funded backlog as
of September 30, 1998 was made up of the following:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Secure Communication Systems ................ $275.8
Specialized Communication Products .......... 538.0
------
Total ..................................... $813.8
======
</TABLE>
GOVERNMENT CONTRACTS
Approximately 68% of the Company's pro forma sales for the nine-month
period ended September 30, 1998 were made to agencies of the Government or to
prime contractors or subcontractors of the Government.
Approximately 71% of the Company's pro forma sales mix of contracts for
the nine-month period ended September 30, 1998 were firm fixed price contracts
under which the Company agrees to perform for a predetermined price. Although
the Company's fixed price contracts generally permit the Company to keep
profits if costs are less than projected, the Company does bear the risk that
increased or unexpected costs may reduce profit or cause the Company to sustain
losses on the contract. Generally, firm fixed price contracts offer higher
margin than cost plus type contracts. All domestic defense contracts and
subcontracts to which the Company is a party are subject to audit, various
profit and cost controls and standard provisions for termination at the
convenience of the Government. Upon termination, other than for a contractor's
default, the contractor will normally be entitled to reimbursement for
allowable costs and to an allowance for profit. Foreign defense contracts
generally contain comparable provisions relating to termination at the
convenience of the government. To date, no significant fixed price contract of
the Company has been terminated.
Companies supplying defense-related equipment to the Government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the Government to unilaterally suspend the
Company from new contracts pending resolution of alleged violations of
procurement laws or regulations. Other risks include a dependence on
appropriations by the Government, changes in the Government's procurement
policies (such as greater emphasis on competitive procurements) and the need to
bid on programs in advance of design completion. A reduction in expenditures by
the Government for products of the type manufactured by the Company, lower
margins resulting from increasingly competitive procurement policies, a
reduction in the volume of contracts or subcontracts awarded to the Company or
substantial cost overruns would have an adverse effect on the Company's cash
flow.
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PROPERTIES
The table below sets forth certain information with respect to the
material manufacturing facilities and properties of the Company.
<TABLE>
<CAPTION>
LOCATION OWNED LEASED
- -------------------------------------------------- ------- -------
(thousands of
square feet)
<S> <C> <C>
L-3 Headquarters, NY ............................. -- 29.7
L-3 Washington Operations, Arlington, VA ......... -- 4.6
SECURE COMMUNICATION SYSTEMS:
Camden, NJ ...................................... -- 580.6
Salt Lake City, UT .............................. -- 487.7
SPECIALIZED COMMUNICATION PRODUCTS:
Anaheim, CA ..................................... -- 165.3
Folsom, CA ...................................... -- 57.5
Menlo Park, CA .................................. -- 93.1
San Diego, CA ................................... 196.0 68.9
Sylmar, CA ...................................... -- 273.0
Sarasota, FL .................................... -- 143.7
Alpharetta, GA .................................. 93.0 --
Concord, MA ..................................... -- 60.0
Lowell, MA ...................................... -- 47.0
Newburyport, MA ................................. -- 81.2
Hauppauge, NY ................................... 240.1 --
Philadelphia, PA ................................ -- 230.0
Warminster, PA .................................. 40.9 --
Kiel, Germany ................................... -- 302.7
Leer, Germany ................................... -- 60.9
</TABLE>
In total, the Company owns approximately 600,000 square feet and leases
approximately 3.0 million square feet of manufacturing facilities and
properties.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of its business. Management believes it is adequately
reserved for these liabilities and that there is no litigation pending that
could have a material adverse effect on the Company's results of operations and
financial condition.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
environmental laws and regulations relating to the discharge, storage,
treatment, handling, disposal and remediation of certain materials, substances
and wastes used in its operations. The Company continually assesses its
obligations and compliance with respect to these requirements. Management
believes that the Company's current operations are in substantial compliance
with all existing applicable environmental laws and permits. The Company does
not currently project the need for any material unbudgeted expenditures to
remain in compliance with applicable environmental laws and regulations.
Pursuant to the L-3 Acquisition agreement, the Company has agreed to
assume certain on-site and off-site environmental liabilities related to events
or activities occurring prior to the L-3 Acquisition. Lockheed Martin has
agreed to retain all environmental liabilities for all facilities no longer
used by the Businesses and to indemnify fully the Company for such prior site
environmental liabilities. Lockheed Martin has also agreed, for the first eight
years following April 1997, to pay 50% of all costs incurred by the Company
above those reserved for on the Company's balance sheet at April 1997 relating
to certain Company-assumed environmental liabilities and, for the seven years
thereafter, to pay 40% of certain reasonable operation and maintenance costs
relating to any environmental remediation projects undertaken in the first
eight years. The Company is aware of environmental contamination at two of the
facilities acquired from Lockheed Martin that will require ongoing remediation.
In November 1997, the Company sold one such facility located in Sarasota,
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Florida, while retaining a leasehold interest in a portion of that facility, to
DMB in a transaction in which DMB contractually agreed to assume responsibility
for further remediation of the Sarasota site. Management believes that the
Company has established adequate reserves for the potential costs associated
with the assumed environmental liabilities. However, there can be no assurance
that any costs incurred will be reimbursable from the Government or covered by
Lockheed Martin under the terms of the L-3 Acquisition agreement or that the
Company's environmental reserves will be sufficient.
In connection with the acquisition of Ocean Systems, the Company has
acquired the stock of ELAC. In November 1998, the Company exercised its option
to purchase the ELAC property. The premises leased by ELAC at the time of the
acquisition have environmental contamination consisting of chlorinated solvents
in the groundwater beneath and adjoining the site. However, Honeywell Inc.
("Honeywell"), the previous owner of ELAC and the owner of the property at the
time of the acquisition, has retained the liability for remediating the ELAC
site and has contractually agreed to indemnify AlliedSignal and ELAC.
Management believes that any necessary remediation will be covered by the
Honeywell indemnification.
In connection with the acquisition of STS, the Company acquired certain
facilities located in Hauppauge, New York. As part of the acquisition,
California Microwave agreed to retain liability for environmental contamination
occurring prior to the closing date. Subsequent to the acquisition, the Company
performed an environmental assessment of the ground water beneath the site and
determined that the ground water contained chlorinated solvents used by STS
only prior to the closing of the STS acquisition. The Company has tendered the
defense of this matter to California Microwave, which is performing a further
investigation of the ground water contamination. Management believes that any
necessary remediation will be covered by an indemnification from California
Microwave.
PENSION PLANS
Pursuant to the L-3 Acquisition agreement, Holdings and L-3 Communications
Corporation assumed certain liabilities relating to defined benefit pension
plans for present and former employees and retirees of certain businesses which
were transferred from Lockheed Martin to Holdings and L-3 Communications
Corporation. Prior to the consummation of the L-3 Acquisition, Lockheed Martin
received a letter from the PBGC which requested information regarding the
transfer of such pension plans and indicated that the PBGC believed certain of
such pension plans were underfunded using the PBGC's actuarial assumptions
(which assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under FASB 87.) The PBGC underfunding
is related to the Subject Plans. As of September 30, 1998, the Company
calculated the net funding position of the Subject Plans and believes them to
be overfunded by approximately $4.8 million under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") assumptions, underfunded by
approximately $28.4 million under FASB 87 assumptions and, on a termination
basis, underfunded by as much as $70.4 million under PBGC assumptions.
With respect to the Subject Plans, Lockheed Martin entered into an
agreement (the "Lockheed Martin Commitment Agreement") among Lockheed Martin,
L-3 Communications Corporation and the PBGC dated as of April 30, 1997. The
material terms and conditions of the Lockheed Martin Commitment Agreement
include a commitment by Lockheed Martin to the PBGC to, under certain
circumstances, assume sponsorship of the Subject Plans or provide another form
of financial support for the Subject Plans. The Lockheed Martin Commitment
Agreement will continue with respect to any Subject Plan until such time as
such Subject Plan is no longer underfunded on a PBGC basis for two consecutive
years or, at any time after May 31, 2002, the Company achieves investment grade
credit ratings. Pursuant to the Lockheed Martin Commitment Agreement, the PBGC
agreed that it would take no further action in connection with the L-3
Acquisition.
In return for the Lockheed Martin Commitment, L-3 Communications
Corporation entered into an agreement with Lockheed Martin, dated as of April
30, 1997, pursuant to which L-3 Communications Corporation provided certain
assurances to Lockheed Martin including, but not necessarily limited to, (i)
continuing to fund the Subject Plans consistent with prior practices and to the
extent deductible for tax purposes and, where appropriate, recoverable under
Government contracts, (ii) agreeing to not
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increase benefits under the Subject Plans without the consent of Lockheed
Martin, (iii) restricting the Company from a sale of any businesses employing
individuals covered by the Subject Plans if such sale would not result in
reduction or elimination of the Lockheed Martin Commitment with regard to the
specific plan and (iv) if the Subject Plans were returned to Lockheed Martin,
granting Lockheed Martin the right to seek recovery from the Company of those
amounts actually paid, if any, by Lockheed Martin with regard to the Subject
Plans after their return. In addition, upon the occurrence of certain events,
Lockheed Martin, at its option, has the right to decide whether to cause the
Company to transfer sponsorship of any or all of the Subject Plans to Lockheed
Martin, even if the PBGC has not sought to terminate the Subject Plans.
Lockheed Martin may exercise this right by giving 45 days prior written notice
to the Company after the occurrence of such triggering events if it has
concluded that the liabilities of the Subject Plans would increase
unreasonably. As a result of a decrease in the PBGC-mandated discount rate and
the resulting increase in the underlying liability, one of such triggering
events has occurred. L-3 Communications Corporation has notified Lockheed
Martin of this fact. Lockheed Martin has informed us that it has no present
intention to exercise its right to cause L-3 Communications Corporation to
transfer sponsorship of the Subject Plans. If Lockheed Martin did assume
sponsorship of these plans, it would be primarily liable for the costs
associated with funding the Subject Plans or any costs associated with the
termination of the Subject plans but L-3 Communications Corporation would be
required to reimburse Lockheed Martin for these costs. To date, the impact on
pension expense and funding requirements resulting from this arrangement has
not been significant. However, should Lockheed Martin assume sponsorship of the
Subject Plans or if these plans were terminated, the impact of any increased
pension expenses or funding requirements could be material to the Company. The
Company has performed its obligations under the letter agreement with Lockheed
Martin and the Lockheed Martin Commitment and has not received any
communications from the PBGC concerning actions which the PBGC contemplates
taking in respect of the Subject Plans.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 8,000
full-time and part-time employees. The Company believes that its relations with
its employees are good.
Approximately 540 of the Company's employees at its Communication
Systems--East operation in Camden, New Jersey are represented by four unions,
the Association of Scientists and Professional Engineering Personnel, the
International Federation of Professional and Technical Engineers, the
International Union of Electronic, Electrical, Salaried, Machine and Furniture
Workers and an affiliate of the International Brotherhood of Teamsters. The
collective bargaining agreements for these four unions were successfully
renegotiated in mid-1998 without any disruptions to operations. Three of the
collective bargaining agreements will expire in 2002, and the other agreement
will expire in 2001.
Approximately 200 employees of Ocean Systems are represented by the United
Auto Workers. The collective bargaining agreement expires in mid-1999.
Approximately 140 of the employees at Ocean Systems' ELAC subsidiary in Kiel,
Germany are represented by the Metal Trade Industrial Workers of the Hamburg
Region and ELAC is represented by the Association of Metal Industry Employers
for Schleswig-Holstein. While the Company has not yet initiated discussions
with representatives of the United Auto Workers, management believes it will be
able to negotiate, without material disruption to its business, a satisfactory
new labor contract with these employees. However, there can be no assurance
that a satisfactory agreement will be reached with the covered employees or
that a material disruption to operations of Ocean Systems will not occur.
Approximately 350 of SPD's employees located in Philadelphia, Pennsylvania
are represented by the United Automobile Aerospace and Agricultural Implement
Workers of America, Local 1612 Amalgamated. The four collective bargaining
agreements covering these employees expire in early April 1999, following a six
year labor agreement. While the Company has not yet initiated discussions with
representatives of the union, management believes that it will be able to
negotiate, without material disruption to its business, satisfactory new
collective bargaining agreements. However, there can be no assurance that a
satisfactory agreement will be reached with the covered employees or that a
material disruption to the Company's Philadelphia operations will not occur.
Approximately 20 of
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SPD's employees located in Anaheim and National City, California are
represented by the International Brotherhood of Electrical Workers, Local 569,
whose collective bargaining agreement expires in late May 2000 and
approximately 20 employees are represented by the International Association of
Machinists and Aerospace Workers, Local 389 whose collective bargaining
agreement expires in early February 2000.
67
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the L-3 Acquisition agreement, Lockheed Martin has agreed to
indemnify L-3, subject to certain limitations, for Lockheed Martin's breach of
representations and warranties and L-3 has assumed certain obligations relating
to environmental matters and benefits plans. These obligations include certain
on-site and off-site environmental liabilities related to events or activities
of the Businesses occurring prior to the L-3 Acquisition. Lockheed Martin has
agreed to indemnify Holdings, subject to certain limitations, for its breach of
(i) non-environmental representations and warranties up to $50 million (subject
to a $5 million threshold) and (ii) for the first eight years following April
1997, to pay 50% of all costs incurred by the Company above those reserved for
on the Company's balance sheet at April 1997 relating to certain
Company-assumed environmental liabilities and, for the seven years thereafter,
40% of certain reasonable operation and maintenance costs relating to any
environmental remediation projects undertaken in the first eight years (subject
to a $6 million threshold).
Lockheed Martin provides to certain divisions of the Company certain
management information systems services at Lockheed Martin's fully-burdened
cost but without profit. Holdings, L-3 Communications Corporation and Lockheed
Martin have entered into certain subleases of real property and cross-licenses
of intellectual property.
In addition, Holdings and Lockheed Martin have entered into a Limited
Noncompetition Agreement (the "Noncompetition Agreement") which, for up to
three years from April 1997, in certain circumstances, precludes Lockheed
Martin from engaging in the sale of any products that compete with the products
of the Company that are set forth in the Noncompetition Agreement for
specifically identified application of the products. Under the Noncompetition
Agreement, Lockheed Martin is prohibited, with certain exceptions, from
acquiring any business engaged in the sale of the specified products referred
to in the preceding sentence, although Lockheed Martin may acquire such a
business under circumstances where the exceptions do not apply provided that it
offers to sell such business to L-3 within 90 days of its acquisition. The
Noncompetition Agreement does not, among other exceptions, (i) apply to
businesses operated and managed by Lockheed Martin on behalf of the Government,
(ii) prohibit Lockheed Martin from engaging in any existing businesses and
planned businesses as of the closing of the L-3 Acquisition or businesses that
are reasonably related to existing or planned businesses or (iii) apply to
selling competing products where such products are part of a larger system sold
by Lockheed Martin.
In the ordinary course of business L-3 sells products to Lockheed Martin
and its affiliates. Sales to Lockheed Martin were $51.1 million, $81.6 million,
$70.7 million and $25.9 million for the nine-month period ended September 30,
1998 and the years ended December 31, 1997, 1996 and 1995, respectively. See
Note 19 to the Consolidated (Combined) Financial Statements.
Sales of products to Lockheed Martin, excluding those under existing
intercompany work transfer agreements, are made on terms no less favorable than
those which would be available from non-affiliated third party customers. A
significant portion of L-3's sales to Lockheed Martin are either based on
competitive bidding or catalog prices.
STOCKHOLDERS AGREEMENT
Holdings, Lockheed Martin, the Lehman Partnership and Messrs. Lanza and
LaPenta entered into a stockholders agreement (the "Stockholders Agreement")
which, except for the terms relating to (i) the registration rights, (ii)
provision of services by Lehman Brothers and (iii) the standstill agreement by
Lockheed Martin, terminated upon the completion of the IPO.
Pursuant to the Stockholders Agreement, Messrs. Lanza and LaPenta,
Lockheed Martin and the Lehman Partnership have the right, from time to time
and subject to certain conditions, to require Holdings to register under the
Securities Act shares of common stock held by them. Lockheed Martin, the Lehman
Partnership and each of the Senior Management has three, four and one demand
registration rights, respectively. In addition, the Stockholders Agreement also
provides certain existing stockholders with certain piggyback registration
rights. The Stockholders Agreement provides, among
68
<PAGE>
other things, that the Company will pay expenses in connection with (i) up to
two demand registrations requested by Lockheed Martin, up to three demand
registrations requested by the Lehman Partnership and the two demand
registrations requested by the Senior Management and (ii) any registration in
which the existing stockholders participate through piggyback registration
rights granted under such agreement.
The Stockholders Agreement also provides that Lehman Brothers Inc. has the
exclusive right to provide investment banking services to Holdings for the
five-year period after the closing of the L-3 Acquisition (except that the
exclusivity period is three years as to cash acquisitions undertaken by L-3) so
long as the Lehman Partnership owns at least 10% of Holdings' outstanding
common stock. In the event that Lehman Brothers Inc. agrees to provide any
investment banking services to L-3, it will be paid fees that are mutually
agreed upon based on similar transactions and practices in the investment
banking industry.
Under the Stockholders Agreement Lockheed Martin is subject to a
standstill arrangement which generally prohibits any increase in its share
ownership percentage over 34.9%.
69
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning the directors and
executive officers of Holdings and L-3 Communications Corporation.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----- -------------------------------------------------
<S> <C> <C>
Frank C. Lanza .................... 67 Chairman, Chief Executive Officer and Director
Robert V. LaPenta ................. 53 President, Chief Financial Officer and Director
Michael T. Strianese .............. 42 Vice President--Finance and Controller
Christopher C. Cambria ............ 40 Vice President--General Counsel and Secretary
Robert F. Mehmel .................. 36 Vice President--Planning and Assistant Secretary
Lawrence W. O'Brien ............... 49 Vice President--Treasurer
Joseph S. Paresi .................. 43 Vice President--Product Development
Lawrence H. Schwartz .............. 61 Vice President--Business Development
Jimmie V. Adams ................... 62 Vice President--Washington D.C. Operations
Robert RisCassi ................... 62 Vice President--Washington D.C. Operations
David J. Brand(1) ................. 37 Director
Thomas A. Corcoran ................ 54 Director
Alberto M. Finali ................. 44 Director
Eliot M. Fried(1) ................. 66 Director
Frank H. Menaker, Jr.(1) .......... 58 Director
Robert B. Millard(2) .............. 48 Director
John E. Montague(2) ............... 44 Director
John M. Shalikashvili ............. 62 Director
Alan H. Washkowitz(2) ............. 58 Director
</TABLE>
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Frank C. Lanza, Chairman and CEO. Mr. Lanza joined the Company in April
1997. From April 1996, when Loral was acquired by Lockheed Martin, until April
1997, Mr. Lanza was Executive Vice President of Lockheed Martin, a member of
Lockheed Martin's Executive Council and Board of Directors and President and
COO of Lockheed Martin's command, control, communications and intelligence
("C3I") and Systems Integration Sector, which comprised many of the businesses
acquired by Lockheed Martin from Loral. Prior to the April 1996 acquisition of
Loral, Mr. Lanza was President and COO of Loral, a position he held since 1981.
He joined Loral in 1972 as President of its largest division, Electronic
Systems. His earlier experience was with Dalmo Victor and Philco Western
Development Laboratory.
Robert V. LaPenta, President and Chief Financial Officer. Mr. LaPenta
joined the Company in April 1997. From April 1996, when Loral was acquired by
Lockheed Martin, until April 1997, Mr. LaPenta was a Vice President of Lockheed
Martin and was Vice President and Chief Financial Officer of Lockheed Martin's
C3I and Systems Integration Sector. Prior to the April 1996 acquisition of
Loral, he was Loral's Senior Vice President and Controller, a position he held
since 1981. He joined Loral in 1972 and was named Vice President and Controller
of its largest division in 1974. He became Corporate Controller in 1978 and was
named Vice President in 1979.
Michael T. Strianese, Vice President-Finance and Controller. Mr. Strianese
joined the Company in April 1997. From April 1996, when Loral was acquired by
Lockheed Martin, until April 1997, Mr. Strianese was Vice President and
Controller of Lockheed Martin's C3I and Systems Integration Sector.
70
<PAGE>
From 1991 to the April 1996 acquisition of Loral, he was Director of Special
Projects at Loral. Prior to joining Loral, he spent 11 years with Ernst &
Young. Mr. Strianese is a Certified Public Accountant.
Christopher C. Cambria, Vice President-General Counsel and Secretary. Mr.
Cambria joined the Company in June 1997. From 1994 until joining the Company,
Mr. Cambria was an associate with Fried, Frank, Harris, Shriver & Jacobson.
From 1986 until 1993, he was an associate with Cravath, Swaine & Moore.
Robert F. Mehmel, Vice President-Planning and Assistant Secretary. Mr.
Mehmel joined the Company in April 1997. From April 1996, when Loral was
acquired by Lockheed Martin, until April 1997, Mr. Mehmel was the Director of
Financial Planning and Capital Review for Lockheed Martin's C3I and Systems
Integration Sector. From 1984 to 1996, Mr. Mehmel held several accounting and
financial analysis positions at Loral Electronic Systems and Loral. At the time
of Lockheed Martin's acquisition of Loral, he was Corporate Manager of Business
Analysis.
Lawrence W. O'Brien, Vice President--Treasurer. Mr. O'Brien joined the
Company in June 1997. Prior to joining the Company, he was the Vice President
and Treasurer of Pechiney Corporation, the North American arm of the Pechiney
Group of France, where he held a number of financial positions since 1981.
Joseph S. Paresi, Vice President--Product Development. Mr. Paresi joined
the Company in April 1997. From April 1996 until April 1997, Mr. Paresi was
Corporate Director of Technology for Lockheed Martin's C3I and System
Integration Sector. Prior to the April 1996 acquisition of Loral, Mr. Paresi
was Corporate Director of Technology for Loral, a position he held since 1993.
From 1978 to 1993, Mr. Paresi was a Systems Engineer, Director of Marketing and
Director of International Programs at Loral Electronic Systems.
Lawrence H. Schwartz, Vice President--Business Development. Mr. Schwartz
joined the Company in May 1997. From April 1996 until May 1997, Mr. Schwartz
was Vice President of Technology for the C3I and System Integration Sector of
Lockheed Martin. Prior to the April 1996 acquisition of Loral, he was Corporate
Vice President of Technology for Loral, a position he held since 1987. Between
1976 and 1987, Mr. Schwartz was Vice President of Engineering, Senior Vice
President of Business Development, Senior Vice President of the Rapport Program
and Senior Vice President of Development Programs at Loral Electronic Systems.
Jimmie V. Adams, Vice President-Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) joined the Company in April 1997. From April
1996 until April 1997, he was Vice President of Lockheed Martin's Washington
Operations for the C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position at Loral since 1993. Before
joining Loral in 1993, he was Commander in Chief, Pacific Air Forces, Hickam
Air Force Base, Hawaii, capping a 35-year career with the U.S. Air Force. He
was also Deputy Chief of Staff for plans and operation for U.S. Air Force
headquarters and Vice Commander of Headquarters Tactical Air Command and Vice
Commander in Chief of the U.S. Air Forces Atlantic at Langley Air Force Base.
He is a command pilot with more than 141 combat missions.
Robert RisCassi, Vice President-Washington, D.C. Operations. General
Robert W. RisCassi (U.S. Army-ret.) joined the Company in April 1997. From
April 1996 until April 1997, he was Vice President of Land Systems for Lockheed
Martin's C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position for Loral since 1993. He
joined Loral in 1993 after retiring as U.S. Army Commander in Chief, United
Nations Command/Korea. His 35-year military career included posts as Army Vice
Chief of Staff; Director, Joint Staff, Joint Chiefs of Staff; Deputy Chief of
Staff for Operations and Plans; and Commander of the Combined Arms Center.
David J. Brand, Director. Mr. Brand has served as a director since April
1997 and is a Managing Director of Lehman Brothers and a principal in the
Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology
Mergers and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and
has been responsible for merger and corporate finance advisory services for
many of Lehman Brothers' technology and defense industry clients. Mr. Brand is
currently a director of K&F Industries, Inc. Mr. Brand holds an M.B.A. from
Stanford University's Graduate School of Business and a B.S. in Mechanical
Engineering from Boston University.
71
<PAGE>
Thomas A. Corcoran, Director. Mr. Corcoran has served as a director since
July 1997 and has been the President and Chief Operating Officer of the
Electronic Systems Sector of Lockheed Martin Corporation since March 1995. From
1993 to 1995, Mr. Corcoran was President of the Electronics Group of Martin
Marietta Corporation. Prior to that he worked for General Electric for 26 years
and from 1983 to 1993 he held various management positions with GE Aerospace;
he was a company officer from 1990 to 1993. Mr. Corcoran is a member of the
Board of Trustees of Worcester Polytechnic Institute, the Board of Trustees of
Stevens Institute of Technology, the Board of Governors of the Electronic
Industries Association, a Director of the U.S. Navy Submarine League and a
Director of REMEC Corporation.
Alberto M. Finali, Director. Mr. Finali has served as a director since
April 1997 and is a Managing Director of Lehman Brothers and principal of the
Merchant Banking Group, based in New York. Prior to joining the Merchant
Banking Group, Mr. Finali spent four years in Lehman Brothers' London office as
a senior member of the M&A Group. Mr. Finali joined Lehman Brothers in 1987 as
a member of the M&A Group in New York and became a Managing Director in 1997.
Prior to joining Lehman Brothers, Mr. Finali worked in the Pipelines and
Production Technology Group of Bechtel, Inc. in San Francisco. Mr. Finali holds
an M. Eng. and an M.B.A. from the University of California at Berkeley, and a
Laurea Degree in Civil Engineering from the Polytechnic School in Milan, Italy.
Eliot M. Fried, Director. Mr. Fried has served as a director since April
1997 and is a Managing Director of Lehman Brothers. Mr. Fried joined Shearson,
Hayden Stone, a predecessor firm, in 1976 and became a Managing Director in
1982. Mr. Fried is currently a director of Bridgeport Machines, Inc. and Axsys
Technologies, Inc. Mr. Fried holds an M.B.A. from Columbia University and a
B.A. from Hobart College.
Frank H. Menaker, Jr., Director. Mr. Menaker has served as a director
since April 1997 and has served as Senior Vice President and General Counsel of
Lockheed Martin since July 1996. He served as Vice President and General
Counsel of Lockheed Martin from March 1995 to July 1996, as Vice President of
Martin Marietta Corporation from 1982 until 1995 and as General Counsel of
Martin Marietta Corporation from 1981 until 1995. He is a director of Martin
Marietta Materials, Inc., a member of the American Bar Association and has been
admitted to practice before the United States Supreme Court. Mr. Menaker is a
graduate of Wilkes University and the Washington College of Law at American
University.
Robert B. Millard, Director. Mr. Millard has served as a director since
April 1997 and is a Managing Director of Lehman Brothers, Head of Lehman
Brothers' Principal Trading & Investments Group and principal of the Merchant
Banking Group. Mr. Millard joined Kuhn Loeb & Co. in 1976 and became a Managing
Director of Lehman Brothers in 1983. Mr. Millard is currently a director of
GulfMark Offshore, Inc. and Weatherford International, Inc. Mr. Millard holds
an M.B.A. from Harvard University and a B.S. from the Massachusetts Institute
of Technology.
John E. Montague, Director. Mr. Montague has served as a director since
April 1997 and has been Vice President and Chief Financial Officer of Lockheed
Martin Global Telecommunications, Inc., a wholly owned subsidiary of Lockheed
Martin, since August 1998. He served as Vice President, Financial Strategies at
Lockheed Martin responsible for mergers, acquisitions and divestiture
activities and shareholder value strategies from March 1995 until August 1998.
Previously, he was Vice President, Corporate Development and Investor Relations
at Martin Marietta Corporation from 1991 to 1995. From 1988 to 1991, he was
Director of Corporate Development at Martin Marietta Corporation, which he
joined in 1977 as a member of the engineering staff. Mr. Montague is a director
of Rational Software Corporation. Mr. Montague received his B.S. from the
Georgia Institute of Technology and an M.S. in engineering from the University
of Colorado.
John M. Shalikashvili, Director. General Shalikashvili (U.S. Army-ret.)
has served as a director since August 1998. Prior to his appointment, he was
the senior officer of the United States military and principal military advisor
to the President of the United States, the Secretary of Defense and National
Security Council by serving as the thirteenth Chairman of the Joint
72
<PAGE>
Chiefs of Staff, Department of Defense, for two terms from 1993 to 1997. Prior
to his tenure as Chairman of the Joint Chiefs of Staff, he served as the
Commander in Chief of all United States forces in Europe and as NATO's tenth
Supreme Allied Commander, Europe (SACEUR). He has also served in a variety of
command and staff positions in the continental United States, Alaska, Belgium,
Germany, Italy, Korea, Turkey and Vietnam. General Shalikashvili is currently a
director of United Defense Industries Inc.
Alan H. Washkowitz, Director. Mr. Washkowitz has served as a director
since April 1997 and is a Managing Director of Lehman Brothers and head of the
Merchant Banking Group, and is responsible for the oversight of Lehman Brothers
Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman
Brothers in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr.
Washkowitz is currently a director of Illinois Central Corporation, K&F
Industries, Inc., McBride plc. and Peabody Coal Co. Mr. Washkowitz holds an
M.B.A. from Harvard University, a J.D. from Columbia University and an A.B.
from Brooklyn College.
The Board of Directors intends to appoint one additional director who is
not affiliated with the Company, Lehman Brothers Inc. or Lockheed Martin by May
18, 1999. The additional director has not yet been identified.
The Company's certificate of incorporation provides for a classified Board
of Directors divided into three classes. Class I will expire at the annual
meeting of the stockholders to be held in 1999; Class II will expire at the
annual meeting of the stockholders to be held in 2000; and Class III will
expire at the annual meeting of the stockholders to be held in 2001. At each
annual meeting of the stockholders, beginning with the 1999 annual meeting, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election and until their successors have been duly elected and
qualified, or until their earlier resignation or removal, if any. To the extent
there is an increase or reduction in the number of directors, increase or
decrease in directorships resulting therefrom will be distributed among the
three classes so that, as nearly as possible, each class will consist of an
equal number of directors.
Each executive officer and key employee serves at the discretion of the
Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: an Audit Committee and
a Compensation Committee. Currently, the Audit Committee consists of Messrs.
Brand, Fried and Menaker. The Company intends to appoint to the Audit Committee
only persons who qualify as an "independent" director for purposes of the rules
and regulations of the NYSE. The Audit Committee selects and engages, on behalf
of the Company, the independent public accountants to audit the Company's
annual financial statements, and reviews and approves the planned scope of the
annual audit. Currently, Messrs. Millard, Montague and Washkowitz serve as
members of the Compensation Committee. The Compensation Committee establishes
remuneration levels for certain officers of the Company, performs such
functions as provided under the Company's employee benefit programs and
executive compensation programs and administers the 1997 Option Plan for Key
Employees of Holdings.
COMPENSATION OF DIRECTORS
The affiliated directors of the Company do not receive compensation for
their services as directors. The non-affiliated directors will receive annual
compensation of $25,000 in cash, $5,000 of Holdings' common stock, and a grant
of stock options to 1,500 shares of Holdings' common stock. The non-affiliated
directors are entitled to reimbursement for their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board of Directors or committees thereof. In addition, the non-affiliated
directors will be compensated $1,000 per meeting attended, including committee
meetings, up to a maximum of $2,000 per day.
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<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's certificate of incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL"), a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director. Under the
DGCL, liability of a director may not be limited (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) in respect of certain unlawful dividend payments or
stock redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of the provisions of
the Company's certificate of incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Company's bylaws provide that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
-------------------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
FISCAL ---------------------- RESTRICTED HOLDINGS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) STOCK AWARDS STOCK OPTIONS COMPENSATION(3)
- -------------------------------------- -------- ----------- ---------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Frank C. Lanza (Chairman and 1998 $750,000 -- -- -- $11,341
Chief Executive Officer) ............ 1997 542,654 -- -- 1,142,857 --
Robert V. LaPenta (President and 1998 500,000 -- -- -- 27,591
Chief Financial Officer) ............ 1997 356,538 -- -- 1,142,857 --
Lawrence H. Schwartz 1998 229,000 -- -- -- 22,080
(Vice President) .................... 1997 145,327 $80,000 -- 17,000 --
Jimmie V. Adams 1998 216,011 -- -- -- 25,445
(Vice President) .................... 1997 157,854 70,000 -- 15,000 61
Robert RisCassi 1998 172,016 -- -- -- 20,415
(Vice President) .................... 1997 125,704 60,000 -- 15,000 611
</TABLE>
- ----------
(1) Fiscal 1997 only included the pay periods ending during the nine months
ended December 31, 1997.
(2) Bonuses for fiscal 1998 have not yet been determined.
(3) Includes Company matching contributions of $3,200 in 1998 under the
Company's savings plan for Messrs. LaPenta, Adams and RisCassi and $61
and $611 in 1997 for Messrs. Adams and RisCassi, respectively, and the
value of supplemental life insurance programs attributable to 1998 in the
amounts of $11,341 for Mr. Lanza, $24,391 for Mr. LaPenta, $22,090 for
Mr. Schwartz, $22,245 for Mr. Adams and $17,215 for Mr. RisCassi.
74
<PAGE>
Stock Options Granted. The following table sets forth information
concerning individual grants of stock options to purchase Holdings' common
stock made in fiscal 1997 to each of the Named Executive Officers. No grants of
stock options were made to the Named Executive Officers during fiscal 1998.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT-DATE
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE VALUE(1)
- ------------------------------------------ ------------------ -------------- --------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Frank C. Lanza (Chairman and Chief
Executive Officer) ...................... 1,142,857(2) 38.2% $6.47 April 30, 2007 $2,326,731
Robert V. LaPenta (President and
Chief Financial Officer) ................ 1,142,857(2) 38.2% $6.47 April 30, 2007 $2,326,731
Lawrence H. Schwartz (Vice
President) .............................. 17,000 0.6% $6.47 July 1, 2007 $ 17,571
Jimmie V. Adams (Vice President) ......... 15,000 0.5% $6.47 July 1, 2007 $ 15,504
Robert RisCassi (Vice President) ......... 15,000 0.5% $6.47 July 1, 2007 $ 15,504
</TABLE>
- ----------
(1) The grant-date valuation of the options was calculated using the minimum
value method described in SFAS No. 123. The minimum value is computed as
the current price of stock at grant date reduced to exclude the present
value of any expected dividends during the option's expected life minus
the present value of the exercise price, and does not consider the
expected volatility of the price of the stock underlying the option. The
material assumptions underlying the computations are: an average discount
rate of 6.3%; a dividend yield of 0% and a weighted average expected
option life of 5.49 years, with the option lives ranging from 2 years to
10 years.
(2) Half of the options granted consists of Time Options and half consists of
Performance Options. See "-- Employment Agreements" for description of
the terms of these options.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND
FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES VALUE AT F-Y END F-Y END(1)
ACQUIRED ON REALIZED ----------------------------- ----------------------------
NAME AND PRINCIPAL POSITION EXERCISES (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- -------------- ----------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Frank C. Lanza (Chairman and
Chief Executive Officer) ........... 228,571 $578,285 -- 914,286 -- $36,656,011
Robert V. LaPenta (President
and Chief Financial Officer) ....... 228,571 578,285 -- 914,286 -- 36,656,011
Lawrence H. Schwartz
(Vice President) ................... -- -- 5,950 11,050 $238,550 443,022
Jimmie V. Adams
(Vice President) ................... -- -- 5,250 9,750 210,486 390,902
Robert RisCassi (Vice President)..... -- -- 5,250 9,750 210,486 390,902
</TABLE>
- ----------
(1) The value of unexercised in-the-money options at fiscal year end was
calculated based on the December 31, 1998 closing stock price of
Holdings' common stock of $46.5625 less the exercise prices of the
options.
75
<PAGE>
PENSION PLAN
The following table shows the estimated annual pension benefits payable
under the L-3 Communications Corporation Pension Plan and Supplemental Employee
Retirement Plan to a covered participant upon retirement at normal retirement
age, based on the career average compensation (salary and bonus) and years of
credited service with the Company.
<TABLE>
<CAPTION>
CAREER AVERAGE COMPENSATION YEARS OF CREDITED SERVICE
- ----------------------------- --------------------------------------------------------------
15 20 25 30 35
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$125,000..................... $ 18,981 $ 24,937 $ 29,833 $ 33,856 $ 37,164
150,000..................... 23,172 30,408 36,355 41,243 45,260
175,000..................... 27,364 35,879 42,877 48,629 53,357
200,000..................... 31,556 41,349 49,399 56,015 61,454
225,000..................... 35,747 46,820 55,921 63,402 69,550
250,000..................... 39,939 52,291 62,444 70,788 77,647
300,000..................... 48,322 63,233 75,488 85,561 93,840
400,000..................... 65,089 85,116 101,577 115,106 126,226
450,000..................... 73,472 96,057 114,621 129,879 142,420
500,000..................... 81,855 106,999 127,665 144,651 158,613
750,000..................... 123,772 161,707 192,887 218,515 239,579
</TABLE>
As of December 31, 1997, the current annual compensation and current years
of credited service (including for Messrs. LaPenta, Adams and RisCassi, years
of credited service as an employee of Loral and Lockheed Martin) for each of
the following persons were: Mr. Lanza, $750,000 and one year; Mr. LaPenta,
$500,000 and 26 years; Mr. Adams, $216,011 and 5 years; Mr. RisCassi, $172,016
and 4 years; and Mr. Schwartz, $229,000 and one year. Compensation covered
under the pension plans includes amounts reported as salary and bonus in the
Summary Compensation Table.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of Holdings established a Compensation Committee in
June 1997. During the 1997 fiscal year, Messrs. Robert Millard, Steven Berger
and John Montague served as members of the Compensation Committee. None of
these individuals has served at any time as an officer or employee of Holdings
or L-3 Communications Corporation. Mr. Berger resigned from Holdings' Board of
Directors and the Compensation Committee in January 1998 and Mr. Washkowitz was
appointed to the Compensation Committee in March 1998. Prior to the
establishment of the Compensation Committee, all decisions relating to
executive compensation were made by Holdings' Board of Directors. Messrs.
Millard and Washkowitz are affiliated with the Lehman Partnership which will
hold 26.0% of the Holdings common stock after this offering (or 24.8% if the
underwriters' over-allotment option is exercised in full) and is a party to the
Stockholders Agreement. Pursuant to the Stockholders Agreement, the Lehman
Partnership has the right, from time to time subject to certain conditions, to
require Holdings to register under the Securities Act shares of its common
stock held by them. The Lehman Partnership has the right to request up to four
demand registrations and also has piggyback registration rights. Holdings has
agreed in the Stockholders Agreement to pay expenses in connection with, among
other things, (i) up to three demand registrations requested by the Lehman
Partnership and (ii) any registration in which the existing stockholders
participate through piggyback registration rights granted under such agreement.
The Stockholders Agreement also provides that Lehman Brothers has the exclusive
right to provide investment banking services to Holdings for the five-year
period after the closing of the L-3 Acquisition (except that the exclusivity
period is three years as to cash acquisitions undertaken by L-3) so long as the
Lehman Partnership owns at least 10% of the outstanding Holdings common stock.
In the event that Lehman Brothers agrees to provide any investment banking
services to L-3, it will be paid fees that are mutually agreed upon based on
similar transactions and practices in the investment banking industry.
No executive officer of Holdings or L-3 Communications Corporation serves
as a member of the board of directors or compensation committee of any entity
which has one or more executive officers serving as a member of Holdings' Board
of Directors or Compensation Committee.
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<PAGE>
1997 STOCK OPTION PLAN
In April 1997, Holdings adopted the 1997 Option Plan for Key Employees of
Holdings (the "1997 Stock Option Plan") which authorizes the Compensation
Committee to grant options to key employees of Holdings and its subsidiaries.
On March 10, 1998, the 1997 Stock Option Plan was amended to increase the
shares available for option grants to 4,255,815 shares of common stock, of
which 3,400,794 had been granted and were outstanding as of December 31, 1998.
The Compensation Committee of the Board of Directors of Holdings, in its sole
discretion, determines the terms of option agreements, including without
limitation the treatment of option grants in the event of a change of control.
The 1997 Stock Option Plan remains in effect for 10 years following the date of
approval.
On April 30, 1997, Holdings granted each of Messrs. Lanza and LaPenta
options to purchase 1,142,857 shares of common stock. See "-- Employment
Agreements" for a description of the terms of these grants. On July 1, 1997 and
November 11, 1997, the Compensation Committee authorized grants of options to
employees of Holdings and its subsidiaries, other than Messrs. Lanza and
LaPenta, to acquire an aggregate of 689,500 shares of common stock at an
exercise price of $6.47 per share (the "Employee Options"). Each Employee
Option was granted pursuant to an individual agreement that provides (i) 20% of
shares underlying the option will become exercisable on the first anniversary
of the grant date, 50% will become exercisable on the second anniversary of the
grant date and 30% will become exercisable on the third anniversary of the
grant date; provided that, after the IPO 15% of the shares underlying the
option (which would otherwise become exercisable on the second anniversary of
the grant date) became exercisable; (ii) all shares underlying the option will
become exercisable upon certain events constituting a change of control; and
(iii) the option will expire upon the earliest to occur of (A) the tenth
anniversary of the grant date, (B) one year after termination of employment due
to the optionee's death or permanent disability, (C) immediately upon
termination of the optionee's employment for cause and (D) three months after
termination of optionee's employment for any other reason. On March 2, 1998,
each of Mr. Lanza and Mr. LaPenta exercised options to acquire 228,571 shares
of common stock. On May 1, 1998, Holdings granted options to employees of
Holdings and its subsidiaries, other than Messrs. Lanza and LaPenta, to
purchase 285,370 shares of common stock at an exercise price of $22.00 per
share and on terms substantially similar to the Employee Options. On August 13,
1998, Holdings granted options to purchase 142,200 shares of common stock at an
exercise price of $32.75 per share primarily to employees of recently acquired
companies, and on January 19, 1999, Holdings granted options to purchase
414,150 shares of common stock at an exercise price of $40.50 per share to
employees who received the Employee Options during 1997 and to employees of
recently acquired companies. The terms of such stock options were substantially
similar to the Employee Options except that such options vest in equal
installments over a period of three years.
EMPLOYMENT AGREEMENTS
Holdings entered into an employment agreement (the "Employment
Agreements") effective on April 30, 1997 with each of Mr. Lanza, Chairman and
Chief Executive Officer of Holdings and L-3 Communications, who will receive a
base salary of $750,000 per annum and appropriate executive level benefits, and
Mr. LaPenta, President and Chief Financial Officer of Holdings and L-3
Communications, who will receive a base salary of $500,000 per annum and
appropriate executive level benefits. The Employment Agreements provide for an
initial term of five years, which will automatically renew for one-year periods
thereafter, unless a party thereto gives notice of its intent to terminate at
least 90 days prior to the expiration of the term.
Upon a termination without cause or resignation for good reason, Holdings
will be obligated, through the end of the term, to (i) continue to pay the base
salary and (ii) continue to provide life insurance and medical and
hospitalization benefits comparable to those provided to other senior
executives; provided, however, that any such coverage shall terminate to the
extent that Mr. Lanza or Mr. LaPenta, as the case may be, is offered or obtains
comparable benefits coverage from any other employer. The Employment Agreements
provide for confidentiality during employment and at all
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<PAGE>
times thereafter. There is also a noncompetition and non-solicitation covenant
which is effective during the employment term and for one year thereafter;
provided, however, that if the employment terminates following the expiration
of the initial term, the noncompetition covenant will only be effective during
the period, if any, that Holdings pays the severance described above.
Holdings has granted each of Messrs. Lanza and LaPenta (together, the
"Equity Executives") nonqualified options to purchase, at $6.47 per share of
Holdings' common stock, 1,142,857 shares of Holdings' initial fully-diluted
common stock. In each case, half of the options will be "Time Options" and half
will be "Performance Options" (collectively, the "Options"). The Time Options
became exercisable with respect to 20% of the shares subject to the Time
Options on March 2, 1998 and will become exercisable each of the second through
fifth anniversaries of the closing of the L-3 Acquisition (the "Closing") if
employment continues through and including such date. The Performance Options
will become exercisable nine years after the Closing, but became exercisable
with respect to up to 20% of the shares subject to the Performance Options on
March 2, 1998 and will become exercisable each of the second through fifth
anniversaries of the Closing, to the extent certain EBITDA targets are
achieved. The Options will become fully exercisable under certain
circumstances, including a change in control. The Option term is ten years from
the Closing; except that if (i) the Equity Executive is fired for cause or
resigns without good reason, the Options will expire upon termination of
employment or (ii) the Equity Executive is fired without cause, resigns for
good reason, dies, becomes disabled or retires, the Options will expire one
year after termination of employment. Unexercisable Options will terminate upon
termination of employment, unless acceleration is expressly provided for. Upon
a change of control, Holdings may terminate the Options, so long as the Equity
Executives are cashed out or permitted to exercise their Options prior to such
change of control.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
As of December 31, 1998, there were 27,402,429 shares of Holdings' common
stock outstanding. The following table sets forth as of December 31, 1998
certain information regarding the beneficial ownership of the common stock
outstanding (but without giving effect to the underwriters' exercise of the
over-allotment option) by (i) each person who is known to Holdings to own 5% or
more of the common stock, (ii) each director of Holdings, (iii) certain
executive officers of Holdings and (iv) all executive officers and directors of
Holdings as a group.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
--------------------------------- -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
- ------------------------------------------------- ------------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Lehman Brothers Capital Partners III, L.P.
and affiliates(1)
c/o Lehman Brothers Holdings Inc.
Three World Financial Center
New York, New York 10285 ....................... 10,020,000 36.6% 8,020,000 26.0%
Lockheed Martin Corporation
6801 Rockledge Drive
Bethesda, Maryland 20817-1877 .................. 6,800,000 24.8 3,050,000 9.9
Frank C. Lanza(2)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016 ....................... 1,700,571(3) 6.2 1,700,571 5.5
Robert V. LaPenta(2)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016 ....................... 1,700,571 6.2 1,700,571 5.5
All directors and executive officers as group (19
persons)(1) .................................... 3,534,142 12.9 3,534,142 11.4
</TABLE>
- ----------
(1) David J. Brand, Alberto M. Finali, Eliot M. Fried, Robert B. Millard and
Alan H. Washkowitz, each of whom is director of the Company, are each
Managing Directors of Lehman Brothers Inc. As limited partners of Lehman
Brothers Capital Partners III, L.P. or other affiliated partnerships
sponsored by Lehman Brothers, all such individuals may be deemed to have
shared beneficial ownership of shares of common stock held by Lehman
Brothers Capital Partners III, L.P. and such affiliated partnerships.
Such individuals disclaim any such beneficial ownership.
(2) As of December 31, 1998, Messrs. Lanza and LaPenta each hold options to
purchase an additional 914,286 shares of Holdings' common stock.
(3) Includes 75,000 shares held by Mr. Lanza on behalf of his sons, Anthony
Lanza, James Lanza and Louis Lanza. Mr. Lanza disclaims beneficial
ownership of such shares.
SELLING STOCKHOLDERS
The following table sets forth as of December 31, 1998 certain information
regarding the beneficial ownership of the common stock outstanding (but without
giving effect to the underwriters' exercise of the over-allotment option) by
each selling stockholder.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------ SHARES BEING SOLD -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE IN THE OFFERING NUMBER PERCENTAGE
- ---------------------------------------------------- ----------- ------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Lehman Brothers Capital Partners III, L.P. ......... 8,016,000 29.3% 1,600,000 6,416,000 20.8%
LB I Group Inc. and affiliates ..................... 2,004,000 7.3 400,000 1,604,000 5.2
Lockheed Martin Corporation ........................ 6,800,000 24.8 3,750,000 3,050,000 9.9
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The current certificate of incorporation of Holdings authorizes
100,000,000 shares of common stock. As of December 31, 1998, the outstanding
capital stock of Holdings consisted of 27,402,429 shares of common stock held
by 85 stockholders of record. The following summaries of certain provisions of
the common stock do not purport to be complete and are subject to, and
qualified in their entirety by, the provisions of the certificate of
incorporation and bylaws of Holdings, which are included as exhibits to the
Registration Statement of which this prospectus forms a part, and by applicable
law.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders of Holdings, and do not have cumulative
voting rights. The holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose, subject to
preferences that may be applicable to any outstanding preferred stock and any
other provisions of Holdings' certificate of incorporation. Holdings does not,
however, anticipate paying any cash dividends in the foreseeable future.
Holders of common stock have no preemptive or other rights to subscribe for
additional shares. No shares of common stock are subject to redemption or a
sinking fund. In the event of any liquidation, dissolution or winding up of
Holdings, after payment of the debts and other liabilities of Holdings, and
subject to the rights of holders of shares of preferred stock, holders of
common stock are entitled to share pro rata in any distribution to the
stockholders. All of the outstanding shares of common stock are, and the shares
offered hereby will be, fully paid and nonassessable. See "Risk Factors --
L-3's Ownership is Concentrated", "Dividend Policy" and "Shares Eligible for
Future Sale".
PREFERRED STOCK
The Board of Directors is authorized, without further vote or action by
holders of common stock, to issue 25,000,000 shares of preferred stock in one
or more series and to designate the rights, preferences, limitations,
restrictions of and upon shares of each series, including voting, redemption
and conversion rights. The Board of Directors may also designate dividend
rights and preferences in liquidation. It is not possible to state the effect
of the authorization and issuance of any series of preferred stock upon the
rights of the holders of common stock until the Board of Directors determines
the specific terms, rights and preferences of such a series of preferred stock.
However, such effects might include, among other things, restricting dividends
on the common stock, diluting the voting power of the common stock or impairing
the liquidation rights of such shares without further action by holders of
common stock. In addition, under certain circumstances, the issuance of
preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of Holdings' securities or the removal of incumbent management, which
could thereby depress the market price of Holdings' common stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Holdings is a Delaware corporation subject to Section 203 of the DGCL
("Section 203"). Section 203 provides in general that a stockholder acquiring
more than 15% of the outstanding voting stock of a corporation subject to
Section 203 (an "Interested Stockholder") but less than 85% of such stock may
not engage in certain Business Combinations (as defined in Section 203) with
the corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's board of directors approved either the Business Combination or
the transaction in which the stockholder became an Interested Stockholder or
(ii) the Business Combination is approved by the corporation's board of
directors and authorized by a vote of at least 66 2/3% of the outstanding voting
stock of the corporation not owned by the Interested Stockholder. A "Business
Combination" includes mergers, asset sales and other transactions resulting in
financial benefit to a stockholder. Section 203 could prohibit or delay mergers
or other takeover or change of control attempts with respect to the Company
and, accordingly, may discourage attempts that might result in a premium over
the market price for the shares held by stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is First Chicago
Trust Company of New York.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITIES
The Senior Credit Facilities have been provided by a syndicate of banks
led by Bank of America National Trust & Savings Association, as administrative
agent. The Senior Credit Facilities provide for (A) $200 million in revolving
credit loans which must be repaid by March 31, 2003 (the "Revolving Credit
Facility") and (B) $185 million in revolving credit loans which must be repaid
by August 12, 1999 (the "Revolving 364 Day Facility" and together with the
Revolving Credit Facility, the "Senior Credit Facilities"); provided that all
or a portion of the Revolving 364 Day Facility may be extended for a period of
364 days following August 12, 1999 with the consent of lenders holding not less
than 50% of the commitments to make 364-day loans (August 12, 1999 or the date
364 days thereafter, the "364 Day Termination Date"); and provided further that
L-3 Communications Corporation may convert the outstanding principal amount of
any or all of the loans outstanding under the Revolving 364 Day Facility to
term loans on the 364 Day Termination Date. The Revolving Credit Facility
includes borrowing capacity available for letters of credit and for borrowings
on same-day notice (the "Swingline Loans").
All borrowings under the Senior Credit Facilities bear interest, at L-3
Communications Corporation's option, at either: (A) a "base rate" equal to, for
any day, the higher of: (a) 0.50% per annum above the latest Federal Funds
Rate; and (b) the rate of interest in effect for such day as publicly announced
from time to time by Bank of America National Trust & Savings Association in
San Francisco, California, at its "reference rate" plus a spread ranging from
0.875% to 0.0% per annum depending on L-3 Communications Corporation's ratio of
debt to EBITDA (as defined in the Senior Credit Facilities ("Bank EBITDA")) at
the time of determination or (B) a "LIBOR rate" equal to, for any Interest
Period (as defined in the Senior Credit Facilities), the London interbank
offered rate of interest per annum for such Interest Period as determined by
the administrative agent, plus a spread ranging from 1.875% to 0.625% per
annum, depending on L-3 Communications Corporation's ratio of debt to Bank
EBITDA at the time of determination, provided that Swingline Loans can only
bear interest at a "base rate" plus the applicable spread.
L-3 Communications Corporation will pay commitment fees calculated at a
rate (A) ranging from 0.50% to 0.25% per annum on the daily amount of the
available unused commitment under the Revolving Credit Facility and (B) ranging
from 0.30% to 0.125% per annum on the daily amount of the available unused
commitment under the Revolving 364 Day Facility, in each case depending on the
L-3 Communications Corporation's ratio of debt to Bank EBITDA in effect on each
day. Such commitment fees will be payable quarterly in arrears and upon
termination of the Senior Credit Facilities.
L-3 Communications Corporation will pay a letter of credit fee calculated
at a rate ranging from (A) 0.9375% to 0.3125% per annum in the case of
performance letters of credit and (B) 1.875% to 0.625% in the case of all other
letters of credit, in each case depending on L-3 Communications Corporation's
ratio of debt to Bank EBITDA at the time of determination. L-3 Communications
Corporation will also pay a fronting fee equal to 0.1250% per annum on the
aggregate face amount of all outstanding letters of credit. Such fees will be
payable quarterly in arrears and upon the termination of the Senior Credit
Facilities. In addition, L-3 Communications Corporation will pay customary
transaction charges in connection with any letters of credit. The Senior Credit
Facilities provide for the issuance of letters of credit in currencies other
than United States dollars.
The foregoing debt to Bank EBITDA-dependent rates range from the highest
rate specified if the ratio of debt to Bank EBITDA is greater than 4.75 to 1.0
and the lowest rate specified if such ratio is less than 2.75 to 1.0.
In the event that the 364 Day loans are converted into term loans, such
term loans shall be repaid by the Borrower in nine (9) consecutive quarterly
installment commencing on March 31, 2001, by funding on each amortization
payment date set forth below an amount necessary to cause the aggregate
principal amount of term loans outstanding on such date to not exceed an amount
equal to the product of (x) the "Applicable Percentage" set forth opposite such
amortization payment date
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<PAGE>
multiplied by (y) the aggregate amount of commitments of lenders to make loans
under the Revolving 364 Day Facility on the 364 Day Termination Date (the
"Applicable Converted Commitment"):
<TABLE>
<CAPTION>
APPLICABLE PERCENTAGE OF THE
AMORTIZATION PAYMENT DATE APPLICABLE CONVERTED COMMITMENT
- --------------------------- --------------------------------
<S> <C>
3/31/01 90.0%
6/30/01 80.0%
9/30/01 70.0%
12/31/01 60.0%
3/31/02 50.0%
6/30/02 40.0%
9/30/02 30.0%
12/31/02 20.0%
3/31/03 0.0%
</TABLE>
Borrowings under the Senior Credit Facilities are subject to mandatory
prepayment (i) with the net proceeds of any incurrence of indebtedness and (ii)
with the proceeds of asset sales, in both cases subject to certain exceptions.
L-3 Communications Corporation's obligations under the Senior Credit
Facilities are secured by (i) a pledge by Holdings of the stock of L-3
Communications Corporation and (ii) a pledge by L-3 Communications Corporation
and its material direct and indirect subsidiaries of all of the stock of their
respective material domestic subsidiaries and 65% of the stock of L-3
Communications Corporation's material first-tier foreign subsidiaries. In
addition, indebtedness under the Senior Credit Facilities is guaranteed by
Holdings and by all of L-3 Communications Corporation's direct and indirect
material domestic subsidiaries.
The Senior Credit Facilities contain customary covenants and restrictions
on L-3 Communications Corporation's ability to engage in certain activities. In
addition, the Senior Credit Facilities provide that L-3 Communications
Corporation must meet or exceed an interest coverage ratio and must not exceed
a leverage ratio. The Senior Credit Facilities also include customary events of
default.
103/8% SENIOR SUBORDINATED NOTES DUE 2007
L-3 Communications Corporation has outstanding $225.0 million in aggregate
principal amount of its 1997 Notes. The 1997 Notes are subject to the terms and
conditions of an Indenture (the "1997 Indenture") dated as of April 30, 1997
between L-3 Communications Corporation and The Bank of New York, as trustee.
The 1997 Notes are subject to all of the terms and conditions of the 1997
Indenture. The following summary of the material provisions of the 1997
Indenture does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, all of the provisions of the 1997 Indenture and
those terms made a part of the 1997 Indenture by the Trust Indenture Act of
1939, as amended. All terms defined in the 1997 Indenture and not otherwise
defined herein are used below with the meanings set forth in the 1997
Indenture.
General. The 1997 Notes will mature on May 1, 2007 and bear interest at
103/8% per annum, payable semi-annually on May 1 and November 1 of each year.
The 1997 Notes are general unsecured obligations of L-3 Communications
Corporation and are subordinated in right of payment to all existing and future
senior debt of L-3 Communications Corporation and rank pari passu with the May
1998 Notes and the December 1998 Notes. The 1997 Notes are unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly and severally,
by all of L-3 Communications Corporation's Restricted Subsidiaries other than
Foreign Subsidiaries.
Optional Redemption. The 1997 Notes are subject to redemption at any time,
at the option of L-3 Communications, in whole or in part, on or after May 1,
2002 at redemption prices (plus accrued and unpaid interest) starting at
105.188% of principal (plus accrued and unpaid interest) during the 12-month
period beginning May 1, 2002 and declining annually to 100% of principal (plus
accrued and unpaid interest) on May 1, 2005 and thereafter.
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In addition, prior to May 1, 2000, L-3 Communications Corporation may
redeem up to 35% of the aggregate principal amount of the 1997 Notes with the
net proceeds of one or more Equity Offerings, to the extent such proceeds are
contributed (within 120 days of any such offering) to L-3 Communications
Corporation as common equity, at a price equal to 109.375% of the principal
(plus accrued and unpaid interest) provided that at least 65% of the original
aggregate principal amount of the 1997 Notes remains outstanding thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the 1997 Notes may require L-3 Communications Corporation to repurchase all
or a portion of such holder's 1997 Notes at a purchase price equal to 101% of
the principal amount thereof (plus accrued and unpaid interest). Generally, a
Change of Control means the occurrence of any of the following: (i) the
disposition of all or substantially all of L-3 Communications Corporation's
assets to any person, (ii) the adoption of a plan relating to the liquidation
or dissolution of L-3 Communications Corporation, (iii) the consummation of any
transaction in which a person other than the Principals and their Related
Parties becomes the beneficial owner of more than 50% of the voting stock of
L-3 Communications Corporation, or (iv) the first day on which a majority of
the members of the Board of Directors of L-3 Communications Corporation are not
Continuing Directors.
Subordination. The 1997 Notes are general unsecured obligations of L-3
Communications Corporation and are subordinate to all existing and future
senior debt of L-3 Communications Corporation. The 1997 Notes will rank senior
in right of payment to all subordinated Indebtedness of L-3 Communications
Corporation. The Subsidiary Guarantees are general unsecured obligations of the
Guarantors and are subordinated to the senior debt and to the guarantees of
senior debt of such Guarantors. The Subsidiary Guarantees rank senior in right
of payment to all subordinated Indebtedness of the Guarantors.
Certain Covenants. The 1997 Indenture contains a number of covenants
restricting the operations of L-3 Communications Corporation, which, among
other things, limit the ability of L-3 Communications Corporation to incur
additional Indebtedness, pay dividends or make distributions, sell assets,
issue subsidiary stock, restrict distributions from Subsidiaries, create
certain liens, enter into certain consolidations or mergers and enter into
certain transactions with affiliates.
Events of Default. Events of Default under the 1997 Indenture include the
following: (i) a default for 30 days in the payment when due of interest on the
1997 Notes; (ii) default in payment when due of the principal of or premium, if
any, on the 1997 Notes; (iii) failure by L-3 Communications Corporation to
comply with certain provisions of the 1997 Indenture (subject, in some but not
all cases, to notice and cure periods); (iv) default under Indebtedness for
money borrowed by L-3 Communications Corporation or any of its Restricted
Subsidiaries in excess of $10.0 million; (v) failure by L-3 Communications
Corporation or any Restricted Subsidiary that would be a Significant Subsidiary
to pay final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days; (vi) except as
permitted by the Indenture, any Subsidiary Guarantee shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Guarantor, or any Person acting on
behalf of any Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee; or (vii) certain events of bankruptcy or insolvency with
respect to L-3 Communications Corporation or any of its Restricted
Subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding 1997 Notes may accelerate the maturity of all the 1997 Notes as
provided in the 1997 Indenture.
8 1/2% SENIOR SUBORDINATED NOTES DUE 2008
L-3 Communications Corporation has outstanding $180.0 million in aggregate
principal amount of 8 1/2% Senior Subordinated Notes due 2008. The May 1998
Notes are subject to the terms and conditions of an Indenture (the "May 1998
Indenture") dated as of May 22, 1998, between L-3 Communications Corporation
and The Bank of New York as trustee. The May 1998 Notes are subject
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<PAGE>
to all of the terms and conditions of the May 1998 Indenture. The following
summary of the material provisions of the May 1998 Indenture does not purport
to be complete, and is subject to, and qualified in its entirety by reference
to, all of the provisions of the May 1998 Indenture and those terms made a part
of the May 1998 Indenture by the Trust Indenture Act of 1939, as amended. All
terms defined in the May 1998 Indenture and not otherwise defined herein are
used below with the meanings set forth in the May 1998 Indenture.
General. The May 1998 Notes will mature on May 15, 2008 and bear interest
at 8 1/2% per annum, payable semi-annually on May 15 and November 15 of each
year. The May 1998 Notes are general unsecured obligations of L-3
Communications Corporation and are subordinated in right of payment to all
existing and future senior debt of L-3 Communications Corporation and rank pari
passu with the 1997 Notes and the December 1998 Notes. The May 1998 Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally by all of L-3 Communications Corporation's Restricted
Subsidiaries other than Foreign Subsidiaries.
Optional Redemption. The May 1998 Notes are subject to redemption at any
time, at the option of L-3 Communications Corporation, in whole or in part, on
or after May 15, 2003 at redemption prices (plus accrued and unpaid interest)
starting at 104.250% of principal (plus accrued and unpaid interest) during the
12-month period beginning May 15, 2003 and declining annually to 100% of
principal (plus accrued and unpaid interest) on May 15, 2006 and thereafter.
In addition, prior to May 15, 2001, L-3 Communications Corporation may
redeem up to 35% of the aggregate principal amount of May 1998 Notes with the
net proceeds of one or more Equity Offerings, to the extent such proceeds are
contributed (within 120 days of any such offering) to L-3 Communications
Corporation as common equity, at a price equal to 108.5000% of the principal
(plus accrued and unpaid interest) provided that at least 65% of the original
aggregate principal amount of the May 1998 Notes remains outstanding
thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the May 1998 Notes may require L-3 Communications Corporation to repurchase
all or a portion of such holder's May 1998 Notes at a purchase price equal to
101% of the principal amount thereof (plus accrued and unpaid interest).
Generally, a Change of Control, means the occurrence of any of the following:
(i) the disposition of all or substantially all of L-3 Communications
Corporation's assets to any person; (ii) the adoption of a plan relating to the
liquidation or dissolution of L-3 Communications Corporation; (iii) the
consummation of any transaction in which a person other than the Principals and
their Related Parties becomes the beneficial owner of more than 50% of the
voting stock of L-3 Communications Corporation; or (iv) the first day on which
a majority of the members of the Board of Directors of L-3 Communications
Corporation are not Continuing Directors.
Subordination. The May 1998 Notes are general unsecured obligations of L-3
Communications Corporation and are subordinate to all existing and future
senior debt of L-3 Communications Corporation. The May 1998 Notes will rank
senior in right of payment to all subordinated Indebtedness of L-3
Communications Corporation. The Subsidiary Guarantees are general unsecured
obligations of the Guarantors and are subordinated to the senior debt and to
the guarantees of senior debt of such Guarantors. The Subsidiary Guarantees
rank senior in right of payment to all subordinated Indebtedness of the
Guarantors.
Certain Covenants. The May 1998 Indenture contains a number of covenants
restricting the operations of L-3 Communications, which, among other things,
limit the ability of L-3 Communications Corporation to incur additional
Indebtedness, pay dividends or make distributions, sell assets, issue
subsidiary stock, restrict distributions from Subsidiaries, create certain
liens, enter into certain consolidations or mergers and enter into certain
transactions with affiliates.
Events of Default. Events of Default under the May 1998 Indenture include
the following: (i) a default for 30 days in the payment when due of interest on
the May 1998 Notes; (ii) default in payment when due of the principal of or
premium, if any, on the May 1998 Notes; (iii) failure by L-3 Communications
Corporation to comply with certain provision of the May 1998 Indenture
(subject, in
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some but not all cases, to notice and cure periods); (iv) default under
Indebtedness for money borrowed by L-3 Communications Corporation or any of its
Restricted Subsidiaries in excess of $10.0 million; (v) failure by L-3
Communications Corporation or any Restricted Subsidiary that would be a
Significant Subsidiary to pay final judgments aggregating in excess of $10.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vi) except as permitted by the May 1998 Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee; or (vii) certain
events of bankruptcy or insolvency with respect to L-3 Communications
Corporation or any of its Restricted Subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding May 1998 Notes may accelerate the maturity of all the May 1998
Notes as provided in the May 1998 Indenture.
8% SENIOR SUBORDINATED NOTES DUE 2008
L-3 Communications Corporation has outstanding $200.0 million in aggregate
principal amount of 8% Senior Subordinated Notes due 2008. The December 1998
Notes are subject to the terms and conditions of an Indenture (the "December
1998 Indenture") dated as of December 11, 1998, among L-3 Communications
Corporation, the guarantors named therein and The Bank of New York as trustee.
The December 1998 Notes are subject to all of the terms and conditions of the
December 1998 Indenture. The following summary of the material provisions of
the December 1998 Indenture does not purport to be complete, and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
December 1998 Indenture and those terms made a part of the December 1998
Indenture by the Trust Indenture Act of 1939, as amended. All terms defined in
the December 1998 Indenture and not otherwise defined herein are used below
with the meanings set forth in the December 1998 Indenture.
General. The December 1998 Notes will mature on August 1, 2008 and bear
interest at 8% per annum, payable semi-annually on February 1 and August 1 of
each year. The December 1998 Notes are general unsecured obligations of L-3
Communications Corporation and are subordinated in right of payment to all
existing and future senior debt of L-3 Communications Corporation and rank pari
passu with the 1997 Notes and the May 1998 Notes. The December 1998 Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally by all of L-3 Communications Corporation's Restricted
Subsidiaries other than Foreign Subsidiaries.
Optional Redemption. The December 1998 Notes are subject to redemption at
any time, at the option of L-3 Communications Corporation, in whole or in part,
on or after August 1, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 104.000% of principal (plus accrued and unpaid interest)
during the 12-month period beginning August 1, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on August 1, 2006 and
thereafter.
In addition, prior to August 1, 2001, L-3 Communications Corporation may
redeem up to 35% of the aggregate principal amount of December 1998 Notes with
the net proceeds of one or more Equity Offerings, to the extent such proceeds
are contributed (within 120 days of any such offering) to L-3 Communications
Corporation as common equity, at a price equal to 108.000% of the principal
(plus accrued and unpaid interest) provided that at least 65% of the original
aggregate principal amount of the December 1998 Notes remains outstanding
thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the December 1998 Notes may require L-3 Communications Corporation to
repurchase all or a portion of such holder's December 1998 Notes at a purchase
price equal to 101% of the principal amount thereof (plus accrued and unpaid
interest and liquidated damages, if any). Generally, a Change of Control, means
the occurrence of any of the following: (i) the disposition of all or
substantially all of L-3 Communications Corporation's assets to any person;
(ii) the adoption of a plan relating to the liquidation or dissolution of L-3
Communications Corporation; (iii) the consummation of any
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transaction in which a person other than the Principals and their Related
Parties becomes the beneficial owner of more than 50% of the voting stock of
L-3 Communications Corporation; or (iv) the first day on which a majority of
the members of the Board of Directors of L-3 Communications Corporation are not
Continuing Directors.
Subordination. The December 1998 Notes are general unsecured obligations
of L-3 Communications Corporation and are subordinate to all existing and
future senior debt of L-3 Communications Corporation. The December 1998 Notes
will rank senior in right of payment to all subordinated Indebtedness of L-3
Communications Corporation. The Subsidiary Guarantees are general unsecured
obligations of the Guarantors and are subordinated to the senior debt and to
the guarantees of senior debt of such Guarantors. The Subsidiary Guarantees
rank senior in right of payment to all subordinated Indebtedness of the
Guarantors.
Certain Covenants. The December 1998 Indenture contains a number of
covenants restricting the operations of L-3 Communications, which, among other
things, limit the ability of L-3 Communications Corporation to incur additional
Indebtedness, pay dividends or make distributions, sell assets, issue
subsidiary stock, restrict distributions from Subsidiaries, create certain
liens, enter into certain consolidations or mergers and enter into certain
transactions with affiliates.
Events of Default. Events of Default under the December 1998 Indenture
include the following: (i) a default for 30 days in the payment when due of
interest on, or liquidated damages with respect to the December 1998 Notes;
(ii) default in payment when due of the principal of or premium, if any, on the
December 1998 Notes; (iii) failure by L-3 Communications Corporation to comply
with certain provision of the December 1998 Indenture (subject, in some but not
all cases, to notice and cure periods); (iv) default under Indebtedness for
money borrowed by L-3 Communications Corporation or any of its Restricted
Subsidiaries in excess of $10.0 million; (v) failure by L-3 Communications
Corporation or any Restricted Subsidiary that would be a Significant Subsidiary
to pay final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days; (vi) except as
permitted by the December 1998 Indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Subsidiary Guarantee; or (vii) certain events of bankruptcy or
insolvency with respect to L-3 Communications Corporation or any of its
Restricted Subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding December 1998 Notes may accelerate the maturity of all the December
1998 Notes as provided in the December 1998 Indenture.
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the consummation of this offering, Holdings will have 30,902,429
shares of common stock issued and outstanding. All of the 9,250,000 shares of
common stock to be sold in this offering (and any shares sold upon exercise of
the underwriters' over-allotment option) will be freely tradable without
restrictions or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of Holdings (as that term is defined in Rule
144 under the Securities Act ("Rule 144")), which will be subject to the resale
limitations of Rule 144. After the completion of this offering, the Company
will have 14,707,142 shares of common stock outstanding which are "restricted
securities" as that term is defined in Rule 144 and are also subject to certain
restrictions on disposition. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act. Sales of restricted
securities in the public market, or the availability of such shares for sale,
could have an adverse effect on the price of the Common Stock. See "Risk
Factors -- The Price of our Common Stock may Fluctuate Significantly" and "Risk
Factors -- A Number of Shares are or Will be Available for Future Sale".
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RULE 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares
of common stock for at least one year, including a person who may be deemed an
"affiliate" of Holdings, is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the total number of
shares of the class of stock sold or the average weekly reported trading volume
of the class of stock being sold during the four calendar weeks preceding such
sale. A person who is not deemed an "affiliate" of Holdings at any time during
the three months preceding a sale and who has beneficially owned shares for at
least two years is entitled to sell such shares under Rule 144 without regard
to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly through the
use of one or more intermediaries controls, is controlled by, or is under
common control with, such issuer. The foregoing summary of Rule 144 is not
intended to be a complete description thereof.
Messrs. Lanza and LaPenta, Lockheed Martin and the Lehman Partnership who,
after this offering, will hold in the aggregate 14,471,142 shares of common
stock, for a period of 270 days after the date of this prospectus, and
Holdings, for a period of 180 days after the date of this prospectus, have
agreed, pursuant to lock-up agreements, that they will not, without the prior
written consent of Lehman Brothers Inc., offer, sell, contract to sell or
otherwise dispose of any shares of common stock or securities exercisable or
exchangeable for common stock or enter into any derivative transaction with
similar effect as a sale of common stock. The restrictions described in this
paragraph do not apply to (i) the sale of common stock to the underwriters in
this offering, (ii) the issuance by Holdings of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security outstanding
on the date of this prospectus, (iii) transactions by any person other than
Holdings relating to shares of common stock or other securities acquired in
open market transactions after the completion of this offering of the common
stock or (iv) the ability of Messrs. Lanza and LaPenta to sell up to an
aggregate of 300,000 shares beginning 30 days after the completion of this
offering.
REGISTRATION RIGHTS
Pursuant to the Stockholders Agreement, certain of the existing
stockholders have the right, under certain circumstances and subject to certain
conditions, to require the Company to register under the Securities Act shares
of common stock held by them. Lockheed Martin, the Lehman Partnership and each
of the Senior Management has three, four and one demand registration rights,
respectively. In addition, the Stockholders Agreement also provides all of the
existing stockholders with certain piggyback registration rights. The
Stockholders Agreement provides, among other things, that the Company will pay
expenses in connection with (i) up to two demand registrations requested by
Lockheed Martin, up to three demand registrations requested by the Lehman
Partnership and the two demand registrations requested by the Senior Management
and (ii) any registration in which the existing stockholders participate
through piggyback registration rights granted under such agreement.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary accurately describes certain United States federal
income and estate tax consequences that may be relevant to the purchase,
ownership and disposition of common stock by a Non-U.S. Holder. For this
purpose, a "Non-U.S. Holder" is any person who is, for United States federal
income tax purposes, a foreign corporation, a non-resident alien individual, a
foreign partnership or a foreign estate or trust. This discussion does not
address all aspects of United States federal income and estate taxes and does
not deal with foreign, state and local consequences that may be relevant to
such Non-U.S. Holders in light of their personal circumstances. Furthermore,
this discussion is based on provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations promulgated thereunder
and administrative and judicial interpretations thereof, as of the date hereof,
all of which are subject to change. EACH PROSPECTIVE PURCHASER OF COMMON STOCK
IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE
TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS
ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the conduct of a trade
or business by the Non-U.S. Holder within the United States and, where a tax
treaty applies, are attributable to a United States permanent establishment of
the Non-U.S. Holder, are not subject to the withholding tax, but instead are
subject to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates. Certain certification and disclosure
requirements must be complied with in order to be exempt from withholding under
such effectively connected income exemption. Any such effectively connected
dividends received by a foreign corporation may be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Until December 31, 1999, dividends paid to an address outside the United
States are presumed to be paid to a resident of such country (unless the payer
has knowledge to the contrary) for purposes of the withholding tax discussed
above and, under the current interpretation of United States Treasury
regulations, for purposes of determining the applicability of a tax treaty
rate. However, a Non-U.S. Holder of common stock who wishes to claim the
benefit of an applicable treaty rate (and avoid back-up withholding as
discussed below) for dividends paid after December 31, 1999, will be required
to satisfy applicable certification and other requirements.
A Non-U.S. Holder of common stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
common stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and
holds the common stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (iii) the Company is or
has been a "U.S. real property holding corporation" for United States federal
income tax purposes.
An individual Non-U.S. Holder described in clause (i) above will be
subject to tax on the net gain derived from the sale under regular graduated
United States federal income tax rates. An individual Non-U.S. Holder described
in clause (ii) above will be subject to a flat 30% tax on the gain derived from
the sale, which may be offset by United States source capital losses (even
though the individual
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is not considered a resident of the United States). If a Non-U.S. Holder that
is a foreign corporation falls under clause (i) above, it will be subject to
tax on its gain under regular graduated United States federal income tax rates
and, in addition, may be subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits within the meaning of the Code for
the taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable income tax treaty. The Company believes it is
not, and does not anticipate becoming, a "U.S. real property holding
corporation" for United States federal income tax purposes.
FEDERAL ESTATE TAX
Common stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder
the amount of dividends paid to such Non-U.S. Holder and the tax withheld with
respect to such dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and withholding may
also be made available to the tax authorities in the country in which the
Non-U.S. Holder resides under the provisions of an applicable income tax
treaty.
Under current law, backup withholding at the rate of 31% generally will
not apply to dividends paid to a Non-U.S. Holder at an address outside the
United States (unless the payer has knowledge that the payee is a U.S. person).
Under the Final Regulations, however, a Non-U.S. Holder will be subject to
back-up withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of common stock by or through a United
States office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a Non-U.S. Holder or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a broker.
If, however, such broker is, for United States federal income tax purposes a
U.S. Person, a controlled foreign corporation, or a foreign person that derives
50% or more of its gross income for a certain period from the conduct of a
trade or business in the United States or for taxable years beginning after
December 31, 1999, a foreign partnership, in which one or more U.S. Persons, in
the aggregate, own more than 50% of the income or capital interests in the
partnership or which is engaged in a trade or business in the United States,
such payments will be subject to information reporting, but not backup
withholding, unless (i) such broker has documentary evidence in its records
that the beneficial owner is a Non-U.S. Holder and certain other conditions are
met, or (ii) the beneficial owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
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UNDERWRITING
Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement, the underwriters named below (the "U.S. Underwriters"),
for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and C.E. Unterberg, Towbin are acting as
representatives (the "U.S. Representatives"), have severally agreed, subject to
the terms and conditions of the U.S. Underwriting Agreement, to purchase from
Holdings and the selling stockholders, and Holdings and the selling
stockholders have agreed to sell to each U.S. Underwriter, the aggregate number
of shares of common stock set forth opposite the name of each such U.S.
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ----------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc. ...........................
Bear, Stearns & Co. Inc. .......................
Credit Suisse First Boston Corporation .........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ............................
Morgan Stanley & Co. Incorporated ..............
C.E. Unterberg, Towbin .........................
---------
Total ........................................ 7,400,000
=========
</TABLE>
Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the form of which is filed as an exhibit
to the Registration Statement, the managers named below of the concurrent
offering of the shares of Common Stock outside the U.S. and Canada (the
"International Managers" and, together with the U.S. Underwriters, the
"Underwriters"), for whom Lehman Brothers International (Europe), Bear, Stearns
International Limited, Credit Suisse First Boston (Europe) Limited, Merrill
Lynch International, Morgan Stanley & Co. International Limited and C.E.
Unterberg, Towbin are acting as lead managers (the "Lead Managers" and,
together with the U.S. Representatives, the "Representatives"), have severally
agreed, subject to the terms and conditions of the International Underwriting
Agreement, to purchase from Holdings and the selling stockholders, and Holdings
and the selling stockholders have agreed to sell to each International Manager,
the aggregate number of shares of common stock set forth opposite the name of
each International Manager below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
- ---------------------------------------------------------- ----------
<S> <C>
Lehman Brothers International (Europe) ..............
Bear, Stearns International Limited .................
Credit Suisse First Boston (Europe) Limited .........
Merrill Lynch International .........................
Morgan Stanley & Co. International Limited ..........
C.E. Unterberg, Towbin ..............................
---------
Total ............................................ 1,850,000
=========
</TABLE>
The U.S. Underwriting Agreement and the International Underwriting
Agreement (together, the "Underwriting Agreements") provide that the
obligations of the U.S. Underwriters and the International Managers to purchase
shares of common stock are subject to certain conditions, and that if any of
the foregoing shares of common stock are purchased by the U.S. Underwriters
pursuant to the U.S. Underwriting Agreement or by the International Managers
pursuant to the International Underwriting Agreement, then all the shares of
common stock agreed to be purchased by the U.S.
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Underwriters and the International Managers, as the case may be, pursuant to
their respective underwriting agreements, must be so purchased. The offering
price and underwriting discounts and commissions per share for the U.S.
offering and the international offering are identical. The closing of the U.S.
offering is a condition to the closing of the international offering and the
closing of the international offering is a condition to the closing of the U.S.
offering.
Holdings and the selling stockholders have been advised by the
Representatives that the U.S. Underwriters and the International Managers
propose to offer the shares of common stock directly to the public at the
public offering price set forth on the cover page of this prospectus, and to
certain selected dealers (who may include the U.S. Underwriters and the
International Managers) at such public offering price less a selling concession
not in excess of $ per share. The selected dealers may reallow a concession
not in excess of $ per share to certain brokers and dealers. After this
offering, the public offering price, the concession to selected dealers and the
reallowance may be changed by the U.S. Underwriters and the International
Managers.
Holdings and the selling stockholders have agreed to indemnify, under
certain circumstances, the U.S. Underwriters and the International Managers
against certain liabilities, including liabilities under the Securities Act,
and to contribute, under certain circumstances, to payments that the U.S.
Underwriters and the International Managers may be required to make in respect
thereof.
Holdings has granted to the U.S. Underwriters an option to purchase up to
an aggregate 1,110,000 additional shares of common stock and has granted to the
International Managers an option to purchase up to 277,500 additional shares of
common stock, in each case exercisable solely to cover over-allotments, at the
public offering price less the underwriting discounts and commissions shown on
the cover page of this prospectus. Such options may be exercised at any time
until 30 days after the date of the Underwriting Agreements. To the extent that
the over-allotment option is exercised, each U.S. Underwriter or International
Manager, as the case may be, will be committed, subject to certain conditions,
to purchase a number of additional shares of common stock proportionate to such
U.S. Underwriter's or International Manager's initial commitment as indicated
in the preceding tables.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to
which each U.S. Underwriter has agreed that, as part of the distribution of the
shares of common stock offered in the U.S. offering, (i) it is not purchasing
any such shares for the account of anyone other than a U.S. Person (as defined
below), and (ii) it has not offered or sold, will not offer, sell, resell or
deliver, directly or indirectly, any such shares or distribute any prospectus
relating to the U.S. offering to anyone other than a U.S. Person. In addition,
pursuant to such agreement, each International Manager has agreed that, as part
of the distribution of the shares of common stock offered in the international
offering, (i) it is not purchasing any such shares for the account of a U.S.
Person, and (ii) it has not offered or sold, and will not offer, sell, resell
or deliver, directly or indirectly, any of such shares or distribute any
prospectus relating to the international offering to any U.S. Person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Managers, including (i)
certain purchases and sales between U.S. Underwriters and the International
Managers, (ii) certain offers, sales, resales, deliveries or distributions to
or through investment advisors or other persons exercising investment
discretion, (iii) purchases, offers or sales by a U.S. Underwriter who is also
acting as an International Manager or by an International Manager who is also
acting as a U.S. Underwriter and (iv) other transactions specifically approved
by the U.S. Representatives and the Lead Managers. As used herein, the term
"U.S. Person" means any resident or national of the United States or Canada,
any corporation, partnership or other entity created or organized in or under
the laws of the United States or Canada, or any estate or trust the income of
which is subject to United States or Canadian federal income taxation
regardless of the source, the term "United States" means the United States of
America (including the District of Columbia) and its territories, its
possessions and other areas subject to its jurisdiction, and the term "Canada"
means Canada, its provinces, its territories, its possessions and other areas
subject to its jurisdiction.
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Pursuant to the Agreement Between the U.S. Underwriters and the
International Managers, sales may be made between the U.S. Underwriters and the
International Managers of such a number of shares of common stock as may be
mutually agreed. The price of any shares so sold shall be the public offering
price as then in effect for the shares of common stock being sold by the U.S.
Underwriters and the International Managers less an amount equal to the selling
concession allocable to such shares of common stock, unless otherwise
determined by mutual agreement. To the extent that there are sales between the
U.S. Underwriters and the International Managers pursuant to the Agreement
Between the U.S. Underwriters and the International Managers the number of
shares of common stock available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount specified on the
cover page of the this prospectus.
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of common stock. As an exception to
these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the common stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
If the Underwriters create a short position in the common stock in
connection with this offering (i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus), the Representatives
may reduce that short position by purchasing common stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment options described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that, if the Representatives purchase
shares of common stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this offering.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Each International Manager has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the date of issue of
the shares of common stock, will not offer or sell any shares of Common Stock
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom and (iii) it has only issued or passed
on, and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the shares of common
stock if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom such document may otherwise be issued or passed upon.
92
<PAGE>
The Common Stock is listed on the NYSE under the symbol LLL.
Messrs. Lanza and LaPenta, Lockheed Martin and the Lehman Partnership who,
after this offering, will own in the aggregate 14,471,142 shares of common
stock, for a period of 270 days from the date of this prospectus, and Holdings,
for a period of 180 days from the date of this prospectus, have agreed that
they will not, subject to certain limited exceptions, directly or indirectly,
offer, sell or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for any such shares
of common stock or enter into any derivative transaction with similar effect as
a sale of common stock, without the prior written consent of Lehman Brothers
Inc. The restrictions described in this paragraph do not apply to (i) the sale
of common stock to the Underwriters in this offering, (ii) the issuance by
Holdings of shares of common stock upon the exercise of an option or a warrant
or the conversion of a security outstanding on the date of this prospectus,
(iii) transactions by any person other than Holdings relating to shares of
common stock or other securities acquired in open market transactions after the
completion of this offering or (iv) the ability of Messrs. Lanza and LaPenta to
sell up to an aggregate of 300,000 shares beginning 30 days after the
completion of this offering.
Any offer of the shares of common stock in Canada will be made only
pursuant to an exemption from the prospectus filing requirement and an
exemption from the dealer registration requirement (where such an exemption is
not available, offers shall be made only by a registered dealer) in the
relevant Canadian jurisdiction where such offer is made.
Purchasers of the shares of common stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover hereof.
The U.S. Underwriters and the International Managers have informed
Holdings and the selling stockholders that they do not intend to sell to, and
therefore will not confirm the sales of shares of common stock offered hereby
to any accounts over which they exercise discretionary authority without prior
written approval of the customer.
Lehman Brothers Inc. has provided investment banking, financial advisory
and other services to the Company, for which services Lehman Brothers Inc. has
received customary fees. In addition, certain of the selling stockholders are
affiliates of Lehman Brothers Inc. Furthermore, Lehman Brothers Commercial
Paper Inc., an affiliate of Lehman Brothers Inc., is a lender under the Senior
Credit Facilities. After the completion of this offering and assuming that the
Underwriters' over-allotment option is exercised, the Lehman Partnership will
beneficially own 24.8% of the outstanding capital stock of Holdings and will be
able to significantly influence the business and the affairs of the Company
with respect to matters requiring stockholder approval. See "Management --
Directors and Executive Officers" and "Ownership of Capital Stock".
Each of Bear, Stearns & Co. Inc., Credit Suisse First Boston Corporation,
Morgan Stanley & Co. Incorporated and C.E. Unterberg, Towbin and certain of
their respective affiliates provided investment banking services to the Company
in connection with the IPO, for which services each received customary fees.
Under Rule 2720 ("Rule 2720") of the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD"), the Company is considered an
affiliate of Lehman Brothers Inc. This offering is being conducted in
accordance with Rule 2720.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for the Company by Simpson Thacher & Bartlett, New York, New York and for
the underwriters by Latham & Watkins, New York, New York.
EXPERTS
The (i) consolidated balance sheet of the Company as of December 31, 1997
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the nine
93
<PAGE>
months then ended, (ii) combined statements of operations, changes in invested
equity and cash flows of the Predecessor Company for the three months ended
March 31, 1997, (iii) combined balance sheet of the Predecessor Company as of
December 31, 1996 and the related combined statements of operations, changes in
invested equity and cash flows for the year then ended, (iv) combined statement
of operations and cash flows of the Loral Acquired Businesses for the three
months ended March 31, 1996 and for the year ended December 31, 1995 and (v)
the combined balance sheet of AlliedSignal Ocean Systems (a wholly-owned
operation of AlliedSignal, Inc.) and the related combined statements of
operations, cash flows and equity for the year then ended have been
included in this prospectus and the Registration Statement in reliance of the
reports of PricewaterhouseCoopers LLP, independent auditors, given in the
authority of such firm as experts in accounting and auditing. The report on the
combined financial statements of the Predecessor Company for the year ended
December 31, 1996 indicates that PricewaterhouseCoopers LLP's opinion, insofar
as it relates to the financial statements of the Lockheed Martin Communications
Systems Division included in such combined financial statements, is based
solely on the report of other auditors.
The consolidated financial statements of SPD Technologies Inc. and
Subsidiaries as of December 31, 1997, 1996 and 1995 and for the years then
ended have been included in this prospectus and the Registration Statement in
reliance of the reports of Grant Thornton LLP, independent certified public
accountants upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of Lockheed Martin Communications
Systems Division as of and for the year ended December 31, 1996 (not presented
separately herein) and for the year ended December 31, 1995, and the financial
statements of the Satellite Transmission Systems Division of California
Microwave, Inc. as of June 30, 1997 and 1996 and for each of the three years in
the period ended June 30, 1997, have been included in this prospectus and the
Registration Statement in reliance on the reports of Ernst & Young LLP,
independent auditors, given on their authority as experts in accounting and
auditing.
The consolidated financial statements of ILEX Systems, Inc. as of December
31, 1997, and for the year then ended have been included in this prospectus and
the Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
L-3 COMMUNICATIONS HOLDINGS, INC.
(AND THE PREDECESSOR COMPANY)
<TABLE>
<CAPTION>
<S> <C>
Condensed Consolidated (Combined) Financial Statements as of September 30, 1998
(Unaudited) and December 31, 1997 and for the three and nine months ended
September 30, 1998 (Unaudited), and the three and six months ended September 30,
1997 (Unaudited) and the three months ended March 31, 1997 ........................ F-3
Condensed Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 ............................................................... F-4
Condensed Consolidated Statements of Operations for the three months ended
September 30, 1998 and 1997 (Unaudited) .......................................... F-5
Condensed Consolidated (Combined) Statements of Operations for the nine months
ended September 30, 1998 (Unaudited), the six months ended September 30, 1997 and
the three months ended March 31, 1997 ............................................ F-6
Condensed Consolidated (Combined) Statements of Cash Flows for the nine months
ended September 30, 1998 (Unaudited), the six months ended September 30, 1997
(Unaudited) and the three months ended March 31, 1997 ............................ F-7
Notes to Unaudited Condensed Consolidated (Combined) Financial Statements ........ F-8
Consolidated (Combined) Financial Statements as of December 31, 1997 and 1996 and for
the nine months ended December 31, 1997, the three months ended March 31, 1997, and
the years ended December 31, 1996 and 1995 ......................................... F-14
Report of PricewaterhouseCoopers LLP ............................................. F-15
Report of Ernst & Young LLP on the financial statements of Lockheed Martin
Communications Systems Division as of December 31, 1996 and for the two years
ended December 31, 1996 ......................................................... F-16
Consolidated (Combined) Balance Sheets as of December 31, 1997 and
December 31, 1996 ............................................................... F-17
Consolidated (Combined) Statements of Operations for the nine months ended
December 31, 1997, for the three months ended March 31, 1997 and for the years
ended December 31, 1996 and 1995 ................................................ F-18
Consolidated (Combined) Statements of Changes in Shareholders' Equity and Invested
Equity for the nine months ended December 31, 1997, for three months ended
March 31, 1997 and for the years ended December 31, 1996 and 1995 ............... F-19
Consolidated (Combined) Statements of Cash Flows for the nine months ended
December 31, 1997, for the three months ended March 31, 1997 and for the years
ended December 31, 1996 and 1995 ............................................... F-20
Notes to Consolidated (Combined) Financial Statements ............................ F-21
LORAL ACQUIRED BUSINESSES
Combined Financial Statements for the three months ended March 31, 1996 and the year
ended December 31, 1995 ............................................................ F-40
Report of PricewaterhouseCoopers LLP ............................................. F-41
Combined Statements of Operations for three months ended March 31, 1996 and the
year ended December 31, 1995 .................................................... F-42
Combined Statements of Cash Flows for three months ended March 31, 1996 and the
year ended December 31, 1995 .................................................... F-43
Notes to Combined Financial Statements ........................................... F-44
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Financial Statements as of June 30, 1998 and for
the six months ended June 30, 1998 and 1997 ........................................ F-50
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 1998 ............. F-51
Condensed Consolidated Statements of Earnings (Unaudited) for the six months ended
June 30, 1998 and 1997 .......................................................... F-52
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months
ended June 30, 1998 and 1997 .................................................... F-53
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Notes to Condensed Consolidated Financial Statements .................................. F-54
Consolidated Financial Statements as of December 31, 1997 and for the year ended
December 31, 1997 ....................................................................... F-55
Report of Grant Thornton LLP .......................................................... F-56
Consolidated Balance Sheet as of December 31, 1997 .................................... F-57
Consolidated Statement of Earnings for the year ended December 31, 1997 ............... F-58
Consolidated Statement of Cash Flows for the year ended December 31, 1997 ............. F-59
Notes to Consolidated Financial Statements ............................................ F-60
Consolidated Financial Statements as of December 31, 1996 and 1995 and for the years
ended December 31, 1996 and 1995 ........................................................ F-69
Report of Grant Thornton LLP .......................................................... F-70
Consolidated Balance Sheets as of December 31, 1996 and 1995 .......................... F-71
Consolidated Statements of Earnings and Accumulated Deficit for the years ended
December 31, 1996 and 1995 ........................................................... F-72
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995 ............................................................................. F-73
Notes to Consolidated Financial Statements ............................................ F-74
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
Unaudited Condensed Financial Statements as of December 31, 1997 and for the
six months ended December 31, 1997 and 1996 ............................................. F-80
Balance Sheet (Unaudited) as of December 31, 1997 ..................................... F-81
Statements of Operations (Unaudited) for the six months ended December 31, 1997
and 1996 ............................................................................. F-82
Statements of Cash Flows (Unaudited) for the six months ended December 31, 1997
and 1996 ............................................................................. F-83
Notes to Financial Statements (Unaudited) ............................................. F-84
Financial Statements as of June 30, 1997 and 1996 and for the years ended June 30, 1997,
1996 and 1995 ........................................................................... F-87
Report of Ernst & Young LLP ........................................................... F-88
Balance Sheets as of June 30, 1997 and 1996 ........................................... F-89
Statements of Operations for the years ended June 30, 1997, 1996 and 1995 ............. F-90
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 ............. F-91
Notes to Financial Statements ......................................................... F-92
ILEX SYSTEMS, INC. AND SUBSIDIARY
Consolidated Financial Statements as of December 31, 1997 and for the year ended
December 31, 1997 ....................................................................... F-98
Report of KPMG LLP .................................................................... F-99
Consolidated Balance Sheet as of December 31, 1997 .................................... F-100
Consolidated Statement of Income for the year ended December 31, 1997 ................. F-101
Consolidated Statement of Shareholders' Equity for the year ended December 31, 1997 F-102
Consolidated Statement of Cash Flows for the year ended December 31, 1997 ............. F-103
Notes to the Consolidated Financial Statements ........................................ F-104
ALLIEDSIGNAL OCEAN SYSTEMS (A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.)
Combined Financial Statements as of December 31, 1997 and for the year ended
December 31, 1997 ....................................................................... F-108
Report of PricewaterhouseCoopers LLP .................................................. F-109
Combined Balance Sheet as of December 31, 1997 ........................................ F-110
Combined Statements of Operations for the year ended December 31, 1997 ................ F-111
Combined Statement of Equity for the year ended December 31, 1997 ..................... F-112
Combined Statement of Cash Flows for the year ended December 31, 1997 ................. F-113
Notes to Combined Financial Statements ................................................ F-114
</TABLE>
F-2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
(AND THE PREDECESSOR COMPANY)
Condensed Consolidated (Combined) Financial Statements as of September 30, 1998
(Unaudited) and December 31, 1997 and for the three and nine months ended
September 30, 1998 (Unaudited),
and the three and six months ended September 30, 1997 (Unaudited)
and the three months ended March 31, 1997
F-3
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 5,687 $ 77,474
Contracts in process ........................................... 345,812 167,202
Net assets held for sale ....................................... -- 6,653
Deferred income taxes .......................................... 8,461 13,298
Other current assets ........................................... 16,444 2,750
---------- --------
Total current assets .......................................... 376,404 267,377
---------- --------
Property, plant and equipment ................................... 143,125 95,034
Less, accumulated depreciation and amortization ................ 25,941 12,025
---------- --------
117,184 83,009
---------- --------
Intangibles, primarily cost in excess of net assets acquired, net
of amortization ................................................ 608,380 297,503
Deferred income taxes ........................................... 53,939 24,217
Other assets .................................................... 40,359 31,298
---------- --------
$1,196,266 $703,404
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ -- $ 5,000
Accounts payable, trade ........................................ 55,326 33,052
Accrued employment costs ....................................... 56,178 31,162
Customer advances .............................................. 40,097 15,989
Amounts in excess of costs incurred ............................ 18,531 18,469
Accrued interest ............................................... 16,664 4,419
Other current liabilities ...................................... 48,593 27,476
---------- --------
Total current liabilities ..................................... 235,389 135,567
---------- --------
Pension and postretirement benefits ............................. 94,438 38,113
Other liabilities ............................................... 11,662 5,009
Long-term debt .................................................. 560,000 392,000
Commitments and contingencies
Common stock subject to repurchase agreement .................... -- 19,048
Shareholders' equity
Common stock, $.01 par value; authorized 100,000,000 shares,
issued 27,363,617 and 17,056,000 shares ...................... 274 171
Capital surplus ................................................ 272,160 110,191
Retained earnings .............................................. 30,995 12,305
Equity adjustments ............................................. (8,652) (9,000)
---------- --------
Total Shareholders' equity ...................................... 294,777 113,667
---------- --------
$1,196,266 $703,404
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales ..................................... $291,312 $174,822
Costs and expenses ........................ 261,244 156,968
-------- --------
Operating income .......................... 30,068 17,854
Interest income ........................... 711 428
Interest expense .......................... 13,584 9,717
-------- --------
Income before income taxes ................ 17,195 8,565
Income taxes .............................. 6,728 3,289
-------- --------
Net income ................................ $ 10,467 $ 5,276
======== ========
Earnings per common share:
Basic .................................... $ 0.38 $ 0.26
-------- --------
Diluted .................................. $ 0.37 $ 0.26
-------- --------
Weighted average common shares outstanding:
Basic .................................... 27,364 20,000
-------- --------
Diluted .................................. 28,663 20,000
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY COMPANY
-------------------- -------------------- ---------------
NINE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 MARCH 31, 1997
-------------------- -------------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales ..................................... $708,300 $342,852 $158,873
Costs and expenses ........................ 644,681 314,287 150,937
-------- -------- --------
Operating income .......................... 63,619 28,565 7,936
Interest income ........................... 2,287 537 --
Interest expense .......................... 35,230 19,796 8,441
-------- -------- --------
Income (loss) before income taxes ......... 30,676 9,306 (505)
Income taxes .............................. 11,986 5,349 (247)
-------- -------- --------
Net income (loss) ......................... $ 18,690 $ 3,957 $ (258)
======== ======== ========
Earnings per common share:
Basic .................................... $ 0.78 $ 0.20
-------- --------
Diluted .................................. $ 0.75 $ 0.20
-------- --------
Weighted average common shares outstanding:
Basic .................................... 23,870 20,000
-------- --------
Diluted .................................. 25,044 20,000
-------- --------
</TABLE>
See notes to condensed consolidated (combined) financial statements.
F-6
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY COMPANY
-------------------- -------------------- ---------------
NINE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 MARCH 31, 1997
-------------------- -------------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................... $ 18,690 $ 3,957 $ (258)
Depreciation and amortization ....................... 26,651 13,063 7,790
Noncash compensation charge ......................... -- 4,410 --
Amortization of deferred debt issue costs ........... 1,805 1,012 --
Deferred income taxes ............................... 11,611 5,349 --
Changes in operating assets and liabilities, net
of amounts acquired ................................
Contracts in process ............................. (13,887) 11,658 (17,475)
Other current assets ............................. 1,521 (1,113) (481)
Other assets ..................................... (681) 3,912 (765)
Accounts payable ................................. (536) (4,879) (207)
Accrued employment costs ......................... 8,684 12,651 (625)
Customer advances ................................ (18,376) 2,518 1,146
Amounts in excess of costs incurred .............. (1,578) (1,643) (3,037)
Accrued interest ................................. 11,351 11,752 --
Other current liabilities ........................ 200 (6,741) (1,867)
Pension and postretirement benefits .............. 135 (567) --
Other liabilities ................................ 2,255 1,039 (500)
All other operating activities ................... 348 -- --
---------- ---------- ---------
Net cash from (used in) operating activities ........ 48,193 56,378 (16,279)
---------- ---------- ---------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ..... (412,526) (470,700) --
Net change in assets held for sale .................. -- 1,503 --
Proceeds from assets held for sale .................. 6,653 -- --
Purchases of investments ............................ (300) (4,020) --
Capital expenditures ................................ (12,691) (6,436) (4,300)
Disposition of property, plant and equipment ........ 1,029 649 --
---------- ---------- ---------
Net cash used in investing activities ............... (417,835) (479,004) (4,300)
---------- ---------- ---------
FINANCING ACTIVITIES:
Borrowings under term loan facilities ............... -- 175,000 --
Borrowings under revolving credit facilities ........ 271,800 -- --
Repayment of borrowings under revolving
credit facilities .................................. (116,800) -- --
Proceeds from sale of 8 1/2% senior
subordinated notes ................................. 180,000 -- --
Proceeds from sale of 10 3/8% senior
subordinated notes ................................. -- 225,000 --
Proceeds from sale of common stock, net ............. 139,500 80,000 --
Debt issuance costs ................................. (7,718) (15,607) --
Repayment of term loan facilities ................... (172,000) (2,000) --
Proceeds from exercise of stock options ............. 3,073 -- --
Advances from Lockheed Martin ....................... -- -- 20,579
---------- ---------- ---------
Net cash from financing activities .................. 297,855 462,393 20,579
---------- ---------- ---------
Net increase (decrease) in cash ..................... (71,787) 39,767 --
Cash and cash equivalents, beginning of the
period ............................................. 77,474 -- --
---------- ---------- ---------
Cash and cash equivalents, end of the period ........ $ 5,687 $ 39,767 $ --
========== ========== =========
</TABLE>
See notes to condensed consolidated (combined) financial statements.
F-7
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited condensed consolidated (combined) financial
statements include the assets, liabilities and results of operations of L-3
Communications Holdings, Inc. ("Holdings", and together with its subsidiaries,
"L-3" or the "Company"), the successor company, following the change in
ownership effective as of April 1, 1997. Prior to April 1, 1997, the statements
comprise the operations of (i) nine business units previously purchased by
Lockheed Martin Corporation ("Lockheed Martin") as part of its acquisition of
Loral Corporation ("Loral") in April 1996 and (ii) one business unit,
Communication Systems-East, purchased by Lockheed Martin as part of its
acquisition of the aerospace business of GE in April 1993 (collectively, the
"Business" or the "Predecessor Company"). The combined financial statements of
the Predecessor Company reflect the Businesses' results of operations and cash
flows included in Lockheed Martin's historical financial statements.
Significant intercompany and inter-business transactions and balances have been
eliminated.
Holdings has no other assets or liabilities and conducts no operations
other than through its wholly-owned subsidiary, L-3 Communications Corporation
("L-3 Communications").
The accompanying unaudited condensed consolidated (combined) financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission
("SEC"); accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The combined statement of operations for the three months ended
March 31, 1997 has been derived from the audited financial statements of the
Predecessor Company for such period. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of the results for the interim periods presented have been
included. The results of operations for the interim periods are not necessarily
indicative of results for the full year. For further information, the interim
financial statements should be read in conjunction with the Company's
Consolidated (Combined) Financial Statements as of December 31, 1997 and notes
thereto included in L-3 Communications' Annual Report on Form 10-K for fiscal
year ended December 31, 1997, as amended by Form 10-K/A.
The Company is a supplier of sophisticated secure communications systems
and specialized communication products including secure, high data rate
communication systems, microwave components, avionics and ocean systems,
telemetry, instrumentation and space products. The Company's customers include
the Department of Defense (the "DoD"), selected U.S. Government intelligence
agencies, major aerospace/defense prime contractors and commercial customers.
Substantially all the Company's products are sold to agencies of the U.S.
Government, primarily the DoD, to foreign government agencies or to prime
contractors or subcontractors thereof. All domestic government contracts and
subcontracts of the Businesses are subject to audit and various cost controls,
and include standard provisions for termination for the convenience of the U.S.
Government. Multi-year U.S. Government contracts and related orders are subject
to cancellation if funds for contract performance for any subsequent year
become unavailable. Foreign government contracts generally include comparable
provisions relating to termination for the convenience of the government.
F-8
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. COMMON STOCK INITIAL PUBLIC OFFERING
On May 19, 1998, Holdings sold 6.9 million shares of its Common Stock in
an Initial Public Offering ("IPO") representing 25.2% of Holdings' Common
Stock. The net proceeds of the IPO amounted to $139,500 and were contributed by
Holdings to L-3 Communications. After the completion of the IPO, the Lehman
Partnership and Lockheed Martin owned 36.6% and 24.9%, respectively, of the
outstanding shares of Holdings' Common Stock.
Immediately prior to the IPO, each authorized share of Holdings Class A
Common Stock, Class B Common Stock and Class C Common Stock was converted into
one class of common stock, the Common Stock. Each outstanding share of Class A
and Class B Common Stock was converted into one share of Holdings Common Stock.
There was no outstanding Class C Common Stock. The authorized Holdings Common
Stock was increased to 100,000,000 shares.
3. ACQUISITIONS
On August 13, 1998, the Company purchased all of the outstanding stock of
SPD Technologies, Inc. ("SPD") for $230,000 of cash, subject to adjustment
based on final closing adjusted net assets. On March 30, 1998 the Company
purchased the assets of the Ocean Systems business ("Ocean Systems") of
AlliedSignal, Inc. for $67,500 of cash. On March 4, 1998, the Company purchased
the assets of ILEX Systems ("ILEX") for $51,900 of cash, subject to adjustment
based on closing net assets, and additional consideration based on
post-acquisition performance of ILEX. On February 5, 1998, the Company
purchased the assets of Satellite Transmission Systems division ("STS") of
California Microwave, Inc. for $27,000 of cash, subject to adjustment based
upon closing net assets.
Additionally, during the nine months ended September 30, 1998, the Company
purchased five other companies for an aggregate purchase price of $24,750 paid
in cash, before adjustments, as appropriate, based on closing date net assets
and additional consideration based on post-acquisition performance. These
acquisitions, both individually and in the aggregate are not expected to have a
material effect on the results of operations or financial position of the
Company.
The Company financed the above-mentioned acquisitions using cash from
operations, the IPO and borrowings. All of the acquisitions have been accounted
for as purchase business combinations and are included in the Company's results
of operation from their effective dates.
The assets and liabilities recorded in connection with the acquisitions of
SPD, Ocean Systems, ILEX and STS are based upon preliminary estimates. Actual
adjustments will be based on the final purchase prices and the final appraisals
and other analyses of fair values which are in process. Management does not
expect that differences between the preliminary and final purchase price
allocations will have a material impact on the Company's financial position or
results of operations. The assets and liabilities recorded in connection with
the acquisitions of SPD, Ocean Systems, ILEX and STS were $318,825 and $77,557,
$136,670 and $68,000, $58,370 and $3,939, and $34,471 and $6,949, respectively.
Had the L-3 Acquisition and the SPD, Ocean Systems, ILEX and STS
acquisitions and the related financing transactions occurred on January 1,
1997, the unaudited pro forma sales, net income and diluted earnings per share
for the nine months ended September 30, 1998 and 1997 would have been $834,500,
$17,400 and $0.61 and $758,700, $2,800 and $0.10, respectively. The pro forma
results are based on various assumptions and are not necessarily indicative of
what would have occurred had the acquisitions and the related financing
transactions been consummated on January 1, 1997.
F-9
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. CONTRACTS IN PROGRESS
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, and other billed receivables comprise the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- ------------------
<S> <C> <C>
Billed contract receivables ........................ $ 83,947 $ 37,980
Unbilled contract receivables ...................... 72,390 32,653
Other billed receivables, principally commercial and
affiliates ....................................... 77,977 32,785
Inventoried costs .................................. 145,395 82,954
--------- ---------
379,709 186,372
Less, unliquidated progress payments ............... (33,897) (19,170)
--------- ---------
Net contracts in process ........................... $ 345,812 $ 167,202
========= =========
</TABLE>
5. DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- ------------------
<S> <C> <C>
Senior Credit Facilities:
Term Loan Facilities ............................ $ -- $172,000
Revolving Credit Facilities ..................... 155,000 --
10 3/8% Senior Subordinated Notes due 2007 ........ 225,000 225,000
8 1/2% Senior Subordinated Notes due 2008 ......... 180,000 --
-------- --------
Total debt ..................................... 560,000 397,000
Less current portion .............................. -- 5,000
-------- --------
Total long-term debt ........................... $560,000 $392,000
======== ========
</TABLE>
In February 1998, an amendment to the Senior Credit Facilities increased
the Revolving Credit Facility thereunder to $200,000. During the third quarter
of 1998, the Senior Credit Facilities were further amended to add a Revolving
364 Day Credit Facility for $185,000. The Revolving 364 Day Credit Facility
expires 364 days after the closing of the amendment, at which time the Company
may (i) request that the creditors extend it for one additional 364 day period
or (ii) exercise an option to convert any or all of the borrowings outstanding
thereunder into term loans which amortize over a two year period beginning
March 31, 2001, and must be paid in full no later than March 31, 2003.
Accordingly, borrowings under the Revolving 364 Day Credit Facility are
classified as a long term obligation. Approximately $28,330 of the Revolving
Credit Facility and $175,000 of the Revolving 364 Day Credit Facility are
available at September 30, 1998, net of outstanding letters of credit of
$26,670 drawn against the Revolving Credit Facility. The Revolving Credit
Facility and the Revolving 364 Day Credit Facility comprise the Revolving
Credit Facilities.
In May 1998, L-3 Communications sold $180,000 of 8 1/2% Senior Subordinated
Notes (the "May 1998 Notes") due May 15, 2008 with interest payable
semi-annually on May 15 and November 15 of each year, commencing November 15,
1998. The May 1998 Notes are redeemable at the option of L-3 Communications, in
whole or in part, at any time on or after May 15, 2003, at various redemption
prices plus accrued and unpaid interest to the applicable redemption date. In
addition, prior to
F-10
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
May 15, 2001, L-3 Communications may redeem up to 35% of the aggregate
principal amount of May 1998 Notes at a redemption price of 108.500% of the
principal amount thereof, plus accrued and unpaid interest to the redemption
date with the net cash proceeds of one or more equity offerings by Holdings
that are contributed to L-3 Communications as common equity capital.
The Senior Credit Facilities, the $225,000 of 10 3/8% Senior Subordinated
Notes due May 1, 2007 (the "1997 Notes") and the May 1998 Notes agreements
contain financial and restrictive covenants that limit, among other things, the
ability of the Company to borrow additional funds, dispose of assets, or pay
cash dividends. The Senior Credit Facilities contain financial covenants which
require that (i) the Company's debt ratio, as defined, be less than or equal to
5.00 for the quarter ended September 30, 1998, and that the maximum allowable
debt ratio, as defined therein, thereafter declines over time to less than or
equal to 3.25 for the quarters ending September 30, 2002 and thereafter, and
(ii) the Company's interest coverage ratio, as defined, be greater than or
equal to 2.00 for the quarter ended September 30, 1998, and that the minimum
allowable interest coverage ratio, as defined therein, thereafter increases
over time to greater than or equal to 3.00 for the quarters ending September
30, 2002 and thereafter. Through and at September 30, 1998 the Company was in
compliance with these covenants at all times.
The indebtedness under the Senior Credit Facilities is guaranteed by
Holdings and by certain of L-3 Communications' direct domestic subsidiaries.
The payment of principal, premium, if any, and interest on the 1997 Notes and
May 1998 Notes is unconditionally guaranteed, on an unsecured senior
subordinated basis, jointly and severally, by substantially all of L-3
Communications' domestic subsidiaries, all of which are wholly-owned
subsidiaries.
6. STOCK OPTIONS
On May 1, 1998, Holdings granted options to certain employees of the
Company to purchase 285,370 shares of Common Stock at an exercise price of
$22.00 per share and on terms substantially similar to the 1997 Options granted
in 1997.
On August 14, 1998, Holdings granted options to certain employees of the
Company to purchase 142,200 shares of Common Stock at an exercise price of
$32.75 per share and on terms substantially similar to the 1997 Options granted
in 1997.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the Condensed Consolidated Statement of Cash
Flows follow:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------- -------------------
<S> <C> <C>
Cash paid for interest ............. $19,828 $4,332
Cash paid for income taxes ......... $ 203 $ --
</TABLE>
During the nine months ended September 30, 1998, the Company recorded an
income tax benefit of $524 directly to shareholders' equity related to the
exercise of Holdings' stock options.
Prior to the L-3 Acquisition, the Predecessor Company participated in the
Lockheed Martin cash management system, under which all cash was received and
all payments were made by Lockheed Martin. For purposes of the statement of
cash flows, all transactions with Lockheed Martin were deemed to have been
settled in cash at the time they were recorded by the Predecessor Company.
F-11
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
established standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. For the nine months ended September 30, 1998,
comprehensive income was $19,038 and was comprised of net income of $18,690 and
other comprehensive income of $348 relating to foreign currency translations.
For the nine months ended September 30, 1997, there were no differences between
net income and comprehensive income.
In September 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes accounting standards for the way that
public enterprises report information about operating segments and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefits plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirements benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when SFAS No. 87 "Employers' Accounting for Pensions", SFAS No. 88
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Plans and for Termination Benefits" and SFAS No. 106 "Employers Accounting for
Postretirement Benefits Other Than Pensions" were issued. SFAS 132 suggests
combined formats for presentation of pension and other postretirement benefits
disclosures. The Company is currently evaluating the impact, if any, of SFAS
No. 131 and SFAS No. 132.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which
provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact, if any, of
SOP 98-5.
In September 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently evaluating the impact, if
any, of SFAS No. 133 which is effective for all quarters of fiscal years
beginning after June 15, 1999.
9. CONTINGENCIES
Management is continually assessing the Company's obligations with respect
to applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments with
respect to those environmental loss contingencies of which management of the
Company is aware, the Company believes that even without considering potential
insurance
F-12
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
(COMBINED) FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's result of
operations. The Company accrues for these contingencies when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated.
The Company is engaged in providing products and services under contracts
with the U.S. Government and to a lesser degree, under contracts with foreign
governments, some of which are funded by the U.S. Government. All such
contracts are subject to extensive legal and regulatory requirements, and,
periodically, agencies of the U.S. Government investigate whether such
contracts were and are being conducted in accordance with these requirements.
Under government procurement regulations, an indictment of the Company by a
Federal grand jury could result in the Company being suspended for a period of
time from eligibility for awards of new government contracts. A conviction
could result in debarment from contracting with the federal government for a
specified term.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities (including environmental matters) incidental
to its business. With respect to those investigative actions, items of
litigation, claims or assessments of which they are aware, management of the
Company believes that, after taking into account certain provisions that have
been made with respect to these matters, the ultimate resolution of any such
investigative actions, items of litigation, claims or assessments would not
have a material adverse effect on the financial position or result of
operations of the Company.
10. SUBSEQUENT EVENTS
On November 12, 1998, L-3 Communications acquired all the outstanding
stock of DBS Microwave Inc. ("DBS") for $13,000 of cash subject to adjustment
based on closing net assets, as defined. The acquisition was financed with
borrowings under the Revolving Credit Facilities.
On December 11, 1998, L-3 Communications completed the sale of $200,000 of
its 8% Senior Subordinated Notes due August 1, 2008 in a private placement
offering.
On December 17, 1998, L-3 Communications acquired all of the outstanding
stock of Electrodynamics Inc. from Carpenter Technology Corporation for $21,500
in cash, subject to adjustment based on closing net assets, as defined. The
acquisition was financed with cash on hand and borrowings under the Senior
Credit Facilities.
F-13
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
(AND THE PREDECESSOR COMPANY)
Consolidated (Combined) Financial Statements as of December 31, 1997 and
1996 and for the nine months ended December 31, 1997, the three months ended
March 31, 1997 and the years ended December 31, 1996 and 1995.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
L-3 Communications Holdings, Inc.
We have audited the accompanying (i) consolidated balance sheet of L-3
Communications Holdings, Inc. and subsidiaries (the "Company") as of December
31, 1997, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the nine months then ended, (ii) the
combined statements of operations and cash flows of the Predecessor Company, as
defined in Note 1 to the Company's financial statements, for the three months
ended March 31, 1997 and (iii) combined balance sheet of the Predecessor
Company as of December 31, 1996 and the related combined statements of
operations, changes in invested equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1996 financial statements of the Lockheed
Martin Communications Systems Division, which statements reflect total assets
and sales constituting 35 percent and 30 percent of the related combined
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for the Lockheed Martin Communications Systems Division for 1996, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (i) present
fairly in all material respects the consolidated financial position of the
Company and subsidiaries as of December 31, 1997 and their consolidated results
of operations and cash flows for the nine months then ended, and (ii) based on
our audit and the report of other auditors for 1996, present fairly in all
material respects the combined financial position of the Predecessor Company as
of December 31, 1996 and their combined results of operations and cash flows
for the year then ended and the three months ended March 31, 1997, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, New York 10019
February 2, 1998
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lockheed Martin Corporation:
We have audited the combined balance sheet of Lockheed Martin
Communications Systems Division, as defined in Note 1 to the financial
statements, as of December 31, 1996, and the related combined statements of
operations, changes in shareholders' equity and invested equity, and cash flows
for the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Division's and Lockheed Martin
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Lockheed Martin Communications Systems Division at December 31, 1996 (not
presented separately herein), and the combined results of its operations and
its cash flows for the year ended December 31, 1996 (not presented separately
herein), and the results of its operations and its cash flows for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Washington, D.C.
March 7, 1997
F-16
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED (COMBINED) BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
CONSOLIDATED COMBINED
------------------- --------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 77,474 $ --
Contracts in process ............................................... 167,202 198,073
Net assets held for sale ........................................... 6,653 --
Deferred income taxes .............................................. 13,298 --
Other current assets ............................................... 2,750 3,661
-------- --------
Total current assets ............................................ 267,377 201,734
-------- --------
Property, plant and equipment ....................................... 95,034 116,566
Less, accumulated depreciation and amortization .................... 12,025 24,983
-------- --------
83,009 91,583
-------- --------
Intangibles, primarily cost in excess of net assets acquired, net
of amortization .................................................... 297,503 282,674
Deferred income taxes ............................................... 24,217 --
Other assets ........................................................ 31,298 17,307
-------- --------
Total assets ..................................................... $703,404 $593,298
======== ========
LIABILITIES AND SHAREHOLDERS' (INVESTED) EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 5,000 $ --
Accounts payable, trade ............................................ 33,052 35,069
Accrued employment costs ........................................... 31,162 27,313
Customer advances .................................................. 15,989 3,381
Amounts in excess of costs incurred ................................ 18,469 10,918
Accrued interest ................................................... 4,419 --
Other current liabilities .......................................... 27,476 26,207
-------- --------
Total current liabilities ....................................... 135,567 102,888
-------- --------
Pension and postretirement benefits ................................. 38,113 --
Other liabilities ................................................... 5,009 16,801
Long-term debt ...................................................... 392,000 --
Commitments and contingencies --
Common stock subject to repurchase agreement, $.01 par value,
authorized 3,000,000 shares, issued and outstanding 2,944,000
shares ............................................................. 19,048 --
Shareholders' equity
Class A Common Stock, $.01 par value; authorized 25,000,000
shares, issued and outstanding 17,056,000 shares ................. 171 --
Additional paid-in capital ......................................... 110,191 --
Retained earnings .................................................. 12,305 --
Deemed distribution ................................................ (9,000) --
-------- --------
Total shareholders' and invested equity ............................. 113,667 473,609
-------- --------
Total liabilities and shareholders' and invested equity .......... $703,404 $593,298
======== ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-17
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
CONSOLIDATED COMBINED
------------------- -------------------------------------------
YEAR ENDED DECEMBER 31,
NINE MONTHS THREE MONTHS -------------------------
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1997 1996 1995
------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ..................................... $ 546,525 $158,873 $543,081 $166,781
Costs and expenses ........................ 490,669 150,937 499,390 162,132
Noncash compensation charge ............... 4,410 -- -- --
----------- -------- -------- --------
Operating income .......................... 51,446 7,936 43,691 4,649
Interest income ........................... 1,430 -- -- --
Interest expense .......................... 29,884 8,441 24,197 4,475
----------- -------- -------- --------
Income (loss) before income taxes ......... 22,992 (505) 19,494 174
Income tax expense (benefit) .............. 10,687 (247) 7,798 1,186
----------- -------- -------- --------
Net income (loss) ......................... $ 12,305 $ (258) $ 11,696 $ (1,012)
=========== ======== ======== ========
Basic earnings per share of
Common Stock ............................. $ 0.62
===========
Diluted earning per share of
Common Stock ............................. $ 0.61
===========
Weighted average common shares
outstanding:
Basic .................................... 20,000,000
===========
Diluted .................................. 20,011,611
===========
</TABLE>
See notes to consolidated (combined) financial statements.
F-18
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED (COMBINED) STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND INVESTED EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997, THREE MONTHS ENDED
MARCH 31, 1997 AND YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
COMBINED CONSOLIDATED
------------ -------------------------------------------------------------------
COMMON STOCK
-------------------- ADDITIONAL
INVESTED SHARES PAID-IN RETAINED EQUITY
EQUITY ISSUED PAR VALUE CAPITAL EARNINGS ADJUSTMENT TOTAL
------------ -------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 ......... $199,506
Repayments to Lockheed
Martin ....................... (3,831)
Net loss ....................... (1,012)
--------
Balance December 31, 1995 ....... 194,663
Advances from Lockheed
Martin ....................... 267,250
Net income ..................... 11,696
--------
Balance December 31, 1996 ....... 473,609
Advances from Lockheed
Martin ....................... 20,579
Net loss ....................... (258)
--------
Balance March 31, 1997 .......... $493,930
========
Shares issued .................. 17,056 $ 171 $110,191 $110,362
Deemed distribution ............ $ (9,000) (9,000)
Net income ..................... $12,305 12,305
------ ------ -------- ------- -------- --------
Balance December 31, 1997 ....... 17,056 $ 171 $110,191 $12,305 $ (9,000) $113,667
====== ====== ======== ======= ======== ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-19
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
CONSOLIDATED COMBINED
------------------- ---------------------------------------------
YEAR ENDED DECEMBER 31,
NINE MONTHS THREE MONTHS ---------------------------
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1997 1996 1995
------------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................... $ 12,305 $ (258) $ 11,696 $ (1,012)
Depreciation and amortization ............... 22,190 7,790 28,139 11,578
Noncash compensation charge ................. 4,410 -- -- --
Amortization of deferred debt issuance
costs ...................................... 1,517 -- -- --
Deferred income taxes ....................... 9,991 -- -- --
Changes in operating assets and liabilities,
net of amounts acquired
Contracts in process ....................... 18,161 (17,475) 23,543 (3,267)
Other current assets ....................... (275) (481) 3,049 788
Other assets ............................... 2,141 (765) (8,346) 1,245
Accounts payable ........................... (6,146) (207) 4,104 (648)
Accrued employment costs ................... 6,363 (625) 2,282 (611)
Customer advances .......................... (611) 1,146 (5,541) --
Amounts in excess of costs incurred ........ 1,156 (3,037) (6,045) (2,041)
Accrued interest ........................... 4,419 -- -- --
Other current liabilities .................. (7,132) (1,867) 3,180 4,004
Pension and postretirement benefits ........ 4,284 -- -- --
Other liabilities .......................... 1,087 (500) (25,327) (699)
---------- --------- ---------- --------
Net cash from (used in) operating
activities ................................. 73,860 (16,279) 30,734 9,337
---------- --------- ---------- --------
INVESTING ACTIVITIES:
Acquisition of business ..................... (466,317) -- (287,803) --
Proceeds from assumption of contract
obligation ................................. 12,176 -- -- --
Net cash from assets held for sale .......... 3,179 -- -- --
Proceeds from sale of property .............. 9,458 -- -- --
Purchases of investments .................... (5,113) -- -- --
Capital expenditures ........................ (11,934) (4,300) (13,528) (5,532)
Disposition of property, plant and
equipment .................................. 771 -- 3,347 26
---------- --------- ---------- --------
Net cash (used in) investing activities ..... (457,780) (4,300) (297,984) (5,506)
---------- --------- ---------- --------
FINANCING ACTIVITIES:
Borrowings under term loan facilities ....... 175,000 -- -- --
Proceeds from sale of 10 3/8% senior
subordinated notes ......................... 225,000 -- -- --
Proceeds from issuance of common stock ...... 80,000 -- -- --
Debt issuance costs ......................... (15,606) -- -- --
Payment of debt ............................. (3,000) -- -- --
Advances from (repayments to) Lockheed
Martin ..................................... -- 20,579 267,250 (3,831)
---------- --------- ---------- --------
Net cash from (used in) financing activities 461,394 20,579 267,250 (3,831)
---------- --------- ---------- --------
Net change in cash .......................... 77,474 -- -- --
Cash and cash equivalents, beginning of
the period ................................. -- -- -- --
---------- --------- ---------- --------
Cash and cash equivalents, end of the
period ..................................... $ 77,474 $ -- $ -- $ --
========== ========= ========== ========
</TABLE>
See notes to consolidated (combined) financial statements.
F-20
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the assets,
liabilities and results of operations of L-3 Communications Holdings, Inc.,
("Holdings", and together with its subsidiaries, "L-3", or the "Company"), the
successor company following the change in ownership (see Note 2) effective as
of April 1, 1997 and for the period from April 1, 1997 to December 31, 1997.
Prior to April 1, 1997, the statements comprise substantially all of the assets
and liabilities and results of operations of (i) nine business units previously
purchased by Lockheed Martin Corporation ("Lockheed Martin") as part of its
acquisition of Loral Corporation ("Loral") in April 1996 (the "Loral Acquired
Businesses"), and (ii) one business unit, Communications Systems -- East
purchased by Lockheed Martin as part of its acquisition of the aerospace
business of GE in April 1993 (collectively, the "Businesses" or the
"Predecessor Company"). The combined financial statements of the Predecessor
Company reflect the Businesses' assets, liabilities and results of operations
included in Lockheed Martin's historical financial statements. Intercompany
accounts between Lockheed Martin and the Businesses have been included in
Invested Equity. The assets and operations of the semiconductor product line
and certain other facilities which are not material have been excluded from the
combined financial statements. Significant intercompany and inter-business
transactions and balances have been eliminated.
Holdings has no other assets or liabilities and conducts no operations
other than through its subsidiary, L-3 Communications Corporation ("L-3
Communications").
The Company is a supplier of sophisticated secure communication systems
and specialized communication products including secure, high data rate
communication systems, microwave components, avionics, recorders, telemetry and
space products. The Company's customers include the Department of Defense (the
"DoD"), selected U.S. government intelligence agencies, major aerospace/defense
prime contractors and commercial customers. The Company operates primarily in
one industry segment, electronic components and systems.
Substantially all the Company's products are sold to agencies of the U.S.
Government, primarily the DoD, to foreign government agencies or to prime
contractors or subcontractors thereof. All domestic government contracts and
subcontracts of the Businesses are subject to audit and various cost controls,
and include standard provisions for termination for the convenience of the U.S.
Government. Multi-year U.S. Government contracts and related orders are subject
to cancellation if funds for contract performance for any subsequent year
become unavailable. Foreign government contracts generally include comparable
provisions relating to termination for the convenience of the government.
2. CHANGE IN OWNERSHIP TRANSACTION
L-3 was formed by Mr. Frank C. Lanza, the former President and Chief
Operating Officer of Loral, Mr. Robert V. LaPenta, the former Senior Vice
President and Controller of Loral (collectively, the "Equity Executives"),
Lehman Brothers Capital Partners III, L.P. and its affiliates (the "Lehman
Partnership") and Lockheed Martin to acquire the Businesses. On December 31,
1997, the Equity Executives, the Lehman Partnership and Lockheed Martin owned
approximately 14.9%, 50.1% and 34.0% of the Company, respectively.
On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, L-3, and
Lockheed Martin entered into a Transaction Agreement (the "L-3 Acquisition
Agreement") whereby Holdings would acquire the Businesses from Lockheed Martin
(the "L-3 Acquisition"). Also included in the acquisition is a semiconductor
product line of another business and certain leasehold improvements in New York
City which were not material. Pursuant to the L-3 Acquisition Agreement, L-3
acquired the Businesses
F-21
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
from Lockheed Martin for $525,000, comprising $458,779 of cash, after a $21,221
reduction related to a purchase price adjustment, and $45,000 of common equity,
representing a 34.9% interest in Holdings retained by Lockheed Martin, plus
acquisition costs of $8,000.
The Company and Lockheed Martin finalized the purchase price adjustment
pursuant to an amendment to the L-3 Acquisition Agreement dated November 5,
1997, which also included the assumption by the Company of Lockheed Martin's
rights and obligations under a contract for the U.S. Army's Command and Control
Vehicle ("C2V") Mission Module Systems ("MMS"), for the production of mission
communication systems for track vehicles, for which the Company received a cash
payment of $12,176.
In connection with the L-3 Acquisition Agreement, the Company anticipated
entering into a transition services agreement with Lockheed Martin pursuant to
which Lockheed Martin would provide to L-3 and its subsidiaries (and L-3 would
provide to Lockheed Martin) certain corporate services of a type previously
provided at costs consistent with past practices until December 31, 1997 (or,
in the case of Communications Systems -- East (formerly known as Communications
Systems -- Camden), for a period of up to 18 months after the Closing).
Lockheed Martin is providing L-3 the services contemplated by the proposed
transaction services agreement in the absence of any executed agreement. The
parties also entered into supply agreements which reflect previously existing
inter-company work transfer agreements or similar support arrangements upon
prices and other terms consistent with previously existing arrangements.
Holdings, the Company and Lockheed Martin have entered into certain subleases
of real property and cross-licenses of intellectual property.
Pursuant to the L-3 Acquisition Agreement the Company also assumed certain
obligations relating to environmental liabilities and benefit plans.
In accordance with Accounting Principles Board Opinion No. 16, the
acquisition of the Businesses by Holdings and L-3 has been accounted for as a
purchase business combination effective as of April 1, 1997. The purchase cost
(including the fees and expenses related thereto) was allocated to the tangible
and intangible assets and liabilities of the Company based upon their
respective fair values. The assets and liabilities recorded in connection with
the purchase price allocation were $664,800 and $164,400, respectively. The
excess of the purchase price over the fair value of net assets acquired of
$303,200 was recorded as goodwill, and is being amortized on a straight-line
basis over a period of 40 years. As a result of the 34.9% ownership interest
retained by Lockheed Martin, the provisions of Emerging Issues Task Force Issue
Number 88-16 were applied in connection with the purchase price allocation,
which resulted in the recognition of a deemed distribution of $9,000.
In connection with the determination of the fair value of assets acquired
and pursuant to the provisions of Accounting Principles Board Opinion No. 16,
the Company has valued acquired contracts in process at contract price, less
the estimated cost to complete and an allowance for the Company's normal profit
on its effort to complete such contracts.
Had the L-3 Acquisition occurred on January 1, 1996, the unaudited pro
forma sales and net income for the years ended December 31, 1997 and 1996 would
have been $703,600 and $11,890 and $663,200 and $5,290, respectively. The pro
forma results, which are based on various assumptions, are not necessarily
indicative of what would have occurred had the acquisition been consummated on
January 1, 1996. The 1997 and 1996 pro forma sales and net income data have
been adjusted to (i) include the operations of the Loral Acquired Businesses
from January 1, 1996 (Note 4) and (ii) exclude the operations of the Hycor
business net assets held for sale from January 1, 1996 (Note 6).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: Cash equivalents consist of highly liquid
investments with a maturity of three months or less at time of purchase.
F-22
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENTS OF CASH FLOWS: Changes in operating assets and liabilities are
net of the impact of acquisitions and final purchase price allocations. The
Predecessor Company participated in Lockheed Martin's cash management system,
under which all cash was received and payments were made by Lockheed Martin.
All transactions between the Predecessor Company and Lockheed Martin have been
accounted for as settled in cash at the time the transactions were recorded by
the Predecessor Company.
REVENUE RECOGNITION: Sales on production-type contracts are recorded as
units are shipped; profits applicable to such shipments are recorded pro rata,
based upon estimated total profit at completion of the contract. Sales and
profits on cost reimbursable contracts are recognized as costs are incurred.
Sales and estimated profits under other long-term contracts are recognized
under the percentage of completion method of accounting using the cost-to-cost
method. Amounts representing contract change orders or claims are included in
sales only when they can be reliably estimated and their realization is
probable.
Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period, on a cumulative catch-up basis, in which
the facts, requiring the revision, become known.
CONTRACTS IN PROCESS: Costs accumulated on contracts in process include
direct costs, as well as manufacturing overhead, and for government contracts,
general and administrative costs, independent research and development costs
and bid and proposal costs. In accordance with industry practice, contracts in
process contain amounts relating to contracts and programs with long
performance cycles, a portion of which may not be realized within one year.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated
at cost. Depreciation is provided primarily on the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements.
COST IN EXCESS OF NET ASSETS ACQUIRED: The excess of the cost of the L-3
Acquisition over the fair value of the net assets acquired is being amortized
using a straight-line method over a 40 year period. Accumulated amortization of
the Company amounted to $5,741 at December 31, 1997.
The carrying amount of cost in excess of net assets acquired is evaluated
on a recurring basis. Current and future profitability as well as current and
future undiscounted cash flows, excluding financing costs, of the acquired
businesses are primary indicators of recoverability. For the nine months ended
December 31, 1997, there was no reduction to the carrying amount of the cost in
excess of net assets acquired resulting from these evaluations.
PREDECESSOR COMPANY INTANGIBLES: Intangibles, primarily the excess of the
cost of Businesses over the fair value of the net assets acquired, was
amortized using a straight-line method primarily over a 40-year period. Other
intangibles were amortized over their estimated useful lives which range from
11 to 15 years. Amortization expense of the Businesses was $2,655 for the three
months ended March 31, 1997; $10,115 and $6,086 for the years ended December
31, 1996 and 1995, respectively. Accumulated amortization was $26,524 at
December 31, 1996.
Intangibles of the Predecessor Company include costs allocated to the
Businesses relating to the Request for Funding Authorization ("RFA"),
consisting of over 20 restructuring projects to reduce operating costs,
initiated by General Electric ("GE") Aerospace in 1990 and to the REC Advance
Agreement ("RAA"), a restructuring plan initiated after Lockheed Martin's
acquisition of GE Aerospace. The RAA was initiated to close two regional
electronic manufacturing centers. Restructure costs are reimbursable from the
U.S. Government if savings can be demonstrated to exceed costs. The total cost
of restructuring under the RFA and the RAA represented approximately
F-23
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15% of the estimated savings to the U.S. Government and, therefore, a deferred
asset has been recorded by Lockheed Martin. The deferred asset is being
allocated to all the former GE Aerospace sites, including the Communications
Systems Division, on a basis that includes manufacturing labor, overhead, and
direct material less non-hardware subcontracts. At December 31, 1997 and 1996,
approximately $2,313 and $4,400, respectively, of unamortized RFA and RAA costs
are deferred on the Company's and the Predecessor Company's consolidated
(combined) balance sheets in other current assets and other assets.
The carrying values of the Predecessor Company intangibles were reviewed
if the facts and circumstances indicated potential impairment of their carrying
value. If this review indicated that intangible assets were not recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Businesses carrying values related to the
intangible assets were reduced by the estimated shortfall of cash flows.
INCOME TAXES: The Company provides for income taxes using the liability
method prescribed by the Financial Accounting Standards Board ("FASB")
Statement No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income tax assets and liabilities reflect tax carryforwards and the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and income tax purposes, as determined
under enacted tax laws and rates. The financial effect of changes in tax laws
or rates is accounted for in the period of enactment.
PREDECESSOR COMPANY INCOME TAXES: The Predecessor Company was included in
the consolidated Federal income tax return and certain combined and separate
state and local income tax returns of Lockheed Martin. However, for purposes of
these financial statements, the provision for income taxes has been allocated
to the Predecessor Company based upon reported combined income before income
taxes. Income taxes, current and deferred, are considered to have been paid or
charged to Lockheed Martin and are recorded through the invested equity account
with Lockheed Martin. The principal components of the deferred taxes are
contract accounting methods, property, plant and equipment, goodwill
amortization and timing of accruals.
RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the
Company and the Predecessor Company include research and development, bid and
proposal costs related to government products and services. These costs
generally are allocated among all contracts and programs in progress under U.S.
Government contractual arrangements. Customer-sponsored research and
development costs incurred pursuant to contracts are accounted for as direct
contract costs.
STOCK OPTIONS: In accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, compensation expense for stock options is recognized in income
based on the excess, if any, of Holdings' fair value of the stock at the grant
date of the award or other measurement date over the amount an employee must
pay to acquire the stock. The exercise price for stock options granted to
employees equals or exceeds the fair value of the Holdings common stock at the
date of grant, thereby resulting in no recognition of compensation expense by
the Company. The Company has adopted the disclosure -- only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
DERIVATIVE FINANCIAL INSTRUMENTS: In the normal course of financing
operations, the Company enters into interest rate cap and floor transactions
for interest rate protection purposes, and not for speculative or trading
purposes. Cash payments to and from the Company and the counterparties are
recorded as a component of interest expense. The initial cost of these
arrangements are deferred and amortized as interest expense.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the
F-24
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The most
significant of these estimates and assumptions relate to contract estimates of
sales and costs, allocations from Lockheed Martin, recoverability of recorded
amounts of fixed assets and cost in excess of net assets acquired, litigation
and environmental obligations. Actual results could differ from these
estimates.
EARNINGS PER SHARE: In accordance with SFAS No. 128, "Earnings per Share",
basic earnings per share is computed by dividing net income attributable to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share ("diluted EPS") is computed by
dividing net income attributable to common stockholders adjusted for any other
changes to net income that would result from the assumed issuance of the
dilutive potential common shares by the weighted-average number of common
shares outstanding adjusted to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued.
ACCOUNTING PRONOUNCEMENTS: In June 1997, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in full set general purpose financial statements. SFAS No. 131
establishes accounting standards for the way that public business enterprises
report selected information about operating segments and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. In February 1998, the FASB issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefits plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when SFAS No. 87
"Employers' Accounting for Pensions", SFAS No. 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions", were issued. SFAS No. 132
suggests combined formats for presentation of pension and other postretirement
benefit disclosures. SFAS No. 130, SFAS No. 131 and SFAS No. 132 are required
to be adopted by 1998. The Company is currently evaluating the impact, if any,
of SFAS No. 130, SFAS No. 131 and SFAS No. 132.
Effective January 1, 1996, the Businesses adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To Be
Disposed Of" ("SFAS 121"). SFAS 121 establishes the accounting standards for
the impairment of long-lived assets, certain intangible assets and cost in
excess of net assets acquired to be held and used for long-lived assets and
certain intangible assets to be disposed of. The impact of adopting SFAS 121
was not material.
Effective in December 1997 the Company adopted the provisions of SFAS No.
128, "Earnings Per Share" ("SFAS 128") and No. 129, "Disclosure of Information
About Capital Structure" ("SFAS 129").
RECLASSIFICATIONS: Certain reclassifications have been made to conform
prior-year amounts to the current-year presentation.
4. PREDECESSOR COMPANY ACQUISITION
Effective April 1, 1996, Lockheed Martin acquired substantially all the
assets and liabilities of the defense businesses of Loral, including the
Wideband Systems Division and the Products Group which
F-25
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
are included in the Businesses. The acquisition of the Wideband Systems
Division and Products Group businesses (the "Loral Acquired Businesses") has
been accounted for as a purchase by Lockheed Martin Communications Systems --
Camden Division ("Division"). The acquisition has been reflected in the
financial statements based on the purchase price allocated to those acquired
businesses by Lockheed Martin. The assets and liabilities recorded in
connection with the purchase price allocation were $401,000 and $113,200,
respectively. As such, the accompanying combined financial statements for
periods prior to April 1, 1997 reflect the results of operations of the
Division and the Loral Acquired Businesses from the effective date of
acquisition including the effects of an allocated portion of cost in excess of
net assets acquired resulting from the acquisition.
5. CONTRACTS IN PROCESS
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, comprise the following:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
------------ ------------
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Billed contract receivables ............................................. $ 39,029 $ 45,212
Unbilled contract receivables ........................................... 33,136 84,814
Other billed receivables, principally commercial and affiliates ......... 31,253 41,154
Inventoried costs ....................................................... 82,954 72,880
--------- ---------
186,372 244,060
Less, unliquidated progress payments (19,170) (45,987)
--------- ---------
Net contracts in process ................................................ $ 167,202 $ 198,073
========= =========
</TABLE>
The U.S. Government has title to or a secured interest in, inventory to
which progress payments are applied. Unbilled contract receivables represent
accumulated costs and profits earned but not yet billed to customers. The
Company believes that substantially all such amounts will be billed and
collected within one year.
The following data has been used in the determination of costs and
expenses:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------- -----------------------------------
NINE THREE
MONTHS MONTHS FOR THE YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, MARCH 31, ----------------------
1997 1997 1996 1995
-------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Selling, general and administrative ("SG&A") costs
included in inventoried costs ............................. $15,379 $14,536 $14,700 $1,156
Selling, general and administrative costs incurred ......... 88,527 28,449 82,226 6,525
Independent research and development, including bid
and proposal costs, included in SG&A incurred ............. 28,893 12,024 36,500 9,800
</TABLE>
6. NET ASSETS HELD FOR SALE
The Company has accounted for the allocation of purchase price and the net
assets of its Hycor business in accordance with the FASB's Emerging Issues Task
Force Issue 87-11 "Allocation of Purchase Price to Assets to be Sold" ("EITF
87-11"). Accordingly, the net assets related to the Hycor business as of April
1, 1997 are included in the accompanying consolidated balance sheet as "Net
assets held for sale". The fair value assigned to such net assets is based upon
management's estimate
F-26
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of the proceeds from the sale of the Hycor business less the estimated income
from operations for such business during the holding period of April 1, 1997
through January 29, 1998 (the "holding period"), plus interest expense on debt
allocated to such net assets during the holding period. On January 29, 1998,
the Company sold the Hycor business, excluding land and buildings for $3,500 in
cash subject to adjustment based on final closing net assets. In accordance
with EITF 87-11, loss from the operations of the Hycor business of $108 and
interest expense of $552 on the debt allocated to the Hycor net assets have
been excluded from the Company's consolidated statements of operations for the
nine months ended December 31, 1997. Management of the Company expects that any
gain or loss realized on the ultimate disposition of the Hycor business will
not have a material impact on the original purchase price allocation.
Also included in net assets held for sale at December 31, 1997 is a
Company property located in Atlanta, Georgia.
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
----------- ------------
DECEMBER 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Land ................................................. $ 6,670 $ 9,200
Buildings and improvements ........................... 19,487 27,000
Machinery, equipment, furniture and fixtures ......... 58,978 73,137
Leasehold improvements ............................... 9,899 7,229
-------- --------
$ 95,034 $116,566
======== ========
</TABLE>
Depreciation and amortization expense attributable to property, plant and
equipment was $13,320 for the nine months ended December 31, 1997; $4,529 for
the three months ended March 31, 1997, and $14,924 and $5,492 for the years
ended December 31, 1996 and 1995, respectively.
8. DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------
<S> <C>
Term Loan Facilites ................................... $ 172,000
10 3/8 Senior Subordinated Notes due 2007 ............. 225,000
---------
397,000
Less current portion of Term Loan Facilities .......... 5,000
---------
Total long-term debt ................................. $ 392,000
=========
</TABLE>
In connection with the L-3 Acquisition, the Company entered into a credit
facility (the "Senior Credit Facilities") with a syndicate of banks and
financial institutions for $275,000 consisting of $175,000 of term loans (the
"Term Loan Facilities") and a $100,000 revolving credit facility (the
"Revolving Credit Facility"). The Senior Credit Facilities bear interest, at
the option of the Company, at rates related to (i) the higher of federal funds
rate plus 0.50% per annum or the reference rate published by Bank of America
NT&SA or (ii) LIBOR. At December 31, 1997, such interest rates, based on
various maturities, ranged from 7.625% to 8.625%. Interest payments vary in
accordance with the type of borrowing and are made at a minimum every three
months. The Revolving Credit Facility expires in 2003 and is available for
ongoing working capital and letter of credit needs. The Term
F-27
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Loans mature in installments until the final maturity date in 2006.
Approximately $93,428 of the Revolving Credit Facility is available at December
31, 1997 reflecting letters of credit of $6,572 drawn against the Revolving
Credit Facility of $100,000. In February 1998, the Senior Credit Facilities
were amended to, among other things, increase the Revolving Credit Facility to
$200,000, waive certain excess cash flow prepayments, as defined, otherwise
required, and permit the incurrence of up to an additional $150,000 of
subordinated debt. The Company pays a commitment fee of 0.375% per annum on the
unused portion of the Revolving Credit Facility.
In April 1997, the Company issued $225,000 of 10 3/8% senior subordinated
notes (the "1997 Notes") due May 1, 2007 with interest payable semi-annually on
May 1 and November 1 of each year, commencing November 1, 1997. On November 5,
1997, the Company completed its exchange offer relating to the 1997 Notes and
the holders of the 1997 Notes received registered securities. The 1997 Notes
are redeemable at the option of the Company, in whole or in part, at any time
on or after May 1, 2002, at various redemption prices plus accrued and unpaid
interest to the applicable redemption date. In addition, prior to May 1, 2000,
the Company may redeem up to 35% of the aggregate principal amount of 1997
Notes at a redemption price of 109.375% of the principal amount thereof, plus
accrued and unpaid interest to the redemption date with the net cash proceeds
of one or more equity offerings by the Company that are contributed to the
Company as common equity capital.
The Senior Credit Facilities and the 1997 Notes agreement contain
financial and restrictive covenants that limit, among other things, the ability
of the Company to borrow additional funds, dispose of assets, or pay cash
dividends. At December 31, 1997, none of the Company's retained earnings were
available to pay dividends. The Senior Credit Facilities contain financial
covenants, which remain in effect so long as any amount is owed by the Company
thereunder. These financial covenants require that (i) the Company's debt
ratio, as defined, be less than or equal to 5.50 for the quarter ended December
31, 1997, and that the maximum allowable debt ratio, as defined, thereafter be
further reduced to less than or equal to 3.1 for the quarters ending after June
30, 2002, and (ii) the Company's interest coverage ratio, as defined, be at
least 1.85 for the quarter ended December 31, 1997, and thereafter increasing
the interest coverage ratio, as defined, to at least 3.10 for any fiscal
quarters ended after June 30, 2002. At December 31, 1997, the Company was in
compliance with these covenants.
In connection with the Senior Credit Facilities, the Company has granted
the lenders a first priority lien on substantially all of the Company's assets,
including the stock of L-3 Communications Corporation.
The aggregate principal payments for debt, excluding borrowings under the
Revolving Credit Facility, for the five years ending December 31, 1998 through
2002 are: $5,000, $11,000, $19,000, $25,000 and $33,200, respectively.
The costs related to the issuance of debt have been deferred and are being
amortized as interest expense over the term of the related debt using a method
that approximates the effective interest method.
9. PREDECESSOR COMPANY'S INTEREST EXPENSE
Interest expense has been allocated to the Predecessor Company by applying
Lockheed Martin's weighted average consolidated interest rate to the portion of
the beginning of the period invested equity account deemed to be financed by
consolidated debt, which has been determined based on Lockheed Martin's debt to
equity ratio on such date, except that the acquisition of the Loral Acquired
Businesses has been assumed to be fully financed by debt. Management of the
Businesses believes that this allocation methodology is reasonable.
F-28
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Interest expense of the Predecessor Company was calculated using the
following balances and interest rates:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED -----------------------------
MARCH 31, 1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Invested Equity ......... $ 473,609 $ 482,466 $ 199,506
Interest Rate ........... 7.10% 7.20% 7.40%
</TABLE>
10. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, billed contract receivables, other billed receivables (principally
commercial and affiliates), trade accounts payable, customer advances, debt
instruments, and interest rate cap and interest rate floor contracts. The book
values of cash and cash equivalents, billed contract receivables, other billed
receivables (principally commercial and affiliates), trade accounts payable and
customer advances are considered to be representative of their respective fair
values at December 31, 1997 due to the short-term maturities or expected
settlement dates of these instruments.
The Company's debt instruments consist of term loans and 1997 Notes (Note
8). The carrying values of the term loans approximate fair value because they
are variable-rate loans which bear interest at current market rates.
The 1997 Notes are registered, unlisted public debt which is traded in the
over-the-counter market. The fair value of such debt at December 31, 1997 was
estimated to be approximately $243,000, based on trading activity on December
31, 1997.
To mitigate risks associated with changing interest rates on certain of
its debt, the Company entered into the interest rate agreements. The fair
values of the interest rate caps and interest rate floors (collectively, the
"interest rate agreements") were estimated by discounting expected cash flows
using quoted market interest rates. The Company manages exposure to
counterparty credit risk by entering into the interest rate agreements only
with major financial institutions that are expected to fully perform under the
terms of such agreements. The notional amounts are used to measure the volume
of these agreements and do not represent exposure to credit loss. The impact of
the interest rate agreements was not material to interest expense for the nine
months ended December 31, 1997. Information with respect to the interest rate
agreements is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
NOTIONAL UNREALIZED
AMOUNT GAINS (LOSSES)
---------- ---------------
<S> <C> <C>
Interest rate caps ........... $100,000 $ (1,008)
-------- --------
Interest rate floors ......... $ 50,000 $ (263)
-------- --------
</TABLE>
At December 31, 1996, the Predecessor Company's financial instruments
consisted primarily of billed contract receivables, other billed receivables
(principally commercial and affiliates), trade accounts payable and customer
advances. The book value of billed contract receivables, other billed
receivables (principally commercial and affiliates), trade accounts payable and
customer advances approximated their respective fair values at December 31,
1996, due to the short-term maturities or expected settlement dates of those
instruments.
11. COMMON STOCK
The Company's Class A Common Stock possesses full voting rights and Class
B Common Stock and Class C Common Stock possess no voting rights except as
otherwise required by law. However,
F-29
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
pursuant to shareholders agreements, the holders of Classes B and C Common
Stock have the right to designate themselves as members of the Board of
Directors as long as they are employees of the Company or any of its
subsidiaries. Each share of Class B Common Stock will convert, at the option of
the Company, into a share of Class A common stock immediately prior to an
initial public offering of equity securities of the Company or upon the
occurrence of certain other events but not later than April, 2006, and will
convert into Class C common stock upon certain other events. Holders of Class B
Common Stock are entitled to share with the holders of Class A Common Stock in
dividends and liquidating distributions.
The Equity Executives are the holders of the Class B Common Stock which
has a par value of $0.01 per share and have the right until the effective date
of an initial public offering to require the Company to repurchase the Class B
Common Stock under certain circumstances. Accordingly, the Class B Common Stock
has been classified on the consolidated balance sheet as "common stock subject
to repurchase agreement" and excluded from shareholders' equity as of December
31, 1997. At December 31, 1997, 3,000,000 shares of the Class B Common Stock
were authorized and 2,944,000 were outstanding.
The Company's Class A Common Stock and Class B Common Stock were issued at
per share prices of $6.47 and $5.00, respectively. The aggregate difference in
issuance prices of $4,410 has been accounted for as a noncash compensation
charge to expense effective April 1, 1997, related to the initial
capitalization of L-3.
12. EARNINGS PER SHARE
Basic earnings per common share and diluted earnings per common share for
the Company for the nine months ended December 31, 1997 were calculated as
follows:
<TABLE>
<CAPTION>
INCOME
AVAILABLE TO
COMMON WEIGHTED AVERAGE PER-SHARE
STOCKHOLDERS SHARES OUTSTANDING AMOUNT
-------------- -------------------- ----------
<S> <C> <C> <C>
Basic earnings per common share ........... $12,305 20,000,000 $0.62
------- ---------- -----
Effect of dilutive securities ............. -- 11,611
------- ----------
Diluted earnings per common share ......... $12,305 20,011,611 $0.61
======= ========== =====
</TABLE>
For purposes of the earnings per common share computations, the Class B
Common Stock subject to repurchase agreement (Note 11) has been included in the
weighted average number of shares of common stock outstanding.
Earnings per share data is not presented for the Predecessor Company
because the Businesses were wholly-owned business units of Lockheed Martin
prior to the L-3 Acquisition.
F-30
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. INCOME TAXES
THE COMPANY
Pretax income of the Company for the nine months ended December 31, 1997
was $22,992 and was primarily domestic. The components of the Company's
provision for income taxes for the nine months ended December 31, 1997 are:
<TABLE>
<CAPTION>
<S> <C>
Income taxes currently payable, primarily federal ......... $ 696
Deferred income taxes:
Federal ................................................. 8,635
State and local ......................................... 1,356
-------
Subtotal ................................................ 9,991
-------
Total provision for income taxes .......................... $10,687
=======
</TABLE>
The effective income tax rate of the Company for the nine months ended
December 31, 1997 differs from the statutory federal income tax rate for the
following reasons:
<TABLE>
<CAPTION>
<S> <C>
Statutory federal income tax rate ..................................... 35.0%
State and local income taxes, net of federal income tax benefit ....... 3.8
Noncash compensation charge ........................................... 6.8
Nondeductible goodwill amortization and other expenses ................ 4.4
Research and development and other tax credits ........................ (3.5)
----
Effective income tax rate ............................................. 46.5 %
=======
</TABLE>
The significant components of the Company's net deferred tax assets at
December 31, 1997 are:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Other postretirement benefits ............................. $ 8,649
Inventoried costs ......................................... 8,711
Compensation and benefits ................................. 528
Pension costs ............................................. 4,177
Property, plant and equipment ............................. 8,098
Income recognition on long-term contracts ................. 3,691
Other, net ................................................ 1,861
Net operating loss and other credit carryforwards ......... 2,969
--------
Total deferred tax assets ................................ 38,684
Deferred tax liabilities:
Cost in excess of net assets acquired ..................... (1,099)
Other, net ................................................ (70)
--------
Total deferred tax liabilities ........................... (1,169)
--------
Net deferred tax assets ..................................... $ 37,515
========
The net deferred tax assets are classified as follows:
Current deferred tax assets ............................... $ 13,298
Long-term deferred tax assets ............................. 24,217
--------
$ 37,515
========
</TABLE>
F-31
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At December 31, 1997, the Company had $2,969 of tax credit carryforwards,
primarily related to U.S. federal net operating losses and research and
experimentation tax credits which expire, if unused, in 2012. The Company
believes that these carryforwards will be available to reduce future income tax
liabilities and has recorded these carryforwards as non-current deferred tax
assets.
PREDECESSOR COMPANY
The (benefit) provision for income taxes for the Predecessor Company was
calculated by applying statutory tax rates to the reported income (loss) before
income taxes after considering items that do not enter into the determination
of taxable income and tax credits reflected in the consolidated provision of
Lockheed Martin, which are related to the Businesses. Substantially all the
income of the Businesses are from domestic operations. For the three months
ended March 31, 1997, it is estimated that the benefit for deferred taxes
represents $1,315. For the years ended December 31, 1996 and 1995, it is
estimated that the (benefit) provision for deferred taxes represents ($2,143)
and $3,994, respectively.
The effective income tax rate of the Predecessor Company differs from the
statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS YEARS ENDED DECEMBER
ENDED 31,
MARCH 31, ----------------------
1997 1996 1995
------------- ---------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate ......................... (35.0)% 35.0% 34.0%
Amortization of cost in excess of net assets acquired ..... (8.1) 2 529
Research and development and other tax credits ............ (11.3) (2) --
State and local income taxes, net of federal income
tax benefit and state and local income tax credits ...... 4.8 6 101
Foreign sales corporation tax benefits .................... (8.4) (1) --
Other, net ................................................ 9.1 -- 17.0
----- ------ ----
Effective income tax rate ................................. (48.9)% 40.0% 681%
===== ====== ====
</TABLE>
14. STOCK OPTIONS
THE COMPANY
Holdings sponsors an option plan for key employees of the Company,
pursuant to which options to purchase up to 3,255,815 shares of Holdings common
stock have been authorized for grant.
On April 30, 1997, Holdings adopted the 1997 Option Plan for key employees
and granted to the Equity Executives nonqualified options to purchase, at $6.47
per share, 2,285,714 shares of Class A common stock of Holdings. In each case,
half of the options are "Time Options" and half are "Performance Options"
(collectively, the "Options"). The Time Options become exercisable with respect
to 20% of the shares subject to the Time Options on each of the first five
anniversaries if employment continues through and including such date. The
Performance Options become exercisable nine years after the grant date, but may
become exercisable earlier with respect to up to 20% of the shares subject to
the Performance Options on each of the first five anniversaries, to the extent
certain defined targets are achieved. The Options, which have a ten year term,
become fully exercisable under certain circumstances, including a change in
control.
On July 1, 1997 and November 11, 1997, Holdings granted nonqualified
options to certain officers and other employees of Holdings to purchase at
$6.47 per share 689,500 shares of Class A common
F-32
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
stock of Holdings (collectively, the "1997 Options"). Generally, the 1997
Options vest over a three-year period and expire ten years from the date of
grant.
The exercise price for Holdings' stock options granted to employees in
1997 equaled the estimated fair value of Holdings' common stock at the date of
grant. Accordingly, in accordance with APB 25, no compensation expense was
recognized by Holdings.
Pro forma information regarding net earnings as required by SFAS 123 has
been determined as if Holdings had accounted for its employee stock options
under the fair value method. Because Holdings is a nonpublic entity the fair
value for the options was estimated at the date of grant using the minimum
value method prescribed in SFAS 123, which does not consider the expected
volatility of Holdings' stock price, with the following weighted-average
assumptions for 1997: risk-free interest rate of 6.3%; dividend yield of 0%;
and weighted-average expected option life of 5.49 years.
For purposes of pro forma disclosures, the compensation cost of the
options based on their estimated fair values is amortized to expense over
vesting periods of the options. The Company's net income for the nine months
ended December 31, 1997 would have decreased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
<S> <C>
Net income:
As reported ......... $12,305
=======
Pro forma ........... $11,751
=======
</TABLE>
A summary of the stock option activity for the nine months ended December
31, 1997 is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(IN THOUSANDS) EXERCISE PRICE
---------------- -----------------
<S> <C> <C>
Options granted ................................ 2,975 $6.47
Options exercised .............................. -- --
Options cancelled .............................. 4 $6.47
Options outstanding, December 31, 1997 ......... 2,971 $6.47
Options exercisable, December 31, 1997 ......... -- --
</TABLE>
The weighted-average grant-date fair value of options granted during the
nine months ended December 31, 1997 was $1.82 per option. The weighted average
remaining contract life of the Company outstanding stock options was 9.37 years
at December 31, 1997.
PREDECESSOR COMPANY
During the three months ended March 31, 1997 and the years ended December
31, 1996 and 1995, certain employees of the Predecessor Company participated in
Lockheed Martin's stock option plans. All stock options granted had 10 year
terms and vested over a two year service period. Exercise prices of options
awarded in both years were equal to the market price of the stock on the date
of grant. Pro forma information regarding net earnings (loss) as required by
SFAS No. 123 has been determined as if the Predecessor Company had accounted
for its employee stock options under the fair value method. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the three
months ended March 31, 1997, and the years ended December 31, 1996 and 1995,
respectively: risk-free interest rates of 5.58%, 5.58% and 6.64%; dividend
yield of 1.70%; volatility factors related to
F-33
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the expected market price of the Lockheed Martin's common stock of .186, .186
and .216; weighted-average expected option life of five years. The
weighted-average fair values of options granted during 1997, 1996 and 1995 were
$17.24, $17.24 and $16.09, respectively.
For the purposes of pro forma disclosures, the options' estimated fair
values are amortized to expense over the options' vesting periods. The
Predecessor Company's pro forma net loss for the three months ended March 31,
1997 and the years ended December 31, 1996 and 1995 were ($386), $11,531, and
($1,040), respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company and the Predecessor Company lease certain facilities and
equipment under agreements expiring at various dates through 2011. At December
31, 1997, the Company's future minimum payments for noncancellable operating
leases with initial or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
---------------------------------------
REAL ESTATE EQUIPMENT TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
1998 ............... $ 8,599 $295 $ 8,894
1999 ............... 7,734 244 7,978
2000 ............... 10,030 232 10,262
2001 ............... 8,926 29 8,955
2002 ............... 2,795 22 2,817
Thereafter ......... 14,393 -- 14,393
------- ---- -------
$52,477 $822 $53,299
======= ==== =======
</TABLE>
Real estate lease commitments have been reduced by minimum sublease
rentals of $22,106 due in the future under noncancellable subleases.
Leases covering major items of real estate and equipment contain renewal
and or purchase options which may be exercised by the Company and Predecessor
Company. Rent expense, net of sublease income from other Lockheed Martin
entities was $7,330 for the Company for the nine months ended December 31,
1997; $2,553 for the Predecessor Company for the three months ended March 31,
1997 and $8,495 and $4,772 for the Predecessor Company for the years ended
December 31, 1996 and 1995, respectively.
The Company is and the Predecessor Company has been engaged in providing
products and services under contracts with the U.S. Government and to a lesser
degree, under foreign government contracts, some of which are funded by the
U.S. Government. All such contracts are subject to extensive legal and
regulatory requirements, and, from time to time, agencies of the U.S.
Government investigate whether such contracts were and are being conducted in
accordance with these requirements. Under government procurement regulations,
an indictment of the Company and the Predecessor Company by a federal grand
jury could result in the Company and the Predecessor Company being suspended
for a period of time from eligibility for awards of new government contracts. A
conviction could result in debarment from contracting with the federal
government for a specified term.
The decline in the U.S. defense budget since the mid-1980s has resulted in
program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Company's programs;
however, in the event that U.S. Government expenditures for products of the
type manufactured by the Company are reduced, and not offset by greater
commercial sales or other new programs or products, or acquisitions, there may
be a reduction in the volume of contracts or subcontracts awarded to the
Company.
F-34
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pursuant to the L-3 Acquisition Agreement, Holdings and the Company has
agreed to assume certain on-site and off-site environmental liabilities related
to events or activities occurring prior to the consummation of the L-3
Acquisition. Lockheed Martin has agreed to retain all environmental liabilities
for all facilities not used by the Businesses as of April 1997 and to indemnify
fully Holdings for such prior site environmental liabilities. Lockheed Martin
has also agreed, for the first eight years following April 1997 to pay 50% of
all costs incurred by Holdings above those reserved for on the Company's
balance sheet at March 31, 1997 relating to certain Company-assumed
environmental liabilities and, for the seven years thereafter, to pay 40% of
certain reasonable operation and maintenance costs relating to any
environmental remediation projects undertaken in the first eight years. The
Company believes that its total liability for known or reasonably probable
environmental claims, even without consideration of the Lockheed Martin
indemnification, would not either individually or collectively have a material
adverse effect upon Holdings' financial condition or upon the results of its
operations.
Management continually assesses the Company's obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management is aware,
the Company believes that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's results of
operations. The Company accrues for these contingencies when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated.
The Company and the Predecessor Company have been periodically subject to
litigation, claims or assessments and various contingent liabilities (including
environmental matters) incidental to its business. With respect to those
investigative actions, items of litigation, claims or assessments of which they
are aware, management of the Company is of the opinion that the probability is
remote that, after taking into account certain provisions that have been made
with respect to these matters, the ultimate resolution of any such
investigative actions, items of litigation, claims or assessments will have a
material adverse effect on the financial position or results of operations of
the Company and the Predecessor Company.
16. PENSIONS AND OTHER EMPLOYEE BENEFITS
THE COMPANY
PENSIONS: The Company maintains a number of pension plans, both
contributory and noncontributory, covering certain employees. Eligibility for
participation in these plans varies and benefits are generally based on
members' compensation and years of service. The Company's funding policy is
generally to contribute in accordance with cost accounting standards that
affect government contractors, subject to the Internal Revenue Code and
regulations thereon. Plan assets are invested primarily in U.S. government and
agency obligations and listed stocks and bonds.
Pension expense for the nine months ended December 31, 1997 includes the
following components:
<TABLE>
<S> <C>
Service cost ......................... $ 5,109
Interest cost ........................ 8,883
Actual return on plan assets ......... (11,285)
Net deferral ......................... 1,581
---------
Total pension cost ................... $ 4,288
=========
</TABLE>
F-35
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following presents the funded status and amounts recognized in the
balance sheet for the Company's pension plans:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits ..................................................... $13,742 $ 152,133
======= =========
Accumulated benefits ................................................ $13,825 $ 155,474
Effect of projected future salary increases ......................... 3,337 25,795
------- ---------
Projected benefits .................................................. $17,162 $ 181,269
======= =========
Plan assets at fair value ............................................. $18,172 $ 155,278
------- ---------
Plan assets in excess of (less than) projected benefit obligation ..... 1,010 (25,991)
Unrecognized net (gain) loss .......................................... (559) 5,683
------- ---------
Prepaid (accrued) pension cost ........................................ $ 451 $ (20,308)
======= =========
</TABLE>
The following assumptions were used in accounting for pension plans for
the Company:
<TABLE>
<CAPTION>
APRIL 1, 1997 DECEMBER 31, 1997
--------------- ------------------
<S> <C> <C>
Discount rate ............................. 7.50% 7.25%
Rate of increase in compensation .......... 5.00% 5.00%
Rate of return on plan assets ............. 9.00% 9.00%
</TABLE>
In connection with the Company's assumption of certain plan obligations
pursuant to the L-3 Acquisition, Lockheed Martin has provided the PBGC with
commitments to assume sponsorship or other forms of financial support under
certain circumstances. In this connection, the Company has provided certain
assurances to Lockheed Martin including, but not limited to, (i) continuing to
fund the pension plans consistent with prior practices and to the extent
deductible for tax purposes and, where appropriate, recoverable under
Government contracts, (ii) agreeing to not increase benefits under the pension
plans without the consent of Lockheed Martin, (iii) restricting the Company
from a sale of any businesses employing individuals covered by the pension
plans if such sale would not result in reduction or elimination of the Lockheed
Martin Commitment with regard to the specific plan and (iv) if the pension
plans were returned to Lockheed Martin, granting Lockheed Martin the right to
seek recovery from the Company of those amounts actually paid, if any, by
Lockheed Martin with regard to the pension plans after their return.
POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE: In addition to providing
pension benefits, the Company provides certain health care and life insurance
benefits for retired employees and dependents at certain locations.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension plans.
These benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.
Post-retirement health care and life insurance costs for the nine months
ended December 31, 1997 include the following components:
<TABLE>
<S> <C>
Service cost ....................................................... $ 466
Interest cost ...................................................... 840
------
Total post-retirement health care and life insurance costs ......... $1,306
======
</TABLE>
F-36
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table presents the amounts recognized in the balance sheet
for the Company at December 31, 1997:
<TABLE>
<S> <C>
Accumulated post-retirement benefit obligation:
Retirees ........................................................... $ 4,702
Fully eligible plan participants ................................... 3,188
Other active plan participants ..................................... 10,990
-------
Total accumulated post-retirement benefit obligation ................. $18,880
Unrecognized net loss ................................................ 624
-------
Accrued post-retirement health care and life insurance costs ......... $18,256
=======
</TABLE>
Actuarial assumptions used in determining the December 31, 1997
accumulated post-retirement benefit obligation include a discount rate of
7.25%, an average rate of compensation increase of 5.0% and an assumed health
care cost trend rate of 6.5% in 1997 decreasing gradually to a rate of 4.5% by
the year 2001. The discount rate used at April 1, 1997 was 7.50%. The other
assumptions did not change from April 1, 1997. Increasing the assumed health
care cost trend rate by 1% would change the accumulated post-retirement
benefits obligation at December 31, 1997 by approximately $2,218 and the
aggregate service and interest cost components for the nine months ended
December 31, 1997 by approximately $81 and $113, respectively.
EMPLOYEE SAVINGS PLAN: Under its various employee savings plans, the
Company matches the contributions of participating employees up to a designated
level. The extent of the match, vesting terms and the form of the matching
contribution vary among the plans. Under these plans, the Company's matching
contributions, in cash, for the nine months ended December 31, 1997 was $3,742.
THE PREDECESSOR COMPANY
Certain of the Businesses for the Predecessor Company participated in
various Lockheed Martin-sponsored pension plans covering certain employees.
Eligibility for participation in these plans varies, and benefits are generally
based on members' compensation and years of service. Lockheed Martin's funding
policy was generally to contribute in accordance with cost accounting standards
that affect government contractors, subject to the Internal Revenue Code and
regulations. Since the aforementioned pension arrangements are part of certain
Lockheed Martin defined benefit plans, no separate actuarial data is available
for the portion allocable to the Businesses. Therefore, no liabilities or
assets are reflected in the accompanying combined financial statements of the
Predecessor Company as of December 31, 1996. The Businesses have been allocated
pension costs based upon participant employee headcount. Net pension expense
included in the accompanying combined financial statements of the Predecessor
Company was $1,848 for the three months ended March 31, 1997, and $7,027 and
$4,134, for the years ended December 31, 1996 and 1995, respectively.
In addition to participating in Lockheed Martin-sponsored pension plans,
certain of the Businesses of the Predecessor Company provided varying levels of
health care and life insurance benefits for retired employees and dependents.
Participants were eligible for these benefits when they retired from active
service and met the pension plan eligibility requirements. These benefits are
funded primarily on a pay-as-you-go basis with the retiree generally paying a
portion of the cost through contributions, deductibles and coinsurance
provisions. Since the aforementioned postretirement benefits are part of
certain Lockheed Martin postretirement arrangements, no separate actuarial data
is available for the portion allocable to the Businesses. Accordingly, no
liability is reflected in the accompanying combined financial statements as of
combined December 31, 1996 and 1995. The Businesses have been allocated
postretirement benefits cost based on participant employee
F-37
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
headcount. Postretirement benefit costs included in the accompanying combined
financial statements was $616 for the three months ended March 31, 1997 and
$2,787 and $2,124 for the years ended December 31, 1996 and 1995, respectively.
Under various employee savings plans sponsored by Lockheed Martin, the
Predecessor Company matched contributions of participating employees up to a
designated level. Under these plans the matching contributions for the three
months ended March 31, 1997 and for the years ended December 31, 1996 and 1995
were $1,241, $3,940 and $1,478, respectively.
17. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statement of cash flows are
as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------------- --------------------------------
YEAR ENDED
DECEMBER 31,
NINE MONTHS THREE MONTHS --------------
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1997 1996 1995
------------------- --------------- ------ -----
<S> <C> <C> <C> <C>
Interest paid ............. $21,245 -- -- --
======= == == ==
Income taxes paid ......... $ 109 -- -- --
======= == == ==
</TABLE>
18. SALES TO PRINCIPAL CUSTOMERS
The Company and the Predecessor Company operate primarily in one industry
segment, government electronic systems. Sales to principal customers are as
follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------- --------------------------------------------
THREE
NINE MONTHS YEAR YEAR
MONTHS ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
-------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
U.S. Government Agencies ......... $434,020 $128,505 $425,033 $161,617
Foreign (principally foreign
governments) ................... 12,090 13,612 33,475 4,945
Other (principally U.S.
commercial) .................... 100,415 16,756 84,573 219
-------- -------- -------- --------
$546,525 $158,873 $543,081 $166,781
======== ======== ======== ========
</TABLE>
19. OTHER TRANSACTIONS WITH LOCKHEED MARTIN
The Company and the Predecessor Company sell products to Lockheed Martin
and its affiliates, net sales for which were $60,402 for the nine months ended
December 31, 1997; $21,171 for the three months ended March 31, 1997 and
$70,658 and $25,874 for the years ended December 31, 1996 and 1995,
respectively. Included in Contracts in Process are receivables from Lockheed
Martin and its affiliates of $8,846 and $10,924 at December 31, 1997 and 1996,
respectively.
Lockheed Martin provides the Company information systems and other
services and previously provided similar services to the Predecessor Company
for which the Company and the Predecessor Company were charged $13,690, $4,210,
$20,901 and $20,508 for the nine months ended December 31, 1997, the three
months ended March 31, 1997 and the years ended December 31, 1996 and 1995,
respectively.
The Predecessor Company relied on Lockheed Martin for certain services,
including treasury, cash management, employee benefits, taxes, risk management,
internal audit, financial reporting, contract administration and general
corporate services. Although certain assets, liabilities and expenses related
to these services have been allocated to the Businesses, the combined financial
position, results of operations and cash flows presented in the accompanying
combined financial statements would not be the same had the Businesses been
independent entities.
F-38
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The amount of allocated corporate expenses to the Predecessor Company and
reflected in these combined financial statements was estimated based primarily
on an allocation methodology prescribed by government regulations pertaining to
government contractors. Allocated costs to the Businesses were $5,208 for the
three months ended March 31, 1997, and $10,057 and $2,964 for the years ended
December 31, 1996 and 1995, respectively.
20. SUBSEQUENT EVENTS
In February 1998, the Company purchased substantially all the assets and
liabilities of the Satellite Transmission Systems division of California
Microwave, Inc. The purchase price of $27,000 is subject to adjustment based on
closing net assets. The Company used cash on hand to fund the purchase price.
On December 22, 1997, the Company signed a definitive agreement to
purchase substantially all the assets and liabilities of the Ocean Systems
division of AlliedSignal Inc. The purchase price of $67,500, subject to
adjustment based on closing net working capital, will be financed through cash
on hand and/or borrowings available under the Senior Credit Facilities.
In February 1998, the Company entered into a definitive agreement to
purchase the assets of ILEX Systems ("ILEX") for $51,900 in cash, subject to
adjustment based on closing net assets and additional consideration based on
post-acquisition performance of ILEX.
The acquisition of ILEX and Ocean Systems are expected to close during the
first quarter of 1998. The company plans to finance the purchase prices using
its cash on hand and available borrowings under its revolving credit facility.
In February 1998, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the sale of $150,000 aggregate
principal amount of Senior Subordinated Notes due 2008 (the "Notes Offering"),
and concurrently with the Notes Offering, Holdings filed a registration
statement with the SEC for the sale of 5.5 million shares of common stock of
Holdings.
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
FOR THE QUARTERS ENDED COMPANY
------------------------------------------------------- ---------------
DEC. 31, 1997 SEPT. 30, 1997 JUNE 30, 1997(A) MARCH 31, 1997
--------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Sales ..................... $203,673 $174,822 $168,030 $158,873
Operating income .......... 22,881 17,854 10,711 7,936
Net income (loss) ......... 8,348 5,276 (1,319) (258)
Basic EPS ................. $ 0.42 $ 0.26 $ (0.07)
Diluted EPS ............... $ 0.42 $ 0.26 $ (0.07)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Sales ..................... $178,040 $158,594 $165,294 $41,153
Operating income .......... 20,564 12,197 9,254 1,676
Net income (loss) ......... 8,401 3,055 737 (497)
</TABLE>
- ----------
(a) Includes a $4,410 ($0.22 per share) noncash compensation charge.
F-39
<PAGE>
LORAL ACQUIRED BUSINESSES
COMBINED FINANCIAL STATEMENTS
For the three months ended March 31, 1996 and the year ended December 31, 1995
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors of
L-3 Communications Corporation:
We have audited the accompanying combined statements of operations and
cash flows for the Loral Acquired Businesses as defined in Note 1 (the
"Businesses") for the three months ended March 31, 1996 and the year ended
December 31, 1995. These financial statements are the responsibility of the
Businesses' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of the operations and cash flows
of the Businesses for the three months ended March 31, 1996 and the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, New York 10019
March 20, 1997
F-41
<PAGE>
LORAL ACQUIRED BUSINESSES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
---------------- ------------------
<S> <C> <C>
Sales .............................. $132,200 $448,165
Cost and expenses .................. 124,426 424,899
-------- --------
Operating income ................... 7,774 23,266
Allocated interest expense ......... 4,365 20,799
-------- --------
Income before income taxes ......... 3,409 2,467
Income taxes ....................... 1,292 854
-------- --------
Net income ......................... $ 2,117 $ 1,613
======== ========
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
LORAL ACQUIRED BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
---------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................... $ 2,117 $ 1,613
Depreciation and amortization ........................ 5,011 20,625
Changes in operating assets and liabilities
Contracts in process ................................ (11,382) 7,327
Other current assets ................................ (3,436) 890
Other assets ........................................ 2,437 6,736
Accounts payable and accrued liabilities ............ 4,525 (4,533)
Other current liabilities ........................... 3,348 4,428
Other liabilities ................................... (452) 117
--------- ----------
Net cash from operating activities ................... 2,168 37,203
--------- ----------
INVESTING ACTIVITIES:
Acquisition of business .............................. -- (214,927)
Capital expenditures ................................. (3,962) (12,683)
Disposition of property, plant and equipment ......... 187 4,342
--------- ----------
(3,775) (223,268)
--------- ----------
FINANCING ACTIVITIES:
Advances from (repayments to) Loral .................. 1,607 186,065
--------- ----------
Net change in cash ................................... $ -- $ --
========= ==========
</TABLE>
See notes to combined financial statements.
F-43
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND DESCRIPTION OF BUSINESS
On January 31, 1997, Lockheed Martin Corporation ("Lockheed Martin"),
Lehman Brothers Holdings Inc. ("Lehman"), Frank C. Lanza ("Lanza") and Robert
V. LaPenta ("LaPenta") entered into a Memorandum of Understanding ("MOU")
regarding the transfer of certain businesses of Lockheed Martin to a newly
formed corporation ("Newco") to be owned by Lockheed Martin, Lehman, Lanza and
LaPenta. The businesses proposed to be transferred (the "Loral Acquired
Businesses" or "Businesses") include Lockheed Martin's Wideband Systems
Division and the Products Group, comprised of ten autonomous operations, all of
which were acquired by Lockheed Martin effective April 1, 1996 as part of the
acquisition by Lockheed Martin of the defense electronics business of Loral
Corporation ("Loral"). Also included in the transaction is the acquisition of a
semiconductor product line of another business and certain leasehold
improvements in New York City.
The Businesses are leading suppliers of sophisticated secure communication
systems, microwave communication components, avionic and instrumentation
products and other products and services to major aerospace and defense
contractors as well as the U.S. Government. The Businesses operate primarily in
one industry segment, communication systems and products.
Substantially all the Businesses' products are sold to agencies of the
United States Government, primarily the Department of Defense, to foreign
government agencies or to prime contractors or subcontractors thereof. All
domestic government contracts and subcontracts of the Businesses are subject to
audit, various cost controls and include standard provisions for termination
for the convenience of the government. Multi-year government contracts and
related orders are subject to cancellation if funds for contract performance
for any subsequent year become unavailable. Foreign government contracts
generally include comparable provisions relating to termination for the
convenience of the government.
The decline in the U.S. defense budget since the mid 1980s has resulted in
program delays, cancellations and scope reductions for defense contractors in
general. These events may or may not have an effect on the Businesses'
programs; however, in the event that expenditures for products of the type
manufactured by the Businesses are reduced, and not offset by greater foreign
sales or other new programs or products, or acquisitions, there may be a
reduction in the volume of contracts or subcontracts awarded to the Businesses.
The Businesses' operations, as presented herein, include allocations and
estimates of certain expenses of Loral based upon estimates of services
performed by Loral that management of the Businesses believe are reasonable.
Such services include treasury, cash management, employee benefits, taxes, risk
management, internal audit and general corporate services. Accordingly, the
results of operations and cash flows as presented herein may not be the same as
would have occurred had the Businesses been independent entities.
2. BASIS OF PRESENTATION
BASIS OF COMBINATION
The accompanying combined financial statements reflect the Businesses'
assets, liabilities and operations included in Loral Corporation's historical
financial statements that will be transferred to Newco. All significant
intercompany transactions and amounts have been eliminated. The combined
financial statements do not include the operations of telecommunications switch
product line which will not be transferred and was exited in 1995. Also, the
assets and operations of the semiconductor product line and certain other
facilities which are not material to the Businesses have been excluded from the
financial statements.
F-44
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
ALLOCATION OF CORPORATE EXPENSES
The amount of corporate office expenses reflected in these financial
statements has been estimated based primarily on the allocation methodology
prescribed by government regulations pertaining to government contractors,
which management of the Businesses believes to be a reasonable allocation
method.
INCOME TAXES
The Businesses were included in the consolidated Federal income tax return
and certain combined and separate state and local income tax returns of Loral.
However, for the purposes of these financial statements, the provision for
income taxes was allocated based upon reported income before income taxes. Such
provision was recorded through the advances from (repayments to) Loral account.
INTEREST EXPENSE
Interest expense has been allocated to the Businesses by applying Loral's
weighted average consolidated interest rate to the portion of the beginning of
the period invested equity account deemed to be financed by consolidated debt,
which amount has been determined based on Loral's debt to equity ratio on such
date, except that the acquisition of Wideband Systems has been assumed to be
fully financed by debt.
STATEMENTS OF CASH FLOWS
The Businesses participated in Loral's cash management system, under which
all cash was received and payments made by Loral. All transactions between the
Businesses and Loral have been accounted for as settled in cash on the date
such transactions were recorded by the Businesses.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTRACTS IN PROCESS
Sales on long-term production-type contracts are recorded as units are
shipped; profits applicable to such shipments are recorded pro rata, based upon
estimated total profit at completion of the contract. Sales and profits on cost
reimbursable contracts are recognized as costs are incurred. Sales and
estimated profits under other long-term contracts are recognized under the
percentage of completion method of accounting using the cost-to-cost method.
Amounts representing contract change orders or claims are included in sales
only when they can be reliably estimated and realization is probable. Incentive
fees and award fees enter into the determination of contract profits when they
can be reliably estimated.
Costs accumulated under long-term contracts include direct costs as well
as manufacturing, overhead, and for government contracts, general and
administrative, independent research and development and bid and proposal
costs. Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period in which the facts which require the
revision become known.
DEPRECIATION AND AMORTIZATION
Depreciation is provided primarily on the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements. The excess of the cost of purchased businesses over the fair
value of the net assets acquired is being amortized using a straight-line
method generally over a 40-year period.
F-45
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The carrying amount of cost in excess of net assets acquired is evaluated
on a recurring basis. Current and future profitability as well as current and
future undiscounted cash flows, excluding financing costs, of the underlying
businesses are primary indicators of recoverability. There were no adjustments
to the carrying amount of cost in excess of net assets acquired resulting from
these evaluations during the periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Businesses' management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. The most significant of these estimates and
assumptions relate to contract estimates of sales and costs, cost allocations
from Loral, including interest and income taxes, recoverability of recorded
amounts of fixed assets and cost in excess of net assets acquired, litigation
and environmental obligations. Actual results could differ from these
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes the accounting
standards for the impairment of long-lived assets, certain intangible assets
and cost in excess of net assets and certain intangible assets to be disposed
of. The impact of adopting SFAS 121 was not material.
Effective January 1, 1994, the Businesses adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"). SFAS 112 requires that the costs of benefits provided
to employees after employment but before retirement be recognized on an accrual
basis. The adoption of SFAS 112 did not have a material impact on the results
of operations of the Businesses.
4. ACQUISITIONS
Effective May 1, 1995, Loral acquired substantially all the assets and
liabilities of the Defense Systems operations of Unisys Corporation, which
included the Wideband Systems Division. The acquisition has been accounted for
as a purchase. As such, the accompanying combined financial statements reflect
the results of operations of the Wideband Systems Division from the effective
date of acquisition, including the amortization of an allocated portion of cost
in excess of net assets acquired resulting from the acquisition. Such
allocation was based on the sales and profitability of the Wideband Systems
Divisions relative to the aggregate sales and profitability of the defense
systems operations acquired by Loral. The assets and liabilities recorded in
connection with the purchase price allocation were $240,525 and $25,598,
respectively.
Had the acquisition of the Wideband Systems Division occurred on January
1, 1995, the unaudited pro forma sales and net income for the year ended
December 31, 1995 would have been $524,355 and $504,780, respectively. The
results, which are based on various assumptions, are not necessarily indicative
of what would have occurred had the acquisition been consummated as of January
1, 1995.
F-46
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. OPERATING EXPENSES
The following expenses have been included in the statements of operations:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
---------------- ------------------
<S> <C> <C>
General and administrative expenses ...................... $23,558 $90,757
Independent research and development, and bid and proposal
costs ................................................... $ 5,587 $21,370
</TABLE>
6. INCOME TAXES
The provision for income taxes was calculated by applying Loral's
statutory tax rates to the reported pre-tax book income after considering items
that do not enter into the determination of taxable income and tax credits
reflected in the consolidated provision which are related to the Businesses. It
is estimated that deferred income taxes represent approximately $714,000 and
$2,857,000 of the provisions for income taxes reflected in these financial
statements for the three months ended March 31, 1996 and the year ended
December 31, 1995. The principal components of deferred income taxes are
contract accounting methods, property plant and equipment, goodwill
amortization, and timing of accruals. Substantially all of the Businesses'
income is from domestic operations.
The following is a reconciliation of the statutory rate to the effective
tax rates reflected in the financial statements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
--------- ----------
<S> <C> <C>
Statutory Federal income tax rate ............................. 35.0% 35.0%
Research and development and other tax credits ................ -- (18.6)
State and local income taxes, net of Federal income tax benefit
and state and local income tax credits ....................... 3.9 (.3)
Foreign sales corporation tax benefit ......................... (2.2) (3.0)
Amortization of goodwill ...................................... 6.3 35.1
Other, net .................................................... (5.1) (13.6)
---- -----
Effective income tax rate ..................................... 37.9% 34.6%
==== =====
</TABLE>
7. INTEREST EXPENSE
Interest expense was calculated using the following balances and interest
rates:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
---------------- ------------------
<S> <C> <C>
Invested Equity ................................... $ 453,062 $ 265,384
Interest Rate ..................................... 7.40% 7.87%
Wideband Systems Allocated Purchase Price ......... -- $ 214,927
Interest Rate ..................................... -- 7.40%
</TABLE>
F-47
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
The Businesses lease certain facilities and equipment under agreements
expiring at various dates through 2011. Leases covering major items of real
estate and equipment contain renewal and/or purchase options which may be
exercised by the Businesses. Rent expense for the three months ended March 31,
1996 was $1,063. Rent expense for the year ended December 31, 1995 was $4,276.
Management is continually assessing its obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Businesses in order to
comply with these laws, based upon available internal and external assessments,
the Businesses believe that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Businesses'
operations. The Businesses accrue for these contingencies when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated. The Businesses believe that it has adequately accrued for future
expenditures in connection with environmental matters and that such
expenditures will not have a material adverse effect on its financial position
or results of operations.
There are a number of lawsuits or claims pending against the Businesses
and incidental to its business. However, in the opinion of management, the
ultimate liability on these matters, if any, will not have a material adverse
effect on the financial position or results of operations of the Businesses.
9. PENSIONS AND OTHER EMPLOYEE BENEFITS
PENSIONS
The Businesses participate in various Loral-sponsored pension plans both
contributory and non-contributory covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
members' compensation and years of service. Loral's funding policy was
generally to contribute in accordance with cost accounting standards that
affect government contractors, subject to the Internal Revenue code and
regulations thereon. Since the aforementioned pension arrangements were part of
certain Loral defined benefit or defined contribution plans, no separate
actuarial data was available for the Businesses. The Businesses have been
allocated their share of pension costs based upon participation employee
headcount. Net pension expense, which approximates the amount funded, included
in the accompanying financial statements was $1,234 and $4,391 for the three
months ended March 31, 1996 and the year ended December 31, 1995, respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to participating in Loral-sponsored pension plans, the
Businesses provide certain health care and life insurance benefits for retired
employees and dependents at certain locations. Participants are eligible for
these benefits when they retire from active service and meet the pension plan
eligibility requirements. These benefits are funded primarily on a
pay-as-you-go basis with the retiree generally paying a portion of the cost
through contributions, deductibles and coinsurance provisions. Since the
aforementioned postretirement benefits were part of certain Loral
postretirement arrangements, no separate actuarial data is available for the
Businesses. The Businesses have been allocated postretirement benefit costs
based upon participant employee headcount. Post-retirement benefits costs
included in the accompanying financial statements were $402 and $1,646 for the
three months ended March 31, 1996 and the year ended December 31, 1995,
respectively.
F-48
<PAGE>
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
EMPLOYEE SAVINGS PLANS
Under various employee savings plans sponsored by Loral, the Businesses
matched the contributions of participating employees up to a designated level.
The extent of the match, vesting terms and the form of the matching
contribution vary among the plans. Under these plans, the matching
contributions, in cash, common stock or both, for the three months ended March
31, 1996 and the year ended December 31, 1995 were $634 and $1,879,
respectively.
10. SALES TO PRINCIPAL CUSTOMERS
The Businesses operate primarily in one industry segment, electronic
components and systems. Sales to principal customers are as follows:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
---------------- ------------------
<S> <C> <C>
U.S. Government Agencies .......................... $ 94,993 $328,476
Foreign (principally foreign governments) ......... 16,838 62,549
Other (principally commercial) .................... 20,369 57,140
-------- --------
$132,200 $448,165
======== ========
</TABLE>
Foreign sales comprise the following:
<TABLE>
<CAPTION>
THREE YEAR
MONTHS ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
---------------- ------------------
<S> <C> <C>
Export sales
Asia ........................ $ 4,056 $19,248
Middle East ................. 3,648 4,147
Europe ...................... 6,275 26,283
Other ....................... 2,859 12,871
------- -------
Total foreign sales ......... $16,838 $62,549
======= =======
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Businesses had a number of transactions with Loral and its affiliates.
Management believes that the arrangements are as favorable to the Businesses as
could be obtained from unaffiliated parties. The following describe the related
party transactions.
Loral allocated certain operational, administrative, legal and other
services to the Businesses. Costs allocated to the Businesses were $1,827 and
$6,535 for the three months ended March 31, 1996 and the year ended December
31, 1995, respectively. The Businesses sold products to Loral and its
affiliates. Net sales to Loral were $14,840 for the three months ended March
31, 1996 and were $54,600 in 1995. Net sales to Space Systems/Loral were $2,471
for the three months ended March 31, 1996 and were $4,596 in 1995. Net sales to
K&F Industries were $1,173 for the three months ended March 31, 1996 and were
$2,415 in 1995.
F-49
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Unaudited Condensed
Consolidated Financial Statements
As of June 30, 1998 and for the
Six Months Ended June 30, 1998 and 1997
F-50
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Current Assets
Cash ............................................................. $ 197,000
Accounts receivable, less allowance for doubtful accounts of
$582,000........................................................ 25,931,000
Inventories ...................................................... 28,174,000
Unbilled costs ................................................... 5,259,000
Deferred income tax benefit ...................................... 6,100,000
Prepaid expenses and other ....................................... 2,596,000
------------
Total current assets ............................................. 68,257,000
Property, plant and equipment--at cost $ 15,663,000
Less accumulated depreciation and amortization ................... (2,782,000) 12,881,000
------------
Deferred Income Tax Benefit ....................................... 927,000
Intangible Assets--net ............................................ 78,035,000
Other Assets ...................................................... 366,000
------------
$160,466,000
============
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities
Current maturities of long-term debt ............................. $ 6,250,000
Accounts payable ................................................. 12,428,000
Accrued expenses and other liabilities ........................... 21,808,000
------------
Total current liabilities ........................................ 40,486,000
Long-term debt, less current maturities ........................... 69,745,000
Postretirement benefits liability ................................. 25,500,000
Pension benefits liability ........................................ 4,731,000
Other liabilities ................................................. 435,000
Commitments and contingencies
Stockholders' equity
Preferred stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 38,010 shares, at stated value ......... $ 3,801,000
Common stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 99,000 shares .......................... 990
Additional paid-in capital ....................................... 2,422,010
Carryover basis adjustment ....................................... (2,151,000)
Net earnings ..................................................... 15,785,000
Cumulative translation adjustment ................................ (289,000) 19,569,000
------------ ------------
$160,466,000
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net revenues ..................................................... $105,505,000 $ 50,782,000
Cost of goods sold ............................................... 76,429,000 33,929,000
------------ ------------
Gross profit ..................................................... 29,076,000 16,853,000
------------ ------------
Operating expenses
Selling, general and administrative ............................. 14,132,000 5,525,000
Engineering, research and development ........................... 3,853,000 3,942,000
------------ ------------
Actuarial and other changes to postretirement and defined benefit
pension plans ................................................. -- (2,663,000)
------------ ------------
17,985,000 6,804,000
------------ ------------
Earnings from operations ........................................ 11,091,000 10,049,000
------------ ------------
Other income (expenses)
Interest expense, net ........................................... (4,951,000) (554,000)
Earnings before income taxes .................................. 6,140,000 9,495,000
Income tax expense ............................................... 2,272,000 2,460,000
------------ ------------
Net earnings .................................................. $ 3,868,000 $ 7,035,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ....................................................... $ 3,868,000 $ 7,035,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization ...................................... 2,559,000 529,000
Changes in operating assets and liabilities, net of effect of
acquisition of SPD Technologies Inc.
Accounts receivable .............................................. (6,544,000) (2,868,000)
Inventories ...................................................... 7,036,000 (386,000)
Unbilled costs ................................................... (644,000) 827,000
Prepaid expenses and other ......................................... (793,000) (511,000)
Accounts payable ................................................... 1,332,000 (618,000)
Pension and postretirement benefits liability ...................... (1,033,000) (2,956,000)
Accrual expenses and other liabilities ............................. 1,776,000 880,000
Income taxes payable ................................................ 1,284,000 703,000
------------ -------------
Net cash provided by operating activities ........................... 8,841,000 2,635,000
------------ -------------
Cash flows from investing activities
Acquisition of SPD Technologies Inc., net of cash acquired ......... (791,000) --
Capital expenditures ............................................... (2,950,000) (914,000)
------------ -------------
Net cash (used in) investing activities .......................... (3,741,000) (914,000)
------------ -------------
Cash flows from financing activities
Proceeds from the issuance of common and preferred stock ............ 1,000 --
Principal payments on short-term debt ............................... (2,955,000) (1,978,000)
Principal payments on long-term debt ................................ (2,500,000) (750,000)
------------ -------------
Net cash (used in) financing activities .......................... (5,454,000) (2,728,000)
------------ -------------
Net (decrease) in cash ........................................... $ (354,000) $ (1,007,000)
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SPD Technologies Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and market electrical power delivery systems and components and
vehicular control systems, focused on switching and distribution and frequency
and voltage conversion for military, commercial marine, rail transportation,
utility and commercial specialty markets in the United States and overseas.
SPD's products encompass the entire electrical distribution (power delivery)
system utilized on self-contained power systems such as ships and rail cars.
In January 1997, SPD Holdings Inc., a company formed by an investor group
and certain minority stockholders of SPD Technologies Inc., the predecessor
company, acquired all of the outstanding stock of the Company. The acquisition
was accounted for as a purchase and was financed by the issuance of common and
preferred stock and bank borrowings. As a result of certain minority
shareholders of the predecessor company acquiring ownership in SPD Holdings
Inc., the Company recorded a carryover basis adjustment to stockholders' equity
of $(2,151,000). During 1997, SPD Holdings Inc. changed its name to SPD
Technologies Inc.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month periods ended June 30, 1998 and 1997 are
not necessarily indicative of the results that may be expected for the years
ended December 31, 1997 and 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's financial
statements for the year ended December 31, 1997.
NOTE B--INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist
of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
<S> <C>
Materials and purchased parts ...................................... $10,730,000
Work-in-process, primarily on U.S. Government contracts ............ 24,064,000
Finished goods ..................................................... 1,703,000
-----------
36,497,000
Less progress billings related to long-term contracts and programs . 8,323,000
-----------
$28,174,000
===========
</TABLE>
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE C--SUBSEQUENT EVENT
Pursuant to a definitive agreement entered into on July 2, 1998, L-3
Communications Corporation acquired the stock of the Company on August 13, 1998
for $230,000,000, subject to adjustment based on closing net assets, as
defined. In connection with the sale of the Company, as provided for in the
Company's stock option plan, on August 13, 1998 the vesting date for all
outstanding stock options of the Company was accelerated and the Company
recorded a related $22,078,000 pre-tax compensation charge.
F-54
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Consolidated Financial Statements and
Report of Independent Certified
Public Accountants
December 31, 1997
F-55
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SPD Technologies Inc.:
We have audited the accompanying consolidated balance sheet of SPD
Technologies Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of earnings and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SPD
Technologies Inc. and Subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
New York, New York
February 25, 1998
F-56
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Current assets
Cash ............................................................. $ 551,230
Accounts receivable, less allowance for doubtful accounts of
$772,000........................................................ 19,791,544
Inventories ...................................................... 35,209,738
Unbilled costs ................................................... 4,616,034
Deferred income tax benefit ...................................... 6,100,000
Prepaid expenses and other ....................................... 1,219,101
------------
Total current assets ........................................... 67,487,647
Property, plant and equipment--at cost
Land ............................................................. $ 150,651
Building and improvements ........................................ 826,754
Machinery and equipment .......................................... 8,701,809
Furniture and fixtures ........................................... 783,851
Leasehold improvements ........................................... 2,469,130
------------
12,932,195
Less accumulated depreciation and amortization ................... (1,626,808) 11,305,387
------------ ------------
Deferred income tax benefit ....................................... 927,466
Intangible assets--net ............................................ 78,434,265
Other assets ...................................................... 726,932
------------
$158,881,697
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt ............................. $ 6,305,700
Accounts payable ................................................. 11,096,002
Postretirement benefits liability ................................ 3,500,000
Pension benefits liability ....................................... 3,049,508
Accrued expenses and other liabilities ........................... 18,808,646
Income taxes payable ............................................. 229,479
------------
Total current liabilities ...................................... 42,989,335
Long-term debt, less current maturities ........................... 75,403,527
Postretirement benefits liability ................................. 22,681,000
Pension benefits liability ........................................ 2,033,797
------------
143,107,659
------------
Commitments and contingencies
Stockholders' equity
Preferred stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 38,010 shares, at stated value ......... $ 3,801,000
Common stock--authorized, 1,000,000 shares of $.01 par value;
issued and outstanding, 99,000 shares .......................... 990
Additional paid-in capital ....................................... 2,422,170
Carryover basis adjustment ....................................... (2,151,000)
Net earnings ..................................................... 11,916,021
Cumulative translation adjustment ................................ (215,143) 15,774,038
------------ ------------
$158,881,697
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-57
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net revenues .................................................................... $130,039,536
Cost of goods sold .............................................................. 86,533,682
------------
Gross profit ................................................................... 43,505,854
------------
Operating expenses
Selling, general and administrative ............................................ 15,749,504
Engineering, research and development .......................................... 8,500,920
Amortization of intangible assets .............................................. 1,458,755
Actuarial and other changes to postretirement and defined benefit pension plans (5,332,680)
------------
20,376,499
------------
Earnings from operations ..................................................... 23,129,355
Other income (expenses)
Interest expense, net .......................................................... (4,842,334)
------------
Earnings before income taxes ................................................. 18,287,021
Income taxes
Current ........................................................................ 3,100,000
Deferred ....................................................................... 3,271,000
------------
6,371,000
------------
Net earnings ................................................................. $ 11,916,021
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-58
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net earnings .......................................................................... $ 11,916,021
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization of property, plant and equipment ...................... 1,626,808
Amortization of intangible assets ................................................... 1,458,755
Deferred income taxes ............................................................... 3,271,000
Actuarial and other changes to postretirement and defined benefit pension plans ..... (5,332,680)
Provision for losses on accounts receivable ......................................... 643,000
Changes in operating assets and liabilities, net of effect of acquisitions of SPD
Technologies Inc. and Power Paragon Inc.
Accounts receivable ................................................................ 664,814
Inventories ........................................................................ (6,995,194)
Unbilled costs ..................................................................... 2,484,834
Prepaid expenses and other ......................................................... 923,808
Accounts payable ................................................................... 1,897,353
Pension and postretirement benefits liability ...................................... (2,893,879)
Other liabilities .................................................................. 2,055,969
-------------
Net cash provided by operating activities ........................................ 11,720,609
-------------
Cash flows from investing activities
Acquisition of SPD Technologies Inc. and Power Paragon Inc., net of cash acquired ..... (84,920,664)
Capital expenditures .................................................................. (1,886,136)
-------------
Net cash used in investing activities .............................................. (86,806,800)
-------------
Cash flows from financing activities
Proceeds from the issuance of common and preferred stock .............................. 3,122,000
Net proceeds from long-term debt ...................................................... 96,954,761
Principal payments on long-term debt .................................................. (22,718,315)
Payment of deferred financing costs ................................................... (1,721,025)
-------------
Net cash provided by financing activities .......................................... 75,637,421
-------------
Net increase in cash ............................................................... $ 551,230
=============
</TABLE>
The accompanying notes are an integral part of this statement.
F-59
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
SPD Technologies Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and market electrical power delivery systems and components and
vehicular control systems, focused on switching and distribution and frequency
and voltage conversion for military, commercial marine, rail transportation,
utility and commercial specialty markets in the United States and overseas.
SPD's products encompass the entire electrical distribution (power delivery)
system utilized on self-contained power systems such as ships and rail cars.
In January 1997, SPD Holdings Inc., a company formed by an investor group
and certain minority stockholders of SPD Technologies Inc., the predecessor
company, acquired all of the outstanding stock of the Company. The acquisition
was accounted for as a purchase and was financed by the issuance of common and
preferred stock and bank borrowings. As a result of certain minority
shareholders of the predecessor company acquiring ownership in SPD Holdings
Inc., the Company recorded a carryover basis adjustment to stockholders' equity
of $(2,151,000). During 1997, SPD Holdings Inc. changed its name to SPD
Technologies Inc.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPD and its
wholly-owned subsidiaries, SPD Electrical Systems, Inc., SPD Switchgear Inc.,
PacOrd Inc., Henschel, Inc., Power Paragon Inc. and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
2. REVENUE RECOGNITION
Revenues for production-type contracts are recognized as units are shipped
or are substantially ready to be shipped subject to customer inspection.
Revenues on long-term, production-type contracts, service contracts and
engineering and development contracts are recognized on the
percentage-of-completion method, whereunder the estimated sales value is
determined on the basis of contract milestones achieved and costs are
recognized on the basis of contract percentage completions (as measured by
applying the most recent estimated profit margin for the entire contract at
completion to the revenues recognized based on contractual milestones
achieved).
The Company believes its approach is conservative and generally results in
lower revenues and gross profits in the early stages of a contract when
estimates are more susceptible to change.
Sales under cost reimbursement contracts are recorded as costs are
incurred and include estimated earned fees proportionate to total estimated
costs. The fees under certain government contracts may be increased or
decreased in accordance with cost or performance incentive provisions, which
measure actual performance against established targets or other criteria. Such
incentive fee awards or penalties are included in sales at the time the amounts
can be reasonably determined.
Generally, sales and earnings on long-term government contracts are
determined on a contract-by-contract basis, based on estimates that are
reviewed and revised periodically and adjustments to recognized sales and
earnings resulting from such revisions are recorded on a cumulative basis in
the period in which they are identified. Provisions for anticipated losses are
made in the period in which they first become determinable.
3. CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with original
maturities of less than three months as cash equivalents.
F-60
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
4. INVENTORIES
Inventories are stated at the lower of cost or market with appropriate
provision to reduce excess and obsolete inventory to net realizable values.
Generally, the Company values inventory at cost, which approximates actual on a
first-in, first-out basis and the weighted moving average method. One
subsidiary values inventory related to government contracts to include all
costs identified with the contract and an allocation of all other indirect
costs, including marketing, general and administrative, and other expenses.
5. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization of property, plant and equipment are
computed by the straight-line method over the estimated useful lives of the
assets for financial reporting purposes and straight-line and accelerated
methods for tax reporting purposes.
6. INTANGIBLE ASSETS
Goodwill is being amortized on a straight-line basis over forty years.
Deferred financing costs are being amortized over the five-year term of the
loan agreement. The Company evaluates goodwill on an annual basis for possible
impairment based on the expected future cash flows of the businesses acquired.
7. INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to postretirement benefits other
than pensions, pension costs, depreciation, inventory and various accrued
expenses.
8. FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's German subsidiaries are
translated into U.S. dollars at current exchange rates in effect at the
reporting date. Income statement items are generally translated at average
exchange rates prevailing during the year. The resulting translation
adjustments are recorded as a separate component of stockholders' equity. Gains
or losses resulting from foreign currency transactions are included in the
consolidated statement of earnings as incurred.
9. ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE B--ACQUISITION OF POWER PARAGON INC.
At the close of business on June 30, 1997, SPD acquired all of the
outstanding stock of Power Paragon Inc. ("PPI") and subsidiaries (formerly
known as PTS Holdings, Inc. and subsidiaries). PPI develops and manufactures
electrical power systems and components for military and commercial specialty
applications in the United States and overseas. The acquisition was financed
principally by bank borrowings. The acquisition has been accounted for as a
purchase and, accordingly, the results of
F-61
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE B--ACQUISITION OF POWER PARAGON INC. (CONTINUED)
operations of PPI are included in the consolidated financial statements from
the date of acquisition. In lieu of cash, certain minority stockholders of PPI
exchanged options for the purchase of stock in PPI for options to purchase
shares of the Company's common stock. The fair value of the PPI options
exchanged, totalling approximately $2,324,000, was recorded as additional
paid-in capital at the date of the acquisition.
NOTE C--INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist
of the following:
<TABLE>
<CAPTION>
<S> <C>
Materials and purchased parts ..................................... $ 8,939,257
Work-in-process, primarily on U.S. Government contracts ........... 33,786,558
Finished goods .................................................... 1,874,897
-----------
44,600,712
Less progress billings related to long-term contracts and programs 9,390,974
-----------
$35,209,738
===========
</TABLE>
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE D--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Goodwill .............................. $ 78,171,995
Deferred financing costs .............. 1,721,025
------------
79,893,020
Less accumulated amortization ......... (1,458,755)
------------
$ 78,434,265
============
</TABLE>
NOTE E--LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Term loan A payable in quarterly installments of principal plus interest at a
variable rate (9.5% at December 31, 1997) maturing June 30, 2002 ........... $37,550,000
Term loan B payable in quarterly installments of principal plus interest at a
variable rate (9.75% at December 31, 1997) maturing June 30, 2004 .......... 24,950,000
Revolving loan payable bearing interest at a variable rate (9.5% at
December 31, 1997) maturing June 30, 2002 .................................. 18,949,707
Capital lease obligation payable in monthly installments of $6,261 through
January 2002 less amount representing interest of $47,285................... 259,520
-----------
81,709,227
Less current maturities ...................................................... 6,305,700
-----------
$75,403,527
===========
</TABLE>
F-62
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE E--LONG-TERM DEBT (CONTINUED)
Substantially all of the assets and capital stock of the Company's
subsidiaries are pledged as collateral for borrowings under the term and
revolving loans. The loan agreement limits the payment of dividends and
provides for mandatory prepayments based upon excess cash flow, as defined. The
agreement also contains various restrictive financial covenants including
interest coverage and leverage ratios and limitations on annual capital
expenditures. Commencing January 1, 1998, the Company has the option to elect a
fixed rate of interest based on LIBOR. At December 31, 1997, approximately
$16,000,000 is available on the revolving loan payable.
The following is a summary of the annual maturities of long-term debt:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------
<S> <C>
1998 $ 6,305,700
1999 7,561,100
2000 8,816,100
2001 10,320,300
2002 29,081,000
Thereafter 19,625,027
-----------
$81,709,227
===========
</TABLE>
NOTE F--COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its business utilizing
leased facilities and equipment with terms lasting through June 2009. The terms
of one principal facility lease include an option to purchase the leased
premises based on 50% of the fair market value of the land and 100% of the fair
market value of the building. The Company can renew the lease for two
additional five-year terms.
At December 31, 1997, future minimum payments under noncancellable
operating leases with remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------
<S> <C>
1998 $ 4,086,000
1999 3,870,000
2000 2,892,000
2001 2,488,000
2002 2,464,000
Thereafter 7,942,000
-----------
$23,742,000
===========
</TABLE>
Rent expense for operating leases was approximately $3,344,000 for the
year ended December 31, 1997.
As a defense contractor for the U.S. Government, the books, records and
other supporting documentation of the Company used to establish certain
contract prices are subject to audit to determine the allowability and
reasonableness of costs. The Company routinely undergoes audits by the
Government on both a pre-award and post-award basis.
F-63
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE F--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company contributed approximately $1,000 in 1997 to multiemployer
pension plans for employees covered by collective bargaining agreements. Under
the Multiemployer Pension Plan Amendments Act of 1980, if the plan terminates
or the Company withdraws, the Company could be subject to a "withdrawal
liability."
NOTE G--PREFERRED STOCK AND COMMON STOCK WARRANT AND OPTIONS
The preferred stock has a stated value of $100 per share and provides for
cumulative dividends at 8%. All shares of preferred stock are subject to
mandatory redemption at the stated value in the event of a sale of securities
of the Company or a sale of substantially all of the assets or a significant
subsidiary of the Company.
In connection with the acquisition discussed in Note A, the Company issued
a warrant for the purchase of 1,000 shares of common stock at an exercise price
of $1.00 to the principal stockholder of the Company. The warrant expires on
December 31, 2006.
In connection with the acquisition discussed in Note B, the Company issued
options for the purchase of 4,397 shares of the Company's common stock at an
exercise price of $68.37 per share. The options are exercisable in four years
or if the Company is acquired. The Company issued additional options to acquire
an aggregate of 14,740 Class B Nonvoting common shares to employees and
directors. The options are exercisable at $1.00 per share and expire on July 1,
2007. These options become exercisable only upon the closing of an initial
public offering or a sale of the Company for an amount in excess of a "minimum
threshold amount." One-half of the options vest in 12 1/2% increments over the
initial four-year period. The remaining one-half of the options vest in four
equal installments beginning on December 31, 1998, based upon the attainment of
certain performance goals.
The Company has determined that a compensation charge will be recorded
once it is determined that it is likely that the options will become
exercisable, as defined above. The amount of the compensation charge will be
based upon the difference between the fair value of the shares of the Company's
common stock at the date of exercise and the exercise price. No compensation
charge has been recorded as of December 31, 1997.
NOTE H--POSTRETIREMENT BENEFITS
1. PENSION PLAN
Substantially all the employees of the Company are covered under two
defined benefit pension plans in the United States and one defined benefit plan
in Germany. The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheet at December 31, 1997:
F-64
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
UNITED STATES GERMANY
--------------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations including vested benefits in
the United States of $61,292,666 and in Germany of $325,971 ............... $61,698,595 $494,879
=========== ========
Projected benefit obligation for services rendered to date ................. $65,881,023 $682,412
Plan assets at fair value, primarily fixed income investments and
common stocks ............................................................. 62,312,893 --
----------- --------
Projected benefit obligation in excess of plan assets -- pension liability . $ 3,568,130 $682,412
=========== ========
</TABLE>
<TABLE>
<CAPTION>
UNITED STATES GERMANY
--------------- ----------
<S> <C> <C>
Net periodic pension cost includes the following components:
Service cost -- benefit earned during the year ............. $ 1,562,196 $21,731
Interest cost on projected benefit obligation .............. 4,956,982 23,171
Actual (return) on plan assets ............................. (7,532,589) --
Net amortization and deferral .............................. 2,477,131 --
------------ -------
Net periodic pension cost .................................. $ 1,463,720 $44,902
============ =======
</TABLE>
The weighted average discount rates used in determining the present value
of the projected benefit obligations was 8.15%. The projected rate of increase
in future compensation levels was 5% - 5.5%. The expected long-term rate of
return on assets was 8% - 9.5%. The Company's policy is to fund pension cost
under its pension plan to the extent necessary under the Employee Retirement
Income Security Act of 1974. For the year ended December 31, 1997, the Company
recorded actuarial and other gains on its pension plans totalling approximately
$3,239,000 principally resulting from better than projected performance of plan
assets.
2. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain subsidiaries of the Company have a defined benefit postretirement
plan that provides medical benefits for retirees. The Company does not fund
retiree benefits in advance. In 1993, the predecessor company established plan
cost maximums to account for and control future medical costs more effectively.
The Company requires that the projected future cost of providing postretirement
benefits, principally health care, be accrued over the period earned rather
than expensed as claims are incurred.
Net periodic postretirement benefit cost for the year ended December 31,
1997, included the following components:
<TABLE>
<CAPTION>
<S> <C>
Service cost benefits attributed to service during the period .......... $ 117,000
Interest cost on the accumulated postretirement benefit obligation ..... 2,088,000
Net amortization and deferral .......................................... (2,114,000)
------------
Net periodic postretirement benefit cost ............................... $ 91,000
============
</TABLE>
Cost was determined by application of the terms of the medical plan,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health care
F-65
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
cost trend rates projected at annual rates progressively declining from 12% in
1995. Future benefits for union-represented employees will be capped at the
limits in effect for December 31, 1996. The effect of a 1% annual increase in
these assumed cost trend rates would increase the accumulated postretirement
benefit obligation by approximately $919,000 in 1997; the annual costs would
not be materially affected. For the year ended December 31, 1997, the Company
recognized prior service costs of approximately $4,362,000 relating to
additional costs of salaried employees whose employer contributions do not have
a cap and approximately $6,476,000 of net gains resulting from various
underwriting changes including lower expected medical cost premiums as a result
of more salaried employees choosing HMO's.
The following table provides information on the status of the plan at
December 31, 1997:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation
Retirees ............................................ $18,420,000
Fully eligible active plan participants ............. 5,984,000
Other active plan participants ...................... 1,777,000
-----------
Accumulated postretirement benefit obligation ......... $26,181,000
===========
</TABLE>
Measurement of the accumulated postretirement benefit obligation was based
on an assumed discount rate of 8.15% in 1997. The health care cost trend rate
for salaried employees was 9% in 1997.
3. EMPLOYEES' SAVINGS AND PROFIT-SHARING PLAN
The Company maintains various employee 401(k) savings plans. The Company
contributes a guaranteed minimum of eligible employee contributions. Additional
company contributions are voluntary and at the discretion of the Board of
Directors. Profit-sharing expense was approximately $754,000 for the year ended
December 31, 1997.
4. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has two supplemental executive retirement plans which are
nonqualified plans maintained primarily for the purpose of providing additional
deferred compensation for a select group of management or highly compensated
employees, as defined by the Employee Retirement Income Security Act of 1974.
Participation in, benefits under, and the duration of the plans are subject to
the Company's discretion.
Participants in the plans accrue benefits each fiscal year based on the
Company's discretionary contribution for each participant. The Company has
accrued $132,000 of estimated yearly contributions to be paid for the year
ended December 31, 1997.
In conjunction with the establishment of the plans, the Company
established rabbi trusts to aid in the payment of plan benefits. The trusts are
revocable and the assets contributed to the trusts can only be used to pay
participant benefits, with certain exceptions. Although the rabbi trusts
established are revocable by the Company, the trust agreements provide that,
after a change in control, the rabbi trusts shall not be revocable until all
protected benefits have been paid in full. The assets held in the trusts at
December 31, 1997 (included in other assets) amounted to approximately
$576,000. Earnings on trust assets are allocated to participants' accounts and
are included in the trust assets amount.
F-66
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE I--INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Currently payable Federal ......... $2,377,000
State ............................. 708,000
Germany ........................... 15,000
----------
3,100,000
----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Deferred
Federal ................ 2,842,000
State .................. 711,000
Germany ................ (282,000)
---------
3,271,000
---------
$6,371,000
==========
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
<S> <C>
Expected provision for Federal income taxes ..................... 34.0%
State and local taxes, net of Federal income tax benefit ........ 5.1
Research and development credits ................................ (4.9)
Amortization of goodwill ........................................ 2.8
Other ........................................................... (2.2)
----
34.8%
====
</TABLE>
Deferred income taxes at December 31, 1997 relate to the following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
---------------- ------------
<S> <C> <C>
Pension and postretirement benefits ............. $ 12,773,000
Net operating loss of German subsidiary ......... 1,245,466
Inventory costs ................................. 2,097,000
Contract costs .................................. $2,663,000
Vacation pay accrual ............................ 1,180,000
Warranty costs .................................. 519,000
Other temporary differences ..................... 2,822,000 318,000
Valuation allowance ............................. (10,628,000)
------------- ----------
$ 10,008,466 $2,981,000
============= ==========
</TABLE>
The Federal income tax returns of PPI for the year ended June 30, 1995 are
under examination by the Internal Revenue Service. As of December 31, 1997, no
adjustments have been proposed.
PPI's subsidiaries in Germany have a net operating loss carryforward of
approximately $2,600,000 which has no expiration date.
F-67
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE J--CASH FLOW INFORMATION
The following is supplemental cash flow information:
<TABLE>
<CAPTION>
<S> <C>
Cash paid for Interest ......... $2,850,000
Income taxes ................... 4,431,000
</TABLE>
In connection with the acquisitions of SPD Technologies Inc. and Power
Paragon Inc., liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired ......... $161,974,000
Cash paid ............................. 84,921,000
------------
Liabilities assumed ................... $ 77,053,000
============
</TABLE>
NOTE K--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Accrued employment costs ................... $ 7,365,243
Accrued interest ........................... 2,112,342
Allowance for contract adjustments ......... 2,258,777
Accrued warranties ......................... 1,287,972
Customer advances .......................... 1,315,714
Other current liabilities .................. 4,468,598
-----------
$18,808,646
===========
</TABLE>
F-68
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
December 31, 1996 and 1995
F-69
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SPD TECHNOLOGIES INC.:
We have audited the accompanying consolidated balance sheets of SPD
Technologies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings and accumulated deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SPD
Technologies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
New York, New York
February 28, 1997
F-70
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 738,344 $ 689,013
Accounts receivable, less allowance for doubtful accounts of
$825,000 and $1,147,000 in 1996 and 1995, respectively......... 12,536,032 10,570,568
Inventories ..................................................... 15,622,720 13,261,009
Unbilled costs .................................................. 6,896,859 6,146,263
Deferred income tax benefit ..................................... 3,185,000 3,279,000
Prepaid expenses and other ...................................... 185,954 446,548
------------- -------------
Total current assets .......................................... 39,164,909 34,392,401
Equipment and leasehold improvements--at cost
Machinery and equipment ......................................... 15,312,374 13,874,680
Furniture and fixtures .......................................... 2,627,740 1,958,226
Leasehold improvements .......................................... 895,940 815,572
------------- -------------
18,836,054 16,648,478
Less accumulated depreciation and amortization .................. 13,834,973 13,041,802
------------- -------------
5,001,081 3,606,676
------------- -------------
Deferred income tax benefit ...................................... 2,900,000 2,900,000
Intangible assets--net ........................................... 2,476,449 3,473,475
Other assets ..................................................... 211,961 224,016
------------- -------------
$ 49,754,400 $ 44,596,568
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Note payable .................................................... $ 2,187,087 $ 3,604,724
Current maturities of long-term debt ............................ 2,500,000 2,500,000
Accounts payable ................................................ 6,000,531 2,760,861
Accrued employment costs ........................................ 3,902,930 3,182,689
Pension and postretirement benefits liability ................... 6,091,716 8,651,354
Other liabilities and accrued expenses .......................... 7,258,908 5,170,895
Income taxes payable ............................................ 55,100 521,000
------------- -------------
Total current liabilities ..................................... 27,996,272 26,391,523
Long-term debt, less current maturities .......................... 2,500,000 5,000,000
Postretirement benefits liability ................................ 26,138,784 26,432,090
Pension liability ................................................ 2,870,173 3,750,000
Deferred income taxes ............................................ 285,000 379,000
Minority interest in subsidiary .................................. 116,955
Commitments and contingencies
Stockholders' deficiency
Common stock--authorized, 1,000,000 shares of $.01 par
value; issued and outstanding, 102,750 shares, in 1996 and
1995, respectively ............................................ 1,027 1,027
Additional paid-in capital ...................................... 2,394,281 2,394,281
Accumulated deficit ............................................. (12,294,547) (19,868,308)
------------- -------------
(9,899,239) (17,473,000)
Less: 2,355 shares of common stock in treasury--at cost at
December 31, 1996 ............................................. 136,590
-------------
(10,035,829) (17,473,000)
------------- -------------
$ 49,754,400 $ 44,596,568
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Net revenues ................................................ $ 93,340,918 $ 87,181,721
Cost of goods sold .......................................... 61,902,538 57,193,503
-------------- --------------
Gross profit ............................................... 31,438,380 29,988,218
-------------- --------------
Operating expenses:
Selling, general and administrative ........................ 10,328,101 11,432,406
Engineering, research and development ...................... 7,213,821 5,487,788
Actuarial gain from postretirement plan .................... (3,000)
--------------
17,541,922 16,917,194
-------------- --------------
Earnings from operations ................................. 13,896,458 13,071,024
Other income (expenses)
Interest expense, net ...................................... (1,179,697) (1,728,787)
-------------- --------------
Earnings before provision for income tax expense (benefit)
and minority interest ................................... 12,716,761 11,342,237
Income taxes--currently payable ............................. 5,143,000 3,042,000
-------------- --------------
Earnings before minority interest ........................ 7,573,761 8,300,237
Minority interest ........................................... 125,414
--------------
Net earnings ............................................. 7,573,761 8,425,651
Accumulated deficit at beginning of year .................... (19,868,308) (28,293,959)
-------------- --------------
Accumulated deficit at end of year .......................... $ (12,294,547) $ (19,868,308)
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................. $ 7,573,761 $ 8,425,651
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization .......................... 1,179,610 988,886
Actuarial gain from postretirement plan ................ (3,000)
Provision for losses on accounts receivable ............ (74,200) 9,495
Loss on sale of equipment .............................. 25,198
Minority interest ...................................... (142,214)
Changes in operating assets and liabilities
Accounts receivable ................................... (1,891,264) 823,833
Inventories ........................................... (2,361,711) 1,437,531
Unbilled costs ........................................ (750,596) (613,467)
Prepaid expenses and other ............................ 272,649 (134,658)
Accounts payable ...................................... 3,239,670 (1,383,543)
Pension and postretirement benefits liability ......... (2,971,220) (4,915,779)
Other liabilities ..................................... 2,247,311 501,886
------------ -------------
Net cash provided by operating activities .............. 6,464,010 5,019,819
------------ -------------
Cash flows from investing activities:
Capital expenditures ................................... (2,338,539) (1,202,917)
Proceeds from sale of equipment ........................ 24,069
------------ -------------
Net cash used in investing activities ................. (2,338,539) (1,178,848)
------------ -------------
Cash flows from financing activities:
Net (decrease) increase in borrowings .................. (1,417,638) 3,345,454
Term loan borrowing .................................... 7,500,000
Principal payments on long-term debt ................... (2,500,000) (14,500,000)
(Purchase) sale of company stock ....................... (136,590) 2,351
Purchase of minority interest .......................... (21,912)
------------ -------------
Net cash used in financing activities ................. (4,076,140) (3,652,195)
------------ -------------
Net increase in cash .................................. 49,331 188,776
Cash at beginning of year ................................. 689,013 500,237
------------ -------------
Cash at end of year ....................................... $ 738,344 $ 689,013
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
SPD Technologies, Inc. ("SPD") and Subsidiaries (the "Company") develop,
manufacture and service circuit protection systems, ship control systems and
combat systems, and perform overhaul and repairs for naval vessels primarily
under fixed-price contracts. At December 31, 1996, Merrill Lynch Capital Corp.
("MLCC") owned 77.9% of the Company. Reference is made to Note L.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SPD and its
wholly-owned subsidiaries, SPD Switchgear Inc., PacOrd Inc. and Henschel, Inc.
All material intercompany accounts and transactions have been eliminated. In
1996, the Company purchased the minority interest of Henschel, Inc. for
$21,912.
2. REVENUE RECOGNITION
Substantially all of the Company's revenues and accounts receivable arise
from contracts with the U.S. Navy or its suppliers.
Production-type contracts, not classified as long-term, provide a
substantial portion of the Company's revenues. Revenues are recognized as units
are shipped or are substantially ready to be shipped subject to customer
inspection. Revenues on long-term, production-type contracts, service contracts
and engineering and development contracts are recognized on the
percentage-of-completion method. Under the Company's methodology, revenues and
gross profit are recognized based on billings rather than on a level-of-effort
basis. The Company believes its approach is more conservative and generally
results in lower revenues and gross profits in the early stages of a contract
when estimates are more susceptible to change. Provisions for anticipated
losses are made in the period in which they first become determinable.
3. INVENTORIES
Inventories are stated at the lower of cost or market, with appropriate
provision to reduce excess and obsolete inventory to net realizable values. In
general, cost is currently adjusted standard cost, which approximates actual
cost on a first-in, first-out basis, and the weighted moving average method.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are computed by the straight-line method
over their estimated useful lives for financial reporting purposes and
straight-line and accelerated methods for tax reporting purposes.
5. INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to postretirement benefits other
than pensions, pension costs, depreciation, inventory and various accrued
expenses.
6. ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-74
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--INVENTORIES
Inventories primarily relate to production-type contracts and include
expenditures for materials, purchased parts and work-in-process beyond what is
required for recorded orders. These expenditures are incurred primarily to help
maintain stable production schedules.
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Materials and purchased parts .................................... $ 2,906,353 $ 2,960,879
Work-in-process, primarily on U.S. Government contracts .......... 10,624,008 9,248,883
Finished goods ................................................... 2,092,359 1,051,247
----------- -----------
$15,622,720 $13,261,009
=========== ===========
</TABLE>
NOTE C--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Engineering drawings ................... $ 699,013 $ 699,013
Less accumulated amortization .......... (699,013) (463,538)
---------- ----------
-- 235,475
Intangible asset - pension ............. 2,476,449 3,238,000
---------- ----------
$2,476,449 $3,473,475
========== ==========
</TABLE>
NOTE D--REVOLVING CREDIT FACILITY
During 1995, the Company entered into a $15,000,000 revolving credit
facility with a financial institution which expires on November 29, 1998.
Borrowings are based upon eligible accounts receivable and inventory of the
Company, as defined. Borrowings bear interest at the lender's prime rate plus
.50% (9% at December 31, 1996).
The agreement contains certain restrictive covenants, including, among
other matters, the requirement to maintain certain financial ratios, and
restricts the payment of dividends. Borrowings under this facility are
collateralized by the Company's inventories and accounts receivable. Available
borrowings under this credit arrangement are subject to a 0.37 percent
commitment fee.
NOTE E--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Term Loan due to Heller Financial Inc. .......... $5,000,000 $7,500,000
Less current maturities ......................... 2,500,000 2,500,000
---------- ----------
$2,500,000 $5,000,000
========== ==========
</TABLE>
The term loan due to Heller Financial Inc. is payable in quarterly
installments of $625,000, and bears interest at prime plus .75% per annum,
payable monthly (9.25% as of December 31, 1996).
The term loan is collateralized by substantially all of the Company's
equipment and leasehold improvements. The loan agreement restricts payment of
dividends and contains certain restrictive covenants regarding the maintenance
of financial ratios.
F-75
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--COMMITMENTS AND CONTINGENCIES
The Company conducts a substantial portion of its business utilizing
leased facilities and equipment with terms lasting through January 31, 2005.
The terms of the facility lease include an option to purchase the leased
premises based on 50% of the fair market value of the land and 100% of the fair
market value of the building. The Company can renew the lease for two
additional five-year terms.
A subsidiary of the Company also conducts its business in a leased
facility. The lease has a non-cancellable initial term of ten years expiring in
December 1999 with two five-year renewal options.
At December 31, 1996, future minimum payments under noncancellable
operating leases with remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31, 1997 ......... $1,450,000
1998 ................................ 1,337,000
1999 ................................ 1,324,000
2000 ................................ 720,000
2001 ................................ 651,000
Thereafter .......................... 778,000
----------
$6,260,000
==========
</TABLE>
Total rental expense for operating leases was approximately $1,875,000 and
$1,787,000 for the years ended December 31, 1996 and 1995, respectively.
As a defense contractor for the U.S. Government, the books, records and
other supporting documentation of the Company used to establish certain
contract prices are subject to audit to determine the allowability and
reasonableness of costs. The Company routinely undergoes audits by the
Government on both a pre-award and post-award basis.
NOTE G--COMMON STOCK AND INCENTIVE STOCK OPTIONS
In 1995, the Company sold 2,355 shares of common stock previously held in
treasury to two employees and a director.
The Company has options outstanding to key executives for the purchase of
954 shares of common stock at an exercise price of $1.00 per share. The options
expire on December 31, 2002.
F-76
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--POSTRETIREMENT BENEFITS
1. PENSION PLAN
Substantially all the employees of the Company are covered under a defined
benefit pension plan. The following table sets forth the plan's funded status
and amounts recognized in the Company's balance sheets at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations including vested benefits of
$59,278,594 in 1996 and $52,700,092 in 1995...................... $ 60,303,661 $ 58,252,380
============ ============
Projected benefit obligation for services rendered to date ......... $ 63,413,303 $ 61,142,368
Plan assets at fair value, primarily fixed income investments and
common stocks ..................................................... 54,588,989 49,449,375
------------ ------------
Projected benefit obligation in excess of plan assets .............. 8,824,314 11,692,993
Unrecognized net loss .............................................. (3,054,968) (3,056,450)
Unrecognized prior service costs ................................... (2,596,625) (3,238,223)
Unrecognized net transition asset .................................. 65,502 77,783
Minimum liability adjustment ....................................... 2,476,449 3,326,902
------------ ------------
Pension liability .................................................. $ 5,714,672 $ 8,803,005
============ ============
Net periodic pension cost includes the following components:
1996 1995
------------- -------------
Service cost -- benefit earned during the year ..................... $ 1,327,831 $ 1,300,886
Interest cost on projected benefit obligation ...................... 4,872,752 4,743,858
Actual (return) on plan assets ..................................... (4,854,957) (6,663,443)
Net amortization and deferral ...................................... 879,262 3,511,186
------------- -------------
Net periodic pension cost ......................................... $ 2,224,888 $ 2,892,487
============= =============
</TABLE>
The weighted average discount rates used in determining the present value
of the projected benefit obligations was 8.15% in 1996 and 1995. The projected
rate of increase in future compensation levels was 5.0% for both years. The
expected long-term rate of return on assets was 9.5% for both years. Prior
service costs are amortized using a straight-line method over the average
remaining service period of employees expected to receive benefits under the
plan. The Company's policy is to fund pension cost under its pension plan to
the extent necessary under the Employee Retirement Income Security Act of 1974.
2. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a defined benefit postretirement plan that provides
medical benefits for retirees. The Company does not fund retiree benefits in
advance. In 1992, the Company established plan cost maximums to account for and
control future medical costs more effectively. The Company requires that the
projected future cost of providing postretirement benefits, principally health
care, be accrued over the period earned rather than expensed as claims are
incurred.
Net periodic postretirement benefit cost for the years ended December 31,
1996 and 1995, included the following components:
F-77
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Service cost benefits attributed to service during the period .......... $ 9,000 $ 13,000
Interest cost on the accumulated postretirement benefit
obligation ............................................................ 2,216,000 2,305,000
Net amortization and deferral .......................................... (104,000)
---------- ----------
Net periodic postretirement benefit cost ............................... $2,121,000 $2,318,000
========== ==========
</TABLE>
Cost was determined by application of the terms of the medical plan,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health care cost trend rates projected at
annual rates progressively declining from 12% in 1995. Future benefits will be
capped at the limits in effect for December 31, 1996. The effect of a 1% annual
increase in these assumed cost trend rates would increase the accumulated
postretirement benefit obligation by approximately $-0- in 1996 and $32,000 in
1995; the annual costs would not be materially affected. In addition to net
periodic postretirement cost, the Company recognized an actuarial gain of
$3,000 in 1995.
The following tables provide information on the status of the plan at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees ............................................. $23,193,000 $23,144,000
Fully eligible active plan participants .............. 4,197,000 4,552,000
Other active plan participants ....................... 142,000 183,000
----------- -----------
Accumulated postretirement benefit obligation ......... 27,532,000 27,879,000
Unrecognized net gain (loss) .......................... 1,854,000 2,135,000
----------- -----------
Accrued postretirement benefit cost recognized in the
consolidated balance sheet ........................... $29,386,000 $30,014,000
=========== ===========
</TABLE>
Measurement of the accumulated postretirement benefit obligation was based
on an assumed discount rate of 8.15% in 1996 and 1995. The health care cost
trend rate was 0% in 1996 and 12% in 1995.
3. EMPLOYEES' SAVINGS AND PROFIT-SHARING PLAN
The Company maintains an hourly and salaried employees' savings plan. The
Company contributes a guaranteed minimum of eligible employee contributions.
Additional company contributions of up to 25% of eligible employee
contributions are voluntary and at the discretion of the Board of Directors.
Profit-sharing expense was approximately $642,000 and $506,000 for the years
ended December 31, 1996 and 1995, respectively.
4. MULTIEMPLOYER PLAN
The Company contributed $1,000 in 1996 and 1995 to multiemployer pension
plans for employees covered by collective bargaining agreements. These plans
are not administered by the Company and contributions are determined in
accordance with provisions of the negotiated labor contract. Information with
respect to the Company's proportionate share of the excess, if any, of the
actuarially computed value of vested benefits over the total of the pension
plans' net assets is not available from the plans' administrators.
F-78
<PAGE>
SPD TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--POSTRETIREMENT BENEFITS (CONTINUED)
The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provisions of the Act, if the plan terminates or the
Company withdraws, the Company could be subject to a "withdrawal liability."
NOTE I--INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Currently payable
Federal ......... $4,133,000 $2,269,000
State ........... 1,010,000 773,000
---------- ----------
$5,143,000 $3,042,000
========== ==========
</TABLE>
The effective tax rate varies from the statutory rate primarily due to
state and local income taxes and for the year ended December 31, 1995 due to
adjustment of prior year's tax provision.
Deferred income taxes at December 31 relate to the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Pension and postretirement benefits ......... $ 13,821,000 $ -- $ 15,462,000 $ --
Other temporary differences ................. 1,683,000 285,000 2,252,000 379,000
Inventory costs ............................. 1,640,000 -- 1,713,000 --
Vacation pay accrual ........................ 644,000 -- 625,000 --
Warranty costs .............................. 484,000 -- 652,000 --
Valuation allowance ......................... (12,187,000) -- (14,525,000) --
------------- -------- ------------- --------
$ 6,085,000 $285,000 $ 6,179,000 $379,000
============= ======== ============= ========
</TABLE>
NOTE J--CASH FLOW INFORMATION
The following is supplemental cash flow information:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash paid for
Interest ............. $1,179,000 $1,665,000
Income taxes ......... 5,621,000 3,916,000
</TABLE>
NOTE K--OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Allowance for contract adjustments .......... $2,499,449 $ 783,513
Accrued warranties .......................... 1,160,613 1,490,294
Customer advances ........................... 797,931 851,364
Other current liabilities ................... 2,800,915 2,045,724
---------- ----------
$7,258,908 $5,170,895
========== ==========
</TABLE>
NOTE L--SUBSEQUENT EVENTS
In January 1997, a newly formed company, by an investor group and certain
minority stockholders of the Company, acquired all the outstanding stock of the
Company. The acquisition was financed through the issuance of preferred and
common stock and bank borrowings.
F-79
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
As of December 31, 1997 and for the six months ended December 31, 1997 and 1996
F-80
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
(Dollars in Thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable, less $554 allowance for doubtful accounts ......... $ 22,204
Inventories ............................................................ 10,382
---------
Total current assets .................................................... 32,586
Property, plant and equipment, at cost .................................. 21,663
Less accumulated depreciation and amortization .......................... (14,467)
---------
Net property and equipment .............................................. 7,196
Other assets ............................................................ 15
---------
Total assets ............................................................ $ 39,797
=========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ....................................................... $ 6,508
Accrued liabilities .................................................... 3,703
Current portion of long-term debt ...................................... 200
---------
Total current liabilities ............................................... 10,411
Long-term debt .......................................................... 1,330
---------
Total liabilities ....................................................... 11,741
Commitments
Division equity ......................................................... 28,056
---------
Total liabilities and Division equity ................................... $ 39,797
=========
</TABLE>
See accompanying notes.
F-81
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales ................................... $ 24,551 $ 38,770
Cost of products sold ....................... 23,226 42,530
-------- ---------
Gross margin ................................ 1,325 (3,760)
-------- ---------
Expenses:
Research and development ................... 712 721
Marketing and administration ............... 5,123 8,064
Amortization of intangible assets .......... -- 72
-------- ---------
Total expenses .............................. 5,835 8,857
-------- ---------
Operating loss .............................. (4,510) (12,617)
Interest expense ............................ (43) (70)
Interest income ............................. -- 5
-------- ---------
Loss before income tax benefit .............. (4,553) (12,682)
Allocated benefit from income taxes ......... 1,639 4,185
-------- ---------
Net loss .................................... $ (2,914) $ (8,497)
======== =========
</TABLE>
See accompanying notes.
F-82
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................. $ (2,914) $ (8,497)
Adjustments for noncash items:
Amortization of intangible assets ................................... -- 72
Depreciation and amortization of property, plant and equipment ..... 780 1,200
Loss on sale of assets ............................................. -- 151
Provision for doubtful accounts .................................... 66 750
Changes in asset and liability accounts:
Accounts receivable ................................................. 6,053 16,124
Inventories ......................................................... (2,644) 6,789
Prepaid expenses and other assets ................................... 85 213
Accounts payable .................................................... (1,256) (10,238)
Accrued liabilities ................................................. 132 (208)
-------- ---------
Net cash provided by operations ...................................... 302 6,356
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................. (160) (1,072)
Proceeds from sale of building ....................................... -- 1,617
-------- ---------
Net cash provided by (used in) investing activities .................. (160) 545
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt ........................................... (100) (200)
Net cash provided to CMI ............................................. (42) (6,701)
-------- ---------
Net cash used in financing activities ................................ (142) (6,901)
-------- ---------
Cash and cash equivalents ............................................ $ -- $ --
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the six month period for interest ................... $ 36 $ 32
======== =========
</TABLE>
See accompanying notes.
F-83
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements include the operations of
the Satellite Transmission Systems Division ("STS" or the "Division") of
California Microwave, Inc. ("CMI" or the "Company"). The Division is a global
satellite communication systems integrator providing hardware, software and
services for turnkey projects to large commercial customers, principally
domestic and foreign telephone companies and major common carriers and to the
U.S. and foreign governments.
These financial statements are presented as if the Division had existed as
an entity separate from CMI during the periods presented and include the
historical assets, liabilities, sales and expenses that are directly related to
the Division's operations. However, these financial statements are not
necessarily indicative of the financial position and results of operations
which would have occurred had the Division been an independent entity.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month periods ended December 31, 1996 and 1997
are not necessarily indicative of the results that may be expected for the
years ended June 30, 1997 and 1998. For further information, refer to the
financial statements and footnotes thereto included in the Division's financial
statements for the year ended June 30, 1997.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates are used in determining the
collectibility of accounts receivable, warranty costs, inventory realization,
profitability on long-term contracts, restructuring reserves, recoverability of
property, plant and equipment, and contingencies. Actual results could differ
from estimates.
INVENTORIES AND COST OF PRODUCTS SOLD
Inventories are recorded at the lower of cost or market. Project
inventories are transferred to cost of products sold at the time revenue is
recognized based on the estimated total manufacturing costs and total contract
prices under each contract. Losses on contracts are recognized in full when the
losses become determinable. The cost of other inventories is generally based on
standard costs which approximate actual costs determined by the first-in,
first-out method.
F-84
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------
(In Thousands)
<S> <C>
Projects in process ............................................. $ 9,351
Less: progress billings ......................................... 1,547
-------
7,804
Product inventories, principally materials and supplies ......... 2,578
-------
Total ........................................................... $10,382
=======
</TABLE>
3. CORPORATE ALLOCATIONS
CMI allocates corporate expenses on a value-added basis to each division,
which CMI believes results in a reasonable allocation of such costs. The
accompanying financial statements reflect charges for general corporate
administrative expenses incurred by CMI which amounted to approximately
$832,000 and $793,000 for the six months ended December 31, 1996 and 1997,
respectively.
No interest is allocated by CMI to the Division.
The Division is charged for its proportional share of CMI's self-insured
medical plan. Such charges amounted to $1,015,000 and $732,000 for the six
months ended December 31, 1996 and 1997, respectively.
In addition, there were direct charges from CMI as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------
1997 1996
------ -------
(In Thousands)
<S> <C> <C>
Marketing .......................... $304 $389
General and administrative ......... -- 142
---- ----
Total .............................. $304 $531
==== ====
</TABLE>
The Division believes that the direct charges from CMI were reasonable
during the periods presented.
4. RESTRUCTURING
During fiscal 1997, a comprehensive review of the Division's operations
was performed, including a review of inventory levels, product development and
migration plans and facility and personnel needs. It was determined to focus
the Division on potentially higher margin products. This resulted in the
write-down of certain inventories and the restructuring of the Division's
operations. During the six month period ended December 31, 1996 inventory and
other charges of $10,300,000, arising from this review, were included in cost
of products sold. During February 1997, additional charges of $800,000 relating
to excess facilities and severance were recorded. There are no remaining cash
outlays associated with the restructuring at December 31, 1997.
F-85
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. OTHER
In November 1997, the Division recorded a $1 million charge to cost of
sales relating to a contract with a customer in Sudan. The President of the
United States imposed economic sanctions on Sudan which banned U.S. companies
from doing business in Sudan and as a result, the Division could not continue
to perform under the existing contract. Based upon this, the contract was
terminated and the Division has been released from further performance
requirements.
On December 19, 1997, L-3 Communications Corporation, an unrelated party,
reached an agreement to purchase from CMI substantially all of the assets of
the Division, and to assume certain of the liabilities of the Division, for
approximately $27 million in cash. The final purchase price is subject to
adjustment based on the net assets of the Division at the closing date of the
transaction.
F-86
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF CALIFORNIA MICROWAVE, INC.
Financial Statements
As of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and
1995
F-87
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
California Microwave, Inc.
We have audited the accompanying balance sheets of the Satellite
Transmission Systems Division of California Microwave, Inc. (the "Company") as
of June 30, 1997 and 1996, and the related statements of operations and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Satellite Transmission
Systems Division of California Microwave, Inc., as of June 30, 1997 and 1996,
and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Melville, New York
January 27, 1998
F-88
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less $140 and $508 allowance for doubtful
accounts in 1996 and 1997 ............................................. $ 28,323 $ 46,750
Inventories ............................................................. 7,738 10,412
Prepaid expenses and other assets ....................................... 77 121
--------- ---------
Total current assets ..................................................... 36,138 57,283
Property, plant and equipment, at cost ................................... 21,503 21,378
Less accumulated depreciation and amortization ........................... (13,687) (12,984)
--------- ---------
Net property and equipment ............................................... 7,816 8,394
Intangible assets, net of accumulated amortization of $2,268 in 1996...... -- 2,032
Other assets ............................................................. 23 2,045
--------- ---------
Total assets ............................................................. $ 43,977 $ 69,754
========= =========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ........................................................ $ 7,764 $ 19,548
Accrued liabilities ..................................................... 3,571 3,584
Current portion of long-term debt ....................................... 100 200
--------- ---------
Total current liabilities ................................................ 11,435 23,332
Long-term debt ........................................................... 1,530 1,630
--------- ---------
Total liabilities ........................................................ 12,965 24,962
Commitments
Division equity .......................................................... 31,012 44,792
--------- ---------
Total liabilities and Division equity .................................... $ 43,977 $ 69,754
========= =========
</TABLE>
See accompanying notes.
F-89
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Net sales ................................................. $ 68,037 $124,393 $ 94,271
Cost of products sold ..................................... 65,724 102,399 86,335
--------- -------- --------
Gross margin .............................................. 2,313 21,994 7,936
--------- -------- --------
Expenses:
Research and development ................................. 1,360 2,540 2,288
Marketing and administration ............................. 14,154 13,295 12,655
Amortization and write-down of intangible assets ......... 2,032 171 171
Restructuring ............................................ 800 -- 2,446
--------- -------- --------
Total expenses ............................................ 18,346 16,006 17,560
--------- -------- --------
Operating (loss) income ................................... (16,033) 5,988 (9,624)
Interest expense .......................................... (65) (69) (98)
Interest income ........................................... 40 11 3
--------- -------- --------
(Loss) income before income tax benefit (expense) ......... (16,058) 5,930 (9,719)
Allocated benefit (expense) from income taxes ............. 4,676 (2,135) 3,207
--------- -------- --------
Net (loss) income ......................................... $ (11,382) $ 3,795 $ (6,512)
========= ======== ========
</TABLE>
See accompanying notes.
F-90
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ........................................... $ (11,382) $ 3,795 $ (6,512)
Adjustments for noncash items:
Amortization and write-down of intangible assets ........... 2,032 171 171
Depreciation and amortization of property, plant and
equipment ................................................ 1,639 1,746 1,848
Loss on sale of assets ..................................... 77 140 64
Provision for doubtful accounts ............................ 750 100 150
Changes in asset and liability accounts:
Accounts receivable ........................................ 17,677 (17,019) 14,937
Inventories ................................................ 2,674 12,243 (8,211)
Prepaid expenses and other assets .......................... 449 1,449 5,627
Accounts payable ........................................... (11,783) 5,736 (3,747)
Accrued and other liabilities .............................. (14) (1,697) 1,895
--------- --------- --------
Net cash provided by operations ............................. 2,119 6,664 6,222
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................................ (1,138) (1,099) (1,881)
Proceeds from sale of building .............................. 1,617 -- --
--------- --------- --------
Net cash (used in) provided by investing activities ......... 479 (1,099) (1,881)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt .................................. (200) (100) (200)
Net cash provided to CMI .................................... (2,398) (5,465) (4,141)
--------- --------- --------
Net cash used in financing activities ....................... (2,598) (5,565) (4,341)
--------- --------- --------
Cash and cash equivalents ................................... $ -- $ -- $ --
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ...................... $ 38 $ 66 $ 70
========= ========= ========
</TABLE>
See accompanying notes.
F-91
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the operations of the
Satellite Transmission Systems Division ("STS" or the "Division") of California
Microwave, Inc. ("CMI" or the "Company"). The Division is a global satellite
communication systems integrator providing hardware, software and services for
turnkey projects to large commercial customers, principally domestic and
foreign telephone companies and major common carriers and to the U.S. and
foreign governments.
These financial statements are presented as if the Division had existed as
an entity separate from CMI during the periods presented and include the
historical assets, liabilities, sales and expenses that are directly related to
the Division's operations. However, these financial statements are not
necessarily indicative of the financial position and results of operations
which would have occurred had the Division been an independent entity.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates are used in determining the
collectibility of accounts receivable, warranty costs, inventory realization,
profitability on long-term contracts, restructuring reserves, recoverability of
property, plant and equipment, and contingencies. Actual results could differ
from estimates.
CASH AND CASH EQUIVALENTS
The Division participates in CMI's centralized cash management function;
accordingly, the Division does not maintain separate cash accounts, other than
payroll and foreign subsidiary accounts, which are deemed insignificant, and
its cash disbursements and collections are settled through Division equity.
INVENTORIES AND COST OF PRODUCTS SOLD
Inventories are recorded at the lower of cost or market. Project
inventories are transferred to cost of products sold at the time revenue is
recognized based on the estimated total manufacturing costs and total contract
prices under each contract. Losses on contracts are recognized in full when the
losses become determinable. During the year ended June 30, 1995, the Division
recognized losses of approximately $2,800,000 on such contracts. The cost of
other inventories is generally based on standard costs which approximate actual
costs determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method based on the estimated useful lives of
the related assets.
INTANGIBLE ASSETS OF BUSINESS ACQUIRED
During 1997, CMI wrote off $1,888,000 of purchased intangible assets,
principally goodwill, relating to the original acquisition of STS by CMI, which
was pushed down to the Division's books.
F-92
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The intangible assets consisted of the excess of the purchase price paid for
STS over the net tangible assets acquired and was amortized using the
straight-line method over 30 years. During 1997, CMI determined that the excess
purchase price was not recoverable due to a significant reduction in sales by
the Division in 1997 as compared to prior periods and appropriately reduced the
carrying value.
OTHER LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of," the Division records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of such assets. Other than as
described above related to purchased intangibles, no such losses have been
incurred.
REVENUE RECOGNITION, RECEIVABLES AND CREDIT RISK
Revenue from product sales is recognized at the time of shipment. Sales on
certain long-term, small quantity, high unit value contracts are recognized at
the completion of significant project milestones, which are generally contract
line items. Scheduled billings and retainages under certain contracts
(principally export contracts) have deferred billing provisions resulting in
unbilled accounts receivable (included in accounts receivable) of $7,426,000
and $4,425,000 at June 30, 1996 and 1997, respectively. The unbilled receivable
at June 30, 1997, is expected to be collected within one year.
The Division manufactures and sells satellite communications products,
systems and turnkey telecommunications networks to large commercial customers,
principally domestic and foreign telephone companies and major common carriers,
and to the U.S. government. The Division generally requires no collateral, but
generally requires letters of credit, denominated in U.S. dollars, from its
foreign customers.
During 1996 and 1997, the Division periodically transferred certain
international accounts receivable to CMI. CMI insures these receivables under a
credit insurance program and then sells the receivables, without recourse, at
prevailing discount rates. The Division retains the responsibility to collect
and service these amounts. Outstanding customer receivables transferred to CMI
through Division equity amounted to approximately $421,000 and $2,100,000
during 1996 and 1997, respectively.
The Division charged to operations $150,000, $100,000 and $750,000 for its
provision for doubtful accounts in 1995, 1996 and 1997, respectively.
WARRANTY
The Company generally warrants its products for a period of 12 to 24
months from completion of contract or shipment. Warranty expense was
approximately $679,000, $753,000 and $688,000 for 1995, 1996 and 1997,
respectively.
INCOME TAXES
Income taxes reflect an allocation of CMI's income tax expense (benefit)
calculated based on CMI's effective tax rate. All deferred tax assets and
liabilities relating to the Division are included in intercompany balances with
CMI and are accounted for within Division equity (see Note 7). On a
F-93
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
stand-alone basis, income tax benefit (expense) for the year ended June 30,
1997 would not be material due to the existence of net operating loss
carryforwards at the Division level and the need for a full valuation allowance
on any resulting net deferred tax asset. Such net operating losses have been
fully utilized by CMI.
FISCAL YEAR
The Division's fiscal year ends on the Saturday closest to June 30, and
includes 52 weeks in fiscal 1995, 1996 and 1997. For 1995, 1996 and 1997, the
fiscal years ended on July 1, 1995, June 29, 1996 and June 28, 1997,
respectively. For clarity of presentation, the financial statements are
reported as ending on a calendar month end.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
LIFE 1997 1996
------------ ---------- ----------
(In Years) (In Thousands)
<S> <C> <C> <C>
Land .................................. $ 950 $ 950
Buildings ............................. 30 3,559 3,559
Machinery and equipment ............... 3-5 8,780 9,256
Office and computer equipment ......... 3-10 6,440 5,653
Building improvements ................. -- 1,721 1,813
Vehicles .............................. 5 53 147
------- -------
$21,503 $21,378
======= =======
</TABLE>
Building improvements are depreciated over the shorter of the life of the
improvement or the remaining life of the building.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Projects in process ............................................. $6,484 $ 6,287
Less: progress billings ......................................... 2,544 1,991
------ -------
3,940 4,296
Product inventories, principally materials and supplies ......... 3,798 6,116
------ -------
Total ........................................................... $7,738 $10,412
====== =======
</TABLE>
F-94
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Salaries and bonuses .......... $ 497 $1,381
Vacation ...................... 610 873
Other payroll related ......... 123 115
Warranties .................... 899 758
Commissions ................... 813 --
Other ......................... 629 457
------ ------
$3,571 $3,584
====== ======
</TABLE>
5. LONG-TERM DEBT
The Division has industrial development bonds that are payable in annual
installments through November 9, 2007, may be prepaid at any time without
penalty and bear interest at 65% of the bank's floating rate (5.5% at June 30,
1997), based upon prevailing market conditions, which is redetermined daily.
The obligor of the industrial development bonds is a related entity, and the
bonds are secured by mortgages on the equipment and properties involved.
At June 30, 1997, the annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 ......................... $ 100,000
1999 ......................... 200,000
2000 ......................... 100,000
2001 ......................... 200,000
2002 ......................... 100,000
Thereafter ................... 930,000
----------
1,630,000
Less current portion ......... 100,000
----------
$1,530,000
==========
</TABLE>
6. COMMITMENTS
On November 15, 1996, the Division leased a facility under an 18-month
noncancelable operating lease. Rent expense was approximately $209,000,
$229,000 and $69,000 for 1995, 1996, and 1997, respectively.
Future minimum lease payments under the operating lease is $48,000 for
1998.
F-95
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DIVISION EQUITY
A summary of the Division equity activity is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
------------ ----------
(In Thousands)
<S> <C> <C>
Beginning balance ................ $ 44,792 $ 46,462
Net income (loss) ................ (11,382) 3,795
Net cash provided to CMI ......... (2,398) (5,465)
--------- --------
Ending balance ................... $ 31,012 $ 44,792
========= ========
</TABLE>
8. EMPLOYEE BENEFITS
The Division participates in the CMI defined contribution retirement plan
which covers substantially all of the employees of the Division. The Division's
contribution was $379,000, $700,000 and $180,000 for 1995, 1996 and 1997,
respectively.
9. SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION
The Division operates in a single industry segment and is engaged in the
manufacture and sale of electronics equipment for satellite communications.
International sales were as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Asia Pacific ............... $22,333 $27,106 $17,164
Africa/Middle East ......... 13,052 41,827 9,572
Latin America .............. 5,149 11,137 14,768
Europe ..................... 7,828 15,984 9,784
Other ...................... 1,391 2,973 4,312
------- ------- -------
$49,753 $99,027 $55,600
======= ======= =======
</TABLE>
The Division had revenues from one customer representing 17.3%, 31.5% and
11% of total revenues in 1995, 1996 and 1997, respectively.
10. CORPORATE ALLOCATIONS
CMI allocates corporate expenses on a value-added basis to each division,
which CMI believes results in a reasonable allocation of such costs. The
accompanying financial statements reflect charges for general corporate
administrative expenses incurred by CMI which amounted to approximately
$1,477,000, $1,555,000 and $1,663,000 in 1995, 1996 and 1997, respectively.
No interest is allocated by CMI to the Division.
The Division is charged for its proportional share of CMI's self-insured
medical plan. Such charges amounted to $944,000, $1,437,000 and $1,856,000 in
1995, 1996, and 1997, respectively.
F-96
<PAGE>
SATELLITE TRANSMISSION SYSTEMS DIVISION OF
CALIFORNIA MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CORPORATE ALLOCATIONS (CONTINUED)
In addition, there were direct charges from CMI as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1996 1995
--------- ------ -----
(In Thousands)
<S> <C> <C> <C>
Marketing .......................... $ 889 -- $--
General and administrative ......... 285 $508 --
------ ---- ---
Total .............................. $1,174 $508 $--
====== ==== ===
</TABLE>
The Division believes that the direct charges from CMI were reasonable
during the periods presented.
11. RELATED PARTY TRANSACTIONS
Included in net sales are product sales to other divisions of CMI. These
sales totaled $3,584,000, $640,000 and $1,800,000 for 1995, 1996 and 1997,
respectively. In addition, there is approximately $2,363,000, $2,937,000 and
$776,000 of purchases from another division of CMI which is included in ending
inventory and $2,139,000, $3,576,000 and $1,129,000 due to this division which
is included in accounts payable at June 30, 1995, 1996 and 1997, respectively.
12. RESTRUCTURING
In June 1995, a decision was made to close the Division's Melbourne,
Florida facility as well as to perform a review of personnel needs at the
Division's operations. Pursuant to these decisions, approximately $2.4 million
of restructuring charges were recorded, including approximately $600,000 to
reflect the facility at its net realizable value. There are no remaining cash
outlays associated with the restructuring at June 30, 1997.
In December 1996 and January 1997, a comprehensive review of the
Division's operations was performed, including a review of inventory levels,
product development and migration plans and facility and personnel needs. It
was determined to focus the Division on potentially higher margin products.
This resulted in the write-down of certain inventories and the restructuring of
the Division's operations. Inventory and other charges of $10,300,000, arising
from this review, were included in cost of products sold and excess facilities
and severance charges of $800,000 were included in restructuring. There are no
remaining cash outlays associated with the restructuring at June 30, 1997.
13. SUBSEQUENT EVENTS
In November 1997, the Division recorded a $1 million charge to cost of
sales relating to a contract with a customer in Sudan. The President of the
United States imposed economic sanctions on Sudan which banned U.S. companies
from doing business in Sudan, and as a result the Division could not continue
to perform under the existing contract. Based upon this, the contract was
terminated and the Division has been released from further performance
requirements.
On December 19, 1997, L-3 Communications Corporation, an unrelated party,
reached an agreement to purchase from CMI substantially all of the assets of
the Division, and to assume certain of the liabilities of the Division, for
approximately $27 million in cash. The final purchase price is subject to
adjustment based on the net assets of the Division at the closing date of the
transaction.
F-97
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1997
F-98
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ILEX Systems, Inc.:
We have audited the accompanying consolidated balance sheet of ILEX
Systems, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ILEX
Systems, Inc. and subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
San Jose, California
February 9, 1998, except as to Note 9 which
is as of February 27, 1998
F-99
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 4,919,548
Accounts receivable, net of allowance for doubtful accounts of $327,422 ........ 7,354,640
Unbilled accounts receivable ................................................... 4,868,453
Inventories .................................................................... 923,466
Deferred income taxes .......................................................... 13,000
Other current assets ........................................................... 278,771
------------
Total current assets .......................................................... 18,357,878
Property, plant, and equipment:
Equipment ...................................................................... 2,343,643
Furniture, fixtures, and leasehold improvements ................................ 634,425
------------
2,978,068
Accumulated depreciation and amortization ...................................... (2,031,763)
------------
946,305
Goodwill, net of accumulated amortization of $117,940 ........................... 343,564
Deposits and other assets ....................................................... 138,730
------------
$ 19,786,477
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................................. $ 62,833
Accounts payable ............................................................... 2,226,340
Accrued payroll and related expenses ........................................... 3,176,151
Deferred income ................................................................ 37,843
Distribution payable to shareholders ........................................... 2,216,877
Income taxes payable ........................................................... 80,552
Other current liabilities ...................................................... 175,011
------------
Total current liabilities ..................................................... 7,975,607
Other liabilities ............................................................... 18,678
------------
Total liabilities ............................................................. 7,994,285
Shareholders' equity:
Common stock, no par value; 5,000,000 shares authorized; 1,317,605 shares issued
and outstanding .............................................................. 1,386,417
Retained earnings .............................................................. 10,405,775
------------
Total shareholders' equity .................................................... 11,792,192
Commitments .....................................................................
------------
$ 19,786,477
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-100
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues:
Consulting fees .............................. $57,309,190
Equipment sales .............................. 6,213,038
-----------
63,522,228
-----------
Costs and expenses:
Cost of revenue, consulting .................. 41,852,031
Cost of sales, equipment ..................... 3,314,614
Selling, general, and administrative ......... 9,507,879
Research and development ..................... 1,211,497
-----------
55,886,021
-----------
Operating income ............................ 7,636,207
Other income (expense):
Interest income .............................. 135,114
Interest expense ............................. (8,579)
Loss on write-down of investment ............. (250,000)
Other expense ................................ (108,000)
-----------
Income before income taxes .................. 7,404,742
Income taxes .................................. 550,000
-----------
Net income .................................. $ 6,854,742
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-101
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1996 ......... 1,315,720 $1,352,249 $ 10,606,517 $ 11,958,766
Issuance of common stock in exchange for
services ................................ 3,400 42,500 -- 42,500
Stock repurchase ......................... (1,515) (8,332) (6,060) (14,392)
Distributions to shareholders ............ -- -- (7,049,424) (7,049,424)
Net income ............................... -- -- 6,854,742 6,854,742
--------- ---------- ------------ ------------
Balances as of December 31, 1997 ......... 1,317,605 $1,386,417 $ 10,405,775 $ 11,792,192
========= ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-102
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income ........................................................................... $ 6,854,742
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 419,593
Allowance for doubtful accounts ..................................................... (203,255)
Loss on write-down of investment .................................................... 250,000
Deferred income taxes ............................................................... 485,000
Issuance of common stock for services ............................................... 42,500
Changes in operating assets and liabilities:
Receivables ........................................................................ (1,267,205)
Inventories ........................................................................ 387,485
Other current assets ............................................................... (112,176)
Deposits and other assets .......................................................... 140,884
Accounts payable and accrued liabilities ........................................... 324,963
Deferred income .................................................................... (159,012)
Income taxes payable ............................................................... 80,552
Other liabilities .................................................................. (459,166)
------------
Net cash provided by operating activities ......................................... 6,784,905
------------
Cash flows used in investing activities -- purchases of property, plant, and equipment (416,630)
------------
Cash flows from financing activities:
Payments on debt ..................................................................... (67,265)
Distributions paid to shareholders ................................................... (4,832,547)
Repurchase of common stock ........................................................... (14,392)
------------
Net cash used in financing activities ............................................. (4,914,204)
------------
Increase in cash and cash equivalents ................................................. 1,454,071
Cash and cash equivalents, beginning of year .......................................... 3,465,477
------------
Cash and cash equivalents, end of year ................................................ $ 4,919,548
============
Supplemental disclosures of cash flow information:
Cash paid during year:
Income taxes ........................................................................ $ 716,190
============
Interest ............................................................................ $ 8,579
============
Noncash investing and financing activities -- distributions payable to shareholders $ 2,216,877
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-103
<PAGE>
ILEX SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ILEX Systems, Inc. (the "Company") provides services and products
primarily in four areas: environmental consulting services to private and
public sector customers; software consulting services to the federal government
and its contractors; supervisory control and data acquisition products and
services to the electrical utility industry; and secured communications
products, principally to the federal government and its agencies. The majority
of the Company's revenues are derived from its software consulting services.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company's consulting services are generally performed on time- and
materials-based contracts for the federal government and its contractors.
Accordingly, revenues are recognized as services are performed. Equipment sales
revenues are recognized upon shipment. Unbilled accounts receivable comprise
charges for services and materials provided to customers that have not been
invoiced.
The Company does not require collateral for its receivables. Reserves are
maintained for potential credit losses.
CASH EQUIVALENTS
Cash equivalents of $1,879,285 as of December 31, 1997, consist
principally of money market investments. For purposes of the accompanying
consolidated statement of cash flows, the Company considers all highly liquid
debt instruments with remaining maturities of three months or less when
acquired to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments in the Company's consolidated
financial statements approximates fair value due to the short-term maturities
of these instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the assets (generally five years). Leasehold improvements are amortized
straight-line over the shorter of the lease term or the estimated useful life
of the asset.
GOODWILL
Goodwill, which represents the excess of purchase price over the fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited of 10 to 15 years. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation.
F-104
<PAGE>
INCOME TAXES
The Company elected S corporation status on March 17, 1997, effective
January 1, 1997. Federal and the majority of state income taxes on the income
of S corporations are generally payable by the individual shareholders rather
than the Company.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) INVENTORIES
Inventories consisted of the following as of December 31, 1997:
<TABLE>
<S> <C>
Raw materials and subassemblies ......... $833,945
Work in process ......................... 89,521
--------
$923,466
========
</TABLE>
(3) LINE OF CREDIT AND LONG-TERM DEBT
The Company has a $5,000,000 line of credit with a bank that is due on
demand. Interest is payable at the bank's prime rate (8.5% as of December 31,
1997) and is secured by trade accounts receivable, inventories, and other
assets. Borrowings outstanding under the line of credit were $-0- as of
December 31, 1997. The line of credit contains certain restrictive financial
covenants, including a minimum level of net worth and cash flow to debt ratio.
As of December 31, 1997, the Company was in compliance with all such covenants.
The Company has an unsecured promissory note payable to a former
shareholder that was issued in conjunction with the repurchase of shares of
common stock in 1992. The note bears interest at 10% with payments of $6,000
per month, including interest, through December 1998. As of December 31, 1997,
the principal balance of this note was $62,833.
(4) INCOME TAXES
The provision for income taxes for the year ended December 31, 1997,
consisted of the following:
<TABLE>
<S> <C>
Federal:
Current ............ --
Deferred ........... $388,000
--------
388,000
--------
State:
Current ............ 65,000
Deferred ........... 97,000
--------
162,000
--------
$550,000
========
</TABLE>
F-105
<PAGE>
The provision for income taxes for the year ended December 31, 1997,
differs from the federal statutory rate, primarily due to the flow through
nature of income tax liability to the shareholders and reduction of the federal
and partial state deferred income tax assets and liabilities as of December 31,
1996, resulting from the S corporation election as follows:
<TABLE>
<S> <C>
Federal income tax statutory rate ................. 34.0%
State income tax rate ............................. 2.2
Benefit of federal S corporation election ......... (28.8)
-----
7.4%
=====
</TABLE>
The gross deferred tax assets were $13,000 as of December 31, 1997,
consisting of the state deferred income tax assets and liabilities for those
states who do not recognize S corporation status. Management considers
realization of the net deferred tax assets more likely than not due to
continued profitability of the Company and significant carryback opportunities.
(5) EMPLOYEE BENEFIT PLANS
The Company has two Section 401(k) retirement savings plans (the Plans).
Under the terms of the Plans, employees may make contributions based on a
percentage of eligible earnings. Company contributions to the Plans are
discretionary and totaled $359,718 in 1997.
(6) STOCK OPTION PLAN
The Company has 100,000 shares of common stock reserved for issuance under
its 1992 Incentive Stock Option Plan (the "Plan"). Under the Plan, the Company
may grant options to employees, officers, and directors. Options are granted at
prices not less than the fair market value of the Company's common stock as
determined by the Board of Directors on the grant date. Options vest ratably
over 48 months and expire 49 months from the date of grant.
The Company applies Accounting Principles Board Opinion No. 25 (APB 25) in
accounting for its stock options. The exercise price for stock options granted
to employees in 1997 equaled the fair value of the Company's common stock at
the date of grant. Accordingly, in accordance with APB 25, no compensation
expense was recognized by the Company.
For purposes of pro forma disclosures required by Statement of Financial
Accounting Standards No. 123 (SFAS 123), the compensation cost of the options,
based on their estimated fair values, is amortized to expense over the vesting
periods of the options. The Company's net income for the year ended December
31, 1997 would have reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net income:
As reported ......... $6,854,742
==========
Pro forma ........... $6,838,958
==========
</TABLE>
On January 1, 1997, the Company had no options outstanding. In July 1997,
the Company granted 25,000 options at an exercise price of $17.50, all of which
were outstanding but not exercisable as of December 31, 1997.
The weighted-average grant-date fair value of options granted during the
year ended December 31, 1997 was $3.05 per option. The weighted-average
remaining contract life of the Company's outstanding stock options was 3.5
years at December 31, 1997.
Pro forma information regarding net income as required by SFAS 123 has
been determined as if the Company had accounted for its employee stock options
under the fair value method. The fair value for the options was estimated at
the date of grant using the minimum value method prescribed in SFAS 123, which
does not consider the expected volatility of the Company stock price, with the
following weighted-average assumptions for 1997: risk free interest rate of
6.06%; dividend yield of 0%; and weighted-average expected option life of 3.25
years.
F-106
<PAGE>
(7) COMMITMENTS
The Company leases certain facilities under operating leases that expire
at various dates through 2001. The Company in turn subleases some of these
facilities. As of December 31, 1997, future minimum lease payments under
noncancelable operating leases, exclusive of the sublease rentals, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------------
<S> <C>
1998 ........... $1,474,448
1999 ........... 510,551
2000 ........... 292,096
2001 ........... 124,212
----------
$2,401,307
==========
</TABLE>
Rent expense, exclusive of sublease rentals, was approximately $1,081,636
in 1997. Sublease rental income was approximately $186,733 in 1997.
(8) SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, sales to a single customer
represented 26% of revenues. The outstanding accounts receivable and unbilled
receivable balances for this customer as of December 31, 1997, were $1,257,875
and $2,228,650, respectively.
(9) SUBSEQUENT EVENT
In January 1998, shareholders of the Company agreed to sell all of their
common stock for approximately $50,000,000, subject to certain adjustments,
plus additional consideration based on post-acquisition performance. The sale
closed on February 27, 1998.
F-107
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.
Combined Financial Statements
as of and for the year ended December 31, 1997
F-108
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
L-3 Communications Corporation
We have audited the accompanying combined balance sheet of AlliedSignal
Ocean Systems, a wholly owned operation of AlliedSignal, Inc. ("Ocean
Systems"), as of December 31, 1997 and the related combined statements of
operations, equity and cash flows for the year then ended. These financial
statements are the responsibility of Ocean System's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Ocean Systems as
of December 31, 1997, and the combined results of their operations and cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 23, 1998
F-109
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Accounts receivable, net of allowances for doubtful accounts of $81 ..... $ 13,313
Inventories ............................................................. 25,274
Contracts in progress ................................................... 793
Prepaid expenses and other current assets ............................... 1,743
--------
Total current assets ................................................... 41,123
Property, plant and equipment, net ....................................... 16,845
Capitalized software, net ................................................ 2,248
Goodwill, net ............................................................ 1,820
Other assets ............................................................. 31
--------
Total assets ............................................................. $ 62,067
========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ........................................................ $ 2,626
Accrued liabilities ..................................................... 16,112
Advance payments ........................................................ 16,162
--------
Total current liabilities .............................................. 34,900
Accrued pension and postretirement benefits .............................. 10,959
--------
Total liabilities ........................................................ 45,859
--------
Commitment and contingencies
Equity:
Invested equity ......................................................... 9,312
ELAC common stock ....................................................... 3,424
ELAC retained earnings .................................................. 4,570
Cumulative translation adjustment ....................................... (1,098)
--------
Total equity ............................................................. 16,208
--------
Total liabilities and equity ............................................. $ 62,067
========
</TABLE>
See accompanying notes to the combined financial statements
F-110
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY-OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Sales ......................................... $ 73,033
Cost of sales ................................. 56,049
--------
Gross profit ................................. 16,984
Operating expenses:
General and administrative ................... 11,981
Selling ...................................... 5,933
Bid and proposal ............................. 2,053
Independent research and development ......... 2,765
--------
Total operating expenses .................... 22,732
--------
Loss from operations .......................... (5,748)
Interest expense, net ......................... 490
Other income .................................. (185)
--------
Loss before income taxes ...................... (6,053)
Benefit for income taxes ...................... (2,378)
--------
Net loss .................................... $ (3,675)
========
</TABLE>
See accompanying notes to the combined financial statements
F-111
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTED ELAC ELAC CUMULATIVE
EQUITY IN OS COMMON RETAINED TRANSLATION TOTAL
(DEFICIT) STOCK EARNINGS ADJUSTMENT EQUITY
-------------- -------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .............. $ 8,298 $3,424 $6,403 $ 87 $ 18,212
Net loss .................................. (2,680) -- (995) -- (3,675)
Cumulative translation adjustment ......... -- -- -- (1,185) (1,185)
Advances from (repayments to)
AlliedSignal ............................. 3,694 -- (838) -- 2,856
-------- ------ ------ -------- --------
Balance at December 31, 1997 .............. $ 9,312 $3,424 $4,570 $ (1,098) $ 16,208
======== ====== ====== ======== ========
</TABLE>
See accompanying notes to the combined financial statements
F-112
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (3,675)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of property, plant and equipment ................................ 2,976
Amortization of capitalized software ......................................... 1,078
Amortization of intangible assets ............................................ 70
Loss on the disposal of property, plant and equipment ........................ 8
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 13,561
Inventories ................................................................. (359)
Contracts in progress ....................................................... 1,666
Prepaid and other current assets ............................................ (220)
Accounts payable ............................................................ (1,976)
Accrued liabilities ......................................................... (10,472)
Advance payments ............................................................ (1,092)
Accrued pension and postretirement benefits ................................. (20)
---------
Net cash provided by operating activities .................................. 1,545
---------
Cash flows from investing activities:
Property, plant and equipment purchased ....................................... (3,090)
Software purchased ............................................................ (265)
---------
Net cash used in investing activities ...................................... (3,355)
---------
Cash flows from financing activities:
Advances from AlliedSignal, net ............................................... 3,198
---------
Net cash provided by financing activities .................................. 3,198
---------
Effect of foreign currency exchange rate changes on cash ...................... (1,388)
---------
Net change in cash ............................................................. --
Cash and cash equivalents at the beginning of the year ......................... --
---------
Cash and cash equivalents at the end of the year ............................... $ --
=========
Supplement disclosures of cash flow information:
Cash paid during the year for:
Interest -- AlliedSignal ..................................................... $ 552
=========
</TABLE>
See accompanying notes to the combined financial statements
F-113
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. BACKGROUND AND DESCRIPTION OF BUSINESS
The Ocean Systems business ("Ocean Systems" or the "Company") is a wholly
owned operation of AlliedSignal Inc. ("AlliedSignal") comprised of the Ocean
Systems Division ("OS"), and AlliedSignal ELAC Nautik GmbH ("ELAC"). The OS
Division headquarters and principal operations, including one manufacturing
site, are located in Sylmar, California, a suburb of Los Angeles. OS also
operates marketing offices located in Canada ("ASCI") and England ("BOSL"). OS
was acquired through AlliedSignal's merger with the Bendix Corporation in 1982.
ELAC is a wholly owned subsidiary of AlliedSignal Deutschland ("AS
Deutschland") and is a separate legal entity located in Kiel, Germany. ELAC was
acquired from Honeywell Inc. in 1994.
On December 22, 1997, L-3 Communications Corporation, a wholly owned
subsidiary of L-3 Communications Holdings, Inc. ("L-3") entered into a
definitive Purchase Agreement with AlliedSignal to acquire substantially all
the net assets excluding land and buildings, and assumed certain of the
liabilities of OS and purchased the outstanding capital stock of ELAC from AS
Deutschland.
Ocean Systems develops, manufactures and sells sophisticated sonar
detection and tracking devices for underwater use. The Company's customers
include the U.S. Government, foreign governments, defense industry prime
contractors and commercial customers. The Company operates primarily in one
industry segment, electronic sonar components and systems.
All domestic government contracts and subcontracts of Ocean Systems are
subject to audit and various cost controls, and Government contracts and
related orders are subject to cancellation if funds for contract performance
for any subsequent year become unavailable. Foreign government contracts
generally include comparable provisions relating to termination for the
convenience of the foreign government.
The decline in the U.S. defense budget since the late 1980s has resulted
in program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Company's programs;
however, in the event that U.S. Government expenditures for products of the
type manufactured by the Company are reduced, and not offset by greater foreign
sales or other new programs or products, or acquisitions, there may be a
reduction in the volume of contracts or subcontracts awarded to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
BASIS OF PRESENTATION AND USE OF ESTIMATES
The accompanying combined financial statements reflect the assets,
liabilities and operations of Ocean Systems including OS and ELAC which are
combined herein as they are entities under common control and management. All
significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principals requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the combined financial statements and the reported amounts of revenue and
expenses during the reporting period. The most significant of these estimates
and assumptions relate to contract estimates of sales and costs, excess and
obsolete inventory reserves, warranty reserves, pension estimates and
recoverability of recorded amounts of fixed assets. Actual results could differ
from these estimates.
F-114
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
REVENUE RECOGNITION
Under fixed-price contracts, sales and related costs are recorded upon
delivery and customer acceptance. Sales and related costs under
cost-reimbursable contracts are recorded on the percentage of completion
method. Anticipated future losses on contracts are charged to income when
identified. Revisions in profit estimates are reflected in the period in which
the facts, which require the revision, become known.
ACCOUNTS RECEIVABLE
Management assesses the credit risk and records an allowance for
uncollectable accounts as considered necessary based on several factors
including, but not limited to, an analysis of specific customers, historical
trends, current economic conditions and other information. The U.S. Navy
comprises a significant portion of Ocean System's revenues. The Company's other
customers include the navies of many foreign countries. The Company's credit
risk is affected by conditions or occurrences within the U.S. Government and
economic conditions of the countries in which the Company operates or has
customers. Sales are made on unsecured, customer-specific credit terms, which
may include extended terms.
INVENTORIES
Inventories are valued at the lower of cost or market using the average
cost method. Inventories consist of raw materials and supplies, work in process
and finished goods. An excess and obsolete inventory reserve has been
established primarily for raw materials and parts that have not been allocated
to firm contracts. The excess and obsolete inventory reserve is based on
estimates of future usage of inventory on hand.
CONTRACTS IN PROCESS
Costs accumulated under cost-reimbursable contracts include direct costs,
as well as manufacturing overhead. In accordance with industry practice, these
amounts are included in current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost net of
accumulated depreciation. For financial purposes, property, plant and equipment
is generally depreciated on the straight line method using estimated useful
lives ranging from 3 to 20 years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the improvements.
Interest costs incurred during the construction of plant and equipment are
capitalized using an imputed interest rate approximating 8%. Interest costs
capitalized during 1997 amounted to $57.
CAPITALIZED SOFTWARE
Capitalized software primarily represents costs incurred related to the
purchase and implementation of the Company's MRP II business system.
Capitalized software is reported at historical cost less accumulated
amortization. Amortization is based on the estimated useful service life not to
exceed five years. Amortization of capitalized software was $1,078 for the year
ended December 31, 1997. Accumulated amortization was $2,368 at December 31,
1997.
F-115
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
GOODWILL
Goodwill represents the excess of the cost of the purchased business over
the net assets acquired and is being amortized on a straight-line basis over 40
years. This excess relates primarily to the allocated portion of goodwill
arising out of the AlliedSignal merger with Bendix in 1982 and was allocated to
OS based on the proportionate percentage of OS pretax earnings to the total
Bendix Aerospace Group pretax earnings at the time of the AlliedSignal
acquisition from Bendix. Amortization expense was $70 for the year ended
December 31, 1997. Accumulated amortization was $980 at December 31, 1997.
The carrying amounts of intangible assets are reviewed if the facts and
circumstances indicate potential impairment of their carrying value. If this
review indicates that intangible assets are not recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying values related to the intangible
assets are reduced to the fair value of the asset.
RESEARCH AND DEVELOPMENT AND SIMILAR COSTS
Research and development costs sponsored by the Company include research
and development and bid and proposal efforts related to government products and
services. Customer-sponsored research and development costs incurred are
included in contract costs.
FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSLATION
The Company's major foreign operation is ELAC located in Germany with the
Deutsche mark as its functional currency. Assets and liabilities are translated
at current exchange rates at the end of the period. Income and expenses are
translated using the monthly average exchange rates. The effect of the
unrealized rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as a separate component of equity
in the accompanying combined balance sheet.
There are no material foreign currency gains or losses for the year ended
December 31, 1997 as the Company's U.S. sales to foreign customers are
denominated in U.S. dollars. ASCI Canadian sales are denominated in Canadian
dollars and the ELAC foreign sales are denominated in Deutsche marks.
FINANCIAL INSTRUMENTS
At December 31, 1997, the carrying value of the Company's financial
instruments, such as receivables, accounts payable and accrued liabilities,
approximate fair value, based on the short-term maturities of these
instruments.
INCOME TAXES
The benefit for income taxes for OS was computed by applying statutory tax
rates to the reported loss before income taxes after considering items that do
not enter into the determination of taxable income and tax credits reflected in
the consolidated provision of AlliedSignal which are related to OS. Income
taxes for OS are assumed to have been settled with AlliedSignal at December 31,
1997 and there are no separate tax attributes related to OS. For ELAC, separate
tax attributes that relate specifically to ELAC have been considered in
computing taxes.
3. TRANSACTIONS WITH ALLIEDSIGNAL
Ocean Systems relies on AlliedSignal for certain services, including
treasury, cash management, employee benefits, taxes, risk management, internal
audit, financial reporting, legal, contract
F-116
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
administration and general corporate services. Although certain assets,
liabilities and expenses related to these services have been allocated to the
Company, the combined financial position, results of operations and cash flows
presented in the accompanying combined financial statements would not be the
same as would have occurred had the Company been an independent entity. The
following describes the related party transactions.
ALLOCATION OF CORPORATE EXPENSES
The amount of allocated corporate expenses reflected in these combined
financial statements has been estimated based primarily on an allocation
methodology prescribed by government regulations pertaining to government
contractors. Corporate expenses allocated to Ocean Systems were $2,258 for the
year ended December 31, 1997, and are included in general and administrative
expense in the accompanying combined statement of operations.
PENSIONS
Certain of the Company's employees participate in various AlliedSignal
sponsored pension plans covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
employees' compensation and years of service.
AlliedSignal funding policy is generally to contribute in accordance with
cost accounting standards that affect government contractors subject to the
Internal Revenue code and regulations. Although the aforementioned pension
arrangements are part of certain AlliedSignal defined benefit plans, separate
actuarial estimates were made for the portion allocable to the Company. Pension
expense included in the accompanying combined statement of operations was
$1,452 for the year ended December 31, 1997. The pension plan liability at
December 31, 1997 was fully funded. The Company also has a supplemental pension
plan for highly compensated employees as defined by IRS rules. The liability
reflected in the accompanying combined balance sheet was $650 at December 31,
1997. Pension expense included in the combined statement of operations for the
supplemental pension plan was $24 for the year ended December 31, 1997.
The Company's German employees of ELAC are covered by a separate pension
plan. Pension costs included the following components for the year ended
December 31, 1997:
<TABLE>
<S> <C>
Service costs earned during the year .................. $ 163
Interest cost on projected benefit obligation ......... 119
Actual return on plan assets .......................... (92)
Amortization of unrecognized net obligation ........... 24
-----
Net periodic pension cost ............................. $ 214
=====
</TABLE>
F-117
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
The following table sets forth the ELAC pension plan funded status and
amounts recognized in the Company's combined balance sheet at December 31,
1997:
<TABLE>
<S> <C>
Actuarial present value of benefit obligation
Vested ......................................................... $1,067
Nonvested ...................................................... 296
------
Accumulated benefit obligation ................................ 1,363
======
Projected benefit obligation ................................... 1,919
Plan assets at fair value ...................................... 1,422
------
Projected benefit obligation in excess of plan assets ......... 497
Unrecognized net loss ......................................... 37
Unrecognized prior service costs ..............................
Unrecognized net obligation ................................... (361)
------
Accrued pension costs ........................................ $ 173
======
</TABLE>
<TABLE>
<S> <C>
Major assumptions were:
Discount Rate ....................................... 6.8%
Expected long-term rate of return on assets ......... 6.8%
Rate of increase in compensation levels ............. 4.0%
</TABLE>
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to participating in AlliedSignal pension plans, employees of
OS are provided varying levels of health care and life insurance benefits for
retired employees and dependents. Participants are eligible for these benefits
when they retire from active service and meet the pension plan eligibility
requirements. These benefits are funded primarily on a pay-as-you-go basis with
the retiree generally paying of the cost through contributions, deductibles and
coinsurance provisions.
Although the aforementioned postretirement benefits are part of certain
AlliedSignal postretirement arrangements, separate actuarial estimates were
made for the portion allocable to the Company. The weighted average discount
rate utilized in determining the accumulated postretirement benefit obligation
was 7.25% for 1997. Net postretirement benefit costs included in the combined
statements of operations was $1,072 for the year ended December 31, 1997.
The net postretirement benefit costs for 1997 included the following
components:
<TABLE>
<S> <C>
Service cost-benefits attributed to service during the period . $ 545
Interest cost on accumulated postretirement benefit obligation 704
Amortization of gain .......................................... (177)
======
Net postretirement benefit cost ............................... $1,072
======
</TABLE>
F-118
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
The funded status of the plan and related liability amounts recognized in
the accompanying combined balance sheet at December 31, 1997 were as follows:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Fully eligible active plan participants ......... $2,698
Other active plan participants .................. 7,049
------
9,747
Unrecognized prior service costs ................. --
Unrecognized net gain (loss) ..................... --
------
Accrued postretirement benefit cost ............. $9,747
======
</TABLE>
EMPLOYEE SAVINGS PLANS
Ocean Systems North American operation also has a supplemental savings
plan in which the Company matches the contributions of participating employees
up to a designated level. Under this plan, the matching contributions, in cash,
were $54 for the year ended December 31, 1997 and the liability recorded at
December 31, 1997 was $562.
INTEREST EXPENSE
Interest expense has been allocated to the Company by applying
AlliedSignal's weighted average consolidated interest rate to the portion of
the beginning of the period equity account deemed to be financed by
consolidated debt, which has been determined based on AlliedSignal's debt to
equity ratio on such date. Management of the Company believes that this
allocation methodology is reasonable.
The allocated interest expense was calculated using the following equity
balance and interest rate, for the year ended December 31, 1997:
<TABLE>
<S> <C>
Equity .......................... $5,751
Interest Rate ................... 9.6%
</TABLE>
Allocated interest expense for the year ended December 31, 1997 amounted
to $552 and is included in interest expense, net in the accompanying combined
statement of operations.
INCOME TAXES
The Company will be included in the consolidated Federal income tax
return, foreign tax returns and certain combined and separate state and local
income tax returns of AlliedSignal for 1997. Income taxes for OS are considered
to have been settled with AlliedSignal at December 31, 1997 and are recorded
through the invested equity account with AlliedSignal as there are no separate
stand alone tax attributes related to OS.
ELAC participates in the AlliedSignal Deutschland GmbH profit pooling
agreement for corporate income tax and municipal trade tax. Since entering into
this agreement ELAC has not paid German taxes, as any profits or losses of ELAC
are transferred to AlliedSignal Deutschland. For purposes of these combined
financial statements, the tax attributes that relate to ELAC prior to entering
into the pooling agreement have been considered in computing the separate ELAC
tax computations as these attributes will remain with ELAC after the
termination of the pooling agreement after the acquisition by L-3.
F-119
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
STATEMENT OF CASH FLOWS
The company participates in the AlliedSignal cash management system, under
which all cash is received and payments are made by AlliedSignal. All
transactions between the Company and AlliedSignal have been accounted for as
settled in cash at the time such transactions were recorded by the Company.
4. INVENTORIES AND CONTRACTS IN PROCESS
Net inventories are comprised of the following components at December 31,
1997:
<TABLE>
<S> <C>
Raw materials and supplies .................... $ 14,894
Work in process ............................... 6,675
Finished goods ................................ 12,080
Excess and obsolete inventory reserve ......... (7,772)
--------
Net inventories .............................. 25,877
Less, unliquidated progress payments ......... (603)
--------
$ 25,274
========
</TABLE>
For the year ended December 31, 1997, there were no general and
administrative, independent research and development, or bid and proposal costs
charged to inventory.
Contracts in process, amounting to $793 as of December 31, 1997, include
accumulated inventoried costs and profits on cost or cost-reimbursement
contracts, principally with the U.S. Government. The U.S. Government has title
to, or a security interest in, inventories to which progress payments are
applied. The Company believes that substantially all such amounts will be
billed and collected within one year.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 are comprised of the
following components:
<TABLE>
<S> <C>
Buildings, building improvements and land
improvements ........................................ $ 9,108
Machinery, equipment, furniture and fixtures ......... 48,060
Leasehold improvements ............................... 300
---------
57,468
Less, accumulated depreciation and
amortization ........................................ (43,324)
---------
14,144
Land ................................................. 388
Construction in progress ............................. 2,313
---------
$ 16,845
=========
</TABLE>
Depreciation and amortization expense was $2,976 for the year ended
December 31, 1997.
F-120
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
The effective tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<S> <C>
Statutory federal income tax rate ............. (35.0)%
State taxes net of federal benefit ............ (6.0)%
Foreign losses with no tax benefit ............ 6.7 %
Foreign sales corporation tax benefit ......... (4.5)%
Other, net .................................... (0.5)%
------
(39.3)%
======
</TABLE>
At December 31, 1997, the German trade tax and corporate income tax net
operating loss ("NOL") carryovers amounted to $953 and $1,180, respectively,
and may be carried forward indefinitely.
At December 31, 1997, deferred tax assets related to ELAC's German trade
tax and corporate income tax NOL carryovers amounted to $468. A full valuation
is recorded against the deferred tax asset.
The valuation allowance for deferred taxes was based on ELAC's historical
losses from operations and its current year loss. In addition, certain aspects
of the acquisition could limit the utilization of a portion or all of these NOL
carryovers. Accordingly, management believes currently there is not enough
historical information to support that it is more likely than not that ELAC
will realize the future tax benefit of these NOL carryovers.
7. EQUITY
Invested equity represents the equity contributed to OS by AlliedSignal
and related accumulated results of operations of OS. ELAC common stock
represents the one share of common stock held by AS Deutschland. ELAC's
retained earnings includes the impact of ELAC's accumulated operating losses,
and repayments to AlliedSignal offset by the effects of the amortization of
negative goodwill associated with the ELAC acquisition from Honeywell.
8. SALES TO PRINCIPAL CUSTOMERS
The Company operates primarily in one industry segment, electronic sonar
components and systems. Sales to principal customers are as follows for the
year ended December 31, 1997:
<TABLE>
<S> <C>
U.S. Government agencies and prime contractors ......... $36,133
German government ...................................... 5,895
Other foreign governments .............................. 24,883
Commercial customers ................................... 6,122
-------
$73,033
=======
</TABLE>
F-121
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Summarized data of the Company's operations by geographic area for the
year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NORTH REST OF
AMERICA GERMANY EUROPE ASIA OTHER ELIM TOTAL
----------- ----------- -------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customer .................... $ 39,002 $ 8,146 $6,220 $18,611 $1,054 -- $ 73,033
Inter-area sales ............. 19,536 4,334 -- -- -- $ (23,870) --
Loss from operations ......... (4,658) (1,090) -- -- -- -- (5,748)
Identifiable assets at
December 31, 1997 ........... 51,613 10,454 -- -- -- -- 62,067
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2011. At December 31, 1997, future minimum
payments for noncancellable operating leases with initial or remaining terms in
excess of one year are $933 for 1998, $340 for 1999, $161 for 2000, $35 for
2001 and $7 for 2002.
Leases covering major items of real estate and equipment contain renewal
and or purchase options which may be exercised by the company. Rent expense,
net of sublease income from other AlliedSignal entities, was $1,342 for the
year ended December 31, 1997.
Management is continually assessing the Company's obligations with respect
to applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management of the
Company is aware, the Company believes that even without considering potential
insurance recoveries, if any, there are no environmental loss contingencies
that individually or in the aggregate, would be material to the Company's
combined financial position, cash flows and results of operations. The Company
accrues for these contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
The Company is engaged in providing products and services under contracts
with the U.S. Government and foreign government agencies. All such contracts
are subject to extensive legal and regulatory requirements, and, from time to
time, agencies of the U.S. Government investigate whether such contracts were
and are being conducted in accordance with these requirements. Under government
procurement regulations, an indictment of the Company by a federal grand jury
could result in the Company being suspended for a period of time from
eligibility for awards of new government contracts. A conviction could result
in debarment from contracting with federal government for a specified term.
The Company is also periodically subject to periodic review or audit by
agencies of the U.S. Government. At December 31, 1997, there are several
pending issues with these agencies that are incidental to the Company's
business. One of these reviews was critical of the Company's procedures for
maintaining control of Government owned property in the Company's custody. The
Company is responsible and liable for $93 million of Government-owned property
in its possession. With respect to this and other U.S. Government matters, the
Company's management believes the ultimate resolution of any such matters will
not have a material adverse effect on the combined financial position, cash
flows or results of operations of the Company.
F-122
<PAGE>
ALLIEDSIGNAL OCEAN SYSTEMS
(A WHOLLY OWNED OPERATION OF ALLIEDSIGNAL, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities (including environmental matters) incidental
to their business. With respect to those investigative actions, items of
litigation, claims or assessments of which they are aware, management of the
Company is of the opinion that the probability is remote that, after taking
into account certain provisions that have been made with respect to these
matters, the ultimate resolution of any such investigative actions, items of
litigation, claims or assessments will have a material adverse effect on the
combined financial position, cash flows or results of operations of the
Company.
F-123
<PAGE>
Pictures of the platforms, such as Global Star, International Space Station,
U-2, E-2C, F14, aircraft carrier, into which L-3's products are integrated.
SECURE COMMUNICATION SYSTEMS
SECURE HIGH DATA RATE COMMUNICATIONS
Wideband Data Links
SATELLITE COMMUNICATION TERMINALS
Ground-Based Satellite
Communication Terminals
SPACE COMMUNICATION AND GROUND CONTROL
Satellite Communication and Tracking Systems
Satellite Command and Control Sustainment and Support
MILITARY COMMUNICATIONS
Shipboard Communication Systems
Digital Battlefield Communications
Communication Software
Support Services
INFORMATION SECURITIES SYSTEMS
Secure Telephone Unit (STU III)
Secure Terminal Equipment (STE)
Local Management Device/Key Processor (LMD/KP)
Information Processing Systems
SPECIALIZED COMMUNICATION PRODUCTS
MICROWAVE PRODUCTS
Passive Components, Mechanical Switches and Wireless Assemblies
Safety Products
Semiconductors
Satellite and Wireless Components
AVIONICS AND OCEAN SYSTEMS
Aviation Recorders
Antenna Systems
Display Systems
Ocean Systems
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
Airborne, Ground and Space Telemetry
Space Products
<PAGE>
9,250,000 SHARES
[L-3 COMMUNICATIONS LOGO]
COMMON STOCK
-------------------------------------
PROSPECTUS
, 1999
-------------------------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
C.E. UNTERBERG, TOWBIN
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[INT'L COVER]
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1999
PROSPECTUS
9,250,000 SHARES
[L-3 COMMUNICATIONS LOGO]
L-3 COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
L-3 Communications Holdings, Inc. is offering 3,500,000 shares. Selling
stockholders, including affiliates of Lehman Brothers, are offering
5,750,000 shares. Of the 9,250,000 shares being offered, 1,850,000 shares
are initially being offered outside the United States and Canada and
7,400,000 shares are initially being offered in the United States and
Canada. After this offering is completed, affiliates of Lehman Brothers will
own approximately 26.0% of the outstanding shares of our common stock.
The shares are listed on the New York Stock Exchange under the symbol "LLL".
The last reported sales price of our shares on the New York Stock Exchange on
February 3, 1999 was $43.25 per share.
Investing in the shares involves risks. Risk Factors begin on page 9.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------- ---------------
<S> <C> <C>
Public Offering Price ............................ $ $
Underwriting Discounts ........................... $ $
Proceeds to L-3 Communications Holdings .......... $ $
Proceeds to Selling Stockholders ................. $ $
</TABLE>
L-3 Communications Holdings has also granted the underwriters the right to
purchase up to an additional 1,387,500 shares within 30 days to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
BEAR, STEARNS INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
, 1999 C.E. UNTERBERG, TOWBIN
<PAGE>
[INT'L BACK COVER]
9,250,000 SHARES
[L-3 COMMUNICATIONS LOGO]
COMMON STOCK
-------------------------------------
PROSPECTUS
, 1999
-------------------------------------
LEHMAN BROTHERS
BEAR, STEARNS INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
C.E. UNTERBERG, TOWBIN
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ---------------------------------------------------------------------- -------------
<S> <C>
Securities and Exchange Commission registration fee .................. $ 132,890
National Association of Securities Dealers, Inc. filing fee .......... 30,500
Legal fees and expenses .............................................. 200,000
Accounting fees and expenses ......................................... 100,000
Printing and engraving fees and expenses ............................. 300,000
Blue Sky fees and expenses ........................................... 7,500
Miscellaneous expenses ............................................... 229,110
----------
Total .............................................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
for, among other things:
(i) permissive indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are parties to litigation other than
stockholder derivative actions if certain conditions are met;
(ii) permissive indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are parties to
stockholder derivative actions if certain conditions are met;
(iii) mandatory indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are successful on
the merits or otherwise in defense of litigation covered by (i) and (ii)
above; and
(iv) that the indemnification provided for by Section 145 is not deemed
exclusive of any other rights which may be provided under any by-law,
agreement, stockholder or disinterested director vote, or otherwise.
In addition to the indemnification provisions of the DGCL described above,
the Registrant's Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Registrant shall, to the fullest extent
permitted by the DGCL, (i) indemnify its officers and directors and (ii)
advance expenses incurred by such officers or directors in relation to any
action, suit or proceeding.
The Registrant's Bylaws (the "Bylaws") require the advancement of expenses
to an officer or director (without a determination as to his conduct) in
advance of the final disposition of a proceeding if such person furnishes a
written affirmation of his good faith belief that he has met the applicable
standard of conduct and furnishes a written undertaking to repay any advances
if it is ultimately determined that he is not entitled to indemnification. In
connection with proceedings by or in the right of the Registrant, the Bylaws
provide that indemnification shall include not only reasonable expenses, but
also judgments, fines, penalties and amounts paid in settlement. The Bylaws
provide that the Registrant may, subject to authorization on a case by case
basis, indemnify and advance expenses to employees or agents to the same extent
as a director or to a lesser extent (or greater, as permitted by law) as
determined by the Board of Directors.
II-1
<PAGE>
The Bylaws purport to confer upon officers and directors contractual
rights to indemnification and advancement of expenses as provided therein.
The Certificate of Incorporation limits the personal liability of
directors to the Registrant or its stockholders for monetary damages for breach
of the fiduciary duty as a director, other than liability as a director (i) for
breach of duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (certain illegal
distributions) or (iv) for any transaction for which the director derived an
improper personal benefit.
The Registrant maintains officers' and directors' insurance covering
certain liabilities that may be incurred by officers and directors in the
performance of their duties.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 30, 1997, L-3 Communications issued 100 shares of its common
stock to Holdings for aggregate consideration of $125 million. The securities
were sold directly by L-3 Communications and did not involve any underwriter.
L-3 Communications considers these securities to have been offered and sold in
a transaction not involving any public offering and, therefore, to be exempted
from registration under Section 4(2) of the Securities Act.
On December 11, 1998, L-3 Communications Corporation issued $200.0 million
in aggregate principal amount of its 8% Senior Subordinated Notes due August 1,
2008. The securities were sold to Lehman Brothers Inc. and NationsBanc
Montgomery Securities LLC. L-3 Communications considers these securities to be
exempted from registration under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- ---------------------------------------------------------------------------------------
<S> <C>
**1.1 Form of U.S. Underwriting Agreement among L-3 Communications Holdings, Inc. and
the U.S. Underwriters named therein.
**1.2 Form of International Underwriting Agreement among L-3 Communications Holdings,
Inc. and the International Managers named therein.
3.1 Certificate of Incorporation of L-3 Communications Holdings, Inc. (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 No.
333-46975).
3.2 By-Laws of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form S-1 No. 333-46975).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
**5 Opinion of Simpson Thacher & Bartlett.
10.1 Amended and Restated Credit Agreement, dated as of August 13, 1998 among L-3
Communications Corporation and lenders named therein (incorporated by reference to
Exhibit 99.1 to L-3 Communication Corporation's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998).
10.2 364 Day Credit Agreement, dated August 13, 1998 among L-3 Communications and
lenders named therein (incorporated by reference to Exhibit 99.2 to L-3 Communications
Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1998).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- --------------------------------------------------------------------------------------------
<S> <C>
10.3 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and
The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to L-3
Communications Corporation's Registration Statement on Form S-4 No. 333-31649).
10.31 Indenture dated as of May 22, 1998 between L-3 Communications and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 10.6 to L-3 Communications
Corporation's Registration Statement on Form S-4 No. 333-70199).
*10.32 Indenture dated as of December 11, 1998 among L-3 Communications Corporation, the
Guarantors named therein and The Bank of New York, as Trustee.
*10.33 Registration Rights Agreement, dated as of December 11, 1998, among L-3
Communications Corporation, the Guarantors named therein, Lehman Brothers Inc. and
NationsBanc Montgomery Securities LLC.
*10.34 Purchase Agreement, dated as of December 3, 1998, among L-3 Communications
Corporation, the Guarantors named therein, Lehman Brothers Inc. and NationsBanc
Montgomery Securities LLC.
10.4 Stockholders Agreement dated as of April 30, 1997 among L-3 Communications Holdings,
Inc. and the stockholders parties thereto (incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.5 Transaction Agreement dated as of March 28, 1997, as amended, among Lockheed Martin
Corporation, Lehman Brothers Capital Partners III, L.P., Frank C. Lanza, Robert V.
LaPenta and L-3 Communications Holdings, Inc. (incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.6 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.7 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.51 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.8 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin
Corporation and L-3 Communications Corporation (incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.9 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications
Corporation and California Microwave, Inc. (incorporated by reference to Exhibit 10.8 to
the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.91 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3
Communications Corporation (incorporated by reference to Exhibit 10.81 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.92 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc.,
AlliedSignal Technologies, Inc., AlliedSignal Deutschland GMBH and L-3
Communications Corporation (incorporated by reference to Exhibit 10.82 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.93 Agreement and Plan of Merger dated as of December 3, 1998 among L-3
Communications, L-M Acquisition Corporation and Microdyne Corporation (incorporated
by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
December 9, 1998).
10.10 Form of Stock Option Agreement for Employee Options (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------------- -------------------------------------------------------------------------------------
<S> <C>
**10.11 1997 Stock Option Plan for Key Employees.
**10.12 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Frank C. Lanza.
**10.13 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Robert V. LaPenta.
10.14 Amended and Restated Agreement and Plan of Merger dated as of August 13, 1998 by
and among L-3 Communications Corporation, SPD Merger Co., SPD Technologies, Inc.
and Midmark Capital, L.P. (incorporated by reference to Exhibit 2 to L-3
Communications Corporation's Current Report on Form 8-K filed on October 27, 1998).
10.20 L-3 Communications Corporation Pension Plan (incorporated by reference to
Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
*11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Common Share
and Diluted Earnings Per Common Share.
**21 Subsidiaries of the Registrant.
**23.1 Consent of Simpson Thacher & Bartlett (included in the opinion filed as Exhibit 5).
*23.2 Consent of PricewaterhouseCoopers LLP, independent auditors.
*23.3 Consent of Ernst & Young LLP, independent auditors.
*23.31 Consent of Ernst & Young LLP, independent auditors.
*23.4 Consent of KPMG LLP, independent auditors.
*23.5 Consent of Grant Thornton LLP, independent certified public accountants.
*23.6 Consent of PricewaterhouseCoopers LLP, independent auditors.
*23.7 Consent of Ernst & Young LLP, independent auditors.
*23.8 Consent of Ernst & Young LLP, independent auditors.
*23.9 Consent of KPMG LLP, independent auditors.
*23.10 Consent of Grant Thornton LLP, independent certified public accountants.
**23.11 Consent of PricewaterhouseCoopers LLP, independent auditors.
**23.12 Consent of Ernst & Young LLP, independent auditors.
**23.13 Consent of Ernst & Young LLP, independent auditors.
**23.14 Consent of KPMG LLP, independent auditors.
**23.15 Consent of Grant Thornton LLP, independent certified public accountants.
*24 Powers of Attorney.
</TABLE>
- ----------
* Previously filed.
** Filed herewith.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused the Registration Statement or amendments thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 4, 1999.
L-3 COMMUNICATIONS HOLDINGS, INC.
By: /s/ Michael T. Strianese
-------------------------------------
Vice President -- Finance and Controller
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 4th day of February, 1999 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------
<S> <C>
* Chairman, Chief Executive Officer (Principal
- --------------------------------- Executive Officer) and Director
Frank C. Lanza
* President, Chief Financial Officer (Principal
- --------------------------------- Financial Officer) and Director
Robert V. LaPenta
/s/ Michael T. Strianese Vice President--Finance and Controller
- --------------------------------- (Principal Accounting Officer)
Michael T. Strianese
*
- ---------------------------------
David J. Brand Director
*
- ---------------------------------
Thomas A. Corcoran Director
*
- ---------------------------------
Alberto M. Finali Director
*
- ---------------------------------
Eliot M. Fried Director
*
- ---------------------------------
Frank H. Menaker, Jr. Director
*
- ---------------------------------
Robert B. Millard Director
*
- ---------------------------------
John E. Montague Director
*
- ---------------------------------
John M. Shalikashvili Director
*
- ---------------------------------
Alan H. Washkowitz Director
* By Michael T. Strianese as attorney-in-fact.
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below are on file with the SEC and are
incorporated herein by reference to such previous filings.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- ----------------------------------------------------------------------------------------------
<S> <C>
**1.1 Form of U.S. Underwriting Agreement among L-3 Communications Holdings, Inc. and the U.S.
Underwriters named therein.
**1.2 Form of International Underwriting Agreement among L-3 Communications Holdings, Inc. and the
International Managers named therein.
3.1 Certificate of Incorporation of L-3 Communications Holdings, Inc. (incorporated by reference
to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
3.2 By-Laws of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 No. 333-46975).
**5 Opinion of Simpson Thacher & Bartlett.
10.1 Amended and Restated Credit Agreement, dated as of August 13, 1998 among L-3 Communications
Corporation and lenders named therein (incorporated by reference to Exhibit 99.1 to L-3
Communication Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998).
10.2 364 Day Credit Agreement, dated August 13, 1998 among L-3 Communications and lenders named
therein (incorporated by reference to Exhibit 99.2 to L-3 Communications Corporation's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998).
10.3 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The Bank of
New York, as Trustee (incorporated by reference to Exhibit 4.1 to L-3 Communications
Corporation's Registration Statement on Form S-4 No. 333-31649).
10.31 Indenture dated as of May 22, 1998 between L-3 Communications and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 10.6 to L-3 Communications Corporation's
Registration Statement on Form S-4 No. 333-70199).
*10.32 Indenture dated as of December 11, 1998 among L-3 Communications Corporation, the Guarantors
named therein and The Bank of New York, as Trustee.
*10.33 Registration Rights Agreement, dated as of December 11, 1998, among L-3 Communications
Corporation, the Guarantors named therein, Lehman Brothers Inc. and NationsBanc Montgomery
Securities LLC.
*10.34 Purchase Agreement, dated as of December 3, 1998, among L-3 Communications Corporation, the
Guarantors named therein, Lehman Brothers Inc. and NationsBanc Montgomery Securities LLC.
10.4 Stockholders Agreement dated as of April 30, 1997 among L-3 Communications Holdings, Inc. and
the stockholders parties thereto (incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.5 Transaction Agreement dated as of March 28, 1997, as amended, among Lockheed Martin
Corporation, Lehman Brothers Capital Partners III, L.P., Frank C. Lanza, Robert V. LaPenta and
L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- ----------------------------------------------------------------------------------------------
10.6 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3 Communications
Holdings, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 No. 333-46975).
10.7 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3 Communications
Holdings, Inc. (incorporated by reference to Exhibit 10.51 to the Registrant's Registration
Statement on Form S-1 No. 333-46975).
10.8 Limited Noncompetition Agreement dated April 30, 1997 between Lockheed Martin Corporation and
L-3 Communications Corporation (incorporated by reference to Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1 No. 333-46975).
10.9 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications Corporation
and California Microwave, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1 No. 333-46975).
10.91 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3
Communications Corporation (incorporated by reference to Exhibit 10.81 to the Registrant's
Registration Statement on Form S-1 No. 333-46975).
10.92 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc., AlliedSignal
Technologies, Inc., AlliedSignal Deutschland GMBH and L-3 Communications Corporation
(incorporated by reference to Exhibit 10.82 to the Registrant's Registration Statement on Form
S-1 No. 333-46975).
10.93 Agreement and Plan of Merger dated as of December 3, 1998 among L-3 Communications, L-M
Acquisition Corporation and Microdyne Corporation (incorporated by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K filed on December 9, 1998).
10.10 Form of Stock Option Agreement for Employee Options (incorporated by reference to Exhibit 10.9
to the Registrant's Registration Statement on Form S-1 No. 333-46975).
**10.11 1997 Stock Option Plan for Key Employees.
**10.12 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Frank C. Lanza.
**10.13 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Robert V. LaPenta.
10.14 Amended and Restated Agreement and Plan of Merger dated as of August 13, 1998 by and among L-3
Communications Corporation, SPD Merger Co., SPD Technologies, Inc. and Midmark Capital, L.P.
(incorporated by reference to Exhibit 2 to L-3 Communications Corporation's Current Report on
Form 8-K filed on October 27, 1998).
10.20 L-3 Communications Corporation Pension Plan (incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
*11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Common Share and Diluted
Earnings Per Common Share.
**21 Subsidiaries of the Registrant.
**23.1 Consent of Simpson Thacher & Bartlett (included in the opinion filed as Exhibit 5).
*23.2 Consent of PricewaterhouseCoopers LLP, independent auditors.
*23.3 Consent of Ernst & Young LLP, independent auditors.
*23.31 Consent of Ernst & Young LLP, independent auditors.
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- ----------------------------------------------------------------------------------------------
*23.4 Consent of KPMG LLP, independent auditors.
*23.5 Consent of Grant Thornton LLP, independent certified public accountants.
*23.6 Consent of PricewaterhouseCoopers LLP, independent auditors.
*23.7 Consent of Ernst & Young LLP, independent auditors.
*23.8 Consent of Ernst & Young LLP, independent auditors.
*23.9 Consent of KPMG LLP, independent auditors.
*23.10 Consent of Grant Thornton LLP, independent certified public accountants.
**23.11 Consent of PricewaterhouseCoopers LLP, independent auditors.
**23.12 Consent of Ernst & Young LLP, independent auditors.
**23.13 Consent of Ernst & Young LLP, independent auditors.
**23.14 Consent of KPMG LLP, independent auditors.
**23.15 Consent of Grant Thornton LLP, independent certified public accountants.
*24 Powers of Attorney.
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
<PAGE>
7,400,000 SHARES
L-3 COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK, $.01 PAR VALUE
U.S. UNDERWRITING AGREEMENT
---------------------------
February __, 1999
LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
C.E. UNTERBERG, TOWBIN
As Representatives of the several
U.S. Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
L-3 Communications Holdings, Inc., a Delaware corporation (the
"Company"), and Lockheed Martin Corporation, Lehman Brothers Capital Partners
III, L.P., LB I Group Inc., Lehman Brothers MBG Partners 1997 (A) L.P. and
Lehman Brothers MBG Partners 1997 (B) L.P. (collectively, the "Selling
Stockholders") propose to sell an aggregate of 7,400,000 shares (the "Firm
Stock") of the Company's Common Stock, par value $.01 per share (the "Common
Stock"). Of the 7,400,000 shares of the Firm Stock, 2,800,000 shares are being
sold by the Company and 4,600,000 are being sold by the Selling Stockholders.
In addition, the Company proposes to grant to the U.S. Underwriters named in
Schedule 1 hereto (the "U.S. Underwriters") an option to purchase up to an
additional 1,110,000 shares of the Common Stock on the terms and for the
purposes set forth in Section 3 (the "Option Stock"). The Firm Stock and the
Option Stock, if purchased, are hereinafter collectively called the "Stock." As
described in the Prospectus (hereinafter defined), the Company will use the net
proceeds from the sale of the Stock to repay any existing indebtedness under
L-3 Communications Corporation's senior credit facilities and for general
corporate purposes, including potential acquisitions. This is to confirm the
agreement concerning the purchase of the Stock from the Company and the Selling
Stockholders by the U.S. Underwriters.
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date hereof
(the "International Underwriting Agreement") providing for the sale by the
Company of 700,000 shares of Common Stock and the sale by the Selling
Stockholders of 1,150,000 shares of Common Stock (together the
<PAGE>
"International Firm Stock") through arrangements with certain underwriters
outside the United States (the "International Managers"), for whom Lehman
Brothers International (Europe), Bear, Stearns International Limited, Credit
Suisse First Boston (Europe) Limited, Merrill Lynch International, Morgan
Stanley & Co. International Limited and C.E. Unterberg, Towbin are acting as
lead managers. In addition, the Company proposes to grant to the International
Managers an option to purchase up to an additional 277,500 shares of the Common
Stock on the terms set forth in the International Underwriting Agreement (the
"International Option Stock" and, together with the International Firm Stock,
the "International Stock"). The U.S. Underwriters and the International
Managers simultaneously are entering into an agreement between the U.S. and
international underwriting syndicates (the "Agreement Between U.S. Underwriters
and International Managers") which provides for, among other things, the
transfer of shares of Common Stock between the two syndicates. Two forms of
prospectus are to be used in connection with the offering and sale of shares of
Common Stock contemplated by the foregoing, one relating to the Stock and the
other relating to the International Stock. The latter form of prospectus will
be identical to the former except for certain substitute pages as included in
the registration statement and amendments thereto referred to below. Except as
used in Sections 3, 4, 5, 11, 12 and 13 herein, and except as the context may
otherwise require, references herein to the Stock shall include all the shares
of Common Stock which may be sold pursuant to either this Agreement or the
International Underwriting Agreement, and references herein to any prospectus
whether in preliminary or final form, and whether as amended or supplemented,
shall include both the U.S. and the international versions thereof.
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments No. 1
and No. 2 thereto, with respect to the Stock have (i) been prepared by
the Company in conformity with the requirements of the United States
Securities Act of 1933, as amended (the "Securities Act") and the
rules and regulations (the "Rules and Regulations") of the United
States Securities and Exchange Commission (the "Commission")
thereunder, (ii) been filed with the Commission under the Securities
Act and (iii) become effective under the Securities Act. Copies of
such registration statement and the amendments thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the U.S. Underwriters. As used in this
Agreement, "Effective Time" means the time as of which such
registration statement, or the most recent post-effective amendment
thereto, if any, was declared effective by the Commission; "Effective
Date" means the date of the Effective Time; " Preliminary Prospectus"
means each prospectus included in such registration statement, or
amendments thereof, before it became effective under the Securities
Act and any prospectus filed with the Commission by the Company with
the consent of the Representatives pursuant to Rule 424(a) of the
Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time, including
all information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the
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Rules and Regulations in accordance with Section 6 hereof and deemed
to be a part of the registration statement as of the Effective Time
pursuant to paragraph (b) of Rule 430A of the Rules and Regulations;
and "Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Rules and Regulations. If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Securities Act registering additional shares
of Common Stock (a "Rule 462(b) Registration Statement"), then, unless
otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration
Statement. The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus; and no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission. Any Rule 462(b) Registration Statement
filed after the effectiveness of this Agreement will become effective
no later than 10:00 A.M., New York City time, on the date following
this Agreement.
(b) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the
effectiveness of this Agreement) conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement
(including, if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such
Rule 462(b) Registration Statement and any amendments thereto) or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the
requirements of the Securities Act and the Rules and Regulations and
do not and will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
no representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to
the Company through the Representatives by or on behalf of any U.S.
Underwriter specifically for inclusion therein.
(c) The market-related and customer-related data and estimates
included in the Prospectus are based on or derived from sources which
the Company believes to be reliable and accurate.
(d) The Company and each of its subsidiaries (as defined in
Section 17) have been duly organized and are validly existing as
corporations or limited liability companies, as applicable, in good
standing under the laws of their respective jurisdictions of
organization, are duly qualified to do business and are in good
standing as foreign corporations in each jurisdiction in which their
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respective ownership or lease of property or the conduct of their
respective businesses requires such qualification except for such
qualification and good standing the failure of which, individually or
in the aggregate, would not result in a material adverse effect on the
condition (financial or other), business, prospects, properties,
stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"), and have
all power and authority necessary to own or hold their respective
properties and to conduct the businesses in which they are engaged.
(e) Prior to the delivery of the Stock on the First Delivery
Date, the Company will have an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; and (i) approximately 85% of the capital
stock of Cardiovascular Computer Systems, Ltd., (ii) approximately 64%
of the membership interests in L-3 Communications Network Security
Systems LLC, (iii) approximately 92% of the capital stock of Microdyne
Corporation and (iv) 100% of the issued shares of capital stock of
each other subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims, other than (A) liens, encumbrances, equities or
claims described in the Prospectus and (B) such other liens,
encumbrances, equities or claims as are not, individually or in the
aggregate, material to the Company and its subsidiaries, taken as a
whole.
(f) Prior to the delivery of the Stock on the First Delivery
Date, the unissued shares of the Stock to be issued and sold by the
Company to the U.S. Underwriters hereunder and to the International
Managers under the International Underwriting Agreement will have been
duly and validly authorized and, when issued and delivered against
payment therefor as provided herein and in the International
Underwriting Agreement, will be duly and validly issued, fully paid
and non-assessable; and the Stock will conform to the description
thereof contained in the Prospectus.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and L-3 Communications Corporation (the
"Significant Subsidiary").
(h) The execution, delivery and performance of this Agreement and
the International Underwriting Agreement by the Company and the
Significant Subsidiary and the consummation of the transactions
contemplated hereby and thereby will not conflict with or constitute a
breach of, or a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which
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the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject that is material to the financial condition or prospects of
the Company and its subsidiaries, taken as a whole (collectively, the
"Material Agreements"), except for breach of which, individually, or
in the aggregate, would not result in a Material Adverse Effect, nor
will such actions result in any violation of the provisions of the
charter or by-laws, or other organizational documents of the Company
or any of its subsidiaries or any material law, statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties or assets, provided that the provisions for
indemnification and contribution hereunder and thereunder may be
limited by equitable principles and public policy consideration; and
except for the registration of the Stock and the International Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the United
States Securities Exchange Act of 1934, as amended (the "Exchange
Act") and applicable state or foreign securities laws in connection
with the purchase and distribution of the Stock by the U.S.
Underwriters and the International Managers, no consent, approval,
authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement, or the International
Underwriting Agreement by the Company and the Significant Subsidiary
and the consummation of the transactions contemplated hereby and
thereby.
(i) Except as described in the Prospectus and other than the
Registration Rights Agreement, dated December 11, 1998, among the
Significant Subsidiary and the parties named therein, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have
been waived or satisfied or rights not exercisable in connection with
the Registration Statement) to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
(j) Except as described in the Registration Statement, the
Company has not sold or issued any shares of Common Stock during the
six-month period preceding the date of the Prospectus, including any
sales pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act other than shares issued pursuant to employee benefit
plans, qualified stock options plans or other employee compensation
plans or pursuant to outstanding options, rights or warrants.
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(k) Neither the Company nor any of its subsidiaries has incurred,
since the date of the latest audited financial statements included in
the Prospectus, any liability or obligation, direct or contingent, or
entered into any transaction, in each case not in the ordinary course
of business, that is material to the Company and its subsidiaries
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, there has not been any material
change in the capital stock or material increase in the short-term or
long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving or which would
reasonably be expected to involve a Material Adverse Effect, otherwise
than as described or contemplated in the Prospectus.
(l) The historical and pro forma financial statements, together
with the related notes, set forth in the Prospectus comply as to form
in all material respects with the requirements of Regulation S-X under
the Securities Act applicable to registration statements on Form S-1
under the Securities Act. The historical financial statements of the
Company fairly present the financial position of the Company (or its
predecessors) at the respective dates indicated and the results of
operations and cash flows of the Company (or its predecessors) for the
respective periods indicated, in accordance with generally accepted
accounting principles consistently applied throughout such periods.
Such pro forma financial statements have been prepared on a basis
consistent with such historical statements of the Company, except for
the pro forma adjustments specified therein, and give effect to
assumptions made on a reasonable basis and in good faith and present
fairly the historical and proposed transactions contemplated by the
Prospectus, this Agreement and the International Underwriting
Agreement. The other financial and statistical information and data
included in the Prospectus, historical and pro forma, have been
derived from the financial records of the Company (or its
predecessors) and, in all material respects, have been prepared on a
basis consistent with such books and records of the Company (or its
predecessor), except as disclosed therein.
(m) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company, whose report appears in the
Prospectus and who have delivered the initial letter referred to in
Section 9(h) hereof, are independent public accountants as required by
the Securities Act and the Rules and Regulations; Ernst & Young LLP
and KPMG LLP, whose reports appear in the Prospectus and who have
delivered the initial letters referred to in Sections 9(i) and 9(j)
hereof, are independent accountants as required by the Securities Act
and the Rules and Regulations; and Grant Thornton LLP, who have
delivered the initial letters referred to in Section 9(k) hereof, are
independent accountants as required by the Securities Act and the
Rules and Regulations.
(n) The Company and each of its subsidiaries have good and
marketable title to all property (real and personal) described in the
Prospectus as
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being owned by them, free and clear of all liens, claims, security
interests or other encumbrances except such as are described in the
Prospectus or, to the extent that any such liens, claims, security
interests or other encumbrances would not have a Material Adverse
Effect (individually or in the aggregate) and all the material
property described in the Prospectus as being held under lease by the
Company and its subsidiaries is held by them under valid, subsisting
and enforceable leases, with only such exceptions as would not have a
Material Adverse Effect (individually or in the aggregate).
(o) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, trademarks, service
marks, trade names, copyrights, licenses, inventions, trade secrets
and other rights, and all registrations or applications relating
thereto, described in the Prospectus as being owned by them or
necessary for the conduct of their business, except as such would not
have a Material Adverse Effect (individually or in the aggregate), and
the Company is not aware of any pending or threatened claim to the
contrary or any pending or threatened challenge by any other person to
the rights of the Company and its subsidiaries with respect to the
foregoing which, if determined adversely to the Company and its
subsidiaries, would have a Material Adverse Effect (individually or in
the aggregate).
(p) Except as described in the Prospectus, there are no legal or
governmental proceedings pending or, to the knowledge of the Company,
threatened, against the Company or any of its subsidiaries or to which
the Company or any of its subsidiaries is a party or of which any
property or assets of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of its
subsidiaries, are reasonably likely to cause a Material Adverse Effect.
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to the Registration Statement or incorporated therein by
reference as permitted by the Rules and Regulations.
(r) No material relationship, direct or indirect, exists between
or among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
except as described in the Prospectus.
(s) The Company is not involved in any strike, job action or
labor dispute with any group of employees that would have a Material
Adverse Effect, and, to the Company's knowledge, no such action or
dispute is threatened.
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(t) Except as disclosed in the Prospectus, the Company is in
compliance in all material respects with all presently applicable
provisions of the Employee Retirement Income Security Act of 1974, as
amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has
occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any material liability; the Company has
not incurred and does not expect to incur any material liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal
from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code") (other than
contributions in the normal course which are not in default); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would reasonably be expected to
cause the loss of such qualification.
(u) The Company and its subsidiaries have filed all federal,
state and local income and franchise tax returns required to be filed
through the date hereof and have paid all taxes due thereon, and no
tax deficiency has been determined adversely to the Company or any of
its subsidiaries nor does the Company have any knowledge of any tax
deficiency which, if determined adversely to the Company and its
subsidiaries, might have a Material Adverse Effect.
(v) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws or other organizational documents,
(ii) is in default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or
condition contained in any Material Agreement or (iii) is in violation
in any material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its property or assets may
be subject or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or permit
necessary to the ownership of its property or to the conduct of its
business, except as would not, individually or in the aggregate, have
a Material Adverse Effect.
(w) To the best of the Company's knowledge, neither the Company
nor any of its subsidiaries, nor any director, officer, agent,
employee or other person associated with or acting on behalf of the
Company or any of its subsidiaries, has used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or
employee from corporate funds or violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977; except as such
that would not have a Material Adverse Effect.
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(x) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the
Company or any of its subsidiaries (or, to the knowledge of the
Company, any of their predecessors in interest) at, upon or from any
of the property now or previously owned or leased by the Company or
its subsidiaries in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or
remedial action which would not have, or would not be reasonably
likely to have, singularly or in the aggregate with all such
violations and remedial actions, a Material Adverse Effect; there has
been no material spill, discharge, leak, emission, injection, escape,
dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to
or caused by the Company or any of its subsidiaries or with respect to
which the Company has knowledge, except for any such spill, discharge,
leak, emission, injection, escape, dumping or release which would not
have or would not be reasonably likely to have, singularly or in the
aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a Material Adverse Effect;
and the terms "hazardous wastes," "toxic wastes," "hazardous
substances" and "medical wastes" shall have the meanings specified in
any applicable local, state, federal and foreign laws or regulations
with respect to environmental protection.
(y) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the United States
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
(z) All of the representations and warranties of the parties to
the International Underwriting Agreement are true and correct.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each of the Selling Stockholders severally represents, warrants
and agrees that:
(a) Such Selling Stockholder has, and immediately prior to the
First Delivery Date such Selling Stockholder will have, good and
marketable title to the shares of Stock to be sold by such Selling
Stockholder hereunder and under the International Underwriting
Agreement on such date, free and clear of all liens, encumbrances,
equities or claims except those that may be created by the U.S.
Underwriters; and upon delivery of such shares and payment therefor
pursuant hereto and thereto, good and valid title to such shares, free
and clear of all liens, encumbrances, equities or claims, will pass to
the several U.S. Underwriters and the International Managers.
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(b) Such Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement") with the Company, as
custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in
the United States or a member firm of the New York or American Stock
Exchanges) representing the shares of Stock to be sold by such Selling
Stockholder hereunder.
(c) Such Selling Stockholder has duly executed and delivered a
power of attorney (the "Power of Attorney") appointing the Custodian
and one or more other persons, as attorneys-in-fact, with full power
of substitution, and with full authority (exercisable by any one or
more of them) to execute and deliver this Agreement and to take such
other action as may be necessary or desirable to carry out the
provisions hereof on behalf of such Selling Stockholder.
(d) Such Selling Stockholder has full right, power and authority
to enter into this Agreement, the International Underwriting
Agreement, the Power of Attorney and the Custody Agreement; the
execution, delivery and performance of this Agreement, the
International Underwriting Agreement, the Power of Attorney and the
Custody Agreement by such Selling Stockholder and the consummation by
such Selling Stockholder of the transactions contemplated hereby and
thereby will not conflict with or constitute a breach of, or a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party
or by which such Selling Stockholder is bound or to which any of the
property or assets of such Selling Stockholder is subject, nor will
such actions result in any violation of the provisions of the charter
or bylaws or the articles of partnership, as applicable, of the
Selling Stockholder or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over such
Selling Stockholder or the property or assets of such Selling
Stockholder; and, except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state or foreign securities laws in connection with
the purchase and distribution of the Stock by the U.S. Underwriters
and the International Managers, no consent, approval, authorization or
order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery
and performance of this Agreement, the International Underwriting
Agreement, the Power of Attorney or the Custody Agreement by such
Selling Stockholder and the consummation by such Selling Stockholder
of the transactions contemplated hereby and thereby.
(e) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration
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Statement and any amendment thereto) and as of the applicable filing
date (as to the Prospectus and any amendment or supplement thereto)
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that this representation
and warranty is made as to information contained in or omitted from
the Registration Statement or the Prospectus under the caption
"Selling Stockholders" relating to such Selling Stockholder.
(f) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the shares of the
Stock.
3. Purchase of the Stock by the U.S. Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 2,800,000 shares of
the Firm Stock and each Selling Stockholder, severally and not jointly, agrees
to sell the number of shares of the Firm Stock set forth opposite its name in
Schedule 2 hereto to the several U.S. Underwriters and each of the U.S.
Underwriters, severally and not jointly, agrees to purchase the number of
shares of the Firm Stock set opposite that U.S. Underwriter's name in Schedule
1 hereto. Each U.S. Underwriter shall be obligated to purchase from the Company
and from each Selling Stockholder that number of shares of the Firm Stock which
represents the same proportion of the number of shares of the Firm Stock to be
sold by the Company and each Selling Stockholder as the number of shares of the
Firm Stock set forth opposite the name of such U.S. Underwriter in Schedule 1
represents of the total number of shares of the Firm Stock to be purchased by
all of the U.S. Underwriters pursuant to this Agreement. The respective
purchase obligations of the U.S. Underwriters with respect to the Firm Stock
shall be rounded among the U.S. Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the U.S. Underwriters an option to
purchase, in whole or in part, the Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 5 hereof. Shares of Option Stock shall be
purchased severally for the account of the U.S. Underwriters in proportion to
the number of shares of Firm Stock set opposite the name of such U.S.
Underwriters in Schedule 1 hereto. The respective purchase obligations of each
U.S. Underwriter with respect to the Option Stock shall be adjusted by the
Representatives so that no U.S. Underwriter shall be obligated to purchase
Option Stock other than in 100 share amounts. The price of both the Firm Stock
and any Option Stock shall be $[___] per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein and in the International
Underwriting Agreement.
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4. Offering of Stock by the U.S. Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several U.S. Underwriters propose to offer the Firm Stock for sale
upon the terms and conditions set forth in the Prospectus.
Each U.S. Underwriter agrees that, except to the extent permitted by
the Agreement Between U.S. Underwriters and International Managers, it will not
offer or sell any of the Stock outside of the United States.
5. Delivery of and Payment for the Stock. Delivery of and payment for
the Firm Stock shall be made at the office of Latham & Watkins, 885 Third
Avenue New York, New York 10022 at 10:00 A.M., New York City time, on the third
full business day following the date of this Agreement or at such other date or
place as shall be determined by agreement between the Representatives and the
Company. This date and time are sometimes referred to as the "First Delivery
Date." On the First Delivery Date, the Company and the Selling Stockholders
shall deliver or cause to be delivered certificates representing the Firm Stock
to the Representatives for the account of each U.S. Underwriter against payment
to or upon the order of the Company and the Selling Stockholders of the
purchase price by wire transfer in immediately available funds. Time shall be
of the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each U.S. Underwriter
hereunder. Upon delivery, the Firm Stock shall be registered in such names and
in such denominations as the Representatives shall request in writing not less
than two full business days prior to the First Delivery Date. For the purpose
of expediting the checking and packaging of the certificates for the Firm
Stock, the Company and the Selling Stockholders shall make the certificates
representing the Firm Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been
exercised nor later than the fifth business day after the date on which the
option shall have been exercised. The date and time the shares of Option Stock
are delivered are sometimes referred to as a "Second Delivery Date" and the
First Delivery Date and any Second Delivery Date are sometimes each referred to
as a "Delivery Date."
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New
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York City time, on such Second Delivery Date. On such Second Delivery Date, the
Company shall deliver or cause to be delivered the certificates representing
the Option Stock to the Representatives for the account of each U.S.
Underwriter against payment to or upon the order of the Company of the purchase
price by wire transfer in immediately available funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each U.S. Underwriter
hereunder. Upon delivery, the Option Stock shall be registered in such names
and in such denominations as the Representatives shall request in the aforesaid
written notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Representatives
in New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to such Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than Commission's close of business
on the second business day following the execution and delivery of
this Agreement or, if applicable, such earlier time as may be required
by Rule 430A(a)(3) under the Securities Act; to make no further
amendment or any supplement to the Registration Statement or to the
Prospectus except as permitted herein; to advise the Representatives,
promptly (i) after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended
Prospectus has been filed and (ii) if the Company is required to file
a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become
effective and, in the case of each of (i) and (ii), to furnish the
Representatives with copies thereof; to advise the Representatives,
promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Stock for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus or suspending
any such qualification, to use promptly its reasonable best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the U.S. Underwriters a conformed copy of the Registration
Statement as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
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(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request
each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus; and, if the delivery of a prospectus is
required at any time after the Effective Time in connection with the
offering or sale of the Stock or any other securities relating thereto
and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply
with the Securities Act, to notify the Representatives and, upon their
request, to file such document and to prepare and furnish (without
charge for the 9 month period following the First Delivery Date) to
each U.S. Underwriter and to any dealer in securities as many copies
as the Representatives may from time to time reasonably request of an
amended or supplemented Prospectus which will correct such statement
or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the U.S.
Underwriters and not to file any such document to which the
Representatives shall reasonably object after having been given
reasonable notice of the proposed filing thereof;
(f) As soon as practicable after the Effective Date, (it being
understood that the Company shall have until at least 410 days after
the end of the Company's current fiscal quarter) to make generally
available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request (provided, however, that the Company
shall not be obligated to qualify as a foreign corporation in any
jurisdiction in which it is not now so qualified or to take any action
that would subject it to general consent to service of process in any
jurisdiction in which it is not now so subject) and to comply with
such laws
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so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Stock;
(h) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock
(other than the Stock, the International Stock and shares issued
pursuant to currently outstanding options, warrants, rights or
convertible securities), or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in
part, any of the economic benefits or risks of ownership of such
shares of Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock
or other securities, in cash or otherwise, in each case without the
prior written consent of Lehman Brothers Inc.; and to cause each of
the Selling Stockholders, Mr. Frank C. Lanza and Mr. Robert V. LaPenta
to furnish to the Representatives, prior to the date of the
Prospectus, a letter or letters, in form and substance satisfactory to
counsel for the U.S. Underwriters, pursuant to which each such person
shall agree not to, directly or indirectly, (1) offer for sale, sell,
or otherwise dispose of (or enter into any transaction or device which
is designed to, or could be expected to, result in the disposition by
any person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common
Stock or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether
any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case for a period of 270 days from the date of the
Prospectus except for transactions by any person other than the
Company and its subsidiaries relating to shares of Common Stock or
other securities convertible into or exchangeable or exercisable for
Common Stock acquired in open market transactions after the completion
of the offering of Common Stock described in the Prospectus or sales
by Messrs. Lanza and LaPenta of up to 100,000 and 200,000 shares of
Common Stock, respectively, at any time and from time to time
beginning 30 days after the Closing Date, without the prior written
consent of Lehman Brothers Inc.;
(i) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus;
(j) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the United States
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder; and
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<PAGE>
(k) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, to
file a Rule 462(b) Registration Statement with the Commission
registering the Shares not so covered in compliance with Rule 462(b)
by 10:00 A.M., New York City time, on the date following this
Agreement and to pay to the Commission the filing fee for such Rule
462(b) Registration Statement at the time of the filing thereof or to
give irrevocable instructions for the payment of such fee pursuant to
Rule 111(b) under the Securities Act.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 270 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock
(other than the Stock, the International Stock and shares issued
pursuant to currently outstanding options, warrants, rights or
convertible securities) or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in
part, any of the economic benefits or risks of ownership of such
shares of Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock
or other securities, in cash or otherwise, in each case without the
prior written consent of Lehman Brothers Inc.;
(b) That the Stock to be sold by such Selling Stockholder
hereunder which is represented by the certificates held in custody for
such Selling Stockholder is subject to the interest of the U.S.
Underwriters, the International Managers and the other Selling
Stockholders, that the arrangements made by such Selling Stockholder
for such custody are to that extent irrevocable except as provided in
the Custody Agreement, and that the obligations of such Selling
Stockholder hereunder shall not be terminated by any act of such
Selling Stockholder, by operation of law or the occurrence of any
other event; and
(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury
Department Form W-8 (if such Selling Stockholder is a non-United
States person) or Form W-9 (if such Selling Stockholder is a United
States person).
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable
in that connection; (b) the costs incident to the preparation, printing and
filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto (provided that the U.S. Underwriters and the
International Managers will pay $350,000 of the printing costs of the
Registration Statement); (c) the costs of distributing the Registration
Statement as originally filed
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<PAGE>
and each amendment thereto and any post-effective amendments thereof
(including, in each case, exhibits), any Preliminary Prospectus, the Prospectus
and any amendment or supplement to the Prospectus, all as provided in this
Agreement; (d) the costs of delivering and distributing the Custody Agreement
and the Power of Attorney; (e) the filing fees incident to securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of sale of the Stock; (f) any applicable listing or other fees; (g) the
fees and expenses of qualifying the Stock under the securities laws of the
several jurisdictions as provided in Section 6(g) and of preparing, printing
and distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the U.S. Underwriters); and (h) all other costs and expenses
incident to the performance of the obligations of the Company and the Selling
Stockholders; provided that (x) the Company and the U.S. Underwriters will bear
their own "road show" expenses and (y) the Company on the one hand, and the
U.S. Underwriters and the International Managers on the other hand, will each
bear one half of the cost of the charter aircraft used in connection with the
"road show" relating to the offering of Common Stock described in the
Prospectus.
9. Conditions of U.S. Underwriters' Obligations. The respective
obligations of the U.S. Underwriters hereunder are subject to the accuracy,
when made and on each Delivery Date, of the representations and warranties of
the Company and the Selling Stockholders contained herein, to the performance
by the Company and the Selling Stockholders of their respective obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with; and any 462(b) Registration Statement required by this Agreement
to be filed shall have been so filed and become effective.
(b) No U.S. Underwriter or International Manager shall have
discovered and disclosed to the Company on or prior to such Delivery
Date that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains an untrue statement of a fact
which, in the opinion of Latham & Watkins, counsel for the U.S.
Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the
International Underwriting Agreement, the Stock, the Registration
Statement and the Prospectus, and all other legal matters relating to
this Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for the
U.S. Underwriters, and the Company and the Selling Stockholders shall
have
17
<PAGE>
furnished to such counsel all documents and information that they
may reasonably request to enable them to pass upon such matters.
(d) Simpson Thacher & Bartlett shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the U.S. Underwriters and dated such Delivery Date, in
form and substance reasonably satisfactory to the Representatives, to
the effect that:
(i) The Company and each of its Delaware subsidiaries have
been duly organized and are validly existing as corporations and
in good standing under the laws of Delaware, and have all
corporate power and authority necessary to conduct their
respective businesses as described in the Registration Statement
and the Prospectus;
(ii) All of the outstanding shares of Common Stock of the
Company (including the shares of Stock and International Stock
being delivered on such Delivery Date) have been duly authorized
and all outstanding shares of Common Stock have been and, upon
payment and delivery in accordance with this Agreement, the Stock
will be validly issued, fully paid and non-assessable; all of the
issued shares of capital stock of each Delaware subsidiary of the
Company have been duly and validly authorized and issued, are
fully paid, and non-assessable (except for directors' qualifying
shares) and, based solely on an examination of each such
subsidiary's stock ledger and minute books, all such shares are
held of record by the Company and/or a subsidiary of the Company;
(iii) The Registration Statement has become effective under
the Securities Act and the Prospectus was filed pursuant to Rule
424(b) of the rules and regulations of the Commission under the
Act and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued or
proceeding for that purpose has been instituted or threatened by
the Commission;
(iv) The statements contained in the Prospectus under the
captions "Risk Factors - A Number of Shares are or Will be
Available for Future Sale", "Risk Factors - Certain Factors may
Delay or Prevent a Change of Control Transaction,"
"Business-Pension Plans," "Certain Relationships and Related
Transactions," "Management-Limitations on Liability and
Indemnification Matters," "Management-1997 Stock Option Plan,"
"Management-Employment Agreements," "Description of Certain
Indebtedness," "Description of Capital Stock" and "Shares
Eligible for Future Sale," insofar as they describe charter
documents, contracts, statutes, rules and regulations and other
legal matters, constitute an accurate summary thereof in all
material respects;
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<PAGE>
(v) The statements made in the Prospectus under the caption
"Certain United States Federal Tax Considerations," insofar as
they purport to constitute summaries of matters of United States
federal tax law and regulations or legal conclusions with respect
thereto, constitute accurate summaries of the matters described
therein in all material respects;
(vi) To such counsel's knowledge, there are no contracts or
documents of a character required by the Securities Act or the
rules and regulations thereunder to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or
filed as required by the Securities Act or the rules and
regulations thereunder;
(vii) This Agreement and the International Underwriting
Agreement have each been duly authorized, executed and delivered
by the Company and the Significant Subsidiary;
(viii) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company and the Significant Subsidiary, as applicable,
with all of the provisions of this Agreement and the
International Underwriting Agreement and the consummation of the
transactions contemplated hereby and thereby will not breach or
result in a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument filed as
an exhibit to the Registration Statement nor will such actions
violate the Certificate of Incorporation or By-Laws or other
organizational documents of the Company or any of its
subsidiaries or any federal or New York statute, the Delaware
Limited Liability Company Act or the Delaware General Corporation
Law or any rule or regulation that has been issued pursuant to
any federal or New York statute, the Delaware Limited Liability
Company Act or the Delaware General Corporation Law or any order
known to such counsel issued pursuant to any federal or New York
statute, the Delaware Limited Liability Company Act or the
Delaware General Corporation Law by any court or governmental
agency or body or court having jurisdiction over the Company or
any of its subsidiaries or any of their properties or assets; and
no consent, approval, authorization, order, registration or
qualification of or with any federal or New York governmental
agency or body or any Delaware governmental agency or body acting
pursuant to the Delaware Limited Liability Company Act or the
Delaware General Corporation Law or, to such counsel's knowledge,
any federal or New York court or any Delaware court acting
pursuant to the Delaware Limited Liability Company Act or the
Delaware General Corporation Law is required for the issue and
sale of the Stock and International Stock by the Company, except
for the registration under the Act and the Exchange Act
19
<PAGE>
of the Stock and the International Stock, and such consents,
approvals, authorizations, registrations or qualifications as may
be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Stock and the
International Stock by the U.S. Underwriters and the
International Managers. The opinions set forth in this paragraph
are based upon our consideration of only those statutes, rules
and regulations which, in such counsel's experience, are normally
applicable to securities underwriting transactions.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the federal laws of the
United States and the laws of the State of New York and the
Delaware General Corporation Law.
Such counsel shall also have furnished to the
Representatives a written statement, addressed to the U.S.
Underwriters and dated such Delivery Date stating: Such counsel
has not independently verified the accuracy, completeness or
fairness of the statements made or included in the Registration
Statement or the Prospectus and take no responsibility therefor,
except as and to the extent set forth in paragraph (iv) above. In
the course of the preparation by the Company of the Registration
Statement and the Prospectus, such counsel participated in
conferences with certain officers and employees of the Company,
with representatives of PricewaterhouseCoopers LLP, Ernst & Young
LLP, KPMG LLP, Grant Thornton LLP and with counsel to the
Company. Based upon such counsel's examination of the
Registration Statement and the Prospectus, our investigations
made in connection with the preparation of the Registration
Statement and the Prospectus and our participation in the
conferences referred to above, (i) such counsel is of the opinion
that the Registration Statement, as of its effective date, and
the Prospectus, as of February ___, 1999, complied as to form in
all material respects with the requirements of the Act and the
applicable rules and regulations of the Commission thereunder,
except that in each case such counsel need not express opinion
with respect to the financial statements or other financial data
contained or incorporated by reference in the Registration
Statement or the Prospectus, and (ii) such counsel has no reason
to believe that the Registration Statement, as of its effective
date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein
or necessary in order to make the statements therein not
misleading or that the Prospectus contains any untrue statement
of a material fact or omits to state any material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except
that in each case such counsel need not express belief
20
<PAGE>
with respect to the financial statements or other financial
data contained in the Registration Statement or the Prospectus.
(e) Christopher C. Cambria, General Counsel of the Company, shall
have furnished to the Representatives his written opinion, as General
Counsel to the Company, addressed to the U.S. Underwriters and dated
such Delivery Date, in form and substance reasonably satisfactory to
the Representatives, to the effect that:
(i) Other than as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the voting or transfer of, any shares of the
Stock pursuant to the Company's charter or by-laws or any
agreement or other instrument known to such counsel;
(ii) To such counsel's knowledge, the Company and each of
its subsidiaries have good and marketable title to all property
(real and personal) described in the Prospectus as being owned by
them, free and clear of all liens, claims, security interests or
other encumbrances except such as are described in the Prospectus
or, to the extent that any such liens, claims, security interests
or other encumbrances would not have a Material Adverse Effect
(individually or in the aggregate) and all the material property
described in the Prospectus as being held under lease by the
Company and its subsidiaries is held by them under valid,
subsisting and enforceable leases, with only such exceptions as
would not have a Material Adverse Effect (individually or in the
aggregate);
(iii) To such counsel's knowledge and except as otherwise
disclosed in the Prospectus, there are no legal or governmental
proceedings pending or threatened, against the Company or any of
its subsidiaries or to which the Company or any of its
subsidiaries is a party or of which any property or assets of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
are reasonably likely to cause a Material Adverse Effect;
(iv) To such counsel's knowledge and except as otherwise
disclosed in the Prospectus, there are no contracts, agreements
or understandings between the Company and any person granting
such person the right to require the Company to include such
person's securities in the securities registered pursuant to the
Registration Statement;
(v) None of the issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company and the Significant Subsidiary with all of the
provisions of this
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<PAGE>
Agreement and the International Underwriting Agreement and
the consummation of the transactions contemplated hereby and
thereby requires any consent, approval, authorization or other
order of , or registration or filing with, any federal court,
federal regulatory body, federal administrative agency or other
federal governmental official having authority over government
procurement matters (provided, that the opinion in this paragraph
(v) may be delivered by other counsel reasonably satisfactory to
the Representatives).
(f) Marian S. Block, Esq., as counsel for Lockheed Martin
Corporation and Steven Berkenfeld, Esq., as counsel for the other
Selling Stockholders shall have each furnished to the Representatives
their written opinion, as counsel to such Selling Stockholder,
addressed to the U.S. Underwriters and dated the First Delivery Date,
in form and substance reasonably satisfactory to the Representatives,
to the effect that:
(i) Such Selling Stockholder has full right, power and
authority to enter into this Agreement, the International
Underwriting Agreement, the Power of Attorney and the Custody
Agreement; the execution, delivery and performance of this
Agreement, the International Underwriting Agreement, the Power of
Attorney and the Custody Agreement by such Selling Stockholder
and the consummation by such Selling Stockholder of the
transactions contemplated hereby and thereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which such
Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets of
such Selling Stockholder is subject, nor will such actions result
in any violation of the provisions of the charter or bylaws or
the articles of partnership, as applicable, of such Selling
Stockholder or any statute or any order, rule or regulation known
to such counsel of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the property
or assets of such Selling Stockholder; and, except for the
registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state or foreign securities laws in connection with
the purchase and distribution of the Stock by the U.S.
Underwriters and the International Managers, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement,
the International Underwriting Agreement, the Power of Attorney
or the Custody Agreement by such Selling Stockholder and the
consummation by such
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<PAGE>
Selling Stockholder of the transactions contemplated hereby
and thereby;
(ii) This Agreement and the International Underwriting
Agreement has each been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement have been
duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and binding agreements of such
Selling Stockholder, enforceable in accordance with their
respective terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating
to or affecting creditors' rights generally, and by general
principles of equity, regardless of whether considered in a
proceeding in equity or at law; and
(iv) Upon physical delivery of the shares of Stock to be
sold by such Selling Stockholder to the U.S. Underwriters and the
International Managers in the State of New York with stock powers
duly endorsed in blank by an effective endorsement and payment
therefor in accordance with the terms of this Agreement and the
International Underwriting Agreement, the U.S. Underwriters and
the International Managers will become the "protected purchaser"
(as defined in Section 8-303(a) of the New York Uniform
Commercial Code) of such shares of Stock, free of any "adverse
claim" (as defined in Section 8-102(a)(1) of the New York Uniform
Commercial Code).
(i) In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the federal laws of the
United States of America, the laws of the State of New York or the
State of Maryland, as the case may be, and the Delaware General
Corporation Law and (ii) in rendering the opinion in Section 9(f)(iv)
above, rely upon a certificate of such Selling Stockholder in respect
of matters of fact as to ownership of and any adverse liens,
encumbrances, equities or claims on the shares of Stock sold by such
Selling Stockholder, provided that such counsel shall furnish copies
thereof to the Representatives and state that they believe that the
U.S. Underwriters, the International Managers and they are justified
in relying upon such certificate.
(g) The Representatives shall have received from Latham &
Watkins, counsel for the U.S. Underwriters, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale of the
Stock, the Registration Statement, the Prospectus and other related
matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
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<PAGE>
(h) At the time of execution of this Agreement, the
Representatives shall have received from PricewaterhouseCoopers LLP a
letter, in form and substance satisfactory to the Representatives,
addressed to the U.S. Underwriters and dated the date hereof (i)
confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the
applicable requirements relating to the qualification of accountants
under Rule 2-01 of Regulation S-X of the Commission and (ii) stating,
as of the date hereof (or, with respect to matters involving changes
or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not
more than five days prior to the date hereof), the conclusions and
findings of such firm with respect to the financial information and
other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(i) At the time of execution of this Agreement, the
Representatives shall have received from Ernst & Young LLP letters, in
form and substance satisfactory to the Representatives, addressed to
the U.S. Underwriters and dated the date hereof (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(j) At the time of execution of this Agreement, the
Representatives shall have received from KPMG LLP a letter, in form
and substance satisfactory to the Representatives, addressed to the
U.S. Underwriters and dated the date hereof (i) confirming that they
are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(k) At the time of execution of this Agreement, the
Representatives shall have received from Grant Thornton LLP letters,
in form and substance satisfactory to the Representatives, addressed
to the U.S. Underwriters and dated
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the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission and (ii) stating, as of the date hereof (or, with respect
to matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date
hereof), the conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(l) With respect to the letters referred to in the preceding four
paragraphs and delivered to the Representatives concurrently with the
execution of this Agreement (the "initial letters"), the Company shall
have furnished to the Representatives letters (the "bring-down
letters") of such accountants, in form and substance satisfactory to
the Representatives, addressed to the U.S. Underwriters and dated such
Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date of the bring-down letters
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date of the bring-down letter), the conclusions and findings of
such firms with respect to the financial information and other matters
covered by the initial letters and (iii) confirming in all material
respects the conclusions and findings set forth in the initial
letters.
(m) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its chief financial officer
stating that:
(i) The representations and warranties of the Company in
Section 1 are true and correct as of such Delivery Date; the
Company has complied with all its agreements contained herein;
and the conditions set forth in Sections 9(a) and 9(o) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective
Date, the Registration Statement and Prospectus did not include
any untrue statement of a material fact and did not omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (B) since the
Effective Date no event has occurred which should have been set
forth in a supplement or amendment to the Registration Statement
or the Prospectus.
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(n) Each of the Selling Stockholders (or the Custodian or one or
more attorneys-in-fact on behalf of each of the Selling Stockholders)
shall have furnished to the Representatives on the First Delivery Date
a certificate, dated the First Delivery Date, signed by, or on behalf
of, each of the Selling Stockholders (or the Custodian or one or more
attorneys-in-fact) stating that the representations and warranties of
each of the Selling Stockholders contained herein are true and correct
as of the First Delivery Date and that each of the Selling
Stockholders has complied with all agreements contained herein to be
performed by each of the Selling Stockholders at or prior to the First
Delivery Date.
(o) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus or (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or
affecting the business, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is, in the judgment of the Representatives, so material
and adverse as to make it impracticable or inadvisable to proceed with
the public offering or the delivery of the Stock being delivered on
such Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(p) Subsequent to the execution and delivery of this Agreement
(i) no downgrading shall have occurred in the rating accorded the
Company's debt securities by any "nationally recognized statistical
rating organization," as that term is defined by the Commission for
purposes of Rule 436(g)(2) of the Rules and Regulations and (ii) no
such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its
rating of any of the Company's debt securities.
(q) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal or state authorities, (iii) the United States
shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United
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<PAGE>
States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political
or financial conditions (or the effect of international conditions on
the financial markets in the United States shall be such) as to make
it, in the judgment of a majority in interest of the several U.S.
Underwriters, impracticable or inadvisable to proceed with the public
offering or delivery of the Stock being delivered on such Delivery
Date on the terms and in the manner contemplated in the Prospectus.
(r) The Representatives shall have received a copy of the
executed Custody Agreement and Power of Attorney from each Selling
Stockholder.
(s) The closing under the International Underwriting Agreement
shall have occurred concurrently with the closing hereunder on the
First Delivery Date.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the U.S. Underwriters.
10. Indemnification and Contribution.
(a) The Company and the Significant Subsidiary, jointly and
severally, shall indemnify and hold harmless each U.S. Underwriter,
its officers and employees and each person, if any, who controls any
U.S. Underwriter within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss,
claim, damage, liability or action relating to purchases and sales of
Stock), to which that U.S. Underwriter, officer, employee or
controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, (ii) the omission or alleged omission
to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any
Blue Sky Application any material fact required to be stated therein
or necessary to make the statements therein not misleading or (iii)
any act or failure to act or any alleged act or failure to act by any
U.S. Underwriter in connection with, or relating in any manner to, the
Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) or (ii)
above (provided that the Company and the Significant Subsidiary shall
not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be
taken by such U.S. Underwriter through
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<PAGE>
its gross negligence or willful misconduct), and shall reimburse
each U.S. Underwriter and each such officer, employee or controlling
person promptly upon demand for any legal or other expenses reasonably
incurred by that U.S. Underwriter, officer, employee or controlling
person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company and
the Significant Subsidiary shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
such amendment or supplement, in reliance upon and in conformity with
written information concerning such U.S. Underwriter furnished to the
Company through the Representatives by or on behalf of any U.S.
Underwriter specifically for inclusion therein, which information
consists solely of the information specified in Section 10(f);
provided further, that the indemnification contained in this paragraph
(a) with respect to the Preliminary Prospectus shall not inure to the
benefit of any U.S. Underwriter (or to the benefit of any officers or
employees of any U.S. Underwriter or of any person controlling such
U.S. Underwriter) on account of any such loss, claim, damage,
liability or action arising from the sale of Stock by such U.S.
Underwriter to any person if the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained
in the Preliminary Prospectus was corrected in the Prospectus and the
U.S. Underwriter sold Stock to that person without sending or giving
at or prior to the written confirmation of such sale, a copy of the
Prospectus (as then amended or supplemented) if the Company has
previously furnished sufficient copies thereof to the U.S. Underwriter
on a timely basis to permit such sending or giving. The foregoing
indemnity agreement is in addition to any liability which the Company
or the Significant Subsidiary may otherwise have to any U.S.
Underwriter or to any officer, employee or controlling person of that
U.S. Underwriter.
(b) Each Selling Stockholder, severally and not jointly, shall
indemnify and hold harmless each U.S. Underwriter, its officers and
employees and each person, if any, who controls any U.S. Underwriter
within the meaning of Section 15 of the Securities Act, from and
against any loss, claim, damage or liability (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim),
or any action in respect thereof (including, but not limited to, any
loss, claim, damage or liability or action relating to purchases and
sales of Stock), to which that U.S. Underwriter, officer, employee or
controlling person may become subject, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus or in any amendment or supplement thereto or (ii) the
omission or alleged omission to
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<PAGE>
state in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or in any amendment or supplement thereto, any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent
that the untrue statement or alleged untrue statement or the omission
or alleged omission relates to information under the caption "Selling
Stockholders" relating to such Selling Stockholder; provided, however,
that the indemnification contained in this paragraph (b) with respect
to the Preliminary Prospectus shall not inure to the benefit of any
U.S. Underwriter (or to the benefit of any officers or employees of
any U.S. Underwriter or of any person controlling such U.S.
Underwriter) on account of any such loss, claim, damage, liability or
action arising from the sale of Stock by such U.S. Underwriter to any
person if the untrue statement or alleged untrue statement or omission
or alleged omission of a material fact contained in the Preliminary
Prospectus was corrected in the Prospectus and the U.S. Underwriter
sold Stock to that person without sending or giving at or prior to the
written confirmation of such sale, a copy of the Prospectus (as then
amended or supplemented) if the Company has previously furnished
sufficient copies thereof to the U.S. Underwriter on a timely basis to
permit such sending or giving. The foregoing indemnity agreement is in
addition to any liability which the Selling Stockholders may otherwise
have to any U.S. Underwriter or any officer, employee or controlling
person of that U.S. Underwriter. Notwithstanding any other provision
of this Section, the liability of each Selling Stockholder under this
Section 10(b) to all such indemnified parties shall not exceed the net
amount received by each such Selling Stockholder (after deducting any
underwriting discount) from the sale of the Stock pursuant to this
Agreement.
(c) Each U.S. Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, the Selling Stockholders, the
officers and employees of the Company, each of the directors of the
Company, and each person, if any, who controls the Company or any
Selling Stockholder within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which the Company or any such director
of the Company, officer of the Company or controlling person of the
Company, or Selling Stockholder or controlling person of any Selling
Stockholder may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or (B) in any Blue Sky Application or
(ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent
that the untrue statement or alleged untrue
29
<PAGE>
statement or omission or alleged omission was made in reliance
upon and in conformity with written information concerning such U.S.
Underwriter furnished to the Company through the Representatives by or
on behalf of that U.S. Underwriter specifically for inclusion therein,
and shall reimburse the Company and any such director of the Company,
officer of the Company or controlling person of the Company, or
Selling Stockholder or controlling person of any Selling Stockholder
for any legal or other expenses reasonably incurred by the Company or
any such director of the Company, officer of the Company or
controlling person of the Company, or Selling Stockholder or
controlling person of any Selling Stockholder in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any
liability which any U.S. Underwriter may otherwise have to the Company
or any such director of the Company, officer of the Company, employee
of the Company, or controlling person of the Company or Selling
Stockholder or controlling person of any Selling Stockholder.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action,
the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Section 10, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under
this Section 10 except to the extent it has been materially prejudiced
by such failure and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it
may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to
the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 10 for
any legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, any indemnified party shall
have the right to employ separate counsel in any such action and to
participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of the indemnified party unless (i)
the employment thereof has been specifically authorized by the
indemnifying party in writing, (ii) such indemnified party shall have
been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to
those available to the indemnifying party and in the reasonable
judgment of such counsel, it is advisable
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<PAGE>
for such indemnified party to employ separate counsel or (iii)
the indemnifying party has failed to assume the defense of such action
and employ counsel reasonably satisfactory to the indemnified party,
in which case, if such indemnified party notifies the indemnifying
party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not,
in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of
attorneys (in addition to one local counsel) at any time for all such
indemnified parties, which firm shall be designated in writing by
Lehman Brothers Inc., if the indemnified parties under this Section 10
consist of any U.S. Underwriters or any of their respective officers,
employees or controlling persons, or by the Company, if the
indemnified parties under this Section 10 consist of the Company or
any of the Company's directors, officers, employees or controlling
persons, or by the attorney-in-fact under the Power of Attorney, if
the indemnified parties under this Section 10 consist of the Selling
Stockholders or any of their respective officers, employees or
controlling persons, provided that if the Company is the indemnifying
party and a Selling Stockholder is an indemnified party, such firm
shall be designated by such Selling Stockholder rather than the
attorney-in-fact. No indemnifying party shall (i) without the prior
written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry
of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified
parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be
liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld),
but if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of
such settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall
for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of
any loss, claim, damage or liability, or any action in respect
thereof, referred to therein, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, (i) in such
proportion as shall be appropriate to reflect the relative benefits
received by the Company, the Significant Subsidiary or the Selling
Stockholders on the one hand and the U.S. Underwriters on the other
from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Company, the Significant Subsidiary or the Selling Stockholders, on
the one hand
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<PAGE>
and the U.S. Underwriters on the other with respect to the
statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the
Company, the Significant Subsidiary or the Selling Stockholders, on
the one hand and the U.S. Underwriters on the other with respect to
such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this
Agreement (before deducting expenses) received by the Company, the
Significant Subsidiary or the Selling Stockholders, on the one hand,
and the total underwriting discounts and commissions received by the
U.S. Underwriters with respect to the shares of the Stock purchased
under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to
information supplied by the Company, the Significant Subsidiary, the
Selling Stockholders or the U.S. Underwriters, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. For
purposes of the preceding two sentences, the net proceeds deemed to be
received by the Company shall be deemed to be also for the benefit of
the Significant Subsidiary and information supplied by the Company
shall also be deemed to have been supplied by the Significant
Subsidiary. The Company, the Significant Subsidiary, the Selling
Stockholders and the U.S. Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 10 were to be
determined by pro rata allocation (even if the U.S. Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, damage or liability,
or action in respect thereof, referred to above in this Section 10
shall be deemed to include, for purposes of this Section 10(e), any
legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 10(e), no U.S.
Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Stock underwritten by
it and distributed to the public was offered to the public exceeds the
amount of any damages which such U.S. Underwriter has otherwise paid
or become liable to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall
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be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The U.S. Underwriters' obligations
to contribute as provided in this Section 10(e) are several in
proportion to their respective underwriting obligations and not joint.
(f) The U.S. Underwriters severally confirm and the Company and
the Significant Subsidiary acknowledge that the statements with
respect to the public offering of the Stock by the U.S. Underwriters
and the last sentence of the first paragraph on the cover page of, the
legend concerning stabilization on page (i) of, and the fourth,
seventh, ninth, fifteenth, twentieth, twenty-first and twenty-third
paragraphs and the stabilization language in paragraphs ten through
thirteen under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such U.S.
Underwriters furnished in writing to the Company by or on behalf of
the U.S. Underwriters specifically for inclusion in the Registration
Statement and the Prospectus.
11. Defaulting U.S. Underwriters.
If, on either Delivery Date, any U.S. Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting U.S. Underwriters shall be obligated to purchase the Stock which
the defaulting U.S. Underwriter agreed but failed to purchase on such Delivery
Date in the respective proportions which the number of shares of the Firm Stock
set opposite the name of each remaining non-defaulting U.S. Underwriter in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting U.S. Underwriters in
Schedule 1 hereto; provided, however, that the remaining non-defaulting U.S.
Underwriters shall not be obligated to purchase any of the Stock on such
Delivery Date if the total number of shares of the Stock which the defaulting
U.S. Underwriter or U.S. Underwriters agreed but failed to purchase on such
date exceeds 9.09% of the total number of shares of the Stock to be purchased
on such Delivery Date, and any remaining non-defaulting U.S. Underwriter shall
not be obligated to purchase more than 110% of the number of shares of the
Stock which it agreed to purchase on such Delivery Date pursuant to the terms
of Section 3. If the foregoing maximums are exceeded, the remaining
non-defaulting U.S. Underwriters, or those other underwriters satisfactory to
the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them,
all the Stock to be purchased on such Delivery Date. If the remaining U.S.
Underwriters or other underwriters satisfactory to the Representatives do not
elect to purchase the shares which the defaulting U.S. Underwriter or U.S.
Underwriters agreed but failed to purchase on such Delivery Date, this
Agreement (or, with respect to the Second Delivery Date, the obligation of the
U.S. Underwriters to purchase, and of the Company to sell, the Option Stock)
shall terminate without liability on the part of any non-defaulting U.S.
Underwriter or the Company or the Selling Stockholders, except that the Company
and the Significant Subsidiary will continue to be liable for the payment of
expenses to the extent set forth in Sections 8 and 13. As used in this
Agreement, the term "U.S. Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who,
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<PAGE>
pursuant to this Section 11, purchases Firm Stock which a defaulting U.S.
Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting U.S. Underwriter
of any liability it may have to the Company and the Selling Stockholders for
damages caused by its default. If other underwriters are obligated or agree to
purchase the Stock of a defaulting or withdrawing U.S. Underwriter, either the
Representatives or the Company may postpone the Delivery Date for up to seven
full business days in order to effect any changes that in the opinion of
counsel for the Company or counsel for the U.S. Underwriters may be necessary
in the Registration Statement, the Prospectus or in any other document or
arrangement.
12. Termination. The obligations of the U.S. Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholders prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections
9(o), 9(p) or 9(q), shall have occurred or if the U.S. Underwriters shall
decline to purchase the Stock for any reason permitted under this Agreement.
13. Reimbursement of U.S. Underwriters' Expenses. If (a) the Company
or the Selling Stockholders shall fail to tender the Stock for delivery to the
U.S. Underwriters by reason of any failure, refusal or inability on the part of
the Company or any Selling Stockholder to perform any agreement on its part to
be performed, or because any other condition of the U.S. Underwriters'
obligations hereunder required to be fulfilled by the Company or the Selling
Stockholders is not fulfilled, the Company and the Significant Subsidiary will
reimburse the U.S. Underwriters for all reasonable out-of-pocket expenses
(including fees and disbursements of counsel) incurred by the U.S. Underwriters
in connection with this Agreement and the proposed purchase of the Stock, and
upon demand the Company and the Significant Subsidiary shall pay the full
amount thereof to the Representative(s). If this Agreement is terminated
pursuant to Section 11 by reason of the default of one or more U.S.
Underwriters, the Company and the Significant Subsidiary shall not be obligated
to reimburse any defaulting U.S. Underwriter on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the U.S. Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 10(d), to the Director of Litigation, Office of
the General Counsel, Lehman Brothers Inc., Three World Financial
Center, 10th Floor, New York, NY 10285;
(b) if to the Company or to the Significant Subsidiary, shall be
delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement,
Attention: Christopher C. Cambria (Fax: 212-805-5494);
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<PAGE>
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at
the address set forth in the Custody Agreement executed by such
Selling Stockholder;
provided, however, that any notice to an U.S. Underwriter pursuant to Section
10(d) shall be delivered or sent by mail, telex or facsimile transmission to
such U.S. Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by
the Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the U.S. Underwriters
by Lehman Brothers Inc. on behalf of the Representatives and the Company and
the U.S. Underwriters shall be entitled to act and rely on any request,
consent, notice or agreement given or made on behalf of the Selling
Stockholders by the Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the U.S. Underwriters, the Company,
the Significant Subsidiary, the Selling Stockholders and their respective
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any U.S. Underwriter within the meaning
of Section 15 of the Securities Act and for the benefit of each International
Manager (and controlling persons thereof) who offers or sells any shares of
Common Stock in accordance with the terms of the Agreement Between U.S.
Underwriters and International Managers and (B) the indemnity agreement of the
U.S. Underwriters contained in Section 10(c) of this Agreement shall be deemed
to be for the benefit of directors of the Company, officers of the Company who
have signed the Registration Statement and any person controlling the Company
within the meaning of Section 15 of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person, other than the
persons referred to in this Section 15, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Significant Subsidiary, the Selling
Stockholders and the U.S. Underwriters contained in this Agreement or made by
or on behalf on them, respectively, pursuant to this Agreement, shall survive
the delivery of and payment for the Stock and shall remain in full force and
effect, regardless of any investigation made by or on behalf of any of them or
any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
35
<PAGE>
18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[Signature pages follow]
36
<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Significant Subsidiary, the Selling Stockholders and the U.S. Underwriters,
please indicate your acceptance in the space provided for that purpose below.
Very truly yours,
L-3 COMMUNICATIONS HOLDINGS, INC.
By:
------------------------------
Name:
Title:
L-3 COMMUNICATIONS CORPORATION,
the Significant Subsidiary
By:
------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE 2 TO THIS AGREEMENT
By: ATTORNEY-IN-FACT
By:
------------------------------
Name:
Title:
<PAGE>
Accepted:
LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
C.E. UNTERBERG, TOWBIN
For themselves and as Representatives
of the several U.S. Underwriters named
in Schedule 1 hereto
By: LEHMAN BROTHERS INC.
By:
--------------------------------
Authorized Representative
<PAGE>
SCHEDULE 1
Number of
U.S. Underwriters Shares
----------------- ------
Lehman Brothers Inc.....................................
Bear, Stearns & Co. Inc.................................
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Morgan Stanley & Co. Incorporated
C.E. Unterberg, Towbin..................................
---------
Total 7,400,000
=========
<PAGE>
SCHEDULE 2
NUMBER OF
SELLING STOCKHOLDERS SHARES
- -------------------- ------
Lockheed Martin Corporation.............................
Lehman Brothers Capital Partners III, L.P...............
LB I Group Inc. ........................................
Lehman Brothers MBG Partners 1997 (A) L.P...............
Lehman Brothers MBG Partners 1997 (B) L.P...............
---------
Total.............................................. 4,600,000
=========
<PAGE>
FORM OF LOCK-UP LETTER AGREEMENT
LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
C.E. UNTERBERG, TOWBIN
As Representatives of the
several U.S. underwriters
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
BEAR, STEARNS INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
C.E. UNTERBERG, TOWBIN
As Representatives of the
several international managers
c/o LEHMAN BROTHERS INC.
Three World Financial Center
New York, NY 10285
Dear Sirs:
The undersigned understands that you and certain other firms propose
to enter into underwriting agreements (the "Underwriting Agreements") providing
for the purchase by you and such other firms (collectively, the "Underwriters")
of shares (the "Shares") of Common Stock, par value $.01 per share (the "Common
Stock"), of L-3 Communications Holdings, Inc. (the "Company") and that the
Underwriters propose to reoffer the Shares to the public (the "Offering").
In consideration of the execution of the Underwriting Agreements by
the Underwriters, and for other good and valuable consideration, the
undersigned hereby irrevocably agrees that, without the prior written consent
of Lehman Brothers Inc., the undersigned will not, directly or indirectly, (1)
offer for sale, sell, or otherwise dispose of (or enter into any transaction or
device that is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common Stock
(including, without limitation, shares of Common Stock that may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission and shares of Common
Stock that may be issued upon exercise of any option or warrant) or securities
convertible into or exchangeable or exercisable for Common Stock (other than
the Shares) owned by the undersigned on the date of execution of this Lock-Up
Letter Agreement or on the date of the completion of the Offering, or (2) enter
into any swap or other derivatives transaction that
<PAGE>
transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, for a period of _____ days
after the date of the final Prospectus relating to the Offering except in each
case for transactions by any person other than the Company relating to shares
of Common Stock or other securities convertible into or exchangeable or
exercisable for Common Stock acquired in open market transactions after the
completion of the Offering.
In furtherance of the foregoing, the Company and its Transfer Agent
are hereby authorized to decline to make any transfer of securities if such
transfer would constitute a violation or breach of this Lock-Up Letter
Agreement.
It is understood that, if the Company or the Selling Stockholders
notifies you that it does not intend to proceed with the Offering, if the
Underwriting Agreement does not become effective, or if the Underwriting
Agreement (other than the provisions thereof which survive termination) shall
terminate or be terminated prior to payment for and delivery of the Shares, we
will be released from our obligations under this Lock-Up Letter Agreement.
It is further understood that the Company and the Underwriters have
represented to the undersigned that each Selling Stockholder and certain
officers and directors of the Company shall be required to execute a Lock-Up
Letter Agreement the terms of which are identical to those contained herein.
The Underwriters and/or the Company will immediately notify the undersigned if
any such Lock-Up Letter Agreement is modified, amended, waived or terminated in
a manner so as to impose less stringent restrictions upon the person to which
such Lock-Up Letter Agreement applies as well as the nature of any such
modification, amendment, waiver or termination and this Lock-Up Letter
Agreement shall be deemed to have been modified, amended, waived or terminated
in the same manner as of the same effective date and time.
The undersigned understands that the Company, the Selling Stockholders
and the Underwriters will proceed with the Offering in reliance on this Lock-Up
Letter Agreement.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into this Lock-Up Letter Agreement and
that, upon request, the undersigned will execute any additional documents
necessary in connection with the enforcement hereof. Any obligations of the
undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
Very truly yours,
By:
-------------------------------------
Name:
Title:
Dated:
----------------------------
<PAGE>
1,850,000 SHARES
L-3 COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK, $.01 PAR VALUE
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
February __, 1999
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
BEAR, STEARNS INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
C.E. UNTERBERG, TOWBIN
As Lead Managers of the several
International Managers named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
L-3 Communications Holdings, Inc., a Delaware corporation (the
"Company"), and Lockheed Martin Corporation, Lehman Brothers Capital Partners
III, L.P., LB I Group Inc., Lehman Brothers MBG Partners 1997 (A) L.P. and
Lehman Brothers MBG Partners 1997 (B) L.P. (collectively, the "Selling
Stockholders") propose to sell an aggregate of 1,850,000 shares (the
"International Firm Stock") of the Company's Common Stock, par value $.01 per
share (the "Common Stock"). Of the 1,850,000 shares of the International Firm
Stock, 700,000 shares are being sold by the Company and 1,150,000 are being
sold by the Selling Stockholders. In addition, the Company proposes to grant to
the International Managers named in Schedule 1 hereto (the "International
Managers") an option to purchase up to an additional 277,500 shares of the
Common Stock on the terms and for the purposes set forth in Section 3
("International Option Stock"). The International Firm Stock and the
International Option Stock, if purchased, are hereinafter collectively called
the "Stock." As described in the Prospectus (hereinafter defined), the Company
will use the net proceeds from the sale of the Stock to repay any existing
indebtedness under L-3 Communications Corporation's senior credit facilities
and for general corporate purposes, including potential acquisitions. This is
to confirm the agreement concerning the purchase of the Stock from the Company
and the Selling Stockholders by the International Managers.
<PAGE>
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date hereof
(the "U.S. Underwriting Agreement") providing for the sale by the Company of
2,800,000 shares of Common Stock and the sale by the Selling Stockholders of
4,600,000 shares of Common Stock (together the "Firm Stock") through
arrangements with certain underwriters inside the United States (the "U.S.
Underwriters"), for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Credit
Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and C.E. Unterberg, Towbin are
acting as representatives. In addition, the Company proposes to grant to the
U.S. Underwriters an option to purchase up to an additional 1,100,000 shares of
the Common Stock on the terms set forth in the U.S. Underwriting Agreement (the
"U.S. Option Stock" and, together with the Firm Stock, the "U.S. Stock"). The
International Managers and the U.S. Underwriters simultaneously are entering
into an agreement between the U.S. and international underwriting syndicates
(the "Agreement Between U.S. Underwriters and International Managers") which
provides for, among other things, the transfer of shares of Common Stock
between the two syndicates. Two forms of prospectus are to be used in
connection with the offering and sale of shares of Common Stock contemplated by
the foregoing, one relating to the Stock and the other relating to the U.S.
Stock. The latter form of prospectus will be identical to the former except for
certain substitute pages as included in the registration statement and
amendments thereto referred to below. Except as used in Sections 3, 4, 5, 11,
12 and 13 herein, and except as the context may otherwise require, references
herein to the Stock shall include all the shares of Common Stock which may be
sold pursuant to either this Agreement or the U.S. Underwriting Agreement, and
references herein to any prospectus whether in preliminary or final form, and
whether as amended or supplemented, shall include both the international and
the U.S. versions thereof.
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments No. 1
and No. 2 thereto, with respect to the Stock have (i) been prepared by
the Company in conformity with the requirements of the United States
Securities Act of 1933, as amended (the "Securities Act") and the
rules and regulations (the "Rules and Regulations") of the United
States Securities and Exchange Commission (the "Commission")
thereunder, (ii) been filed with the Commission under the Securities
Act and (iii) become effective under the Securities Act. Copies of
such registration statement and the amendments thereto have been
delivered by the Company to you as the lead managers (the "Lead
Managers") of the International Managers. As used in this Agreement,
"Effective Time" means the time as of which such registration
statement, or the most recent post-effective amendment thereto, if
any, was declared effective by the Commission; "Effective Date" means
the date of the Effective Time; " Preliminary Prospectus" means each
prospectus included in such registration statement, or amendments
thereof, before it became effective under the Securities Act and any
prospectus filed with the Commission by the Company with the consent
of the Lead Managers pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration
2
<PAGE>
statement, as amended at the Effective Time, including all information
contained in the final prospectus filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations in accordance with Section
6 hereof and deemed to be a part of the registration statement as of
the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules
and Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4) of
Rule 424(b) of the Rules and Regulations. If the Company has filed or
is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Securities Act registering
additional shares of Common Stock (a "Rule 462(b) Registration
Statement"), then, unless otherwise specified, any reference herein to
the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus; and no
stop order suspending the effectiveness of the Registration Statement
is in effect, and no proceedings for such purpose are pending before
or threatened by the Commission. Any Rule 462(b) Registration
Statement filed after the effectiveness of this Agreement will become
effective no later than 10:00 A.M., New York City time, on the date
following this Agreement.
(b) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the
effectiveness of this Agreement) conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement
(including, if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such
Rule 462(b) Registration Statement and any amendments thereto) or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the
requirements of the Securities Act and the Rules and Regulations and
do not and will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
no representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to
the Company through the Lead Managers by or on behalf of any
International Manager specifically for inclusion therein.
(c) The market-related and customer-related data and estimates
included in the Prospectus are based on or derived from sources which
the Company believes to be reliable and accurate.
(d) The Company and each of its subsidiaries (as defined in
Section 17) have been duly organized and are validly existing as
corporations or limited liability companies, as applicable, in good
standing under the laws of their
3
<PAGE>
respective jurisdictions of organization, are duly qualified to
do business and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of property
or the conduct of their respective businesses requires such
qualification except for such qualification and good standing the
failure of which, individually or in the aggregate, would not result
in a material adverse effect on the condition (financial or other),
business, prospects, properties, stockholders' equity or results of
operations of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect"), and have all power and authority necessary
to own or hold their respective properties and to conduct the
businesses in which they are engaged.
(e) Prior to the delivery of the Stock on the First Delivery
Date, the Company will have an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; and (i) approximately 85% of the capital
stock of Cardiovascular Computer Systems, Ltd., (ii) approximately 64%
of the membership interests in L-3 Communications Network Security
Systems LLC, (iii) approximately 92% of the capital stock of Microdyne
Corporation and (iv) 100% of the issued shares of capital stock of
each other subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims, other than (A) liens, encumbrances, equities or
claims described in the Prospectus and (B) such other liens,
encumbrances, equities or claims as are not, individually or in the
aggregate, material to the Company and its subsidiaries, taken as a
whole.
(f) Prior to the delivery of the Stock on the First Delivery
Date, the unissued shares of the Stock to be issued and sold by the
Company to the International Managers hereunder and to the U.S.
Underwriters under the U.S. Underwriting Agreement will have been duly
and validly authorized and, when issued and delivered against payment
therefor as provided herein and in the U.S. Underwriting Agreement,
will be duly and validly issued, fully paid and non-assessable; and
the Stock will conform to the description thereof contained in the
Prospectus.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and L-3 Communications Corporation (the
"Significant Subsidiary").
(h) The execution, delivery and performance of this Agreement and
the U.S. Underwriting Agreement by the Company and the Significant
Subsidiary and the consummation of the transactions contemplated
hereby and thereby will not conflict with or constitute a breach of,
or a default under, any indenture,
4
<PAGE>
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject that is material to the financial condition or
prospects of the Company and its subsidiaries, taken as a whole
(collectively, the "Material Agreements"), except for breach of which,
individually, or in the aggregate, would not result in a Material
Adverse Effect, nor will such actions result in any violation of the
provisions of the charter or by-laws, or other organizational
documents of the Company or any of its subsidiaries or any material
law, statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their properties or assets, provided
that the provisions for indemnification and contribution hereunder and
thereunder may be limited by equitable principles and public policy
consideration; and except for the registration of the Stock and the
U.S. Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under the United States Securities Exchange Act of 1934, as amended
(the "Exchange Act") and applicable state or foreign securities laws
in connection with the purchase and distribution of the Stock by the
International Managers and the U.S. Underwriters, no consent,
approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, or the U.S.
Underwriting Agreement by the Company and the Significant Subsidiary
and the consummation of the transactions contemplated hereby and
thereby.
(i) Except as described in the Prospectus and other than the
Registration Rights Agreement, dated December 11, 1998, among the
Significant Subsidiary and the parties named therein, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have
been waived or satisfied or rights not exercisable in connection with
the Registration Statement) to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
(j) Except as described in the Registration Statement, the
Company has not sold or issued any shares of Common Stock during the
six-month period preceding the date of the Prospectus, including any
sales pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act other than shares issued pursuant to employee benefit
plans, qualified stock options plans or other employee compensation
plans or pursuant to outstanding options, rights or warrants.
5
<PAGE>
(k) Neither the Company nor any of its subsidiaries has incurred,
since the date of the latest audited financial statements included in
the Prospectus, any liability or obligation, direct or contingent, or
entered into any transaction, in each case not in the ordinary course
of business, that is material to the Company and its subsidiaries
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, there has not been any material
change in the capital stock or material increase in the short-term or
long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving or which would
reasonably be expected to involve a Material Adverse Effect, otherwise
than as described or contemplated in the Prospectus.
(l) The historical and pro forma financial statements, together
with the related notes, set forth in the Prospectus comply as to form
in all material respects with the requirements of Regulation S-X under
the Securities Act applicable to registration statements on Form S-1
under the Securities Act. The historical financial statements of the
Company fairly present the financial position of the Company (or its
predecessors) at the respective dates indicated and the results of
operations and cash flows of the Company (or its predecessors) for the
respective periods indicated, in accordance with generally accepted
accounting principles consistently applied throughout such periods.
Such pro forma financial statements have been prepared on a basis
consistent with such historical statements of the Company, except for
the pro forma adjustments specified therein, and give effect to
assumptions made on a reasonable basis and in good faith and present
fairly the historical and proposed transactions contemplated by the
Prospectus, this Agreement and the U.S. Underwriting Agreement. The
other financial and statistical information and data included in the
Prospectus, historical and pro forma, have been derived from the
financial records of the Company (or its predecessors) and, in all
material respects, have been prepared on a basis consistent with such
books and records of the Company (or its predecessor), except as
disclosed therein.
(m) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company, whose report appears in the
Prospectus and who have delivered the initial letter referred to in
Section 9(h) hereof, are independent public accountants as required by
the Securities Act and the Rules and Regulations; Ernst & Young LLP
and KPMG LLP, whose reports appear in the Prospectus and who have
delivered the initial letters referred to in Sections 9(i) and 9(j)
hereof, are independent accountants as required by the Securities Act
and the Rules and Regulations; and Grant Thornton LLP, who have
delivered the initial letters referred to in Section 9(k) hereof, are
independent accountants as required by the Securities Act and the
Rules and Regulations.
(n) The Company and each of its subsidiaries have good and
marketable title to all property (real and personal) described in the
Prospectus as
6
<PAGE>
being owned by them, free and clear of all liens, claims,
security interests or other encumbrances except such as are described
in the Prospectus or, to the extent that any such liens, claims,
security interests or other encumbrances would not have a Material
Adverse Effect (individually or in the aggregate) and all the material
property described in the Prospectus as being held under lease by the
Company and its subsidiaries is held by them under valid, subsisting
and enforceable leases, with only such exceptions as would not have a
Material Adverse Effect (individually or in the aggregate).
(o) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, trademarks, service
marks, trade names, copyrights, licenses, inventions, trade secrets
and other rights, and all registrations or applications relating
thereto, described in the Prospectus as being owned by them or
necessary for the conduct of their business, except as such would not
have a Material Adverse Effect (individually or in the aggregate), and
the Company is not aware of any pending or threatened claim to the
contrary or any pending or threatened challenge by any other person to
the rights of the Company and its subsidiaries with respect to the
foregoing which, if determined adversely to the Company and its
subsidiaries, would have a Material Adverse Effect (individually or in
the aggregate).
(p) Except as described in the Prospectus, there are no legal or
governmental proceedings pending or, to the knowledge of the Company,
threatened, against the Company or any of its subsidiaries or to which
the Company or any of its subsidiaries is a party or of which any
property or assets of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of its
subsidiaries, are reasonably likely to cause a Material Adverse Effect.
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to the Registration Statement or incorporated therein by
reference as permitted by the Rules and Regulations.
(r) No material relationship, direct or indirect, exists between
or among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
except as described in the Prospectus.
(s) The Company is not involved in any strike, job action or
labor dispute with any group of employees that would have a Material
Adverse Effect, and, to the Company's knowledge, no such action or
dispute is threatened.
(t) Except as disclosed in the Prospectus, the Company is in
compliance in all material respects with all presently applicable
provisions of the
7
<PAGE>
Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder
("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the
Company would have any material liability; the Company has not
incurred and does not expect to incur any material liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from,
any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code") (other than
contributions in the normal course which are not in default); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would reasonably be expected to
cause the loss of such qualification.
(u) The Company and its subsidiaries have filed all federal,
state and local income and franchise tax returns required to be filed
through the date hereof and have paid all taxes due thereon, and no
tax deficiency has been determined adversely to the Company or any of
its subsidiaries nor does the Company have any knowledge of any tax
deficiency which, if determined adversely to the Company and its
subsidiaries, might have a Material Adverse Effect.
(v) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws or other organizational documents,
(ii) is in default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or
condition contained in any Material Agreement or (iii) is in violation
in any material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its property or assets may
be subject or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or permit
necessary to the ownership of its property or to the conduct of its
business, except as would not, individually or in the aggregate, have
a Material Adverse Effect.
(w) To the best of the Company's knowledge, neither the Company
nor any of its subsidiaries, nor any director, officer, agent,
employee or other person associated with or acting on behalf of the
Company or any of its subsidiaries, has used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or
employee from corporate funds or violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977; except as such
that would not have a Material Adverse Effect.
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(x) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the
Company or any of its subsidiaries (or, to the knowledge of the
Company, any of their predecessors in interest) at, upon or from any
of the property now or previously owned or leased by the Company or
its subsidiaries in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or
remedial action which would not have, or would not be reasonably
likely to have, singularly or in the aggregate with all such
violations and remedial actions, a Material Adverse Effect; there has
been no material spill, discharge, leak, emission, injection, escape,
dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to
or caused by the Company or any of its subsidiaries or with respect to
which the Company has knowledge, except for any such spill, discharge,
leak, emission, injection, escape, dumping or release which would not
have or would not be reasonably likely to have, singularly or in the
aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a Material Adverse Effect;
and the terms "hazardous wastes," "toxic wastes," "hazardous
substances" and "medical wastes" shall have the meanings specified in
any applicable local, state, federal and foreign laws or regulations
with respect to environmental protection.
(y) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the United States
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
(z) All of the representations and warranties of the parties to
the U.S. Underwriting Agreement are true and correct.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each of the Selling Stockholders severally represents, warrants
and agrees that:
(a) Such Selling Stockholder has, and immediately prior to the
First Delivery Date such Selling Stockholder will have, good and
marketable title to the shares of Stock to be sold by such Selling
Stockholder hereunder and under the U.S. Underwriting Agreement on
such date, free and clear of all liens, encumbrances, equities or
claims except those that may be created by the International Managers;
and upon delivery of such shares and payment therefor pursuant hereto
and thereto, good and valid title to such shares, free and clear of
all liens, encumbrances, equities or claims, will pass to the several
International Managers and the U.S. Underwriters.
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<PAGE>
(b) Such Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement") with the Company, as
custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in
the United States or a member firm of the New York or American Stock
Exchanges) representing the shares of Stock to be sold by such Selling
Stockholder hereunder.
(c) Such Selling Stockholder has duly executed and delivered a
power of attorney (the "Power of Attorney") appointing the Custodian
and one or more other persons, as attorneys-in-fact, with full power
of substitution, and with full authority (exercisable by any one or
more of them) to execute and deliver this Agreement and to take such
other action as may be necessary or desirable to carry out the
provisions hereof on behalf of such Selling Stockholder.
(d) Such Selling Stockholder has full right, power and authority
to enter into this Agreement, the U.S. Underwriting Agreement, the
Power of Attorney and the Custody Agreement; the execution, delivery
and performance of this Agreement, the U.S. Underwriting Agreement,
the Power of Attorney and the Custody Agreement by such Selling
Stockholder and the consummation by such Selling Stockholder of the
transactions contemplated hereby and thereby will not conflict with or
constitute a breach of, or a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets of such
Selling Stockholder is subject, nor will such actions result in any
violation of the provisions of the charter or bylaws or the articles
of partnership, as applicable, of the Selling Stockholder or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over such Selling Stockholder or
the property or assets of such Selling Stockholder; and, except for
the registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or qualifications
as may be required under the Exchange Act and applicable state or
foreign securities laws in connection with the purchase and
distribution of the Stock by the International Managers and the U.S.
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement, the U.S. Underwriting Agreement, the Power of Attorney or
the Custody Agreement by such Selling Stockholder and the consummation
by such Selling Stockholder of the transactions contemplated hereby
and thereby.
(e) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration
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<PAGE>
Statement and any amendment thereto) and as of the applicable
filing date (as to the Prospectus and any amendment or supplement
thereto) contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided that this
representation and warranty is made as to information contained in or
omitted from the Registration Statement or the Prospectus under the
caption "Selling Stockholders" relating to such Selling Stockholder.
(f) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the shares of the
Stock.
3. Purchase of the Stock by the International Managers. On the basis
of the representations and warranties contained in, and subject to the terms
and conditions of, this Agreement, the Company agrees to sell 700,000 shares of
International Firm Stock and each Selling Stockholder, severally and not
jointly, agrees to sell the number of shares of the International Firm Stock
set forth opposite its name in Schedule 2 hereto to the several International
Managers and each of the International Managers, severally and not jointly,
agrees to purchase the number of shares of International Firm Stock set
opposite that International Manager's name in Schedule 1 hereto. Each
International Manager shall be obligated to purchase from the Company and from
each Selling Stockholder that number of shares of the International Firm Stock
which represents the same proportion of the number of shares of the
International Firm Stock to be sold by the Company and each Selling Stockholder
as the number of shares of the International Firm Stock set forth opposite the
name of such International Manager in Schedule 1 represents of the total number
of shares of the International Firm Stock to be purchased by all of the
International Managers pursuant to this Agreement. The respective purchase
obligations of the International Managers with respect to the International
Firm Stock shall be rounded among the International Managers to avoid
fractional shares, as the Lead Managers may determine.
In addition, the Company grants to the International Managers an
option to purchase, in whole or in part, the International Option Stock. Such
option is granted for the purpose of covering over-allotments in the sale of
International Firm Stock and is exercisable as provided in Section 5 hereof.
Shares of International Option Stock shall be purchased severally for the
account of the International Managers in proportion to the number of shares of
International Firm Stock set opposite the name of such International Managers
in Schedule 1 hereto. The respective purchase obligations of each International
Manager with respect to the International Option Stock shall be adjusted by the
Lead Managers so that no International Manager shall be obligated to purchase
International Option Stock other than in 100 share amounts. The price of both
the International Firm Stock and any International Option Stock shall be $[___]
per share.
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<PAGE>
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein and in the U.S. Underwriting
Agreement.
4. Offering of Stock by the International Managers.
Upon authorization by the Lead Managers of the release of the
International Firm Stock, the several International Managers propose to offer
the International Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
Each International Manager agrees that, except to the extent permitted
by the Agreement Between U.S. Underwriters and International Managers, it will
not offer or sell any of the Stock outside of the United States.
5. Delivery of and Payment for the Stock. Delivery of and payment for
the International Firm Stock shall be made at the office of Latham & Watkins,
885 Third Avenue New York, New York 10022 at 10:00 A.M., New York City time, on
the third full business day following the date of this Agreement or at such
other date or place as shall be determined by agreement between the Lead
Managers and the Company. This date and time are sometimes referred to as the
"First Delivery Date." On the First Delivery Date, the Company and the Selling
Stockholders shall deliver or cause to be delivered certificates representing
the International Firm Stock to the Lead Managers for the account of each
International Manager against payment to or upon the order of the Company and
the Selling Stockholders of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each International Manager hereunder. Upon delivery, the
International Firm Stock shall be registered in such names and in such
denominations as the Lead Managers shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the International
Firm Stock, the Company and the Selling Stockholders shall make the
certificates representing the International Firm Stock available for inspection
by the Lead Managers in New York, New York, not later than 2:00 P.M., New York
City time, on the business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Lead Managers. Such notice
shall set forth the aggregate number of shares of International Option Stock as
to which the option is being exercised, the names in which the shares of
International Option Stock are to be registered, the denominations in which the
shares of International Option Stock are to be issued and the date and time, as
determined by the Lead Managers, when the shares of International Option Stock
are to be delivered; provided, however, that this date and time shall not be
earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been
exercised. The date and time the shares of International Option Stock are
delivered are sometimes referred to as a
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<PAGE>
"Second Delivery Date" and the First Delivery Date and any Second Delivery Date
are sometimes each referred to as a "Delivery Date."
Delivery of and payment for the International Option Stock shall be
made at the place specified in the first sentence of the first paragraph of
this Section 5 (or at such other place as shall be determined by agreement
between the Lead Managers and the Company) at 10:00 A.M., New York City time,
on such Second Delivery Date. On such Second Delivery Date, the Company shall
deliver or cause to be delivered the certificates representing the
International Option Stock to the Lead Managers for the account of each
International Manager against payment to or upon the order of the Company of
the purchase price by wire transfer in immediately available funds. Time shall
be of the essence, and delivery at the time and place specified pursuant to
this Agreement is a further condition of the obligation of each International
Manager hereunder. Upon delivery, the International Option Stock shall be
registered in such names and in such denominations as the Lead Managers shall
request in the aforesaid written notice. For the purpose of expediting the
checking and packaging of the certificates for the International Option Stock,
the Company shall make the certificates representing the International Option
Stock available for inspection by the Lead Managers in New York, New York, not
later than 2:00 P.M., New York City time, on the business day prior to such
Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Lead
Managers and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the
second business day following the execution and delivery of this
Agreement or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act; to make no further amendment
or any supplement to the Registration Statement or to the Prospectus
except as permitted herein; to advise the Lead Managers, promptly (i)
after it receives notice thereof, of the time when any amendment to
the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and (ii) if the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the Rule
462(b) Registration Statement has become effective and, in the case of
each of (i) and (ii), to furnish the Lead Managers with copies
thereof; to advise the Lead Managers, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or
of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the qualification
of the Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or
of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending
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<PAGE>
any such qualification, to use promptly its reasonable best
efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Lead Managers and to
counsel for the International Managers a conformed copy of the
Registration Statement as originally filed with the Commission, and
each amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Lead Managers such number of the
following documents as the Lead Managers shall reasonably request each
Preliminary Prospectus, the Prospectus and any amended or supplemented
Prospectus; and, if the delivery of a prospectus is required at any
time after the Effective Time in connection with the offering or sale
of the Stock or any other securities relating thereto and if at such
time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply
with the Securities Act, to notify the Lead Managers and, upon their
request, to file such document and to prepare and furnish (without
charge for the 9 month period following the First Delivery Date) to
each International Manager and to any dealer in securities as many
copies as the Lead Managers may from time to time reasonably request
of an amended or supplemented Prospectus which will correct such
statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the Lead
Managers, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Lead Managers and counsel for the
International Managers and not to file any such document to which the
Lead Managers shall reasonably object after having been given
reasonable notice of the proposed filing thereof;
(f) As soon as practicable after the Effective Date, (it being
understood that the Company shall have until at least 410 days after
the end of the Company's current fiscal quarter) to make generally
available to the Company's security holders and to deliver to the Lead
Managers an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the
Securities Act and the Rules and Regulations (including, at the option
of the Company, Rule 158);
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<PAGE>
(g) Promptly from time to time to take such action as the Lead
Managers may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Lead
Managers may request (provided, however, that the Company shall not be
obligated to qualify as a foreign corporation in any jurisdiction in
which it is not now so qualified or to take any action that would
subject it to general consent to service of process in any
jurisdiction in which it is not now so subject) and to comply with
such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock;
(h) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock
(other than the Stock, the U.S. Stock and shares issued pursuant to
currently outstanding options, warrants, rights or convertible
securities), or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the
economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc.; and to cause each of the
Selling Stockholders, Mr. Frank C. Lanza and Mr. Robert V. LaPenta to
furnish to the Lead Managers, prior to the date of the Prospectus, a
letter or letters, in form and substance satisfactory to counsel for
the International Managers, pursuant to which each such person shall
agree not to, directly or indirectly, (1) offer for sale, sell, or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common
Stock or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether
any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case for a period of 270 days from the date of the
Prospectus except for transactions by any person other than the
Company and its subsidiaries relating to shares of Common Stock or
other securities convertible into or exchangeable or exercisable for
Common Stock acquired in open market transactions after the completion
of the offering of Common Stock described in the Prospectus or sales
by Messrs. Lanza and LaPenta of up to 100,000 and 200,000 shares of
Common Stock, respectively, at any time and from time to time
beginning 30 days after the Closing Date, without the prior written
consent of Lehman Brothers Inc.;
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<PAGE>
(i) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus;
(j) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the United States
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder; and
(k) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, to
file a Rule 462(b) Registration Statement with the Commission
registering the Shares not so covered in compliance with Rule 462(b)
by 10:00 A.M., New York City time, on the date following this
Agreement and to pay to the Commission the filing fee for such Rule
462(b) Registration Statement at the time of the filing thereof or to
give irrevocable instructions for the payment of such fee pursuant to
Rule 111(b) under the Securities Act.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 270 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock
(other than the Stock, the U.S. Stock and shares issued pursuant to
currently outstanding options, warrants, rights or convertible
securities) or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the
economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc.;
(b) That the Stock to be sold by such Selling Stockholder
hereunder which is represented by the certificates held in custody for
such Selling Stockholder is subject to the interest of the
International Managers, the U.S. Underwriters and the other Selling
Stockholders, that the arrangements made by such Selling Stockholder
for such custody are to that extent irrevocable except as provided in
the Custody Agreement, and that the obligations of such Selling
Stockholder hereunder shall not be terminated by any act of such
Selling Stockholder, by operation of law or the occurrence of any
other event; and
(c) To deliver to the Lead Managers prior to the First Delivery
Date a properly completed and executed United States Treasury
Department Form W-8 (if such Selling Stockholder is a non-United
States person) or Form W-9 (if such Selling Stockholder is a United
States person).
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<PAGE>
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable
in that connection; (b) the costs incident to the preparation, printing and
filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto (provided that the International Managers and
the U.S. Underwriters will pay $350,000 of the printing costs of the
Registration Statement); (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of delivering and distributing
the Custody Agreement and the Power of Attorney; (e) the filing fees incident
to securing any required review by the National Association of Securities
Dealers, Inc. of the terms of sale of the Stock; (f) any applicable listing or
other fees; (g) the fees and expenses of qualifying the Stock under the
securities laws of the several jurisdictions as provided in Section 6(g) and of
preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the International Managers); and (h) all other
costs and expenses incident to the performance of the obligations of the
Company and the Selling Stockholders; provided that (x) the Company and the
International Managers will bear their own "road show" expenses and (y) the
Company on the one hand, and the International Managers and the U.S.
Underwriters on the other hand, will each bear one half of the cost of the
charter aircraft used in connection with the "road show" relating to the
offering of Common Stock described in the Prospectus.
9. Conditions of International Managers' Obligations. The respective
obligations of the International Managers hereunder are subject to the
accuracy, when made and on each Delivery Date, of the representations and
warranties of the Company and the Selling Stockholders contained herein, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder, and to each of the following additional terms and
conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with; and any 462(b) Registration Statement required by this Agreement
to be filed shall have been so filed and become effective.
(b) No International Manager or U.S. Underwriter shall have
discovered and disclosed to the Company on or prior to such Delivery
Date that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains an untrue statement of a fact
which, in the opinion of Latham & Watkins, counsel for the
International Managers, is material or omits to state a fact which, in
the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
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<PAGE>
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the U.S.
Underwriting Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement and
the transactions contemplated hereby shall be reasonably satisfactory
in all material respects to counsel for the International Managers,
and the Company and the Selling Stockholders shall have furnished to
such counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.
(d) Simpson Thacher & Bartlett shall have furnished to the Lead
Managers its written opinion, as counsel to the Company, addressed to
the International Managers and dated such Delivery Date, in form and
substance reasonably satisfactory to the Lead Managers, to the effect
that:
(i) The Company and each of its Delaware subsidiaries have
been duly organized and are validly existing as corporations and
in good standing under the laws of Delaware, and have all
corporate power and authority necessary to conduct their
respective businesses as described in the Registration Statement
and the Prospectus;
(ii) All of the outstanding shares of Common Stock of the
Company (including the shares of Stock and U.S. Stock being
delivered on such Delivery Date) have been duly authorized and
all outstanding shares of Common Stock have been and, upon
payment and delivery in accordance with this Agreement, the Stock
will be validly issued, fully paid and non-assessable; all of the
issued shares of capital stock of each Delaware subsidiary of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable (except for directors' qualifying
shares) and, based solely on an examination of each such
subsidiary's stock ledger and minute books, all such shares are
held of record by the Company and/or a subsidiary of the Company;
(iii) The Registration Statement has become effective under
the Securities Act and the Prospectus was filed pursuant to Rule
424(b) of the rules and regulations of the Commission under the
Act and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued or
proceeding for that purpose has been instituted or threatened by
the Commission;
(iv) The statements contained in the Prospectus under the
captions "Risk Factors-A Number of Shares are or Will be
Available for Future Sale", "Risk Factors-Certain Factors may
Delay or Prevent a Change of Control Transaction,"
"Business-Pension Plans," "Certain Relationships and Related
Transactions," "Management-Limitations on Liability and
Indemnification Matters," "Management-1997 Stock Option
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<PAGE>
Plan," "Management-Employment Agreements," "Description of
Certain Indebtedness," "Description of Capital Stock" and "Shares
Eligible for Future Sale," insofar as they describe charter
documents, contracts, statutes, rules and regulations and other
legal matters, constitute an accurate summary thereof in all
material respects;
(v) The statements made in the Prospectus under the caption
"Certain United States Federal Tax Considerations," insofar as
they purport to constitute summaries of matters of United States
federal tax law and regulations or legal conclusions with respect
thereto, constitute accurate summaries of the matters described
therein in all material respects;
(vi) To such counsel's knowledge, there are no contracts or
documents of a character required by the Securities Act or the
rules and regulations thereunder to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or
filed as required by the Securities Act or the rules and
regulations thereunder;
(vii) This Agreement and the U.S. Underwriting Agreement
have each been duly authorized, executed and delivered by the
Company and the Significant Subsidiary;
(viii) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company and the Significant Subsidiary, as applicable,
with all of the provisions of this Agreement and the U.S.
Underwriting Agreement and the consummation of the transactions
contemplated hereby and thereby will not breach or result in a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument filed as an exhibit to
the Registration Statement nor will such actions violate the
Certificate of Incorporation or By-Laws or other organizational
documents of the Company or any of its subsidiaries or any
federal or New York statute, the Delaware Limited Liability
Company Act or the Delaware General Corporation Law or any rule
or regulation that has been issued pursuant to any federal or New
York statute, the Delaware Limited Liability Company Act or the
Delaware General Corporation Law or any order known to such
counsel issued pursuant to any federal or New York statute, the
Delaware Limited Liability Company Act or the Delaware General
Corporation Law by any court or governmental agency or body or
court having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and no
consent, approval, authorization, order, registration or
qualification of or with any federal or New York governmental
agency or body or any Delaware governmental agency or body acting
pursuant to the
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Delaware Limited Liability Company Act or the Delaware General
Corporation Law or, to such counsel's knowledge, any federal or
New York court or any Delaware court acting pursuant to the
Delaware Limited Liability Company Act or the Delaware General
Corporation Law is required for the issue and sale of the U.S.
Stock and Stock by the Company, except for the registration under
the Act and the Exchange Act of the U.S. Stock and the Stock, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
U.S. Stock and the Stock by the International Managers and the
U.S. Underwriters. The opinions set forth in this paragraph are
based upon our consideration of only those statutes, rules and
regulations which, in such counsel's experience, are normally
applicable to securities underwriting transactions.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the federal laws of the
United States and the laws of the State of New York and the
Delaware General Corporation Law.
Such counsel shall also have furnished to the Lead Managers
a written statement, addressed to the International Managers and
dated such Delivery Date stating: Such counsel has not
independently verified the accuracy, completeness or fairness of
the statements made or included in the Registration Statement or
the Prospectus and take no responsibility therefor, except as and
to the extent set forth in paragraph (iv) above. In the course of
the preparation by the Company of the Registration Statement and
the Prospectus, such counsel participated in conferences with
certain officers and employees of the Company, with
representatives of PricewaterhouseCoopers LLP, Ernst & Young LLP,
KPMG LLP, Grant Thornton LLP and with counsel to the Company.
Based upon such counsel's examination of the Registration
Statement and the Prospectus, our investigations made in
connection with the preparation of the Registration Statement and
the Prospectus and our participation in the conferences referred
to above, (i) such counsel is of the opinion that the
Registration Statement, as of its effective date, and the
Prospectus, as of February __, 1999, complied as to form in all
material respects with the requirements of the Act and the
applicable rules and regulations of the Commission thereunder,
except that in each case such counsel need not express opinion
with respect to the financial statements or other financial data
contained or incorporated by reference in the Registration
Statement or the Prospectus, and (ii) such counsel has no reason
to believe that the Registration Statement, as of its effective
date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein
or necessary in order to make the statements therein not
20
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misleading or that the Prospectus contains any untrue statement
of a material fact or omits to state any material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except
that in each case such counsel need not express belief with
respect to the financial statements or other financial data
contained in the Registration Statement or the Prospectus.
(e) Christopher C. Cambria, General Counsel of the Company, shall
have furnished to the Lead Managers his written opinion, as General
Counsel to the Company, addressed to the International Managers and
dated such Delivery Date, in form and substance reasonably
satisfactory to the Lead Managers, to the effect that:
(i) Other than as set forth in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the voting or transfer of, any shares of the
Stock pursuant to the Company's charter or by-laws or any
agreement or other instrument known to such counsel;
(ii) To such counsel's knowledge, the Company and each of
its subsidiaries have good and marketable title to all property
(real and personal) described in the Prospectus as being owned by
them, free and clear of all liens, claims, security interests or
other encumbrances except such as are described in the Prospectus
or, to the extent that any such liens, claims, security interests
or other encumbrances would not have a Material Adverse Effect
(individually or in the aggregate) and all the material property
described in the Prospectus as being held under lease by the
Company and its subsidiaries is held by them under valid,
subsisting and enforceable leases, with only such exceptions as
would not have a Material Adverse Effect (individually or in the
aggregate);
(iii) To such counsel's knowledge and except as otherwise
disclosed in the Prospectus, there are no legal or governmental
proceedings pending or threatened, against the Company or any of
its subsidiaries or to which the Company or any of its
subsidiaries is a party or of which any property or assets of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
are reasonably likely to cause a Material Adverse Effect;
(iv) To such counsel's knowledge and except as otherwise
disclosed in the Prospectus, there are no contracts, agreements
or understandings between the Company and any person granting
such person the right to require the Company to include such
person's securities in the securities registered pursuant to the
Registration Statement;
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(v) None of the issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company and the Significant Subsidiary with all of the
provisions of this Agreement and the U.S. Underwriting Agreement
and the consummation of the transactions contemplated hereby and
thereby requires any consent, approval, authorization or other
order of, or registration or filing with, any federal court,
federal regulatory body, federal administrative agency or other
federal governmental official having authority over government
procurement matters (provided, that the opinion in this paragraph
(v) may be delivered by other counsel reasonably satisfactory to
the Lead Managers).
(f) Marian S. Block, Esq., as counsel for Lockheed Martin
Corporation and Steven Berkenfeld, Esq., as counsel for the other
Selling Stockholders shall have each furnished to the Lead Managers
their written opinion, as counsel to such Selling Stockholder,
addressed to the International Managers and dated the First Delivery
Date, in form and substance reasonably satisfactory to the Lead
Managers, to the effect that:
(i) Such Selling Stockholder has full right, power and
authority to enter into this Agreement, the U.S. Underwriting
Agreement, the Power of Attorney and the Custody Agreement; the
execution, delivery and performance of this Agreement, the U.S.
Underwriting Agreement, the Power of Attorney and the Custody
Agreement by such Selling Stockholder and the consummation by
such Selling Stockholder of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any statute, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to
such counsel to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the
property or assets of such Selling Stockholder is subject, nor
will such actions result in any violation of the provisions of
the charter or bylaws or the articles of partnership, as
applicable, of such Selling Stockholder or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over such Selling
Stockholder or the property or assets of such Selling
Stockholder; and, except for the registration of the Stock under
the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state or foreign securities laws in
connection with the purchase and distribution of the Stock by the
International Managers and the U.S. Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement,
the U.S.
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Underwriting Agreement, the Power of Attorney or the Custody
Agreement by such Selling Stockholder and the consummation by
such Selling Stockholder of the transactions contemplated hereby
and thereby;
(ii) This Agreement and the U.S. Underwriting Agreement has
each been duly authorized, executed and delivered by or on behalf
of such Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement have been
duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and binding agreements of such
Selling Stockholder, enforceable in accordance with their
respective terms except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating
to or affecting creditors' rights generally, and by general
principles of equity, regardless of whether considered in a
proceeding in equity or at law; and
(iv) Upon physical delivery of the shares of Stock to be
sold by such Selling Stockholder to the International Managers
and the U.S. Underwriters in the State of New York with stock
powers duly endorsed in blank by an effective endorsement and
payment therefor in accordance with the terms of this Agreement
and the U.S. Underwriting Agreement, the International Managers
and the U.S. Underwriters will become the "protected purchaser"
(as defined in Section 8-303(a) of the New York Uniform
Commercial Code) of such shares of Stock, free of any "adverse
claim" (as defined in Section 8-102(a)(1) of the New York Uniform
Commercial Code).
(i) In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the federal laws of the
United States of America, the laws of the State of New York or the
State of Maryland, as the case may be, and the Delaware General
Corporation Law and (ii) in rendering the opinion in Section 9(f)(iv)
above, rely upon a certificate of such Selling Stockholder in respect
of matters of fact as to ownership of and any adverse liens,
encumbrances, equities or claims on the shares of Stock sold by such
Selling Stockholder, provided that such counsel shall furnish copies
thereof to the Lead Managers and state that they believe that the
International Managers, U.S. Underwriters and they are justified in
relying upon such certificate.
(g) The Lead Managers shall have received from Latham & Watkins,
counsel for the International Managers, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale of the
Stock, the Registration Statement, the Prospectus and other related
matters as the Lead Managers may reasonably require, and the Company
shall have furnished to such counsel such
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<PAGE>
documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
(h) At the time of execution of this Agreement, the Lead Managers
shall have received from PricewaterhouseCoopers LLP a letter, in form
and substance satisfactory to the Lead Managers, addressed to the
International Managers and dated the date hereof (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(i) At the time of execution of this Agreement, the Lead Managers
shall have received from Ernst & Young LLP letters, in form and
substance satisfactory to the Lead Managers, addressed to the
International Managers and dated the date hereof (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(j) At the time of execution of this Agreement, the Lead Managers
shall have received from KPMG LLP a letter, in form and substance
satisfactory to the Lead Managers, addressed to the International
Managers and dated the date hereof (i) confirming that they are
independent public accountants within the meaning of the Securities
Act and are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission and (ii) stating, as of the date hereof (or, with
respect to matters involving changes or developments since the
respective dates as of which specified financial information is given
in the Prospectus, as of a date not more than five days prior to the
date hereof), the conclusions and findings of such firm with respect
to the financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
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<PAGE>
(k) At the time of execution of this Agreement, the Lead Managers
shall have received from Grant Thornton LLP letters, in form and
substance satisfactory to the Lead Managers, addressed to the
International Managers and dated the date hereof (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(l) With respect to the letters referred to in the preceding four
paragraphs and delivered to the Lead Managers concurrently with the
execution of this Agreement (the "initial letters"), the Company shall
have furnished to the Lead Managers letters (the "bring-down letters")
of such accountants, in form and substance satisfactory to the Lead
Managers, addressed to the International Managers and dated such
Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date of the bring-down letters
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date of the bring- down letter), the conclusions and findings of
such firms with respect to the financial information and other matters
covered by the initial letters and (iii) confirming in all material
respects the conclusions and findings set forth in the initial
letters.
(m) The Company shall have furnished to the Lead Managers a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its chief financial officer
stating that:
(i) The representations and warranties of the Company in
Section 1 are true and correct as of such Delivery Date; the
Company has complied with all its agreements contained herein;
and the conditions set forth in Sections 9(a) and 9(o) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective
Date, the Registration Statement and Prospectus did not include
any untrue statement of a material fact and did not omit to state
a material fact required to be stated therein or necessary to
make the statements therein
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<PAGE>
not misleading, and (B) since the Effective Date no event
has occurred which should have been set forth in a supplement or
amendment to the Registration Statement or the Prospectus.
(n) Each of the Selling Stockholders (or the Custodian or one or
more attorneys-in-fact on behalf of each of the Selling Stockholders)
shall have furnished to the Lead Managers on the First Delivery Date a
certificate, dated the First Delivery Date, signed by, or on behalf
of, each of the Selling Stockholders (or the Custodian or one or more
attorneys-in-fact) stating that the representations and warranties of
each of the Selling Stockholders contained herein are true and correct
as of the First Delivery Date and that each of the Selling
Stockholders has complied with all agreements contained herein to be
performed by each of the Selling Stockholders at or prior to the First
Delivery Date.
(o) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus or (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or
affecting the business, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is, in the judgment of the Lead Managers, so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(p) Subsequent to the execution and delivery of this Agreement
(i) no downgrading shall have occurred in the rating accorded the
Company's debt securities by any "nationally recognized statistical
rating organization," as that term is defined by the Commission for
purposes of Rule 436(g)(2) of the Rules and Regulations and (ii) no
such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its
rating of any of the Company's debt securities.
(q) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the
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<PAGE>
Commission, by such exchange or by any other regulatory body or
governmental authority having jurisdiction, (ii) a banking moratorium
shall have been declared by Federal or state authorities, (iii) the
United States shall have become engaged in hostilities, there shall
have been an escalation in hostilities involving the United States or
there shall have been a declaration of a national emergency or war by
the United States or (iv) there shall have occurred such a material
adverse change in general economic, political or financial conditions
(or the effect of international conditions on the financial markets in
the United States shall be such) as to make it, in the judgment of a
majority in interest of the several International Managers,
impracticable or inadvisable to proceed with the public offering or
delivery of the Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
(r) The Lead Manager shall have received a copy of the executed
Custody Agreement and Power of Attorney from each Selling Stockholder.
(s) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the First Delivery
Date.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the International Managers.
10. Indemnification and Contribution.
(a) The Company and the Significant Subsidiary, jointly and severally,
shall indemnify and hold harmless each International Manager, its officers and
employees and each person, if any, who controls any International Manager
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that International Manager,
officer, employee or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment
or supplement thereto, or in any Blue Sky Application any material fact
required to be stated therein or necessary to make the statements therein not
misleading or (iii) any act or failure to act or any alleged act or failure to
act by any International Manager in connection with, or relating in any manner
to, the Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action arising
out of or based upon matters covered by clause (i) or (ii) above (provided that
the Company and the Significant Subsidiary shall not be liable under this
clause (iii) to the extent that it is determined in a final judgment by a court
of competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
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<PAGE>
omitted to be taken by such International Manager through its gross negligence
or willful misconduct), and shall reimburse each International Manager and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that International Manager, officer,
employee or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action
as such expenses are incurred; provided, however, that the Company and the
Significant Subsidiary shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of, or is based
upon, any untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in reliance upon and in
conformity with written information concerning such International Manager
furnished to the Company through the Lead Managers by or on behalf of any
International Manager specifically for inclusion therein, which information
consists solely of the information specified in Section 10(f); provided
further, that the indemnification contained in this paragraph (a) with respect
to the Preliminary Prospectus shall not inure to the benefit of any
International Manager (or to the benefit of any officers or employees of any
International Manager or of any person controlling such International Manager)
on account of any such loss, claim, damage, liability or action arising from
the sale of Stock by such International Manager to any person if the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in the Preliminary Prospectus was corrected in the
Prospectus and the International Manager sold Stock to that person without
sending or giving at or prior to the written confirmation of such sale, a copy
of the Prospectus (as then amended or supplemented) if the Company has
previously furnished sufficient copies thereof to the International Manager on
a timely basis to permit such sending or giving. The foregoing indemnity
agreement is in addition to any liability which the Company or the Significant
Subsidiary may otherwise have to any International Manager or to any officer,
employee or controlling person of that International Manager.
(b) Each Selling Stockholder, severally and not jointly, shall
indemnify and hold harmless each International Manager, its officers and
employees and each person, if any, who controls any International Manager
within the meaning of Section 15 of the Securities Act, from and against any
loss, claim, damage or liability (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or
investigating any such action or claim), or any action in respect thereof
(including, but not limited to, any loss, claim, damage or liability or action
relating to purchases and sales of Stock), to which that International Manager,
officer, employee or controlling person may become subject, insofar as such
loss, claim, damage, liability or action arises out of, or is based upon, (i)
any untrue statement or alleged untrue statement of a material fact contained
in any Preliminary Prospectus, the Registration Statement or the Prospectus or
in any amendment or supplement thereto or (ii) the omission or alleged omission
to state in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any amendment or supplement thereto, any material fact
required to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or the omission or alleged omission relates to
information under the caption "Selling Stockholders" relating to such Selling
Stockholder; provided, however, that the indemnification contained in this
paragraph (b) with
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respect to the Preliminary Prospectus shall not inure to the benefit of any
International Manager (or to the benefit of any officers or employees of any
International Manager or of any person controlling such International Manager)
on account of any such loss, claim, damage, liability or action arising from
the sale of Stock by such International Manager to any person if the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in the Preliminary Prospectus was corrected in the
Prospectus and the International Manager sold Stock to that person without
sending or giving at or prior to the written confirmation of such sale, a copy
of the Prospectus (as then amended or supplemented) if the Company has
previously furnished sufficient copies thereof to the International Manager on
a timely basis to permit such sending or giving. The foregoing indemnity
agreement is in addition to any liability which the Selling Stockholders may
otherwise have to any International Manager or any officer, employee or
controlling person of that International Manager. Notwithstanding any other
provision of this Section, the liability of each Selling Stockholder under this
Section 10(b) to all such indemnified parties shall not exceed the net amount
received by each such Selling Stockholder (after deducting any underwriting
discount) from the sale of the Stock pursuant to this Agreement.
(c) Each International Manager, severally and not jointly, shall
indemnify and hold harmless the Company, the Selling Stockholders, the officers
and employees of the Company, each of the directors of the Company, and each
person, if any, who controls the Company or any Selling Stockholder within the
meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company or any such director of the Company, officer of the Company or
controlling person of the Company, or Selling Stockholder or controlling person
of any Selling Stockholder may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or (B)
in any Blue Sky Application or (ii) the omission or alleged omission to state
in any Preliminary Prospectus, the Registration Statement or the Prospectus, or
in any amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information concerning such
International Manager furnished to the Company through the Lead Managers by or
on behalf of that International Manager specifically for inclusion therein, and
shall reimburse the Company and any such director of the Company, officer of
the Company or controlling person of the Company, or Selling Stockholder on
controlling person of any Selling Stockholder for any legal or other expenses
reasonably incurred by the Company or any such director of the Company, officer
of the Company or controlling person of the Company, or Selling Stockholder or
controlling person of any Selling Stockholder in connection with investigating
or defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred. The foregoing indemnity
agreement is in addition to any liability which any International Manager may
otherwise have to the Company or any such director of the Company, officer of
the Company, employee of the Company or
29
<PAGE>
controlling person of the Company, or Selling Stockholder or controlling person
of any Selling Stockholder.
(d) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however,
that the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 10. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 10 for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, any indemnified party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof but the fees and expenses of such counsel shall be at the expense of
the indemnified party unless (i) the employment thereof has been specifically
authorized by the indemnifying party in writing, (ii) such indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party and in the reasonable judgment of such
counsel, it is advisable for such indemnified party to employ separate counsel
or (iii) the indemnifying party has failed to assume the defense of such action
and employ counsel reasonably satisfactory to the indemnified party, in which
case, if such indemnified party notifies the indemnifying party in writing that
it elects to employ separate counsel at the expense of the indemnifying party,
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to one local counsel) at any time for all such indemnified parties,
which firm shall be designated in writing by Lehman Brothers Inc., if the
indemnified parties under this Section 10 consist of any International Managers
or any of their respective officers, employees or controlling persons, or by
the Company, if the indemnified parties under this Section 10 consist of the
Company or any of the Company's directors, officers, employees or controlling
persons, or by the attorney-in-fact under the Power of Attorney, if the
indemnified parties under this Section 10 consist of the Selling Stockholders
or any of their respective officers, employees or controlling persons provided
that if the Company is the indemnifying party and a Selling Stockholder is an
indemnifying party, such firm shall be designated by such Selling Stockholder
rather than the attorney-in-fact. No indemnifying party shall (i) without the
prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit
30
<PAGE>
or proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for
any settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(e) If the indemnification provided for in this Section 10
shall for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in
respect thereof, (i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Company, the Significant Subsidiary or the
Selling Stockholders on the one hand and the International Managers on the
other from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company, the Significant Subsidiary or
the Selling Stockholders, on the one hand and the International Managers on the
other with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Significant Subsidiary or the Selling Stockholders, on the one
hand and the International Managers on the other with respect to such offering
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Stock purchased under this Agreement (before deducting
expenses) received by the Company, the Significant Subsidiary or the Selling
Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the International Managers with respect to the shares
of the Stock purchased under this Agreement, on the other hand, bear to the
total gross proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Significant Subsidiary the Selling Stockholders, or the
International Managers, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement or
omission. For purposes of the preceding two sentences, the net proceeds deemed
to be received by the Company shall be deemed to be also for the benefit of the
Significant Subsidiary and information supplied by the Company shall also be
deemed to have been supplied by the Significant Subsidiary. The Company, the
Significant Subsidiary, the Selling Stockholders and the International Managers
agree that it would not be just and equitable if contributions pursuant to this
Section 10 were to be determined by pro rata allocation (even if the
International Managers were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to herein. The
31
<PAGE>
amount paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in this
Section 10 shall be deemed to include, for purposes of this Section 10(e), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 10(e), no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the Stock underwritten by it and distributed to the public
was offered to the public exceeds the amount of any damages which such
International Manager has otherwise paid or become liable to pay by reason of
any untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The International
Managers' obligations to contribute as provided in this Section 10(e) are
several in proportion to their respective underwriting obligations and not
joint.
(f) The International Managers severally confirm and the Company and
the Significant Subsidiary acknowledge that the statements with respect to the
public offering of the Stock by the International Managers and the last
sentence of the first paragraph on the cover page of, the legend concerning
stabilization on page (i) of, and the fourth, seventh, ninth, fifteenth,
twentieth, twenty-first and twenty-third paragraphs and the stabilization
language in paragraphs ten through thirteen under the caption "Underwriting"
in, the Prospectus are correct and constitute the only information concerning
such International Managers furnished in writing to the Company by or on behalf
of the International Managers specifically for inclusion in the Registration
Statement and the Prospectus.
11. Defaulting International Managers.
If, on either Delivery Date, any International Manager defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting International Managers shall be obligated to purchase the Stock
which the defaulting International Manager agreed but failed to purchase on
such Delivery Date in the respective proportions which the number of shares of
the International Firm Stock set opposite the name of each remaining
non-defaulting International Manager in Schedule 1 hereto bears to the total
number of shares of the International Firm Stock set opposite the names of all
the remaining non-defaulting International Managers in Schedule 1 hereto;
provided, however, that the remaining non-defaulting International Managers
shall not be obligated to purchase any of the Stock on such Delivery Date if
the total number of shares of the Stock which the defaulting International
Manager or International Managers agreed but failed to purchase on such date
exceeds 9.09% of the total number of shares of the Stock to be purchased on
such Delivery Date, and any remaining non-defaulting International Manager
shall not be obligated to purchase more than 110% of the number of shares of
the Stock which it agreed to purchase such Delivery Date pursuant to the terms
of Section 3. If the foregoing maximums are exceeded, the remaining
non-defaulting International Managers, or those other underwriters satisfactory
to the Lead Managers who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them,
all the Stock to be purchased on such Delivery Date. If the remaining
International Managers or other underwriters satisfactory to the Lead Managers
do not elect to
32
<PAGE>
purchase the shares which the defaulting International Manager or International
Managers agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
International Managers to purchase, and of the Company to sell, the
International Option Stock) shall terminate without liability on the part of
any non-defaulting International Manager or the Company or the Selling
Stockholders, except that the Company and the Significant Subsidiary will
continue to be liable for the payment of expenses to the extent set forth in
Sections 8 and 13. As used in this Agreement, the term "International Manager"
includes, for all purposes of this Agreement unless the context requires
otherwise, any party not listed in Schedule 1 hereto who, pursuant to this
Section 11, purchases International Firm Stock which a defaulting International
Manager agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting International
Manager of any liability it may have to the Company and the Selling
Stockholders for damages caused by its default. If other underwriters are
obligated or agree to purchase the Stock of a defaulting or withdrawing
International Manager, either the Lead Managers or the Company may postpone the
Delivery Date for up to seven full business days in order to effect any changes
that in the opinion of counsel for the Company or counsel for the International
Managers may be necessary in the Registration Statement, the Prospectus or in
any other document or arrangement.
12. Termination. The obligations of the International Managers
hereunder may be terminated by the Lead Managers by notice given to and
received by the Company and the Selling Stockholders prior to delivery of and
payment for the International Firm Stock if, prior to that time, any of the
events described in Sections 9(o), 9(p) or 9(q), shall have occurred or if the
International Managers shall decline to purchase the Stock for any reason
permitted under this Agreement.
13. Reimbursement of International Managers' Expenses. If (a) the
Company or the Selling Stockholders shall fail to tender the Stock for delivery
to the International Managers by reason of any failure, refusal or inability on
the part of the Company or any Selling Stockholder to perform any agreement on
its part to be performed, or because any other condition of the International
Managers' obligations hereunder required to be fulfilled by the Company or the
Selling Stockholders is not fulfilled, the Company and the Significant
Subsidiary will reimburse the International Managers for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred
by the International Managers in connection with this Agreement and the
proposed purchase of the Stock, and upon demand the Company and the Significant
Subsidiary shall pay the full amount thereof to the Lead Manager(s). If this
Agreement is terminated pursuant to Section 11 by reason of the default of one
or more International Managers, the Company and the Significant Subsidiary
shall not be obligated to reimburse any defaulting International Manager on
account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the International Managers, shall be delivered or sent
by mail, telex or facsimile transmission to Lehman Brothers Inc.,
Three World Financial
33
<PAGE>
Center, New York, New York 10285, Attention: Syndicate Department
(Fax: 212-526-6588), with a copy, in the case of any notice pursuant
to Section 10(d), to the Director of Litigation, Office of the General
Counsel, Lehman Brothers Inc., Three World Financial Center, 10th
Floor, New York, NY 10285;
(b) if to the Company or to the Significant Subsidiary, shall be
delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement,
Attention: Christopher C. Cambria (Fax: 212-805-5494);
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at
the address set forth in the Custody Agreement executed by such
Selling Stockholder;
provided, however, that any notice to an International Manager pursuant to
Section 10(d) shall be delivered or sent by mail, telex or facsimile
transmission to such International Manager at its address set forth in its
acceptance telex to the Lead Managers, which address will be supplied to any
other party hereto by the Lead Managers upon request. Any such statements,
requests, notices or agreements shall take effect at the time of receipt
thereof. The Company and the Selling Stockholders shall be entitled to act and
rely upon any request, consent, notice or agreement given or made on behalf of
the International Managers by Lehman Brothers Inc. on behalf of the Lead
Managers and the Company and the International Managers shall be entitled to
act and rely on any request, consent, notice or agreement given or made on
behalf of the Selling Stockholders by the Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the International Managers, the
Company, the Significant Subsidiary, the Selling Stockholders and their
respective successors. This Agreement and the terms and provisions hereof are
for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company and the
Selling Stockholders contained in this Agreement shall also be deemed to be for
the benefit of the person or persons, if any, who control any International
Manager within the meaning of Section 15 of the Securities Act and for the
benefit of each International Manager (and controlling persons thereof) who
offers or sells any shares of Common Stock in accordance with the terms of the
Agreement Between U.S. Underwriters and International Managers and (B) the
indemnity agreement of the International Managers contained in Section 10(c) of
this Agreement shall be deemed to be for the benefit of directors of the
Company, officers of the Company who have signed the Registration Statement and
any person controlling the Company within the meaning of Section 15 of the
Securities Act. Nothing in this Agreement is intended or shall be construed to
give any person, other than the persons referred to in this Section 15, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
16. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Significant Subsidiary, the Selling
Stockholders and the International Managers contained in this Agreement or made
by or on behalf on them,
34
<PAGE>
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
17. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[Signature pages follow]
35
<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Significant Subsidiary, the Selling Stockholders and the International
Managers, please indicate your acceptance in the space provided for that
purpose below.
Very truly yours,
L-3 COMMUNICATIONS HOLDINGS, INC.
By:
------------------------------------
Name:
Title:
L-3 COMMUNICATIONS CORPORATION,
the Significant Subsidiary
By:
------------------------------------
Name:
Title:
The Selling Stockholders Named in
Schedule 2 to this Agreement
By: Attorney-in-Fact
By:
------------------------------------
Name:
Title:
<PAGE>
Accepted:
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
BEAR, STEARNS INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
C.E. UNTERBERG, TOWBIN
For themselves and as Lead Managers
of the several International Managers named
in Schedule 1 hereto
By: LEHMAN BROTHERS INTERNATIONAL (EUROPE)
By:
--------------------------------
Authorized Representative
<PAGE>
SCHEDULE 1
International Managers Number of Shares
- ---------------------- ----------------
Lehman Brothers International (Europe).........................
Bear, Stearns International Limited............................
Credit Suisse First Boston (Europe) Limited....................
Merrill Lynch International....................................
Morgan Stanley & Co. International Limited.....................
C.E. Unterberg, Towbin.........................................
---------
Total 1,850,000
<PAGE>
SCHEDULE 2
Number of
Selling Stockholders Shares
- -------------------- ------
Lockheed Martin Corporation...........................................
Lehman Brothers Capital Partners III, L.P.............................
LB I Group Inc. ......................................................
Lehman Brothers MBG Partners 1997 (A) L.P.............................
Lehman Brothers MBG Partners 1997 (B) L.P.............................
Total 1,150,000
<PAGE>
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
February 4, 1999
L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, NY 10016
Ladies and Gentlemen:
We have acted as counsel to L-3 Communications Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-1 and any related registration statement that may be filed pursuant to
Rule 462(b) (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended, relating to the issuance and sale by the Company of
3,500,000 shares of Common Stock, par value $0.01 per share (together with any
other shares that may be issued and sold by the Company pursuant to Rule 462(b),
the "Primary Shares") and the sale by Lehman Brothers Capital Partners III,
L.P., LB I Group Inc. and affiliates and Lockheed Martin Corporation (the
"Selling Stockholders") of 1,600,000, 400,000 and 3,750,000 shares of Common
Stock, par value $0.01 per share, respectively (together with any other shares
that may be sold by the Selling Stockholders pursuant to Rule 462(b), the
"Secondary Shares").
We have examined the Registration Statement and a form of the share
certificate, which has been filed with the Commission as an exhibit to the
Registration Statement. We also have examined the originals, or duplicates or
certified or conformed copies, of such records, agreements, instruments and
other documents and have made such other and further investigations as we have
deemed relevant and necessary in connection with the opinions expressed herein.
As to questions of fact material to this opinion, we have relied upon
certificates of public officials and of officers and representatives of the
Company.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as duplicates or certified or conformed copies, and the
authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, we are of the opinion that the Secondary Shares have been duly
authorized, and are validly issued, fully paid and nonassessable and (1) when
the Board of Directors of the Company (the "Board") has taken all necessary
corporate action to authorize and approve the issuance of the Primary Shares and
(2) upon payment and delivery in accordance with the applicable definitive
underwriting agreements approved by the Board, the Primary Shares will be
validly issued, fully paid and non-assessable.
We are members of the Bar of the State of New York and we do not express
any opinion herein concerning any law other than the law of the State of New
York and the Delaware General Corporation Law.
We hereby consent to the filing of this opinion letter as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
<PAGE>
1997 OPTION PLAN
FOR KEY EMPLOYEES OF
L-3 COMMUNICATIONS HOLDINGS, INC.
1. Purpose of Plan
The 1997 Option Plan for Key Employees of L-3 Communications Holdings,
Inc. and Subsidiaries (the "Plan") is designed:
(a) to promote the long term financial interests and growth of L-3
Communications Holdings, Inc. (the "Corporation") and its subsidiaries by
attracting and retaining management personnel with the training, experience and
ability to enable them to make a substantial contribution to the success of the
Corporation's business;
(b) to motivate management personnel by means of growth-related
incentives to achieve long range goals; and
(c) to further the alignment of interests of participants with those
of the stockholders of the Corporation through opportunities for increased
stock, or stock-based, ownership in the Corporation.
2. Definitions
As used in the Plan, the following words shall have the following
meanings:
(a) "Board of Directors" means the Board of Directors of the
Corporation.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of
Directors.
(d) "Common Stock" or "Share" means Class A Common Stock of the
Corporation which may be authorized but unissued, or issued and reacquired.
(e) "Employee" means a person, including an officer, in the regular
full-time employment of the Corporation or one of its Subsidiaries who, in the
opinion of the Committee, is, or is expected to be, primarily responsible for
the management, growth or protection of some part or all of the business of the
Corporation.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(g) "Fair Market Value" means, unless otherwise defined in an Option
Agreement, such value of a Share as reported for stock exchange transactions
and/or determined in
<PAGE>
2
accordance with any applicable resolutions or regulations of the Committee in
effect at the relevant time.
(h) "Option Agreement" means an agreement between the Corporation and
a Participant that sets forth the terms, conditions and limitations applicable
to a grant of Options pursuant to the Plan.
(i) "Option" means an option to purchase shares of the Common Stock
which will not be an "incentive stock option" (within the meaning of Section
422 of the Code).
(j) "Participant" means an Employee, or other person having a
relationship with the Corporation or one of its Subsidiaries, to whom one or
more grants of Options have been made and such grants have not all been
forfeited or terminated under the Plan; provided, however, that a non-employee
director of the Corporation or one of its Subsidiaries may not be a
Participant.
(k) "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Corporation if each of the corporations, or
group of commonly controlled corporations, other than the last corporation in
the unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
3. Administration of Plan
(a) The Plan shall be administered by the Committee. None of the
members of the Committee shall be eligible to be selected for Option grants
under the Plan, or have been so eligible for selection within one year prior
thereto; provided, however, that the members of the Committee shall qualify to
administer the Plan for purposes of Rule 16b-3 (and any other applicable rule)
promulgated under Section 16(b) of the Exchange Act to the extent that the
Corporation is subject to such rule. The Committee may adopt its own rules of
procedure, and action of a majority of the members of the Committee taken at a
meeting, or action taken without a meeting by unanimous written consent, shall
constitute action by the Committee. The Committee shall have the power and
authority to administer, construe and interpret the Plan, to make rules for
carrying it out and to make changes in such rules. Any such interpretations,
rules and administration shall be consistent with the basic purposes of the
Plan.
(b) The Committee may delegate to the Chief Executive Officer and to
other senior officers of the Corporation its duties under the Plan subject to
such conditions and limitations as the Committee shall prescribe except that
only the Committee may designate and make Option grants to Participants who are
subject to Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Corporation, and the
officers and directors of the Corporation shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith
<PAGE>
3
shall be final and binding upon all Participants, the Corporation and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or Option grants, and all members of the Committee shall be fully
protected by the Corporation with respect to any such action, determination or
interpretation.
4. Eligibility
The Committee may from time to time make Option grants under the Plan
to such Employees, or other persons having a relationship with the Corporation
or any of its Subsidiaries, and in such form and having such terms, conditions
and limitations as the Committee may determine. No Option grants may be made
under this Plan to non-employee directors of the Corporation or any of its
Subsidiaries. Options may be granted singly, in combination or in tandem. The
terms, conditions and limitations of each Option grant under the Plan shall be
set forth in an Option Agreement, in a form approved by the Committee,
consistent, however, with the terms of the Plan; provided, however, that such
Option Agreement shall contain provisions dealing with the treatment of Option
grants in the event of the termination, death or disability of a Participant,
and may also include provisions concerning the treatment of Option grants in
the event of a change of control of the Corporation.
5. Grants
From time to time, the Committee, in its sole discretion, will
determine the forms and amounts of Options to be granted to Participants. At
the time of the grant the Committee shall determine, and shall include in the
Option Agreement or other Plan rules, the option exercise period, the option
price, and such other conditions or restrictions on the grant or exercise of
the Option as the Committee deems appropriate. In addition to other
restrictions contained in the Plan, an Option granted under this Paragraph 5,
may not be exercised more than 10 years after the date it is granted. Payment
of the option price shall be made in cash or in shares of Common Stock, or a
combination thereof, in accordance with the terms of the Plan, the Option
Agreement and of any applicable guidelines of the Committee in effect at the
time.
Options may be granted prior to the effective date of the Plan (as
determined pursuant to Paragraph 13 herein); provided, however, that no Option
shall be exercisable prior to the date of the approval of the Plan by the
stockholders of the Corporation.
6. Limitations and Conditions
(a) The number of Shares available under this Plan shall be 4,255,815
shares of the authorized Common Stock as of the effective date of the Plan.
Unless restricted by applicable law, Shares related to Options that are
forfeited, terminated, cancelled or expire unexercised, shall immediately
become available to be subject to Option grants.
(b) No Options shall be granted under the Plan beyond ten years after
the effective date of the Plan, but the terms of Options granted on or before
the expiration of the Plan may extend beyond such expiration. At the time an
Option is granted or amended or the terms or
<PAGE>
4
conditions of an Option are changed, the Committee may provide for limitations
or conditions on such Grant.
(c) Nothing contained herein shall affect the right of the Corporation
to terminate any Participant's employment at any time or for any reason.
(d) Other than as specifically provided with regard to the death of a
Participant, no benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to do so shall be void. No such benefit shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements, or torts of the Participant.
(e) Participants shall not be, and shall not have any of the rights or
privileges of, stockholders of the Corporation in respect of any Shares
purchasable in connection with any Option grant unless and until certificates
representing any such Shares have been issued by the Corporation to such
Participants.
(f) No election as to benefits or exercise of Options may be made
during a Participant's lifetime by anyone other than the Participant except by
a legal representative appointed for or by the Participant.
(g) Absent express provisions to the contrary, any grant of Options
under this Plan shall not be deemed compensation for purposes of computing
benefits or contributions under any retirement plan of the Corporation or its
Subsidiaries and shall not affect any benefits under any other benefit plan of
any kind now or subsequently in effect under which the availability or amount
of benefits is related to level of compensation. This Plan is not a "Retirement
Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of
1974, as amended.
(h) Unless the Committee determines otherwise, no benefit or promise
under the Plan shall be secured by any specific assets of the Corporation or
any of its Subsidiaries, nor shall any assets of the Corporation or any of its
Subsidiaries be designated as attributable or allocated to the satisfaction of
the Corporation's obligations under the Plan.
7. Transfers and Leaves of Absence
For purposes of the Plan, unless the Committee determines otherwise:
(a) a transfer of a Participant's employment without an intervening period of
separation among the Corporation and any Subsidiary shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. Adjustments
In the event of any change in the outstanding Common Stock by reason
of a stock split, spin-off, stock dividend, stock combination or
reclassification, recapitalization or merger, change of control, or similar
event, the Committee shall adjust appropriately and equitably the number of
<PAGE>
5
Shares subject to the Plan and available for or covered by Option grants and
exercise prices related to outstanding Option grants and make such other
revisions to outstanding Option grants as it deems are equitably required.
9. Merger, Consolidation, Exchange,
Acquisition, Liquidation or Dissolution
In its absolute discretion, and on such terms and conditions as it
deems appropriate, coincident with or after the grant of any Option, the
Committee may provide that such Option cannot be exercised after the merger or
consolidation of the Corporation into another corporation, the exchange of all
or substantially all of the assets of the Corporation for the securities of
another corporation, the acquisition by another corporation of 80% or more of
the Corporation's then outstanding shares of voting stock or the
recapitalization, reclassification, liquidation or dissolution of the
Corporation, and if the Committee so provides, it shall also provide, either by
the terms of such Option or by a resolution adopted prior to the occurrence of
such merger, consolidation, exchange, acquisition, recapitalization,
reclassification, liquidation or dissolution, that, for a period of at least
thirty (30) days prior to such event, such Option shall be exercisable as to
all shares subject thereto, notwithstanding anything to the contrary herein
(but subject to the provisions of Paragraph 6(b)) and that, upon the occurrence
of such event, such Option shall terminate and be of no further force or
effect; provided, however, that the Committee may also provide, in its absolute
discretion, that even if the Option shall remain exercisable after any such
event, from and after such event, any such Option shall be exercisable only for
the kind and amount of securities and/or other property, or the cash equivalent
thereof, receivable as a result of such event by the holder of a number of
shares of stock for which such Option could have been exercised immediately
prior to such event.
10. Amendment and Termination
The Committee shall have the authority to make such amendments to any
terms and conditions applicable to outstanding Option grants as are consistent
with this Plan provided that, except for adjustments under Paragraph 8 or 9
hereof, no such action shall modify such Option grant in a manner adverse to
the Participant without the Participant's consent.
The Board of Directors may amend, suspend or terminate the Plan except
that no such action, other than an action under Paragraph 8 or 9 hereof, may be
taken which would, without shareholder approval, increase the aggregate number
of Shares subject to Options under the Plan, decrease the exercise price of
outstanding Options, change the requirements relating to the Committee or
extend the term of the Plan, but only to the extent such shareholder approval
would be required by Rule 16b-3 at a time when the Company is subject to
Section 16(b) of the Exchange Act.
11. Foreign Options and Rights
The Committee may grant Options to Employees who are subject
to the laws of nations other than the United States, which Option grants may
have terms and conditions that
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6
differ from the terms thereof as provided elsewhere in the Plan for the purpose
of complying with foreign laws.
12. Withholding Taxes
The Corporation shall have the right to deduct from any cash payment
made under the Plan any federal, state or local income or other taxes required
by law to be withheld with respect to such payment. It shall be a condition to
the obligation of the Corporation to deliver shares upon the exercise of an
Option that the Participant pay to the Corporation such amount as may be
requested by the Corporation for the purpose of satisfying any liability for
such withholding taxes. Any Option Agreement may provide that the Participant
may elect, in accordance with any conditions set forth in such Option
Agreement, to pay a portion or all of such withholding taxes in shares of
Common Stock.
13. Effective Date and Termination Dates
The Plan shall be effective on and as of the date of its approval
by the stockholders of the Corporation and shall terminate ten years
later, subject to earlier termination by the Board of Directors pursuant to
Paragraph 10.
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of April 30, 1997 is made by and between L-3
Communications Holdings, Inc., a Delaware corporation hereinafter referred to
as the "Company", and Frank C. Lanza, an employee of the Company or a
Subsidiary (as defined below) or Affiliate (as defined below) of the Company,
hereinafter referred to as "Optionee".
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Class A Common Stock ("Class A Common
Stock");
WHEREAS, the Company wishes to carry out the Plan (as hereinafter
defined), the terms of which are hereby incorporated by reference and made a
part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Company and its stockholders to grant the Non-Qualified Options
provided for herein to the Optionee as an incentive for increased efforts
during his term of office with the Company or its Subsidiaries or Affiliates,
and has advised the Company thereof and instructed the undersigned officers to
issue said Options;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall
have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
Section 1.1 - Active Trading Market
"Active Trading Market" shall mean, as to the Company's common stock,
that the Company's common stock is listed or quoted on a national exchange or
the NASDAQ National Market.
Section 1.2 - Affiliate
"Affiliate", as applied to any Person, shall mean any other Person
directly or indirectly controlling, controlled by, or under common control
with, that person. For the purposes of this definition "control" (including,
with correlative meanings,
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2
the terms "controlling", "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
Person, whether through the ownership of voting securities, by contract or
otherwise.
Section 1.3 - Applicable Percentage
"Applicable Percentage" shall mean the percentage set forth on
Schedule B attached hereto.
Section 1.4 - Board of Directors
"Board of Directors" shall mean the Board of Directors of the Company.
Section 1.5 - Cause
"Cause" shall have the meaning of "Cause" set forth in Section 6.2(b)
of the Employment Agreement.
Section 1.6 - Change of Control
"Change of Control" shall mean an acquisition of all or substantially
all of the direct and indirect assets of the Company and its Subsidiaries (by
merger, consolidation, stock or asset sale or otherwise), unless immediately
following any such transaction Lehman, LBHI and Lockheed Martin and their
affiliates own 50% or more of the combined voting power of the then outstanding
voting securities entitled to vote generally of the Company or the acquiror of
such assets, as the case may be.
Section 1.7 - Class A Common Stock
"Class A Common Stock" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.8 - Class B Common Stock
"Class B Common Stock" shall mean the Class B Common Stock, par value
$.01 per share, of the Company.
Section 1.9 - Class C Common Stock
"Class C Common Stock" shall mean the Class C Common Stock, par value
$.01 per share, of the Company.
Section 1.10 - Closing Date
"Closing Date" shall mean date on which the consummation of the
transactions contemplated by the Transaction Agreement occurs.
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3
Section 1.11 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.12 - Committee
"Committee" shall mean the Compensation Committee of the Company.
Section 1.13 - Common Stock
"Common Stock" shall mean the Class A Common Stock, Class B Common
Stock and Class C Common Stock of the Company.
Section 1.14 - Common Stock Subscription Agreement
"Common Stock Subscription Agreement" shall mean that certain Common
Stock Subscription Agreement dated as of the date hereof between the Optionee
and the Company.
Section 1.15 - Cumulative EBITDA Target
"Cumulative EBITDA Target" shall mean the Cumulative EBITDA Targets as
set forth in Schedule A attached hereto.
Section 1.16 - Disability
"Disability" shall have the meaning of "Disability" set forth in
Section 6.3 of the Employment Agreement.
Section 1.17 - EBITDA
"EBITDA" shall mean, with respect to the Company and its Subsidiaries
on a consolidated basis as of the last day of any fiscal year, the audited
consolidated net income (excluding without duplication, (a) extraordinary gains
and losses in accordance with GAAP, (b) gains and losses in connection with
asset dispositions whether or not constituting extraordinary gains and losses
and (c) gains or losses on discontinued operations) for such period, plus (x)
consolidated interest expense for such period and (y) to the extent deducted in
computing such consolidated net income, the sum of income taxes, depreciation
and amortization for the year ended on such date; provided, however, that for
any calculation of EBITDA for the year ending December 31, 1997, EBITDA shall
be deemed to be EBITDA from March 31, 1997 to the last day of such period.
Section 1.18 - EBITDA Target
"EBITDA Target" shall mean the EBITDA Targets as set forth in Schedule
A attached hereto.
Section 1.19 - Employment Agreement
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4
"Employment Agreement" shall mean the employment agreement between the
Optionee and the Company dated as of the date hereof, and as amended from time
to time.
<PAGE>
5
Section 1.20 - Exercise Price
"Exercise Price" shall mean $6.47 per share of Class A Common Stock,
as adjusted pursuant to Section 2.4 herein.
Section 1.21 - Fiscal Year
"Fiscal Year" shall mean the most recently completed fiscal year of
the Company.
Section 1.22 - FMV per Share
"FMV per Share" shall mean: (i) if determined upon a Public Offering,
the offering price per share of Common Stock; (ii) if determined upon a Change
of Control, the value of the equity of the Company divided by the total number
of outstanding shares of Common Stock of the Company; and (iii) otherwise, fair
market value of the equity of the Company, as determined by the Board of
Directors in good faith (based on the opinion of an independent
nationally-recognized investment banking firm), divided by total number of
outstanding shares of Common Stock of the Company; provided, however, that in
the case of clause (iii) of this Section 1.19 if there is an Active Trading
Market for the Common Stock at the time of the determination of the FMV per
Share, FMV per Share shall be the average of the per share closing prices of
the Common Stock for the 20 trading days immediately preceding such
determination date.
Section 1.23 - Good Reason
"Good Reason" shall have the meaning of "Good Reason" set forth in
Section 6.1(b) of the Employment Agreement.
Section 1.24 - Grant Date
"Grant Date" shall mean the date hereof.
Section 1.25 - Group
"Group" means two or more Persons acting together as a partnership,
limited partnership, syndicate or other group for the purpose of acquiring,
holding or disposing of securities of the Company.
Section 1.26 - Initial Public Offering
"Initial Public Offering" shall mean the initial Public Offering
(other than pursuant to a registration statement on Form S-8 or otherwise
relating to equity securities issuable under any employee benefit plan of the
Company).
Section 1.27 - Lehman
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6
"Lehman" shall mean Lehman Brothers Capital Partners III, L.P., a
Delaware limited partnership.
Section 1.28 - Lockheed Martin
"Lockheed Martin" shall mean Lockheed Martin Corporation, a Maryland
Corporation.
Section 1.29 - Missed Year
"Missed Year" shall mean a Fiscal Year in which the Company's EBITDA
is less than 100% of the EBITDA Target for such Fiscal Year.
Section 1.30 - Options
"Options" shall mean the non-qualified options, which may include a
Time Option and/or a Performance Option, to purchase Common Stock granted under
this Agreement.
Section 1.31 - Performance Option
"Performance Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.2 hereof.
Section 1.32 - Person
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, limited liability company, unincorporated
association, joint venture or other entity of whatever nature.
Section 1.33 - Plan
"Plan" shall mean the 1997 Option Plan for Key Employees of L-3
Communications Holdings, Inc. and Subsidiaries.
Section 1.34 - Pronouns
The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.
Section 1.35 - Public Offering
"Public Offering" shall mean the sale of shares of any class
of the Company's stock to the public pursuant to an effective registration
statement (other than a registration statement on Form S-4 or S-8 or any
similar or successor form) filed under the Securities Act of 1933 which results
in an Active Trading Market of 25% or more of the outstanding shares of the
Common Stock of the Company.
<PAGE>
7
Section 1.36 - Put/Call Percentage
"Put/Call Percentage" shall mean, initially, 75%, which Put/Call
Percentage shall be reduced by 15 percentage points on each anniversary
(including the first) of the date hereof.
Section 1.37 - Retirement
"Retirement" shall mean normal retirement under the terms of any
tax-qualified retirement plan of the Company, which retirement occurs more than
three years after the Purchase Date. Any purported retirement prior to the
third anniversary of the Purchase Date shall be treated the same as a
termination without Good Reason.
Section 1.38 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.39 - Stockholders' Agreement
"Stockholders' Agreement" shall mean the Stockholders' Agreement dated
as of the date hereof among the Company, Lehman, Lockheed Martin, the Optionee
and LaPenta.
Section 1.40 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations, or group
of commonly controlled corporations, other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
Section 1.41 - Termination of Employment
"Termination of Employment" shall mean a termination of the Optionee's
employment with the Company (regardless of the reason therefor).
Section 1.42 - Time Option
"Time Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1 hereof.
Section 1.43 - Transaction Agreement
"Transaction Agreement" shall mean the Transaction Agreement dated as
of March 28, 1997, as amended, by and among the Company, Lehman, Lockheed
Martin, the Optionee and LaPenta.
<PAGE>
8
ARTICLE II
GRANT OF OPTIONS
Section 2.1 - Grant of Options
For good and valuable consideration, on and as of the date hereof the
Company irrevocably grants to the Optionee a Time Option and/or a Performance
Option to purchase any part or all of an aggregate of the number of shares set
forth with respect to each such Option on the signature page hereof of its
Class A Common Stock upon the terms and conditions set forth in this Agreement.
Section 2.2 - Exercise Price
The exercise price of the shares of Class A Common Stock covered by
the Options shall be $6.47 per share subject to adjustment pursuant to Section
2.4 herein without commission or other charge.
Section 2.3 - No Obligation of Employment
Nothing in this Agreement or in the Plan shall confer upon the
Optionee any right to continue in the employ of the Company or any Subsidiary
or Affiliate or shall interfere with or restrict in any way the rights of the
Company and its Subsidiaries or Affiliates, which are hereby expressly
reserved, to terminate the employment of the Optionee at any time for any
reason whatsoever, with or without Cause.
Section 2.4 - Adjustments in Options
Subject to Section 9 of the Plan, in the event that the outstanding
shares of the stock subject to an Option are, from time to time, changed into
or exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares, or otherwise, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares or other consideration as to which
such Option, or portions thereof then unexercised, shall be exercisable and the
exercise price therefor. Any such adjustment made by the Committee shall be
final and binding upon the Optionee, the Company and all other interested
persons.
ARTICLE III
EXERCISABILITY of Options
Section 3.1 - Time Options
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9
Unless otherwise provided in this Agreement, the Time Options shall
become exercisable as follows:
<PAGE>
10
Percentage of Class A Common
Date Time Option Stock As to which Time Option
Becomes Exercisable Is Exercisable
- ------------------- -----------------------------
After the first anniversary 20%
of the Closing Date
After the second anniversary 40%
of the Closing Date
After the third anniversary 60%
of the Closing Date
After the fourth anniversary 80%
of the Closing Date
After the fifth anniversary 100%
of the Closing Date
Section 3.2 - Performance Options
(a) Unless otherwise provided in this Agreement, the Performance
Option shall become exercisable with respect to 20% of the shares of Class A
Common Stock subject to such Performance Option on each of the first five
anniversaries of the Closing Date to the extent that the Company's EBITDA for
the Fiscal Year equals or exceeds the EBITDA Target.
(b) If any Fiscal Year is a Missed Year, such Performance Option shall
become exercisable with respect to a portion of the shares subject to
Performance Options in an amount equal to the product of (i) 20%, (ii) the
Applicable Percentage and (C) 571,429.
(c) If either all or a portion of Optionee's Performance Options do
not become exercisable in any year pursuant to the above, the Optionee may
"catch-up" based on the Cumulative EBITDA Target in an amount equal to (i) the
product of (A) 40%, if the determination is on the second anniversary of the
Closing Date, 60%, if on the third anniversary of the Closing Date, 80%, if on
the fourth anniversary of the Closing Date and 100%, if on the fifth
anniversary of the Closing Date, (B) the Applicable Percentage and (C) 571,429
less (ii) the total number of shares of Common Stock subject to Optionee's
Performance Option which have become exercisable.
(d) Notwithstanding the foregoing, the Performance Option shall become
exercisable as to 100% of the shares of Class A Common Stock subject to the
Performance Option after nine years after the Closing Date (but only to the
extent such Performance Option has not otherwise terminated or become
exercisable) at an exercise price of $6.47 per share, as adjusted pursuant to
Section 2.4 herein, whether or not the EBITDA Targets are achieved.
<PAGE>
11
Section 3.3 - Acceleration Events
Notwithstanding anything in this Article III to the contrary:
(a) The Time Option shall become immediately exercisable as to 100% of
the shares of Class A Common Stock subject to such Time Option (but only to the
extent such Time Option has not otherwise terminated or become exercisable)
upon the first to occur of: (i) Termination of Employment (A) on account of
death or Disability or (B) without Cause or with Good Reason and (ii) a Change
of Control.
(b) The Performance Options shall become fully exercisable early upon
the first to occur of: (i) Termination of Employment without Cause or with Good
Reason and (ii) a Change of Control; provided, however, that the acceleration
provided for in this subsection (b) shall occur if, and only if, (A) 100% or
more of the EBITDA Target has been achieved in each Fiscal Year prior to such
Termination of Employment or such Change of Control or (B) 100% of the
Cumulative EBITDA Target has been achieved in the Fiscal Year immediately
preceding such Termination of Employment or such Change of Control.
Section 3.4 - Effect of Termination of Employment
(a) Except as otherwise provided in this Article III, no Option shall
become exercisable as to any additional shares of Common Stock following
Termination of Employment.
<PAGE>
12
Section 3.5 - Expiration of Options
The Options may not be exercised to any extent by Optionee after the
first to occur of the following events:
(a) The tenth anniversary of the Grant Date; or
(b) The first anniversary of the date of Termination of Employment (i)
by reason of death, Disability, or Retirement or (ii) without Cause or for
Good Reason; or
(c) The date of a Termination of Employment for Cause or without Good
Reason; or
(d) If the Committee so determines pursuant to Section 9 of the Plan,
the effective date of either the merger or consolidation of the Company
into another Person, or the exchange or acquisition by another Person of
all or substantially all of the Company's assets or 80% or more of its
then outstanding voting stock, or the recapitalization, reclassification,
liquidation or dissolution of the Company; provided, that the Optionee is
either cashed out of such Options or permitted to exercise such Options
for a period of at least thirty (30) days prior to the effective date or
<PAGE>
13
such event. At least thirty (30) days prior to the effective date of such
merger, consolidation, exchange, acquisition, recapitalization,
reclassification, liquidation or dissolution, the Committee shall give the
Optionee notice of such event if the Option has then neither been fully
exercised nor become unexercisable under this Section 3.5.
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
During the lifetime of the Optionee, only he may exercise an Option or
any portion thereof. After the death of the Optionee, any exercisable portion
of an Option may, prior to the time when an Option becomes unexercisable under
Section 3.5, be exercised by his personal representative or by any person
empowered to do so under the Optionee's will or under the then applicable laws
of descent and distribution.
Section 4.2 - Partial Exercise
Any exercisable portion of an Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior to
the time when the Option or portion thereof becomes unexercisable under Section
3.5; provided, however, that any partial exercise shall be for whole shares of
Class A Common Stock only.
Section 4.3 - Manner of Exercise
An Option, or any exercisable portion thereof, may be exercised solely
by delivering to the Secretary or his office all of the following prior to the
time when the Option or such portion becomes unexercisable under Section 3.5:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with
all applicable rules established by the Committee;
(b) Full payment (in cash, by check or by a combination thereof) for
the shares with respect to which such Option or portion thereof is
exercised;
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the
shares of stock are being acquired for his own account, for investment and
without any present intention of distributing or reselling
<PAGE>
14
said shares or any of them except as may be permitted under the Securities
Act of 1933, as amended (the "Act"), and then applicable rules and
regulations thereunder, and that the Optionee or other person then
entitled to exercise such Option or portion thereof will indemnify the
Company against and hold it free and harmless from any loss, damage,
expense or liability resulting to the Company if any sale or distribution
of the shares by such person is contrary to the representation and
agreement referred to above; provided, however, that the Committee may, in
its absolute discretion, take whatever additional actions it deems
appropriate to ensure the observance and performance of such
representation and agreement and to effect compliance with the Act and any
other federal or state securities laws or regulations;
(d) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the
Option; and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
option.
Without limiting the generality of the foregoing, the Committee may require an
opinion of counsel acceptable to it to the effect that any subsequent transfer
of shares acquired on exercise of an Option does not violate the Act, and may
issue stop-transfer orders covering such shares. Share certificates evidencing
stock issued on exercise of this Option shall bear an appropriate legend
referring to the provisions of subsection (c) above and the agreements herein.
The written representation and agreement referred to in subsection (c) above
shall, however, not be required if the shares to be issued pursuant to such
exercise have been registered under the Act, and such registration is then
effective in respect of such shares.
Section 4.4 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of an Option, or any
portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Company. Such shares shall
be fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of an Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The obtaining of approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
<PAGE>
15
(b) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may from time to time establish for reasons
of administrative convenience.
Section 4.5 - Rights as Stockholder
The holder of an Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares
purchasable upon the exercise of the Option or any portion thereof unless and
until certificates representing such shares shall have been issued by the
Company to such holder.
ARTICLE V
Puts and Calls
Section 5.1 - Company's Right to Purchase. (a) In the event of any Termination
of Employment (i) by the Company without Cause, (ii) due to resignation by the
Optionee with Good Reason or (iii) due to the Optionee's Retirement, the
Company (or its designee) shall have the right to purchase and cancel, and the
Optionee shall be required upon exercise of such right to sell to the Company
(or its designee), all of the exercisable Options held by Optionee for an
amount equal to the product of (A) the total number of shares of Class A Common
Stock subject to exercisable Options held by the Optionee and (B) the Put/Call
Percentage as of the date of Termination of Employment, at a price per share
equal to the FMV per Share as of the date of such Termination of Employment
less the Exercise Price.
(b) In the event of any Termination of Employment due to (i)
death of the Optionee or (ii) Disability of the Optionee, the Company (or its
designee) shall have the right to purchase and cancel, and the Optionee shall
be required upon exercise by the Company of such right to sell to the Company
(or its designee), all of the exercisable Options held by the Optionee for an
amount equal to the product of (A) the total number of shares of Class A Common
Stock subject to exercisable Options held by Optionee and (B) the FMV per Share
as of the date of such Termination of Employment less the Exercise Price.
(c) In the event of any Termination of Employment (i) by the
Company for Cause or (ii) by the Optionee without Good Reason, all Options
(whether or not then exercisable) shall terminate without any payment.
(d) If the Company desires to exercise its right to purchase
any Common Stock subject to Options pursuant to this Section 5.1, the Company
shall, not later than the date of seventy-five (75) days following such
Termination of Employment, send written notice to the Optionee or his estate of
its intention to purchase such Options. The closing of such purchase shall take
place at the principal office of the Company within
<PAGE>
16
thirty (30) days after the giving of such written notice by the Company. The
Company's rights to purchase under this Section 5.1 may not be exercised in
part. If the Company chooses not to exercise such right, the Company shall not
later than seventy-five (75) days after the date of such Termination of
Employment send written notice to the Optionee or his estate of its intention
not to exercise such right.
Section 5.2 - Optionee's Right to Put. (a) In the event of any Termination of
Employment (i) by the Company without Cause, (ii) due to resignation by the
Optionee with Good Reason or (iii) due to the Optionee's Retirement, the
Optionee shall have the right to put to the Company, and the Company (or its
designee) shall be required upon exercise of such right to purchase and cancel,
all of the exercisable Options held by Optionee for an amount equal to the
product of (A) the total number of shares of Class A Common Stock subject to
exercisable Options held by the Optionee and (B) the Put/Call Percentage as of
the date of Termination of Employment, at a price per share equal to the FMV
per Share as of the date of such Termination of Employment less the Exercise
Price.
(b) In the event of any Termination of Employment due to (i) death of
the Optionee or (ii) Disability of the Optionee, the Optionee shall have the
right to put to the Company, and the Company (or its designee) shall be
required upon exercise of such right to purchase and cancel, all of the
exercisable Options held by the Optionee for an amount equal to the product of
(A) the total number of shares of Class A Common Stock subject to exercisable
Options held by Optionee and (B) the FMV per Share as of the date of such
Termination of Employment less the Exercise Price.
(c) In the event of any Termination of Employment (i) by the Company
for Cause or (ii) by the Optionee without Good Reason, all Options (whether or
not then exercisable) shall terminate without any payment.
(d) If the Optionee or his estate desires to exercise his or its
rights pursuant to this Section 5.2, the Optionee or his estate shall give
written notice of such intent to the Company no later than the earlier of (i)
90 days after the Company gives notice that it will not exercise its rights
under Section 5.1 and (ii) 15 days after the expiration of the Company's rights
under Section 5.1. The closing of such purchase shall take place at the
principal office of the Company within thirty (30) days after the giving of
such written notice to the Company. The Optionee's or his estate's rights to
put under this Section 5.2 may not be exercised in part.
Section 5.3 - Payment of Purchase Price by the Company. Notwithstanding the
foregoing, the Company shall not be required to purchase for cash any shares of
Common Stock subject to Options pursuant to Section 5.1 or Section 5.2 if (a)
such
<PAGE>
17
purchase would be or would result in a violation by the Company or any of its
Subsidiaries of (i) the terms of any debt agreements or other documents related
thereto to which the Company or any of its Subsidiaries is a party or (ii)
applicable law or (b) the Board of Directors (excluding Messrs. Lanza and
LaPenta or their respective nominees) unanimously determines that such purchase
would be reasonably likely to materially impact the Company's available cash,
require unsuitable additional debt to be incurred by the Company or otherwise
have a material adverse effect on the financial condition of the Company. If
the Company is precluded from paying for all or any portion of the Options in
cash pursuant to the preceding sentence, the Company shall issue a subordinated
note to the Optionee or his estate in respect of the Options not purchased for
cash, which note shall be repaid in cash (i) from the proceeds obtained by the
Company from the sale of Common Stock in an Initial Public Offering and (ii) at
such time that the Board of Directors determines that the conditions described
in the preceding sentence no longer exist; provided, that such note shall (A)
bear pay-in-kind interest at a rate per annum which, in the opinion of an
independent, mutually acceptable nationally-recognized investment banking firm,
will result in such note having a fair market value on the date of issuance
equal to the aggregate principal amount thereof, (B) be payable in full on
April 30, 2007 except as otherwise provided herein, (C) be subordinated to the
Company's obligations under any guarantee of any bank credit obligations of its
subsidiaries and (D) contain such other covenants, events of default and other
terms and conditions customary for notes of that kind. If in connection with
the exercise of rights pursuant to Section 5.1 or 5.2, the Company is required
to issue a subordinated note, at the request of the Optionee, the Company (by
action of the Board) will in good faith endeavor to cause the Company to
purchase the Options to be purchased pursuant to Section 5.1 or 5.2 in exchange
for the issuance of a subordinated note so long as such purchase is permitted
by the terms of any debt agreements or other documents related thereto to which
the Company or any of its subsidiaries is a party; provided, that in no event
shall the Company (or the Board) be required to cause the Company to purchase
such Options unless in its judgment such purchase on the terms set forth herein
would not have a material adverse impact on the Company's ability to raise debt
financing on commercially reasonable terms. Any subordinated note issued by the
Company pursuant to the foregoing shall contain such covenants, events of
default and other terms and conditions customary for notes of that kind,
including terms described in (A)-(C) above, except that (x) interest on such
note shall be payable in cash and (y) such note shall be payable in full on
August 15, 2007 except as otherwise provided herein and shall be subordinated
to the Company's obligations under any bank credit obligations or senior
subordinated debt. In the event that the Company is precluded from paying for
all or any portion of the Options in cash because such purchase would be or
would result in a violation by the Company or any of its Subsidiaries of the
terms of any debt agreements or other documents related thereto to which the
<PAGE>
18
Company or any of its Subsidiaries is a party, the Company shall use its
reasonable best efforts to obtain, or cause any such Subsidiary to obtain, a
waiver under such debt agreements or other agreements of such term or terms to
allow the Company to pay for all or any portion of the Options in cash.
Section 5.4 - Termination of Put/Call Rights. The rights and obligations set
forth in this Article 5 shall lapse upon a Public Offering.
ARTICLE VI
MISCELLANEOUS
Section 6.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee shall be final and binding upon the Optionee, the Company
and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or the Options. In its absolute discretion, the
Board of Directors may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan and this Agreement.
Section 6.2 - Options Not Transferable
Neither the Options nor any interest or right therein or part thereof
shall be liable for the debts, contracts or engagements of the Optionee or his
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that this Section 6.2
shall not prevent transfers by will or by the applicable laws of descent and
distribution.
Section 6.3 - Shares to Be Reserved
The Company shall at all times during the term of the Options reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
<PAGE>
19
Section 6.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
6.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall,
if the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of
his status and address by written notice under this Section 6.4. Any notice
shall have been deemed duly given when enclosed in a properly sealed envelope
or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
Section 6.5 - Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 6.6 - Applicability of Plan, Common Stock Subscription Agreement and
Stockholders' Agreement.
The Options and the shares of Common Stock issued to the Optionee upon
exercise of the Options shall be subject to all of the terms and provisions of
the Plan, Common Stock Subscription Agreement and the Management Stockholders'
Agreement, to the extent applicable to the Options and such shares. In the
event of any conflict between this Agreement and the Plan, the terms of the
Plan shall control. In the event of any conflict between this Agreement or the
Plan and the Common Stock Subscription Agreement, the terms of the Common Stock
Subscription Agreement shall control. In the event of any conflict between this
Agreement or the Plan or the Common Stock Subscription Agreement and the
Stockholders' Agreement, the terms of the Stockholders' Agreement shall
control.
Section 6.7 - Amendment
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
Section 6.8 - Governing Law
The laws of the State of New York shall govern the interpretation,
validity and performance of the terms of this Agreement regardless of the law
that might be applied under principles of conflicts of laws.
<PAGE>
20
Section 6.9 - Jurisdiction
Any suit, action or proceeding against the Optionee with respect to
this Agreement, or any judgment entered by any court in respect of any thereof,
shall be brought in any court of competent jurisdiction in the State of New
York, as the Company may elect in its sole discretion, and the Optionee hereby
submits to the non-exclusive jurisdiction of such courts for the purpose of any
such suit, action, proceeding or judgment. The Optionee hereby irrevocably
waives any objections which he may now or hereafter have to the laying of the
venue of any suit, action or proceeding arising out of or relating to this
Agreement brought in any court of competent jurisdiction in the State of New
York, and hereby further irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in any
inconvenient forum. No suit, action or proceeding against the Company with
respect to this Agreement may be brought in any court, domestic or foreign, or
before any similar domestic or foreign authority other than in a court of
competent jurisdiction in the State of New York, and the Optionee hereby
irrevocably waives any right which he may otherwise have had to bring such an
action in any other court, domestic or foreign, or before any similar domestic
or foreign authority. The Company hereby submits to the jurisdiction of such
courts for the purpose of any such suit, action or proceeding.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
L-3 COMMUNICATIONS HOLDINGS, INC.
By /s/ Michael T. Strianese
------------------------------
Its Vice President, Finance
and Controller
--------------------------
/s/ Frank C. Lanza
- ----------------------------------- Aggregate number of shares of
Frank C. Lanza Class A Common Stock for which
the Time Option granted
hereunder is exercisable:
571,428
L-3 Communications Corporation
- -----------------------------------
600 Third Avenue
New York, NY 10016 Aggregate number of shares of
- ----------------------------------- Class A Common Stock for which
Address the Performance Option granted
hereunder is exercisable:
571,429
Frank C. Lanza's Taxpayer
Identification Number:
- -------------------------------
<PAGE>
Schedule A
----------
EBITDA Targets
--------------
($ in millions)
EBITDA Target* Cumulative EBITDA Target*
-------------- -------------------------
1997 (9 months only) $70.5
1998 97.4 $167.9
1999 104.1 272.0
2000 112.4 384.4
2001 120.5 504.9
- -------------
* Upon disposition or acquisition of any business or substantial portion of the
assets of the Company or another company, the EBITDA Targets for the year of
such disposition or such acquisition and each subsequent year shall be
adjusted to eliminate or include, as the case may be, the income and expense
related to the business or assets that were subject to disposition or
acquisition.
Such adjustments must be consented to by all non-management directors
of the Board of Directors. If such directors cannot so consent, the adjustment
proposal shall be submitted to the Company's independent auditors, who can
consult with the necessary consultants for binding resolution.
<PAGE>
Schedule B
----------
Applicable Percentage
---------------------
Target Achieved Percentage of EBITDA Applicable
(annual or cumulative) (Pct.) Percentage
- ------------------------------------ ----------
Less than 85 0.00
85 but less than 89 25.00
89 but less than 95 50.00
95 but less than 99 75.00
99 or more 100.00
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of April 30, 1997 is made by and between L-3
Communications Holdings, Inc., a Delaware corporation hereinafter referred to
as the "Company", and Robert V. LaPenta, an employee of the Company or a
Subsidiary (as defined below) or Affiliate (as defined below) of the Company,
hereinafter referred to as "Optionee".
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Class A Common Stock ("Class A Common
Stock");
WHEREAS, the Company wishes to carry out the Plan (as hereinafter
defined), the terms of which are hereby incorporated by reference and made a
part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Company and its stockholders to grant the Non-Qualified Options
provided for herein to the Optionee as an incentive for increased efforts
during his term of office with the Company or its Subsidiaries or Affiliates,
and has advised the Company thereof and instructed the undersigned officers to
issue said Options;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall
have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
Section 1.1 - Active Trading Market
"Active Trading Market" shall mean, as to the Company's common stock,
that the Company's common stock is listed or quoted on a national exchange or
the NASDAQ National Market.
Section 1.2 - Affiliate
"Affiliate", as applied to any Person, shall mean any other Person
directly or indirectly controlling, controlled by, or under common control
with, that person. For the purposes of this definition "control" (including,
with correlative meanings,
<PAGE>
2
the terms "controlling", "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
Person, whether through the ownership of voting securities, by contract or
otherwise.
Section 1.3 - Applicable Percentage
"Applicable Percentage" shall mean the percentage set forth on
Schedule B attached hereto.
Section 1.4 - Board of Directors
"Board of Directors" shall mean the Board of Directors of the Company.
Section 1.5 - Cause
"Cause" shall have the meaning of "Cause" set forth in Section 6.2(b)
of the Employment Agreement.
Section 1.6 - Change of Control
"Change of Control" shall mean an acquisition of all or substantially
all of the direct and indirect assets of the Company and its Subsidiaries (by
merger, consolidation, stock or asset sale or otherwise), unless immediately
following any such transaction Lehman, LBHI and Lockheed Martin and their
affiliates own 50% or more of the combined voting power of the then outstanding
voting securities entitled to vote generally of the Company or the acquiror of
such assets, as the case may be.
Section 1.7 - Class A Common Stock
"Class A Common Stock" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.8 - Class B Common Stock
"Class B Common Stock" shall mean the Class B Common Stock, par value
$.01 per share, of the Company.
Section 1.9 - Class C Common Stock
"Class C Common Stock" shall mean the Class C Common Stock, par value
$.01 per share, of the Company.
Section 1.10 - Closing Date
"Closing Date" shall mean date on which the consummation of the
transactions contemplated by the Transaction Agreement occurs.
<PAGE>
3
Section 1.11 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.12 - Committee
"Committee" shall mean the Compensation Committee of the Company.
Section 1.13 - Common Stock
"Common Stock" shall mean the Class A Common Stock, Class B Common
Stock and Class C Common Stock of the Company.
Section 1.14 - Common Stock Subscription Agreement
"Common Stock Subscription Agreement" shall mean that certain Common
Stock Subscription Agreement dated as of the date hereof between the Optionee
and the Company.
Section 1.15 - Cumulative EBITDA Target
"Cumulative EBITDA Target" shall mean the Cumulative EBITDA Targets as
set forth in Schedule A attached hereto.
Section 1.16 - Disability
"Disability" shall have the meaning of "Disability" set forth in
Section 6.3 of the Employment Agreement.
Section 1.17 - EBITDA
"EBITDA" shall mean, with respect to the Company and its Subsidiaries
on a consolidated basis as of the last day of any fiscal year, the audited
consolidated net income (excluding without duplication, (a) extraordinary gains
and losses in accordance with GAAP, (b) gains and losses in connection with
asset dispositions whether or not constituting extraordinary gains and losses
and (c) gains or losses on discontinued operations) for such period, plus (x)
consolidated interest expense for such period and (y) to the extent deducted in
computing such consolidated net income, the sum of income taxes, depreciation
and amortization for the year ended on such date; provided, however, that for
any calculation of EBITDA for the year ending December 31, 1997, EBITDA shall
be deemed to be EBITDA from March 31, 1997 to the last day of such period.
Section 1.18 - EBITDA Target
"EBITDA Target" shall mean the EBITDA Targets as set forth in Schedule
A attached hereto.
Section 1.19 - Employment Agreement
<PAGE>
4
"Employment Agreement" shall mean the employment agreement between the
Optionee and the Company dated as of the date hereof, and as amended from time
to time.
<PAGE>
5
Section 1.20 - Exercise Price
"Exercise Price" shall mean $6.47 per share of Class A Common Stock,
as adjusted pursuant to Section 2.4 herein.
Section 1.21 - Fiscal Year
"Fiscal Year" shall mean the most recently completed fiscal year of
the Company.
Section 1.22 - FMV per Share
"FMV per Share" shall mean: (i) if determined upon a Public Offering,
the offering price per share of Common Stock; (ii) if determined upon a Change
of Control, the value of the equity of the Company divided by the total number
of outstanding shares of Common Stock of the Company; and (iii) otherwise, fair
market value of the equity of the Company, as determined by the Board of
Directors in good faith (based on the opinion of an independent
nationally-recognized investment banking firm), divided by total number of
outstanding shares of Common Stock of the Company; provided, however, that in
the case of clause (iii) of this Section 1.19 if there is an Active Trading
Market for the Common Stock at the time of the determination of the FMV per
Share, FMV per Share shall be the average of the per share closing prices of
the Common Stock for the 20 trading days immediately preceding such
determination date.
Section 1.23 - Good Reason
"Good Reason" shall have the meaning of "Good Reason" set forth in
Section 6.1(b) of the Employment Agreement.
Section 1.24 - Grant Date
"Grant Date" shall mean the date hereof.
Section 1.25 - Group
"Group" means two or more Persons acting together as a partnership,
limited partnership, syndicate or other group for the purpose of acquiring,
holding or disposing of securities of the Company.
Section 1.26 - Initial Public Offering
"Initial Public Offering" shall mean the initial Public Offering
(other than pursuant to a registration statement on Form S-8 or otherwise
relating to equity securities issuable under any employee benefit plan of the
Company).
Section 1.27 - Lehman
<PAGE>
6
"Lehman" shall mean Lehman Brothers Capital Partners III, L.P., a
Delaware limited partnership.
Section 1.28 - Lockheed Martin
"Lockheed Martin" shall mean Lockheed Martin Corporation, a Maryland
Corporation.
Section 1.29 - Missed Year
"Missed Year" shall mean a Fiscal Year in which the Company's EBITDA
is less than 100% of the EBITDA Target for such Fiscal Year.
Section 1.30 - Options
"Options" shall mean the non-qualified options, which may include a
Time Option and/or a Performance Option, to purchase Common Stock granted under
this Agreement.
Section 1.31 - Performance Option
"Performance Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.2 hereof.
Section 1.32 - Person
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, limited liability company, unincorporated
association, joint venture or other entity of whatever nature.
Section 1.33 - Plan
"Plan" shall mean the 1997 Option Plan for Key Employees of L-3
Communications Holdings, Inc. and Subsidiaries.
Section 1.34 - Pronouns
The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.
Section 1.35 - Public Offering
"Public Offering" shall mean the sale of shares of any class of the
Company's stock to the public pursuant to an effective registration statement
(other than a registration statement on Form S-4 or S-8 or any similar or
successor form) filed under the Securities Act of 1933 which results in an
Active Trading Market of 25% or more of the outstanding shares of the Common
Stock of the Company.
<PAGE>
7
Section 1.36 - Put/Call Percentage
"Put/Call Percentage" shall mean, initially, 75%, which Put/Call
Percentage shall be reduced by 15 percentage points on each anniversary
(including the first) of the date hereof.
Section 1.37 - Retirement
"Retirement" shall mean normal retirement under the terms of any
tax-qualified retirement plan of the Company, which retirement occurs more than
three years after the Purchase Date. Any purported retirement prior to the
third anniversary of the Purchase Date shall be treated the same as a
termination without Good Reason.
Section 1.38 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.39 - Stockholders' Agreement
"Stockholders' Agreement" shall mean the Stockholders' Agreement dated
as of the date hereof among the Company, Lehman, Lockheed Martin, the Optionee
and Lanza.
Section 1.40 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations, or group
of commonly controlled corporations, other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
Section 1.41 - Termination of Employment
"Termination of Employment" shall mean a termination of the Optionee's
employment with the Company (regardless of the reason therefor).
Section 1.42 - Time Option
"Time Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1 hereof.
Section 1.43 - Transaction Agreement
"Transaction Agreement" shall mean the Transaction Agreement dated as
of March 28, 1997, as amended, by and among the Company, Lehman, Lockheed
Martin, the Optionee and Lanza.
<PAGE>
8
ARTICLE II
GRANT OF OPTIONS
Section 2.1 - Grant of Options
For good and valuable consideration, on and as of the date hereof the
Company irrevocably grants to the Optionee a Time Option and/or a Performance
Option to purchase any part or all of an aggregate of the number of shares set
forth with respect to each such Option on the signature page hereof of its
Class A Common Stock upon the terms and conditions set forth in this Agreement.
Section 2.2 - Exercise Price
The exercise price of the shares of Class A Common Stock covered by
the Options shall be $6.47 per share subject to adjustment pursuant to Section
2.4 herein without commission or other charge.
Section 2.3 - No Obligation of Employment
Nothing in this Agreement or in the Plan shall confer upon the
Optionee any right to continue in the employ of the Company or any Subsidiary
or Affiliate or shall interfere with or restrict in any way the rights of the
Company and its Subsidiaries or Affiliates, which are hereby expressly
reserved, to terminate the employment of the Optionee at any time for any
reason whatsoever, with or without Cause.
Section 2.4 - Adjustments in Options
Subject to Section 9 of the Plan, in the event that the outstanding
shares of the stock subject to an Option are, from time to time, changed into
or exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares, or otherwise, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares or other consideration as to which
such Option, or portions thereof then unexercised, shall be exercisable and the
exercise price therefor. Any such adjustment made by the Committee shall be
final and binding upon the Optionee, the Company and all other interested
persons.
ARTICLE III
EXERCISABILITY of Options
Section 3.1 - Time Options
<PAGE>
9
Unless otherwise provided in this Agreement, the Time Options shall
become exercisable as follows:
<PAGE>
10
Percentage of Class A Common
Date Time Option Stock As to which Time Option
Becomes Exercisable Is Exercisable
- ------------------- -----------------------------
After the first anniversary 20%
of the Closing Date
After the second anniversary 40%
of the Closing Date
After the third anniversary 60%
of the Closing Date
After the fourth anniversary 80%
of the Closing Date
After the fifth anniversary 100%
of the Closing Date
Section 3.2 - Performance Options
(a) Unless otherwise provided in this Agreement, the Performance
Option shall become exercisable with respect to 20% of the shares of Class A
Common Stock subject to such Performance Option on each of the first five
anniversaries of the Closing Date to the extent that the Company's EBITDA for
the Fiscal Year equals or exceeds the EBITDA Target.
(b) If any Fiscal Year is a Missed Year, such Performance Option shall
become exercisable with respect to a portion of the shares subject to
Performance Options in an amount equal to the product of (i) 20%, (ii) the
Applicable Percentage and (C) 571,429.
(c) If either all or a portion of Optionee's Performance Options do
not become exercisable in any year pursuant to the above, the Optionee may
"catch-up" based on the Cumulative EBITDA Target in an amount equal to (i) the
product of (A) 40%, if the determination is on the second anniversary of the
Closing Date, 60%, if on the third anniversary of the Closing Date, 80%, if on
the fourth anniversary of the Closing Date and 100%, if on the fifth
anniversary of the Closing Date, (B) the Applicable Percentage and (C) 571,429
less (ii) the total number of shares of Common Stock subject to Optionee's
Performance Option which have become exercisable.
(d) Notwithstanding the foregoing, the Performance Option shall become
exercisable as to 100% of the shares of Class A Common Stock subject to the
Performance Option after nine years after the Closing Date (but only to the
extent such Performance Option has not otherwise terminated or become
exercisable) at an exercise price of $6.47 per share, as adjusted pursuant to
Section 2.4 herein, whether or not the EBITDA Targets are achieved.
<PAGE>
11
Section 3.3 - Acceleration Events
Notwithstanding anything in this Article III to the contrary:
(a) The Time Option shall become immediately exercisable as to 100% of
the shares of Class A Common Stock subject to such Time Option (but only to the
extent such Time Option has not otherwise terminated or become exercisable)
upon the first to occur of: (i) Termination of Employment (A) on account of
death or Disability or (B) without Cause or with Good Reason and (ii) a Change
of Control.
(b) The Performance Options shall become fully exercisable early upon
the first to occur of: (i) Termination of Employment without Cause or with Good
Reason and (ii) a Change of Control; provided, however, that the acceleration
provided for in this subsection (b) shall occur if, and only if, (A) 100% or
more of the EBITDA Target has been achieved in each Fiscal Year prior to such
Termination of Employment or such Change of Control or (B) 100% of the
Cumulative EBITDA Target has been achieved in the Fiscal Year immediately
preceding such Termination of Employment or such Change of Control.
Section 3.4 - Effect of Termination of Employment
(a) Except as otherwise provided in this Article III, no Option shall
become exercisable as to any additional shares of Common Stock following
Termination of Employment.
<PAGE>
12
Section 3.5 - Expiration of Options
The Options may not be exercised to any extent by Optionee after the
first to occur of the following events:
(a) The tenth anniversary of the Grant Date; or
(b) The first anniversary of the date of Termination of Employment (i)
by reason of death, Disability, or Retirement or (ii) without Cause or for
Good Reason; or
(c) The date of a Termination of Employment for Cause or without Good
Reason; or
(d) If the Committee so determines pursuant to Section 9 of the Plan,
the effective date of either the merger or consolidation of the Company
into another Person, or the exchange or acquisition by another Person of
all or substantially all of the Company's assets or 80% or more of its
then outstanding voting stock, or the recapitalization, reclassification,
liquidation or dissolution of the Company; provided, that the Optionee is
either cashed out of such Options or permitted to exercise such Options
for a period of at least thirty (30) days prior to the effective date or
<PAGE>
13
such event. At least thirty (30) days prior to the effective date of such
merger, consolidation, exchange, acquisition, recapitalization,
reclassification, liquidation or dissolution, the Committee shall give the
Optionee notice of such event if the Option has then neither been fully
exercised nor become unexercisable under this Section 3.5.
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
During the lifetime of the Optionee, only he may exercise an Option or
any portion thereof. After the death of the Optionee, any exercisable portion
of an Option may, prior to the time when an Option becomes unexercisable under
Section 3.5, be exercised by his personal representative or by any person
empowered to do so under the Optionee's will or under the then applicable laws
of descent and distribution.
Section 4.2 - Partial Exercise
Any exercisable portion of an Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior to
the time when the Option or portion thereof becomes unexercisable under Section
3.5; provided, however, that any partial exercise shall be for whole shares of
Class A Common Stock only.
Section 4.3 - Manner of Exercise
An Option, or any exercisable portion thereof, may be exercised solely
by delivering to the Secretary or his office all of the following prior to the
time when the Option or such portion becomes unexercisable under Section 3.5:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with
all applicable rules established by the Committee;
(b) Full payment (in cash, by check or by a combination thereof) for
the shares with respect to which such Option or portion thereof is
exercised;
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the
shares of stock are being acquired for his own account, for investment and
without any present intention of distributing or reselling
<PAGE>
14
said shares or any of them except as may be permitted under the Securities
Act of 1933, as amended (the "Act"), and then applicable rules and
regulations thereunder, and that the Optionee or other person then
entitled to exercise such Option or portion thereof will indemnify the
Company against and hold it free and harmless from any loss, damage,
expense or liability resulting to the Company if any sale or distribution
of the shares by such person is contrary to the representation and
agreement referred to above; provided, however, that the Committee may, in
its absolute discretion, take whatever additional actions it deems
appropriate to ensure the observance and performance of such
representation and agreement and to effect compliance with the Act and any
other federal or state securities laws or regulations;
(d) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the
Option; and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
option.
Without limiting the generality of the foregoing, the Committee may require an
opinion of counsel acceptable to it to the effect that any subsequent transfer
of shares acquired on exercise of an Option does not violate the Act, and may
issue stop-transfer orders covering such shares. Share certificates evidencing
stock issued on exercise of this Option shall bear an appropriate legend
referring to the provisions of subsection (c) above and the agreements herein.
The written representation and agreement referred to in subsection (c) above
shall, however, not be required if the shares to be issued pursuant to such
exercise have been registered under the Act, and such registration is then
effective in respect of such shares.
Section 4.4 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of an Option, or any
portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Company. Such shares shall
be fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of an Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The obtaining of approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
<PAGE>
15
(b) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may from time to time establish for reasons
of administrative convenience.
Section 4.5 - Rights as Stockholder
The holder of an Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares
purchasable upon the exercise of the Option or any portion thereof unless and
until certificates representing such shares shall have been issued by the
Company to such holder.
ARTICLE V
Puts and Calls
Section 5.1 - Company's Right to Purchase. (a) In the event of any Termination
of Employment (i) by the Company without Cause, (ii) due to resignation by the
Optionee with Good Reason or (iii) due to the Optionee's Retirement, the
Company (or its designee) shall have the right to purchase and cancel, and the
Optionee shall be required upon exercise of such right to sell to the Company
(or its designee), all of the exercisable Options held by Optionee for an
amount equal to the product of (A) the total number of shares of Class A Common
Stock subject to exercisable Options held by the Optionee and (B) the Put/Call
Percentage as of the date of Termination of Employment, at a price per share
equal to the FMV per Share as of the date of such Termination of Employment
less the Exercise Price.
(b) In the event of any Termination of Employment due to (i) death of
the Optionee or (ii) Disability of the Optionee, the Company (or its designee)
shall have the right to purchase and cancel, and the Optionee shall be required
upon exercise by the Company of such right to sell to the Company (or its
designee), all of the exercisable Options held by the Optionee for an amount
equal to the product of (A) the total number of shares of Class A Common Stock
subject to exercisable Options held by Optionee and (B) the FMV per Share as of
the date of such Termination of Employment less the Exercise Price.
(c) In the event of any Termination of Employment (i) by the Company
for Cause or (ii) by the Optionee without Good Reason, all Options (whether or
not then exercisable) shall terminate without any payment.
(d) If the Company desires to exercise its right to purchase any
Common Stock subject to Options pursuant to this Section 5.1, the Company
shall, not later than the date of seventy-five (75) days following such
Termination of Employment, send written notice to the Optionee or his estate of
its intention to purchase such Options. The closing of such purchase shall take
place at the principal office of the Company within
<PAGE>
16
thirty (30) days after the giving of such written notice by the Company. The
Company's rights to purchase under this Section 5.1 may not be exercised in
part. If the Company chooses not to exercise such right, the Company shall not
later than seventy-five (75) days after the date of such Termination of
Employment send written notice to the Optionee or his estate of its intention
not to exercise such right.
Section 5.2 - Optionee's Right to Put. (a) In the event of any Termination of
Employment (i) by the Company without Cause, (ii) due to resignation by the
Optionee with Good Reason or (iii) due to the Optionee's Retirement, the
Optionee shall have the right to put to the Company, and the Company (or its
designee) shall be required upon exercise of such right to purchase and cancel,
all of the exercisable Options held by Optionee for an amount equal to the
product of (A) the total number of shares of Class A Common Stock subject to
exercisable Options held by the Optionee and (B) the Put/Call Percentage as of
the date of Termination of Employment, at a price per share equal to the FMV
per Share as of the date of such Termination of Employment less the Exercise
Price.
(b) In the event of any Termination of Employment due to (i) death of
the Optionee or (ii) Disability of the Optionee, the Optionee shall have the
right to put to the Company, and the Company (or its designee) shall be
required upon exercise of such right to purchase and cancel, all of the
exercisable Options held by the Optionee for an amount equal to the product of
(A) the total number of shares of Class A Common Stock subject to exercisable
Options held by Optionee and (B) the FMV per Share as of the date of such
Termination of Employment less the Exercise Price.
(c) In the event of any Termination of Employment (i) by the Company
for Cause or (ii) by the Optionee without Good Reason, all Options (whether or
not then exercisable) shall terminate without any payment.
(d) If the Optionee or his estate desires to exercise his or its
rights pursuant to this Section 5.2, the Optionee or his estate shall give
written notice of such intent to the Company no later than the earlier of (i)
90 days after the Company gives notice that it will not exercise its rights
under Section 5.1 and (ii) 15 days after the expiration of the Company's rights
under Section 5.1. The closing of such purchase shall take place at the
principal office of the Company within thirty (30) days after the giving of
such written notice to the Company. The Optionee's or his estate's rights to
put under this Section 5.2 may not be exercised in part.
Section 5.3 - Payment of Purchase Price by the Company. Notwithstanding the
foregoing, the Company shall not be required to purchase for cash any shares of
Common Stock subject to Options pursuant to Section 5.1 or Section 5.2 if (a)
such
<PAGE>
17
purchase would be or would result in a violation by the Company or any of its
Subsidiaries of (i) the terms of any debt agreements or other documents related
thereto to which the Company or any of its Subsidiaries is a party or (ii)
applicable law or (b) the Board of Directors (excluding Messrs. Lanza and
LaPenta or their respective nominees) unanimously determines that such purchase
would be reasonably likely to materially impact the Company's available cash,
require unsuitable additional debt to be incurred by the Company or otherwise
have a material adverse effect on the financial condition of the Company. If
the Company is precluded from paying for all or any portion of the Options in
cash pursuant to the preceding sentence, the Company shall issue a subordinated
note to the Optionee or his estate in respect of the Options not purchased for
cash, which note shall be repaid in cash (i) from the proceeds obtained by the
Company from the sale of Common Stock in an Initial Public Offering and (ii) at
such time that the Board of Directors determines that the conditions described
in the preceding sentence no longer exist; provided, that such note shall (A)
bear pay-in-kind interest at a rate per annum which, in the opinion of an
independent, mutually acceptable nationally-recognized investment banking firm,
will result in such note having a fair market value on the date of issuance
equal to the aggregate principal amount thereof, (B) be payable in full on
April 30, 2007 except as otherwise provided herein, (C) be subordinated to the
Company's obligations under any guarantee of any bank credit obligations of its
subsidiaries and (D) contain such other covenants, events of default and other
terms and conditions customary for notes of that kind. If in connection with
the exercise of rights pursuant to Section 5.1 or 5.2, the Company is required
to issue a subordinated note, at the request of the Optionee, the Company (by
action of the Board) will in good faith endeavor to cause the Company to
purchase the Options to be purchased pursuant to Section 5.1 or 5.2 in exchange
for the issuance of a subordinated note so long as such purchase is permitted
by the terms of any debt agreements or other documents related thereto to which
the Company or any of its subsidiaries is a party; provided, that in no event
shall the Company (or the Board) be required to cause the Company to purchase
such Options unless in its judgment such purchase on the terms set forth herein
would not have a material adverse impact on the Company's ability to raise debt
financing on commercially reasonable terms. Any subordinated note issued by the
Company pursuant to the foregoing shall contain such covenants, events of
default and other terms and conditions customary for notes of that kind,
including terms described in (A)-(C) above, except that (x) interest on such
note shall be payable in cash and (y) such note shall be payable in full on
August 15, 2007 except as otherwise provided herein and shall be subordinated
to the Company's obligations under any bank credit obligations or senior
subordinated debt. In the event that the Company is precluded from paying for
all or any portion of the Options in cash because such purchase would be or
would result in a violation by the Company or any of its Subsidiaries of the
terms of any debt agreements or other documents related thereto to which the
<PAGE>
18
Company or any of its Subsidiaries is a party, the Company shall use its
reasonable best efforts to obtain, or cause any such Subsidiary to obtain, a
waiver under such debt agreements or other agreements of such term or terms to
allow the Company to pay for all or any portion of the Options in cash.
Section 5.4 - Termination of Put/Call Rights. The rights and obligations set
forth in this Article 5 shall lapse upon a Public Offering.
ARTICLE VI
MISCELLANEOUS
Section 6.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee shall be final and binding upon the Optionee, the Company
and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or the Options. In its absolute discretion, the
Board of Directors may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan and this Agreement.
Section 6.2 - Options Not Transferable
Neither the Options nor any interest or right therein or part thereof
shall be liable for the debts, contracts or engagements of the Optionee or his
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that this Section 6.2
shall not prevent transfers by will or by the applicable laws of descent and
distribution.
Section 6.3 - Shares to Be Reserved
The Company shall at all times during the term of the Options reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
<PAGE>
19
Section 6.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
6.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall,
if the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of
his status and address by written notice under this Section 6.4. Any notice
shall have been deemed duly given when enclosed in a properly sealed envelope
or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
Section 6.5 - Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 6.6 - Applicability of Plan, Common Stock Subscription Agreement and
Stockholders' Agreement.
The Options and the shares of Common Stock issued to the Optionee upon
exercise of the Options shall be subject to all of the terms and provisions of
the Plan, Common Stock Subscription Agreement and the Management Stockholders'
Agreement, to the extent applicable to the Options and such shares. In the
event of any conflict between this Agreement and the Plan, the terms of the
Plan shall control. In the event of any conflict between this Agreement or the
Plan and the Common Stock Subscription Agreement, the terms of the Common Stock
Subscription Agreement shall control. In the event of any conflict between this
Agreement or the Plan or the Common Stock Subscription Agreement and the
Stockholders' Agreement, the terms of the Stockholders' Agreement shall
control.
Section 6.7 - Amendment
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
Section 6.8 - Governing Law
The laws of the State of New York shall govern the interpretation,
validity and performance of the terms of this Agreement regardless of the law
that might be applied under principles of conflicts of laws.
<PAGE>
20
Section 6.9 - Jurisdiction
Any suit, action or proceeding against the Optionee with respect to
this Agreement, or any judgment entered by any court in respect of any thereof,
shall be brought in any court of competent jurisdiction in the State of New
York, as the Company may elect in its sole discretion, and the Optionee hereby
submits to the non-exclusive jurisdiction of such courts for the purpose of any
such suit, action, proceeding or judgment. The Optionee hereby irrevocably
waives any objections which he may now or hereafter have to the laying of the
venue of any suit, action or proceeding arising out of or relating to this
Agreement brought in any court of competent jurisdiction in the State of New
York, and hereby further irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in any
inconvenient forum. No suit, action or proceeding against the Company with
respect to this Agreement may be brought in any court, domestic or foreign, or
before any similar domestic or foreign authority other than in a court of
competent jurisdiction in the State of New York, and the Optionee hereby
irrevocably waives any right which he may otherwise have had to bring such an
action in any other court, domestic or foreign, or before any similar domestic
or foreign authority. The Company hereby submits to the jurisdiction of such
courts for the purpose of any such suit, action or proceeding.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
L-3 COMMUNICATIONS HOLDINGS, INC.
By /s/ Michael T. Strianese
------------------------------
Its Vice President, Finance
and Controller
--------------------------
/s/ Robert V. LaPenta
- ----------------------------------- Aggregate number of shares of
Robert V. LaPenta Class A Common Stock for which
the Time Option granted
hereunder is exercisable:
571,428
L-3 Communications Corporation
- -----------------------------------
600 Third Avenue
New York, NY 10016 Aggregate number of shares of
- ----------------------------------- Class A Common Stock for which
Address the Performance Option granted
hereunder is exercisable:
571,429
Robert V. LaPenta's Taxpayer
Identification Number:
- -------------------------------
<PAGE>
Schedule A
----------
EBITDA Targets
--------------
($ in millions)
EBITDA Target* Cumulative EBITDA Target*
-------------- -------------------------
1997 (9 months only) $70.5
1998 97.4 $167.9
1999 104.1 272.0
2000 112.4 384.4
2001 120.5 504.9
- -------------
* Upon disposition or acquisition of any business or substantial portion of the
assets of the Company or another company, the EBITDA Targets for the year of
such disposition or such acquisition and each subsequent year shall be
adjusted to eliminate or include, as the case may be, the income and expense
related to the business or assets that were subject to disposition or
acquisition.
Such adjustments must be consented to by all non-management directors
of the Board of Directors. If such directors cannot so consent, the adjustment
proposal shall be submitted to the Company's independent auditors, who can
consult with the necessary consultants for binding resolution.
<PAGE>
Schedule B
----------
Applicable Percentage
---------------------
Target Achieved Percentage of EBITDA Applicable
(annual or cumulative) (Pct.) Percentage
- ------------------------------------ ----------
Less than 85 0.00
85 but less than 89 25.00
89 but less than 95 50.00
95 but less than 99 75.00
99 or more 100.00
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name
Doing Business As State of Incorporation
- ----------------- ----------------------
<S> <C>
1. L-3 Communications Corporation Delaware
L-3 Communications
2. Hygienetics Environmental Services, Inc. Delaware
Hygienetics Environmental Services
3. L-3 Communications ILEX Systems, Inc. Delaware
ILEX Systems
4. Southern California Microwave, Inc. California
Southern California Microwave
5. L-3 Communications SPD Technologies, Inc. Delaware
SPD Technologies
6. L-3 Communications ESSCO, Inc. Delaware
ESSCO
7. Electronic Space Systems International Corp. U.S. Virgin Islands
Electronic Space Systems
8. Electronic Space Systems (UK) Limited United Kingdom
Electronic Space Systems (UK)
9. ESSCO Collins Limited Republic of Ireland
ESSCO Collins
10. ESSCO Satellite Systems Corp. Delaware
ESSCO Satellite
11. L-3 Communications Storm Control Systems, Inc. California
Storm Control Systems
12. L-3 Communications DBS Microwave, Inc. California
DBS Microwave
13. SPD Electrical Systems, Inc. Delaware
SPD Electrical Systems
14. SPD Switchgear Inc. Delaware
SPD Switchgear
15. Pac Ord Inc. Delaware
Pac Ord
16. Henschel Inc. Delaware
Henschel
17. Power Paragon, Inc. Delaware
Power Paragon
18. SPD Holdings, Inc. Delaware
SPD Holdings
19. Cardiovascular Computer Systems, Ltd. Wisconsin
Cardiovascular Computer Systems
20. Digital Technics, L.L.C. Delaware
Digital Technics
21. Digital Technics, L.P. Delaware
Digital Technics
22. Electrodynamics, Inc. Arizona
Electrodynamics
23. L-3 Communications Secure Information Technology, Inc. Delaware
L-3 Secure Information Technology
24. L-3 Communications Network Security Systems, LLC Delaware
L-3 Network Security Systems
25. L-3 Communications Network Security Systems (Europe) PLC United Kingdom
L-3 Network Security Systems (Europe)
26. L-3 Communications U.K. Ltd. United Kingdom
L-3 Communications U.K.
27. Storm Control Systems Limited United Kingdom
Storm Control Systems
28. L-3 Management Corp. Delaware
L-3 Management
29. L-M Acquisition Corporation Maryland
L-M Acquisition
30. Microdyne Corporation Maryland
Microdyne
31. Microdyne Communications Technologies, Inc. Maryland
Microdyne Communications
32. MCTI Acquisition Corp. Maryland
MCTI Acquisition
33. Apcom Inc. Maryland
Apcom
34. Celerity Systems Inc. California
Celerity Systems
35. Microdyne Ltd. U.S. Virgin Islands
Microdyne Ltd.
36. Microdyne Outsourcing Incorporated Maryland
Microdyne Outsourcing
37. Microdyne U.K., Inc. Delaware
Microdyne U.K.
38. Medical Education Technologies, Inc Delaware
Medical Education Technologies
39. L-3 Communications Holding GmbH Federal Republic of Germany
L-3 Communications Holding
40. L-3 Communications ELAC Nautik GmbH Federal Republic of Germany
L-3 Communications ELAC Nautik
41. Power Paragon (Deutschland) Holding GmbH Federal Republic of Germany
Power Paragon (Deutschland)
42. EuroAtlas Gesellschaft fur Leistungselektronik mbH Federal Republic of Germany
EuroAtlas
43. JovyAtlas Elektrische Umformtechnik GmbH Federal Republic of Germany
JovyAtlas
</TABLE>
<PAGE>
EXHIBIT 23.11
Consent of Independent Auditors
We consent to the inclusion in this registration statement on Form S-1 of (i)
our report dated February 2, 1998 on our audits of the consolidated financial
statements of L-3 Communications Holdings, Inc. and subsidiaries as of December
31, 1997 and for the nine months then ended, and the combined financial
statements of the Predecessor Company for the three months ended March 31,
1997, and as of December 31, 1996 and for the year then ended, and (ii) our
report, dated March 20, 1997, on our audits of the combined financial
statements of the Loral Acquired Businesses for the three months ended March
31, 1996 and for the year ended December 31, 1995, and (iii) our report, dated
February 23, 1998, on our audit of the combined financial statements of
AlliedSignal Ocean Systems (a wholly owned operation of AlliedSignal, Inc.) as
of and for the year ended December 31, 1997. Our report on the combined
financial statements of the Predecessor Company as of and for the year ended
December 31, 1996 indicates that our opinion, insofar as it relates to the
financial statements of the Lockheed Martin Communications Systems Division as
of December 31, 1996 included in such combined financial statements, is based
solely on the report of other auditors. We also consent to the reference to our
Firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
New York, New York
February 2, 1999
<PAGE>
EXHIBIT 23.12
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 7, 1997, with respect to the combined financial
statements of Lockheed Martin Communications Systems Division as of and for the
year ended December 31, 1996 (not presented separately herein) and for the year
ended December 31, 1995, included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-70125) and related Prospectus of L-3 Communications
Holdings, Inc. for the registration of its common stock.
/s/ Ernst & Young
Washington, D.C.
February 2, 1999
<PAGE>
EXHIBIT 23.13
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 27, 1998 with respect to the financial
statements of Satellite Transmission Systems Division of California Microwave,
Inc. included in Amendment No. 2 to the Registration Statement (Form S-1 No.
333-70125) and related Prospectus of L-3 Communications Holdings, Inc. for the
registration of its common stock.
/s/ Ernst & Young
Melville, New York
February 2, 1999
<PAGE>
EXHIBIT 23.14
Consent of Independent Auditors
The Board of Directors
ILEX Systems, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Mountain View, California
February 3, 1999
<PAGE>
EXHIBIT 23.15
Consent of Independent Certified Public Accountants
We have issued our reports dated February 25, 1998 and February 28, 1997,
accompanying the financial statements of SPD Technologies Inc. and Subsidiaries
contained in the Registration Statement and Prospectus. We consent to the
use of the aforementioned reports in the Registration Statement and Prospectus,
and to the use of our name as it appears under the caption "Experts".
/s/ Grant Thornton LLP
New York, New York
February 4, 1999
