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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 5, 1999
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED AMOUNT OF
TITLE OF CLASS OF SECURITIES AMOUNT TO BE MAXIMUM REGISTRATION
TO BE REGISTERED REGISTERED OFFERING PRICE(1) FEE(1)
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Common Stock, par value $.01 per share ......... 10,637,500 $ 478,022,656.25 $ 132,890.30
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(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely
for the purposes of calculating the registration fee, based on the
average of the high and low sales prices of the Common Stock on December
29, 1998.
-------------------
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 JANUARY 5, 1999
PROSPECTUS
9,250,000 SHARES
[GRAPHIC OF L3 COMMUNICATIONS]
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
January 4, 1999 was $46.19 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 ................. $ $
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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.
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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 pending
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,
1
<PAGE>
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
2
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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, ExpertTM 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
eleven additional businesses for an aggregate cash purchase price including
expenses, net of cash acquired, of $444.0 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 commenced a cash tender offer for all of the common stock of
Microdyne. This acquisition is subject to the receipt of a majority of the
outstanding shares of Microdyne's common stock and the approval of our lenders,
regulatory approvals and other customary closing conditions. Microdyne's largest
stockholder has agreed to tender his shares, which amount to approximately 43%
of the total shares outstanding, in the tender offer. We expect to close the
transaction 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. It is expected that the acquisition will be
financed using cash from operations and borrowings under our bank 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 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 the 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 3,745,200 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)
---------- ----------- ----------- -----------
(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".
Although we have signed an agreement to acquire all of the outstanding common
stock of Microdyne, we cannot assure you that the acquisition will be
completed.
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.
11
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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. 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;
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.
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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.
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,
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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 Board 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 these 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. We have not yet received a response as
to whether Lockheed Martin will 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 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". We expect, based in part upon discussions with our consulting
actuaries, that any increase in pension expenses or future funding requirements
from those previously anticipated for the pension plans would not be material.
However, the impact of any increased pension expenses or funding requirements
under this arrangement or the cost to us of any reimbursement of Lockheed
Martin (if these plans were terminated) 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.
Should the acquisition of Microdyne close, we expect to use our existing cash
balances and to borrow under our bank credit facilities to fund that
acquisition.
OUR DEBT AGREEMENTS CONTAIN RESTRICTIONS
Our debt agreements contain a number of significant provisions that, among
other things, restrict our ability to:
o sell assets;
o incur more indebtedness;
o repay certain indebtedness;
o pay dividends;
o make certain investments or acquisitions;
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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:
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;
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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 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.
16
<PAGE>
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, and Holdings 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 for a period of days after the
date of this prospectus. 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 L-3 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; and
o transactions by any person other than L-3 relating to shares of common
stock or other securities acquired in the market 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 L-3 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 L-3
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 $149.7 million ($209.5 million if the underwriters'
over-allotment option is exercised in full) based on the closing price per
share of the common stock on December 28, 1998 of $44.625 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 the
existing indebtedness, if any, 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 December
28, 1998 of $44.625) 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(1) $ 193.2
======== ========= ========
Current portion of long-term debt ......................... $ -- $ -- $ --
Senior Credit Facilities .................................. 155.0(2) -- --
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 ............................... 272.2 272.2 421.9
Retained earnings ........................................ 31.0 31.0 31.0
Equity adjustments ....................................... (8.7) (8.7) (8.7)
---------- --------- --------
Total shareholders' equity .............................. 294.8 294.8 444.5
---------- --------- --------
Total capitalization .................................... $ 854.8 $ 899.8 $1,049.5
========== ========= ========
</TABLE>
- ----------
(1) These amounts reflect repayment of the outstanding borrowings as of
September 30, 1998.
(2) This amount represents borrowings under the Senior Credit Facilities
outstanding as of September 30, 1998. 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. Upon consummation of the Notes Offering,
the Company had available under its Senior Credit Facilities $385.0
million (subject to compliance with covenants), reflecting no outstanding
borrowings, less amounts outstanding for 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 pending 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
======
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
<PAGE>
<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
====== ======
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
<PAGE>
<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
====== ======
See notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
<PAGE>
<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
<PAGE>
<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, and additional consideration based on the
post-acquisition performance of DBS. 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 commenced a cash tender offer for all of the common stock of Microdyne.
This acquisition is subject to the receipt of a majority of the outstanding
shares of Microdyne's common stock and the approval of the Company's lenders,
regulatory approvals and other customary closing conditions. Microdyne's
largest stockholder has agreed to tender his shares, which amount to
approximately 43% of the total shares outstanding, in the tender offer.
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.
It is expected that the acquisition will be financed using cash from operations
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 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, as defined, thereafter
decline over time to less than or equal to 3.25 for the quarters ending
September 30, 2002 and thereafter and (ii) L-3 Communications Corporation's
interest coverage ratio, as defined therein, be at least 2.00 for the quarter
ended September 30, 1998 and thereafter increase over time the interest
coverage ratio, as defined, 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 pending
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, ExpertTM 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 o Used on aircraft, naval ships,
terminals secure communication links for unmanned aerial vehicles and
interoperable tactical battlefield satellites for relaying of
data communication and intelligence and reconnaissance
reconnaissance information
SATELLITE COMMUNICATION TERMINALS
o Ground-based satellite o Interoperable, transportable o Provide remote personnel with
communication terminals and ground terminals for remote data communication links to distant
payloads links to distant segments via forces
commercial or military satellites
SPACE COMMUNICATION AND SATELLITE CONTROL
o Satellite communication and o On-board satellite external o International Space Station;
tracking systems communications, video systems, Earth Observing Satellite;
solid state recorders and ground Landsat-7; Space Shuttle; and
support equipment National Oceanic and
Atmospheric Administration
weather satellites
o Satellite command and control o Software integration, test and o Air Force satellite control
sustainment and support maintenance support for Air network and Titan IV launch
Force satellite control network; system
engineering support for satellite
launch systems
MILITARY COMMUNICATIONS
o Shipboard communication o Internal and external o Shipboard voice communications
systems communications (radio room) for systems for Aegis cruisers and
ships and submarines destroyers and fully automated
Integrated Radio Room (IRR)
for ship-to-ship communications
on Trident submarines
o Digital battlefield o Communications on the move for o Communication systems for U.S.
communications tactical battlefield Army C2V
o Communication software support o Value-added, critical software o ASAS, JSTARS, and
services support for C3I systems GUARDRAIL
INFORMATION SECURITY SYSTEMS
o Secure Telephone Unit (STU o Secure and non-secure voice, o Office and battlefield secure and
III)/Secure Terminal Equipment data and video communication non-secure communication for
(STE) utilizing ISDN and ATM armed services, intelligence and
commercial network technologies security agencies
o Local management device/key o Provides electronic key material o User authorization and
processor (LMD/KP) accounting, system management recognition and message
and audit support functions for encryption for secure
secure data communication communication
encryption
o Information processing systems o Custom designed strategic and o Classified military and national
tactical signal intelligence agency intelligence efforts
systems that detect, collect,
identify, analyze and disseminate
information and related support
contracts
</TABLE>
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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>
MICROWAVE COMPONENTS (CATALOG)
o Passive components, switches and o Radio transmission, switching o Broad-band and narrow-band
wireless assemblies and conditioning; antenna and commercial applications (PCS,
base station testing and cellular, SMR, and paging
monitoring infrastructure) sold under the
Narda brand name; and broad-
band military applications
o Safety products o Radio frequency (RF) o Monitor cellular base station and
monitoring and measurement for industrial RF emissions
safety frequency monitoring
o Semiconductors (diodes, o Radio frequency switches, o Various industrial and military
capacitors) limiters, voltage control, end uses, including commercial
oscillators, harmonic generators satellites, avionics and specialty
communication products
o Satellite and wireless components o Satellite transponder control, o China Sat, PanAmSat, Telstar,
(channel amplifiers, transceivers, channel and frequency separation Sirius, Tempo, Tiros, Milstar,
converters, filters and GPS and LandSat
multiplexers)
o Amplifiers and amplifier based o Automatic Test Equipment o LEO satellites, ground stations,
components (amplifiers, up/down (ATE), military EW, ground and LMDS, MMDS, military EW and
converters and Ka assemblies) space communications ATE
AVIONICS AND OCEAN PRODUCTS
Aviation Recorders
o Solid state crash resistant cockpit o Voice recorders continuously o Installed on business and
voice and flight data recorders record most recent 30-120 commercial aircraft and certain
minutes of voice and sounds military transport aircraft; sold to
from cockpit and aircraft both aircraft OEMs and airlines
inter-communications. Flight data under the Fairchild brand name
recorders record the last 25
hours of flight parameters
o Solid state video recorders o Reconnaissance platforms o New product
Antenna Products
o Ultra-wide frequency and o Surveillance; radar detection o F-15, F-16, F-18, E-2C, P-3,
advanced radar antenna systems C-130, B-2, AWACS, Apache,
and rotary joints Cobra, Mirage (France),
Maritime Patrol (U.K.) and
Tornado (U.K.)
o Precision antenna systems o Antennas for high frequency, o Various military and commercial
serving major military and millimeter satellite customers
commercial frequencies, communications programs and
including Ka band scientific astronomy
o Ground based radomes o Protective shields for antennas o FAA, weather radar and military
against weather applications
</TABLE>
50
<PAGE>
SPECIALIZED COMMUNICATION PRODUCTS
(CONTINUED)
<TABLE>
<CAPTION>
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES
- ---------------------------------------- ----------------------------------------- --------------------------------------
<S> <C> <C>
Display Products
o Cockpit and mission display o High performance, ruggedized o E-2C, V-22, F-14, F-117, E-6B,
systems and controls flat panel and cathode ray tube C-130, AWACS, JSTARS S-3 and
displays and processors AH-64
Ocean Products
o Airborne dipping sonar systems o Submarine detection and o SH-60, SH-2/3, AB-212, EH-101
localization and Lynx Helicopters
o Submarine and surface ship o Submarine and surface ship o SSN, SSBN, DDG-963, and
towed arrays detection and localization FFG-7
o Torpedo defense systems o Torpedo detection and jamming o SSN, SSBN and DDG-963
o Mine countermeasure systems o Coastal and route survey o MCDV (Canada)
o Naval and commercial power o Switching, distribution and o All naval combatants;
delivery and switching products protection, as well as frequency submarines, surface ships and
and voltage conversion aircraft carriers - Trident, 688,
NSSN, DDG51, CG49, DD963
and Nimitz - class CVN
o Commercial transfer switches, o Production and maintenance of o FAA, financial institutions and
UPS systems and power products systems and high-speed switches rail transportation
for power interruption
prevention for computer systems
o Shipboard communications and o Design, develop and manufacture o CVN, NSSN
controls of ship control and interior
communications equipment
o Ship electrical repair and o Repair, installation, overhaul and o All naval combatants
overhaul testing services for USN
shipboard electrical, electronic
and ordinance systems
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
Airborne, Ground and Space Telemetry
o Aircraft, missile and satellite o Real time data acquisition, o JSF, F-15, F-18, F-22, Comanche,
telemetry and instrumentation measurement, processing, Nimrod (U.K.), Tactical Hellfire,
systems simulation, distribution, display Titan, EELV, A2100, ATHENA,
and storage for flight testing ARTEMIS and ICO
o Training range telemetry systems o Training ranges and test ranges o Combat simulation and tests
Space Products
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private
systems supplier video and data networks, direct to home uplinks,
satellite news gathering and
wideband applications
o Safe and arms processor o Weapons o Hellfire, Javeline
</TABLE>
51
<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 eleven additional businesses for an aggregate cash purchase price
including expenses, net of cash acquired, of $444.0 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 commenced a cash tender offer for all of the common stock of
Microdyne. This acquisition is subject to the receipt of a majority of the
outstanding shares of Microdyne's common stock and the approval of our lenders,
regulatory approvals and other customary closing conditions. Microdyne's
largest stockholder has agreed to tender his shares, which amount to
approximately 43% of the total shares outstanding, in the tender offer. We
expect to close the transaction 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. It is expected that the
acquisition will be financed using cash from operations and borrowings under
the bank 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.
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<PAGE>
During the 1980s, largely based on its prior experience with command and
control guidance systems for remotely-piloted vehicles, L-3 developed its
current family of strategic and tactical data links, including its Modular
Interoperable Data Link ("MIDL") systems and Modular Interoperable Surface
Terminals ("MIST"). MIDL and MIST technologies are considered virtual DoD
standards in terms of data link hardware. The Company's primary focus is spread
spectrum communication (based on CDMA technology), which involves transmitting
a data signal with a high rate noise signal so as to make it difficult to
detect by others, and then re-capturing the signal and removing the noise. The
Company's data links are capable of providing information at over 200 Mb/s.
L-3 provides these secure high band width products to the U.S. Air Force,
Navy, Army and various Government agencies, many through long-term sole source
programs. The scope of these programs include air-to-ground, air-to-air,
ground-to-air and satellite communications. Government programs include: U-2
Support Program, Common High-Band Width Data Link ("CHBDL"), Battle Group
Passive Horizon Extension System ("BGPHES"), Light Airborne Multi-Purpose
System ("LAMPS"), TriBand SATCOM Subsystem ("TSS"), major unmanned aerial
vehicle ("UAV") programs and Direct Air-Satellite Relay ("DASR").
o SATELLITE COMMUNICATION TERMINALS
L-3 provides ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals to
communicate with commercial, military and international satellites. These
terminals provide remote personnel with anywhere, anytime effective
communication capability and provide communications links to distant forces.
The Company's TriBand SATCOM Subsystem ("TSS") employs a 6.25 meter tactical
dish with a single point feed that provides C, Ku and X band communication to
support the U.S. Army. The Company also offers an 11.3 meter dish which is
transportable on two C-130 aircraft. The SHF Portable Terminal System ("PTS")
is a lightweight (28 lbs.), manportable terminal, which communicates through
DSCS, NATO or SKYNET satellites and brings unprecedented connectivity to small
military tactical units and mobile command posts. L-3 delivered 14 of these
terminals for use by NATO forces in Bosnia.
o SPACE COMMUNICATIONS AND SATELLITE CONTROL
Continuing L-3's tradition of providing communications for every manned
U.S. space flight since Mercury, the Company is currently designing and testing
three communication subsystems for the International Space Station ("ISS").
These systems will control all ISS radio frequency ("RF") communications and
external video activities. The Company also provides solid-state recorders and
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
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communications, command and control and air traffic control. The Company also
offers on-board, high data rate communications systems which provide a data
link for carrier battle groups which are interoperable with the U.S. Air
Force's surveillance/ reconnaissance terminal platforms. The Company provides
the US Army's Command and Control Vehicle ("C2V") Mission Module Systems
("MMS"). MMS provides the "communications on the move" capability needed for
the digital battlefield by packaging advanced communications into a modified
Bradley Fighting Vehicle. The Company is a proven supplier of superior
technological expertise to the DoD, including its contractors and related
government intelligence agencies.
o INFORMATION SECURITY SYSTEMS
The Company has produced more than 100,000 secure telephone units ("STU
III") which are in use today by the U.S. Armed Forces to provide secure
telephone capabilities for classified confidential communication over public
commercial telephone networks. The Company has begun producing the
next-generation digital, ISDN-compatible STE. STE provides clearer voice and
thirteen-times faster data/fax transmission capabilities than the STU III. STE
also supports secure conference calls and secure video teleconferencing. STE
uses a CryptoCard security system which consists of a small, portable,
cryptographic module mounted on a PCMCIA card holding the algorithms, keys and
personalized credentials to identify its user for secure communications access.
The Company also provides LMD/KP which is the workstation component of the
Government's Electronic Key Management System ("EKMS"), the next generation of
information security systems. EKMS is the Government system to replace current
"paper" secret keys used to secure government communications with "electronic"
secret keys. LMD/KP is the component of the EKMS which produces and distributes
the electronic keys. L-3 also develops specialized strategic and tactical
SIGINT systems to detect, acquire, collect, and process information derived
from electronic sources. These systems are used by classified customers for
intelligence gathering and require high speed digital signal processing and
high density custom hardware designs.
SPECIALIZED COMMUNICATION PRODUCTS
MICROWAVE COMPONENTS
L-3 is the preeminent worldwide supplier of commercial off-the-shelf, high
performance RF microwave components, assemblies and instruments supplying the
wireless communications, industrial 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
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is working and whether the base station radios are operating at peak power
levels. Military applications include general procurement for test equipment or
electronic surveillance and countermeasure systems. Safety products are
instruments which are used to measure the level of non-ionizing radiation in a
given area, i.e., from an antenna, test set or other emitting source, and
determine whether human exposure limits are within federal standards.
Narda West designs and manufactures state-of-the-art space-qualified and
wireless components. Space qualified components include channel amplifiers,
linearizers and diplexers/multiplexers, which are used to separate various
signals and direct them to the appropriate other sections of the payload. Narda
West's primary areas of focus are communications satellite payload products.
Channel amplifiers and linearizers constitute Narda West's main satellite
products. Channel amplifiers amplify the weak signals received from earth
stations by a factor of 1 million, and then drive the power amplifier tubes
that broadcast the signal back to earth. These products are sold to satellite
manufacturers and offer lower cost, lower weight and improved performance as
compared to in-house alternatives. On a typical satellite, for which there are
20 to 50 channel amplifiers, Narda West's channel amplifiers offer cost savings
of up to 60% (up to $1 million per satellite) and decrease launch weight by up
to 25 kilograms. Linearizers, used either in conjunction with a channel
amplifier or by themselves, pre-distort a signal to be transmitted back to
earth before it enters a Traveling Wave Tube ("TWT") for amplification. This
pre-distortion is exactly the opposite of the distortion created at peak power
by the TWT and, consequently has a cancellation effect that keeps the signal
linear over a much larger power band of the tube. This significantly increases
the useful output power of the TWT and consequent terrestrial coverage from the
satellite.
Narda West products include wireless microwave components for cellular and
PCS base station applications. These products include filters used to transmit
and receive channel separation as well as ferrite components which isolate
certain microwave functions, thereby preventing undesired signal interaction.
Other products include a wide variety of high reliability power splitters,
combiners and filters for spacecraft and launch vehicles, such as LLV, Tiros,
THAAD, Mars Surveyor, Peacekeeper, Galileo, Skynet, Cassini, Milstar, Space
Shuttle, LandSat, FltSatCom, GPS, GPS Block IIR, IUS, ACE, SMEX and certain
classified programs. The balance of the operation's business involves wideband
filters used for electronic warfare applications.
DBS designs and manufactures both broad and narrow band amplifiers and
amplifier-based products in the microwave and millimeter wave frequencies.
These amplifiers are used as low-noise, high-gain components in defense and
communications applications. These devices can be narrow band for communication
needs or broadband for electronic warfare. DBS has an extensive offering of
amplifier designs allowing it to rapidly respond to unique requirements from
its marketplace.
DBS offers standard packaged amplifiers for use in various automated test
equipment and system applications. It is also developing higher-level
assemblies for specific military applications in which the amplifier serves as
the cornerstone component. For future growth, DBS is at the forefront of
technology in both the design and manufacturing of millimeter range (-20GHz)
amplifier products for use in emerging communication applications such as back
haul radios, LMDS and ground terminals for LEOS. Further, DBS is starting to
penetrate the space qualified communications market with designs applicable to
many LEO communication satellite needs.
AVIONICS AND OCEAN PRODUCTS
o AVIATION RECORDERS
L-3 manufactures commercial solid-state crash-protected aviation recorders
("black boxes") under the Fairchild brand name, and has delivered over 40,000
flight recorders to airplane manufacturers and airlines around the world.
Recorders are mandated and regulated by various worldwide agencies for
commercial airlines and a large portion of business aviation aircraft.
Management anticipates growth opportunities in Aviation Recorders as a result
of the current high level of orders for new commercial aircraft. Expansion into
the military market shows continued growth opportunities. L-3 Recorders were
recently selected for installation on the fleet of the Royal Australian Air
Force and
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Royal Australian Army transport aircraft and are currently being installed on
the U.S. Navy C-9 aircraft. There are two types of recorders: (i) the Cockpit
Voice Recorder ("CVR") which records the last 30 to 120 minutes of crew
conversation and ambient sounds from the cockpit and (ii) the Flight Data
Recorder ("FDR") which records the last 25 hours of aircraft flight parameters
such as speed, altitude, acceleration, thrust from each engine and direction of
the flight in its final moments. Recorders are highly ruggedized instruments,
designed to absorb the shock equivalent to that of an object traveling at 268
knots stopping in 18 inches, fire resistant to 1,100 degrees centigrade and
pressure resistant to 20,000 feet undersea for 30 days. Management believes
that the Company has the leading worldwide market position for CVR's and FDR's.
o ANTENNA PRODUCTS
Under the Randtron brand name, L-3 produces high performance antennas
designed for surveillance, high-resolution, ultra-wide frequency bands,
detection of low radar cross section ("LRCS") targets, LRCS installations,
severe environmental applications and polarization diversity. L-3's main
antenna product is a sophisticated 24-foot diameter antenna operational on all
E-2C aircraft. This airborne antenna consists of a 24-foot rotating aerodynamic
radome containing a UHF surveillance radar antenna, IFF antenna and forward and
aft auxiliary antennas. Production of this antenna began in the early 1980s,
and production is planned beyond 2000 for the E-2C, P-3 and C-130 AEW aircraft.
The replacement for this antenna is a very adaptive radar currently under
development for introduction early in the next decade. L-3 also produces
broad-band antennas for a variety of tactical aircraft and rotary joints for
the AWAC's and E-2C's antenna. Randtron has delivered over 2,000 aircraft sets
of antennas and has a current backlog through 1999. L-3 is a leading supplier
of ground-based radomes. Radomes are designed to enclose an antenna system as a
protective shield against the environment as well as to accentuate the
performance of an antenna system. Radomes are used to enclose antenna systems
used for air traffic control, weather radar, defense and scientific purposes.
o DISPLAY PRODUCTS
L-3 specializes in the design, development and manufacture of ruggedized
display system solutions for military and high-end commercial applications.
L-3's current product lines include cathode ray tubes ("CRTs"), the Actiview
family of active matrix liquid crystal displays ("AMLCD"), 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
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applications; Henschel, which is the leading designer, developer, and
manufacturer of ship control and interior communications equipment; and Pac
Ord, which is the only combat systems overhaul and repair contractor, which
services the U.S. Naval Fleet on a national basis with locations in San Diego,
Norfolk and Jacksonville.
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
The Company is a leader in component products and systems used in
telemetry and instrumentation for airborne applications such as satellites,
aircraft, UAVs, launch vehicles, guided missiles, projectiles and targets.
Telemetry involves the collection of data from these platforms, its
transmission to ground stations for analysis, and its further dissemination or
transportation to another platform. A principal use of this telemetry data is
to measure as many as 1,000 different parameters of the platform's operation
(in much the same way as a flight data recorder on an airplane measures various
flight parameters) and transmit this data to the ground.
Additionally, for satellite platforms, the equipment also acquires the
command uplink that controls the satellite and transmits the necessary data for
ground processing. In these applications, high reliability of components is
crucial because of the high cost of satellite repair and the length of
uninterrupted service required. Telemetry also provides the data to terminate
the flight of missiles and rockets under errant conditions and/or at the end of
a mission. Telemetry and command/control products are currently provided on
missile programs such as AMRAAM, ASRAAM, AIM-9X, JASSM, JDAM, FOTT, ATACMS and
PAC-3, as well as satellite programs such as GPS BLK IIF, GLOBALSTAR,
EARTHWATCH, SBIRS, LUNAR PROSPECTOR, MTSAT, ARTEMIS and Hughes ICO.
o AIRBORNE, GROUND AND SPACE TELEMETRY
The Company provides airborne equipment and data link systems to gather
critical information and to process, format and transmit it to the ground
through communication data links from a communications satellite, spacecraft,
aircraft and/or missile. These products are available in both COTS and custom
configurations and include software and software engineering services. Major
customers are the major defense contractors who manufacture aircraft, missiles,
warheads, launch vehicles, munitions and bombs. Ground instrumentation activity
occurs at the ground station where 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
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improvements to the hospital. The Company is an exclusive reseller of EchoNet
(Trade Mark) pursuant to a reseller arrangement with Heartlab, Inc. EchoNet
(Trade Mark) is a digital archive management and review system designed
specifically for the echocardiology profession. The system accepts digital
echocardiology studies from a variety of currently available ultrasound
systems, manages the studies, making them available on a network, and allows
the physicians and technicians to become more productive. EchoNet (Trade Mark)
is a trademark of Heartlab, Inc. GEMnet (Trade Mark) is a trademark of GE.
The Company has approximately a one-third equity ownership interest in
Medical Education Technologies, Inc. ("METI"). METI is a medical technology
company engaged in the development, manufacture and sale of Human Patient
Simulators ("HPS"). The HPS is a computerized system with a life-like mannequin
that reacts to medical treatments and interventions similar to a human being.
Originally oriented to the anesthesiology training and education domain, METI
has expanded into cardiology, critical care, trauma care, allied health care,
military medicine and continuing medical education. METI's target customers for
its HPS include medical schools throughout the world, colleges with registered
nursing programs, community colleges and state, local and volunteer emergency
medical service organizations.
o WIRELESS LOOP TELECOMMUNICATIONS EQUIPMENT
The Company is applying its wireless communication expertise to introduce
local wireless loop telecommunications equipment using a synchronous Code
Division Multiple Access technology ("CDMA") supporting terrestrial and space
based, fixed and mobile communication services. The system's principal targeted
customer base is emerging market countries and rural areas where existing
telecommunications infrastructure is inadequate or non-existent. The Company's
system will have the potential to interface with low earth orbit ("LEO") PCS
systems such as Globalstar, Iridium and/or any local public telephone network.
The Company expects to manufacture for sale certain of the infrastructure
equipment. The Company intends to pursue joint ventures with third parties for
service and distribution capabilities. The Company has entered into product
distribution agreements with Granger Telecom Ltd. for distribution in parts of
Africa, the Middle East and the United Kingdom, and with Unisys for
distribution in parts of Mexico and South America. This same technology is also
being introduced into the Ellipso "big LEO" program to provide the key
communications capability in the ground and user segments. In this program, the
Company will provide the CDMA processing equipment in the Ground Control
Segment and the Ellipso user terminals, both fixed and mobile.
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.
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In early November 1998, L-3 Network Security announced the release of its
third-generation network security software, Expert (Trade Mark) 3.0, which
automates the sophisticated network risk analysis process. This software was
first developed for the U.S. Air Force and is now used by leading corporations,
consulting firms and government agencies. Expert (Trade Mark) 3.0 allows
network administrators and business managers to measure and manage information
risk by first automatically mapping a user's network, compiling a database of
all systems, applications and services -- including unauthorized modems. Expert
(Trade Mark) 3.0's risk algorithms then quantify the amount of risk present in
all parts of the network and analyze the likelihood of various insider and
outsider threats, linking these threats to actual vulnerabilities present on
the network. Expert (Trade Mark) 3.0's databases contain virtually all
publicly known computer vulnerabilities, researched and verified by L-3's
full-time security team. A comprehensive vulnerability report is provided by
Expert (Trade Mark) 3.0, which permits users to quantify risk measures and to
formulate a basis for information security policy.
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.
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Management does not believe any one competitor or a small number of competitors
is dominant in any of the business areas of the Company. Management believes
the Company will continue to be able to compete successfully based upon the
quality and cost competitiveness of its products and services.
PATENTS AND LICENSES
Although the Company owns some patents and has filed applications for
additional patents, it does not believe that its operations depend upon its
patents. In addition, the Company's Government contracts generally license it
to use patents owned by others. Similar provisions in the Government contracts
awarded to other companies make it impossible for the Company to prevent the
use by other companies of its patents in most domestic work.
BACKLOG
As of 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
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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.
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%
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of all costs incurred by the Company above those reserved for on the Company's
balance sheet at April 1997 relating to certain Company-assumed environmental
liabilities and, for the seven years thereafter, to pay 40% of certain
reasonable operation and maintenance costs relating to any environmental
remediation projects undertaken in the first eight years. The Company is aware
of environmental contamination at two of the facilities acquired from Lockheed
Martin that will require ongoing remediation. In November 1997, the Company
sold one such facility located in Sarasota, Florida, while retaining a
leasehold interest in a portion of that facility, to DMB in a transaction in
which DMB contractually agreed to assume responsibility for further remediation
of the Sarasota site. 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
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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 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. The
Company has not yet received a response as to whether Lockheed Martin will
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. The Company expects, based in part upon
discussions with its consulting actuaries, that any increase in pension
expenses or future funding requirements from those previously anticipated for
the pension plans would not be material. However notwithstanding this
expectation, the impact of any increased pension expenses or funding
requirements under this arrangement 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 September 30, 1998, the Company employed approximately 7,800
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
66
<PAGE>
material disruption to its business, a satisfactory new labor contract with
these employees. However, there can be no assurance that a satisfactory
agreement will be reached with the covered employees or that 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 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, certain of the existing
stockholders 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 other things, that the Company will pay
68
<PAGE>
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 ................ 53 Director
Alberto M. Finali ................. 44 Director
Eliot M. Fried(1) ................. 65 Director
Frank H. Menaker, Jr.(1) .......... 57 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. 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.
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<PAGE>
Christopher C. Cambria, Vice President-General Counsel and Secretary. Mr.
Cambria joined the Company in June 1997. From 1994 until joining the Company,
Mr. Cambria was an associate with Fried, Frank, Harris, Shriver & Jacobson.
From 1986 until 1993, he was an associate with Cravath, Swaine & Moore.
Robert F. Mehmel, Vice President-Planning and Assistant Secretary. Mr.
Mehmel joined the Company in April 1997. From April 1996, when Loral was
acquired by Lockheed Martin, until April 1997, Mr. Mehmel was the Director of
Financial Planning and Capital Review for Lockheed Martin's C3I and Systems
Integration Sector. From 1984 to 1996, Mr. Mehmel held several accounting and
financial analysis positions at Loral Electronic Systems and Loral. At the time
of Lockheed Martin's acquisition of Loral, he was Corporate Manager of Business
Analysis.
Lawrence W. O'Brien, Vice President--Treasurer. Mr. O'Brien joined the
Company in June 1997. Prior to joining the Company, he was the Vice President
and Treasurer of Pechiney Corporation, the North American arm of the Pechiney
Group of France, where he held a number of financial positions since 1981.
Joseph S. Paresi, Vice President--Product Development. Mr. Paresi joined
the Company in April 1997. From April 1996 until April 1997, Mr. Paresi was
Corporate Director of Technology for Lockheed Martin's C3I and System
Integration Sector. Prior to the April 1996 acquisition of Loral, Mr. Paresi
was Corporate Director of Technology for Loral, a position he held since 1993.
From 1978 to 1993, Mr. Paresi was a Systems Engineer, Director of Marketing and
Director of International Programs at Loral Electronic Systems.
Lawrence H. Schwartz, Vice President--Business Development. Mr. Schwartz
joined the Company in May 1997. From April 1996 until May 1997, Mr. Schwartz
was Vice President of Technology for the C3I and System Integration Sector of
Lockheed Martin. Prior to the April 1996 acquisition of Loral, he was Corporate
Vice President of Technology for Loral, a position he held since 1987. Between
1976 and 1987, Mr. Schwartz was Vice President of Engineering, Senior Vice
President of Business Development, Senior Vice President of the Rapport Program
and Senior Vice President of Development Programs at Loral Electronic Systems.
Jimmie V. Adams, Vice President-Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) joined the Company in April 1997. From April
1996 until April 1997, he was Vice President of Lockheed Martin's Washington
Operations for the C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position at Loral since 1993. Before
joining Loral in 1993, he was Commander in Chief, Pacific Air Forces, Hickam
Air Force Base, Hawaii, capping a 35-year career with the U.S. Air Force. He
was also Deputy Chief of Staff for plans and operation for U.S. Air Force
headquarters and Vice Commander of Headquarters Tactical Air Command and Vice
Commander in Chief of the U.S. Air Forces Atlantic at Langley Air Force Base.
He is a command pilot with more than 141 combat missions.
Robert RisCassi, Vice President-Washington, D.C. Operations. General
Robert W. RisCassi (U.S. Army-ret.) joined the Company in April 1997. From
April 1996 until April 1997, he was Vice President of Land Systems for Lockheed
Martin's C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position for Loral since 1993. He
joined Loral in 1993 after retiring as U.S. Army Commander in Chief, United
Nations Command/Korea. His 35-year military career included posts as Army Vice
Chief of Staff; Director, Joint Staff, Joint Chiefs of Staff; Deputy Chief of
Staff for Operations and Plans; and Commander of the Combined Arms Center.
David J. Brand, Director. Mr. Brand has served as a director since April
1997 and is a Managing Director of Lehman Brothers and a principal in the
Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology
Mergers and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and
has been responsible for merger and corporate finance advisory services for
many of Lehman Brothers' technology and defense industry clients. Mr. Brand is
currently a director of K&F Industries, Inc. 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 Chiefs of
Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his
tenure as Chairman of the Joint
72
<PAGE>
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.
73
<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") during the nine months ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
-----------------------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
---------------------- RESTRICTED HOLDINGS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK AWARDS STOCK OPTIONS COMPENSATION(1)
- ----------------------------------------------- ----------- ---------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Frank C. Lanza (Chairman and Chief
Executive Officer)(2) ........................ $542,654 -- -- 1,142,857 --
Robert V. LaPenta (President and Chief
Financial Officer)(2) ........................ 356,538 -- -- 1,142,857 --
Lawrence H. Schwartz (Vice President) ......... 145,327 $80,000 -- 17,000 --
Jimmie V. Adams (Vice President) .............. 157,854 70,000 -- 15,000 $ 61
Robert RisCassi (Vice President) .............. 125,704 60,000 -- 15,000 611
</TABLE>
- ----------
(1) Represents amounts matched by the Company under its savings plan.
(2) On March 2, 1998, each of Mr. Lanza and Mr. LaPenta exercised 228,571
options to purchase Holdings' common stock.
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<PAGE>
Stock Options Granted in 1997. The following table sets forth information
concerning individual grants of stock options to purchase Holdings' common
stock made in 1997 to each of the Named Executive Officers.
OPTION GRANTS 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 3,402,784 had been granted 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. 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 times thereafter.
There is also a noncompetition and non-solicitation covenant which is effective
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<PAGE>
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 September 30, 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.
10 3/8% 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
10 3/8% 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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<PAGE>
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, and Holdings 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 for a
period of days after the date of this prospectus. 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 or (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.
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, and Holdings have agreed that they will not, subject to certain limited
exceptions, for a period of days from the date of this prospectus, 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 or (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.
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 upon the authority of such firm 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 Peat Marwick
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 Peat Marwick 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 6, 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, and additional consideration based on the
post-acquisition performance of DBS. 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>
<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>
<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>
<CAPTION>
<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>
<CAPTION>
<S> <C>
Accumulated post-retirement benefit obligation:
Retirees ........................................................... $ 4,702
Fully eligible plan participants ................................... 3,188
Other active plan participants ..................................... 10,990
-------
Total accumulated post-retirement benefit obligation ................. $18,880
Unrecognized net loss ................................................ 624
-------
Accrued post-retirement health care and life insurance costs ......... $18,256
=======
</TABLE>
Actuarial assumptions used in determining the December 31, 1997
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>
<CAPTION>
<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>
<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>
<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>
<S> <C>
Materials and purchased parts ..................................... $ 8,939,257
Work-in-process, primarily on U.S. Government contracts ........... 33,786,558
Finished goods .................................................... 1,874,897
-----------
44,600,712
Less progress billings related to long-term contracts and programs 9,390,974
-----------
$35,209,738
===========
</TABLE>
Under the contractual arrangements by which progress payments are
received, the United States government asserts that it has a security interest
in the contracts in process identified with the related contracts.
NOTE D--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Goodwill .............................. $ 78,171,995
Deferred financing costs .............. 1,721,025
------------
79,893,020
Less accumulated amortization ......... (1,458,755)
------------
$ 78,434,265
============
</TABLE>
NOTE E--LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Term loan A payable in quarterly installments of principal plus interest at a
variable rate (9.5% at December 31, 1997) maturing June 30, 2002 ........... $37,550,000
Term loan B payable in quarterly installments of principal plus interest at a
variable rate (9.75% at December 31, 1997) maturing June 30, 2004 .......... 24,950,000
Revolving loan payable bearing interest at a variable rate (9.5% at
December 31, 1997) maturing June 30, 2002 .................................. 18,949,707
Capital lease obligation payable in monthly installments of $6,261 through
January 2002 less amount representing interest of $47,285................... 259,520
-----------
81,709,227
Less current maturities ...................................................... 6,305,700
-----------
$75,403,527
===========
</TABLE>
F-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>
<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>
<CAPTION>
<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
----------
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>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Accounts receivable, less $554 allowance for doubtful accounts ......... $ 22,204
Inventories ............................................................ 10,382
---------
Total current assets .................................................... 32,586
Property, plant and equipment, at cost .................................. 21,663
Less accumulated depreciation and amortization .......................... (14,467)
---------
Net property and equipment .............................................. 7,196
Other assets ............................................................ 15
---------
Total assets ............................................................ $ 39,797
=========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ....................................................... $ 6,508
Accrued liabilities .................................................... 3,703
Current portion of long-term debt ...................................... 200
---------
Total current liabilities ............................................... 10,411
Long-term debt .......................................................... 1,330
---------
Total liabilities ....................................................... 11,741
Commitments
Division equity ......................................................... 28,056
---------
Total liabilities and Division equity ................................... $ 39,797
=========
</TABLE>
See accompanying notes.
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>
<CAPTION>
<S> <C>
1998 ......................... $ 100,000
1999 ......................... 200,000
2000 ......................... 100,000
2001 ......................... 200,000
2002 ......................... 100,000
Thereafter ................... 930,000
----------
1,630,000
Less current portion ......... 100,000
----------
$1,530,000
==========
</TABLE>
6. COMMITMENTS
On November 15, 1996, the Division leased a facility under an 18-month
noncancelable operating lease. Rent expense was approximately $209,000,
$229,000 and $69,000 for 1995, 1996, and 1997, respectively.
Future minimum lease payments under the operating lease is $48,000 for
1998.
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 Peat Marwick 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>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income ........................................................................... $ 6,854,742
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 419,593
Allowance for doubtful accounts ..................................................... (203,255)
Loss on write-down of investment .................................................... 250,000
Deferred income taxes ............................................................... 485,000
Issuance of common stock for services ............................................... 42,500
Changes in operating assets and liabilities:
Receivables ........................................................................ (1,267,205)
Inventories ........................................................................ 387,485
Other current assets ............................................................... (112,176)
Deposits and other assets .......................................................... 140,884
Accounts payable and accrued liabilities ........................................... 324,963
Deferred income .................................................................... (159,012)
Income taxes payable ............................................................... 80,552
Other liabilities .................................................................. (459,166)
------------
Net cash provided by operating activities ......................................... 6,784,905
------------
Cash flows used in investing activities -- purchases of property, plant, and equipment (416,630)
------------
Cash flows from financing activities:
Payments on debt ..................................................................... (67,265)
Distributions paid to shareholders ................................................... (4,832,547)
Repurchase of common stock ........................................................... (14,392)
------------
Net cash used in financing activities ............................................. (4,914,204)
------------
Increase in cash and cash equivalents ................................................. 1,454,071
Cash and cash equivalents, beginning of year .......................................... 3,465,477
------------
Cash and cash equivalents, end of year ................................................ $ 4,919,548
============
Supplemental disclosures of cash flow information:
Cash paid during year:
Income taxes ........................................................................ $ 716,190
============
Interest ............................................................................ $ 8,579
============
Noncash investing and financing activities -- distributions payable to shareholders $ 2,216,877
============
</TABLE>
See accompanying notes to consolidated financial statements.
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>
<CAPTION>
<S> <C>
Raw materials and subassemblies ......... $833,945
Work in process ......................... 89,521
--------
$923,466
========
</TABLE>
(3) LINE OF CREDIT AND LONG-TERM DEBT
The Company has a $5,000,000 line of credit with a bank that is due on
demand. Interest is payable at the bank's prime rate (8.5% as of December 31,
1997) and is secured by trade accounts receivable, inventories, and other
assets. Borrowings outstanding under the line of credit were $-0- as of
December 31, 1997. The line of credit contains certain restrictive financial
covenants, including a minimum level of net worth and cash flow to debt ratio.
As of December 31, 1997, the Company was in compliance with all such covenants.
The Company has an unsecured promissory note payable to a former
shareholder that was issued in conjunction with the repurchase of shares of
common stock in 1992. The note bears interest at 10% with payments of $6,000
per month, including interest, through December 1998. As of December 31, 1997,
the principal balance of this note was $62,833.
(4) INCOME TAXES
The provision for income taxes for the year ended December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Federal:
Current ............ --
Deferred ........... $388,000
--------
388,000
--------
State:
Current ............ 65,000
Deferred ........... 97,000
--------
162,000
--------
$550,000
========
</TABLE>
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>
<CAPTION>
<S> <C>
Federal income tax statutory rate ................. 34.0%
State income tax rate ............................. 2.2
Benefit of federal S corporation election ......... (28.8)
-----
7.4%
=====
</TABLE>
The gross deferred tax assets were $13,000 as of December 31, 1997,
consisting of the state deferred income tax assets and liabilities for those
states who do not recognize S corporation status. Management considers
realization of the net deferred tax assets more likely than not due to
continued profitability of the Company and significant carryback opportunities.
(5) EMPLOYEE BENEFIT PLANS
The Company has two Section 401(k) retirement savings plans (the Plans).
Under the terms of the Plans, employees may make contributions based on a
percentage of eligible earnings. Company contributions to the Plans are
discretionary and totaled $359,718 in 1997.
(6) STOCK OPTION PLAN
The Company has 100,000 shares of common stock reserved for issuance under
its 1992 Incentive Stock Option Plan (the "Plan"). Under the Plan, the Company
may grant options to employees, officers, and directors. Options are granted at
prices not less than the fair market value of the Company's common stock as
determined by the Board of Directors on the grant date. Options vest ratably
over 48 months and expire 49 months from the date of grant.
The Company applies Accounting Principles Board Opinion No. 25 (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>
<CAPTION>
<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>
<CAPTION>
<S> <C>
Sales ......................................... $ 73,033
Cost of sales ................................. 56,049
--------
Gross profit ................................. 16,984
Operating expenses:
General and administrative ................... 11,981
Selling ...................................... 5,933
Bid and proposal ............................. 2,053
Independent research and development ......... 2,765
--------
Total operating expenses .................... 22,732
--------
Loss from operations .......................... (5,748)
Interest expense, net ......................... 490
Other income .................................. (185)
--------
Loss before income taxes ...................... (6,053)
Benefit for income taxes ...................... (2,378)
--------
Net loss .................................... $ (3,675)
========
</TABLE>
See accompanying notes to the combined financial statements
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>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (3,675)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of property, plant and equipment ................................ 2,976
Amortization of capitalized software ......................................... 1,078
Amortization of intangible assets ............................................ 70
Loss on the disposal of property, plant and equipment ........................ 8
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 13,561
Inventories ................................................................. (359)
Contracts in progress ....................................................... 1,666
Prepaid and other current assets ............................................ (220)
Accounts payable ............................................................ (1,976)
Accrued liabilities ......................................................... (10,472)
Advance payments ............................................................ (1,092)
Accrued pension and postretirement benefits ................................. (20)
---------
Net cash provided by operating activities .................................. 1,545
---------
Cash flows from investing activities:
Property, plant and equipment purchased ....................................... (3,090)
Software purchased ............................................................ (265)
---------
Net cash used in investing activities ...................................... (3,355)
---------
Cash flows from financing activities:
Advances from AlliedSignal, net ............................................... 3,198
---------
Net cash provided by financing activities .................................. 3,198
---------
Effect of foreign currency exchange rate changes on cash ...................... (1,388)
---------
Net change in cash ............................................................. --
Cash and cash equivalents at the beginning of the year ......................... --
---------
Cash and cash equivalents at the end of the year ............................... $ --
=========
Supplement disclosures of cash flow information:
Cash paid during the year for:
Interest -- AlliedSignal ..................................................... $ 552
=========
</TABLE>
See accompanying notes to the combined financial statements
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>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligation
Vested ......................................................... $1,067
Nonvested ...................................................... 296
------
Accumulated benefit obligation ................................ 1,363
======
Projected benefit obligation ................................... 1,919
Plan assets at fair value ...................................... 1,422
------
Projected benefit obligation in excess of plan assets ......... 497
Unrecognized net loss ......................................... 37
Unrecognized prior service costs ..............................
Unrecognized net obligation ................................... (361)
------
Accrued pension costs ........................................ $ 173
======
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Major assumptions were:
Discount Rate ....................................... 6.8%
Expected long-term rate of return on assets ......... 6.8%
Rate of increase in compensation levels ............. 4.0%
</TABLE>
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to participating in AlliedSignal pension plans, employees of
OS are provided varying levels of health care and life insurance benefits for
retired employees and dependents. Participants are eligible for these benefits
when they retire from active service and meet the pension plan eligibility
requirements. These benefits are funded primarily on a pay-as-you-go basis with
the retiree generally paying of the cost through contributions, deductibles and
coinsurance provisions.
Although the aforementioned postretirement benefits are part of certain
AlliedSignal postretirement arrangements, separate actuarial estimates were
made for the portion allocable to the Company. The weighted average discount
rate utilized in determining the accumulated postretirement benefit obligation
was 7.25% for 1997. 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>
<CAPTION>
<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>
<CAPTION>
<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>
<CAPTION>
<S> <C>
Equity .......................... $5,751
Interest Rate ................... 9.6%
</TABLE>
Allocated interest expense for the year ended December 31, 1997 amounted
to $552 and is included in interest expense, net in the accompanying combined
statement of operations.
INCOME TAXES
The Company will be included in the consolidated Federal income tax
return, foreign tax returns and certain combined and separate state and local
income tax returns of AlliedSignal for 1997. Income taxes for OS are considered
to have been settled with AlliedSignal at December 31, 1997 and are recorded
through the invested equity account with AlliedSignal as there are no separate
stand alone tax attributes related to OS.
ELAC participates in the AlliedSignal Deutschland GmbH profit pooling
agreement for corporate income tax and municipal trade tax. Since entering into
this agreement ELAC has not paid German taxes, as any profits or losses of ELAC
are transferred to AlliedSignal Deutschland. For purposes of these combined
financial statements, the tax attributes that relate to ELAC prior to entering
into the pooling agreement have been considered in computing the separate ELAC
tax computations as these attributes will remain with ELAC after the
termination of the pooling agreement after the acquisition by L-3.
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
[GRAPHIC OMITTED]
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 JANUARY 5, 1999
PROSPECTUS
9,250,000 SHARES
[GRAPHIC OMITTED]
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
January 4, 1999 was $46.19 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 & CO.
MORGAN STANLEY DEAN WITTER
, 1999 C.E. UNTERBERG,
TOWBIN
<PAGE>
[INT'L BACK COVER]
9,250,000 SHARES
[GRAPHIC OMITTED]
COMMON STOCK
-------------------------------------
PROSPECTUS
, 1999
-------------------------------------
LEHMAN BROTHERS
BEAR, STEARNS INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
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 .................. $
National Association of Securities Dealers, Inc. filing fee ..........
Legal fees and expenses ..............................................
Accounting fees and expenses .........................................
Printing and engraving fees and expenses .............................
Blue Sky fees and expenses ...........................................
Trustee fees and expenses ............................................
Miscellaneous expenses ...............................................
Total .............................................................. $
==========
</TABLE>
- ----------
* To be provided by amendment.
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 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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------------- --------------------------------------------------------------------------------------------
<S> <C>
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 4.1 to L-3 Communications
Corporation's Registration Statement on Form S-1 No. 333-46963).
**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).
10.61 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).
10.62 Form of Transition Services Agreement dated April 30, 1997 among L-3 Communications
Holdings, Inc., L-3 Communications Corporation and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.7 to L-3 Communications Corporation's
Registration Statement on Form S-4 No. 333-31649).
10.7 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and KSL, Division of Bonneville International
(incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 No. 333-46975).
10.71 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, L-3
Communications Corporation and Unisys Corporation (incorporated by reference to
Exhibit 10.61 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.72 Sublease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and Unisys Corporation (incorporated by reference to
Exhibit 10.62 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>
10.8 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 Form of 1997 Stock Option Plan for Key Employees (incorporated by reference to
Exhibit 10.91 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
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 Peat Marwick LLP, independent auditors.
**23.5 Consent of Grant Thornton LLP, independent auditors.
24 Powers of Attorney (included in Part II of this Registration Statement).
</TABLE>
- ----------
* To be filed by amendment.
** 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 January 4, 1999.
L-3 COMMUNICATIONS HOLDINGS, INC.
By: /s/ Frank C. Lanza
-------------------------------------
Chief Executive Officer and
Chairman of the Board of Directors
POWER OF ATTORNEY
Each of the undersigned officers and directors of L-3 Communications
Holdings, Inc., a Delaware company, hereby constitutes and appoints Michael T.
Strianese and Christopher C. Cambria and each of them, severally, as his
attorney-in-fact and Agent, with full power of substitution and resubstitution,
in his name and on his behalf, to sign in any and all capacities this
Registration Statement and any and all amendments (including post-effective
amendments) and exhibits to this Registration Statement, any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b) under the Securities Act of 1933, as amended, and any and all amendments
(including post-effective amendments) and exhibits thereto, and any and all
applications and other documents relating thereto, with the Securities and
Exchange Commission, with full power and authority to perform and do any and
all acts and things whatsoever which any such attorney or substitute may deem
necessary or advisable to be performed or done in connection with any or all of
the above-described matters, as fully as each of the undersigned could do if
personally present and acting, hereby ratifying and approving all acts of any
such attorney or substitute.
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 4th day of January, 1999 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------
<S> <C>
/s/ Frank C Lanza Chairman, Chief Executive Officer (Principal
- --------------------------------- Executive Officer) and Director
Frank C. Lanza
/s/ Robert V. LaPenta President, Chief Financial Officer (Principal
- --------------------------------- Financial Officer) and Director
Robert V. LaPenta
/s/ Michael T. Strianese Vice President--Finance and Controller
- --------------------------------- (Principal Accounting Officer)
Michael T. Strianese
/s/ David J. Brand
- ---------------------------------
David J. Brand Director
/s/ Thomas A. Corcoran
- ---------------------------------
Thomas A. Corcoran Director
/s/ Alberto M. Finali
- ---------------------------------
Alberto M. Finali Director
/s/ Eliot M. Fried
- ---------------------------------
Eliot M. Fried Director
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------- ---------
<S> <C>
/s/ Frank H. Menaker, Jr.
- ---------------------------------
Frank H. Menaker, Jr. Director
/s/ Robert B. Millard
- ---------------------------------
Robert B. Millard Director
/s/ John E. Montague
- ---------------------------------
John E. Montague Director
/s/ John M. Shalikashvili
- ---------------------------------
John M. Shalikashvili Director
/s/ Alan H. Washkowitz
- ---------------------------------
Alan H. Washkowitz Director
</TABLE>
II-7
<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 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 4.1 to L-3 Communications
Corporation's Registration Statement on Form S-1 No. 333-46963).
**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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- -----------------------------------------------------------------------------------------
<S> <C>
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).
10.61 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).
10.62 Form of Transition Services Agreement dated April 30, 1997 among L-3 Communications
Holdings, Inc., L-3 Communications Corporation and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.7 to L-3 Communications Corporation's
Registration Statement on Form S-4 No. 333-31649).
10.7 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and KSL, Division of Bonneville International
(incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1 No. 333-46975).
10.71 Lease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, L-3
Communications Corporation and Unisys Corporation (incorporated by reference to
Exhibit 10.61 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.72 Sublease dated as of April 29, 1997 among Lockheed Martin Tactical Systems, Inc., L-3
Communications Corporation and Unisys Corporation (incorporated by reference to
Exhibit 10.62 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 Form of 1997 Stock Option Plan for Key Employees (incorporated by reference to
Exhibit 10.91 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- -------------------------------------------------------------------------------------
<S> <C>
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 Peat Marwick LLP, independent auditors.
**23.5 Consent of Grant Thornton LLP, independent auditors.
24 Powers of Attorney (included in Part II of this Registration Statement).
</TABLE>
- ----------
* To be filed by amendment.
** Filed herewith.
<PAGE>
===============================================================================
L-3 COMMUNICATIONS CORPORATION,
As Issuer
$300,000,000
8% SENIOR SUBORDINATED NOTES DUE 2008
--------------------------------------------------------------
INDENTURE
Dated as of December 11, 1998
--------------------------------------------------------------
--------------------------------------------------------------
The Bank of New York,
As Trustee
--------------------------------------------------------------
===============================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE....................... 1
SECTION 1.01. DEFINITIONS................................................... 1
SECTION 1.02. OTHER DEFINITIONS............................................. 18
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT............. 18
SECTION 1.04. RULES OF CONSTRUCTION......................................... 19
ARTICLE 2. THE NOTES........................................................ 19
SECTION 2.01. FORM AND DATING............................................... 19
SECTION 2.02. EXECUTION AND AUTHENTICATION.................................. 20
SECTION 2.03. REGISTRAR AND PAYING AGENT.................................... 20
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST........................... 21
SECTION 2.05. HOLDER LISTS.................................................. 21
SECTION 2.06. TRANSFER AND EXCHANGE......................................... 21
SECTION 2.07. REPLACEMENT NOTES............................................. 33
SECTION 2.08. OUTSTANDING NOTES............................................. 34
SECTION 2.09. TREASURY NOTES................................................ 34
SECTION 2.10. TEMPORARY NOTES............................................... 34
SECTION 2.11. CANCELLATION.................................................. 35
SECTION 2.12. DEFAULTED INTEREST............................................ 35
SECTION 2.13. CUSIP NUMBERS................................................. 35
ARTICLE 3. REDEMPTION AND PREPAYMENT........................................ 35
SECTION 3.01. NOTICES TO TRUSTEE............................................ 35
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED............................. 36
SECTION 3.03. NOTICE OF REDEMPTION.......................................... 36
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION................................ 37
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE................................... 37
SECTION 3.06. NOTES REDEEMED IN PART........................................ 37
SECTION 3.07. OPTIONAL REDEMPTION........................................... 38
SECTION 3.08. MANDATORY REDEMPTION.......................................... 38
SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS........... 38
ARTICLE 4. COVENANTS........................................................ 40
SECTION 4.01. PAYMENT OF NOTES.............................................. 40
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY............................... 40
SECTION 4.03. REPORTS....................................................... 41
SECTION 4.04. COMPLIANCE CERTIFICATE........................................ 42
SECTION 4.05. TAXES......................................................... 42
SECTION 4.06. [INTENTIONALLY OMITTED]....................................... 42
SECTION 4.07. RESTRICTED PAYMENTS........................................... 43
SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES.................................................. 45
SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.... 46
SECTION 4.10. ASSET SALES................................................... 49
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.................................. 50
<PAGE>
SECTION 4.12. LIENS......................................................... 50
SECTION 4.13. FUTURE SUBSIDIARY GUARANTEES.................................. 51
SECTION 4.14. CORPORATE EXISTENCE........................................... 52
SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.................... 52
SECTION 4.16. NO SENIOR SUBORDINATED DEBT................................... 53
SECTION 4.17. PAYMENTS FOR CONSENT.......................................... 53
ARTICLE 5. SUCCESSORS....................................................... 54
SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS...................... 54
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED............................. 54
ARTICLE 6. DEFAULTS AND REMEDIES............................................ 55
SECTION 6.01. EVENTS OF DEFAULT............................................. 55
SECTION 6.02. ACCELERATION.................................................. 56
SECTION 6.03. OTHER REMEDIES................................................ 57
SECTION 6.04. WAIVER OF PAST DEFAULTS....................................... 57
SECTION 6.05. CONTROL BY MAJORITY........................................... 58
SECTION 6.06. LIMITATION ON SUITS........................................... 58
SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT................. 58
SECTION 6.08. COLLECTION SUIT BY TRUSTEE.................................... 59
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.............................. 59
SECTION 6.10. PRIORITIES.................................................... 59
SECTION 6.11. UNDERTAKING FOR COSTS......................................... 60
ARTICLE 7. TRUSTEE.......................................................... 60
SECTION 7.01. DUTIES OF TRUSTEE............................................. 60
SECTION 7.02. RIGHTS OF TRUSTEE............................................. 61
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.................................. 62
SECTION 7.04. TRUSTEE'S DISCLAIMERS......................................... 62
SECTION 7.05. NOTICE OF DEFAULTS............................................ 62
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.................... 63
SECTION 7.07. COMPENSATION AND INDEMNITY.................................... 63
SECTION 7.08. REPLACEMENT OF TRUSTEE........................................ 64
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.............................. 65
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION................................. 65
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY............. 65
ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE......................... 65
SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE...... 65
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE................................ 65
SECTION 8.03. COVENANT DEFEASANCE........................................... 66
SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.................... 66
SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS................................ 68
ii
<PAGE>
SECTION 8.06. REPAYMENT TO COMPANY.......................................... 68
SECTION 8.07. REINSTATEMENT................................................. 69
ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER................................ 69
SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES........................... 69
SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES.............................. 69
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT........................... 71
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS............................. 71
SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES.............................. 71
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC............................... 72
ARTICLE 10. SUBORDINATION................................................... 72
SECTION 10.01. AGREEMENT TO SUBORDINATE..................................... 72
SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY......................... 72
SECTION 10.03. DEFAULT ON DESIGNATED SENIOR DEBT............................ 72
SECTION 10.04. ACCELERATION OF SECURITIES................................... 73
SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER.......................... 73
SECTION 10.06. NOTICE BY COMPANY............................................ 74
SECTION 10.07. SUBROGATION.................................................. 74
SECTION 10.08. RELATIVE RIGHTS.............................................. 74
SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY................. 75
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE..................... 75
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT........................... 75
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION........................ 76
SECTION 10.13. AMENDMENTS................................................... 76
ARTICLE 11. MISCELLANEOUS................................................... 76
SECTION 11.01. TRUST INDENTURE ACT CONTROLS................................. 76
SECTION 11.02. NOTICES...................................................... 76
SECTION 11.03. COMMUNICATIONS BY HOLDERS OF NOTES WITH OTHER HOLDERS
OF NOTES..................................................... 77
SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT........... 77
SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION................ 78
SECTION 11.06. RULE BY TRUSTEE AND AGENTS................................... 78
SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES
AND STOCKHOLDERS............................................. 78
SECTION 11.08. GOVERNING LAW................................................ 78
SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS................ 79
SECTION 11.10. SUCCESSORS................................................... 79
SECTION 11.11. SEVERABILITY................................................. 79
SECTION 11.12. COUNTERPART ORIGINALS........................................ 79
SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC............................. 79
iii
<PAGE>
EXHIBITS
--------
EXHIBIT A FORM OF NOTE
EXHIBIT B FORM OF CERTIFICATE OF TRANSFER
EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE
EXHIBIT D FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL
ACCREDITED INVESTORS
EXHIBIT E FORM OF SUPPLEMENTAL INDENTURE
EXHIBIT F FORM OF NOTATION ON SENIOR
SUBORDINATED NOTE RELATING TO
SUBSIDIARY GUARANTEE
iv
<PAGE>
Cross-Reference Table** This Cross-Reference Table is not part of the
Indenture.
Trust Indenture Indenture
Act Section Section
310 (a)(1) 7.10
(a)(2) 7.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 7.10
(b) 7.10
(c) N.A.
311 (a) 7.11
(b) 7.11
(c) N.A.
312 (a) 2.05
(b) 11.03
(c) 11.03
313 (a) 7.06
(b)(1) 10.03
(b)(2) \ 7.07
(c) 7.06;11.02
(d) 7.06
314 (a) 4.03;11.02
(b) 10.02
(c)(1) 11.04
(c)(2) 11.04
(c)(3) N.A.
(d) 10.03, 10.04, 10.05
(e) 11.05
(f) N.A.
315 (a) 7.01
(b) 7.05, 11.02
(c) 7.01
(d) 7.01
(e) 6.11
316 (a)(last sentence) 2.09
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
(c) 2.12
317 (a)(1) 6.08
v
<PAGE>
(a)(2) 6.09
(b) 2.04
318 (a) 11.01
(b) N.A.
(c) 11.01
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
vi
<PAGE>
This INDENTURE dated as of December 11, 1998, among L-3
Communications Corporation, a Delaware corporation (the "Company"), Hygienetics
Environmental Services, Inc., a Delaware corporation, L-3 Communications ILEX
Systems, Inc., a Delaware corporation, Southern California Microwave, Inc., a
California corporation, L-3 Communications SPD Technologies, Inc., a Delaware
corporation, L-3 Communications ESSCO, Inc., a Delaware corporation, Storm
Control Systems, Inc., a California corporation, DBS Microwave, Inc., a
California corporation, SPD Electrical Systems Inc., a Delaware corporation,
SPD Switchgear Inc., a Delaware corporation, Pac Ord Inc., a Delaware
corporation, Henschel Inc., a Delaware corporation, SPD Holdings, Inc., a
Delaware corporation, and Power Paragon, Inc., a Delaware corporation
(collectively, the "Guarantors"), and The Bank of New York, as trustee (the
"Trustee").
The Company and the Trustee agree as follows for the benefit
of each other and for the equal and ratable benefit of the Holders of the 8%
Senior Subordinated Notes due 2008 (the "Series A Notes") and the 8% Senior
Subordinated Notes due 2008 (the "Exchange Notes" and, together with the
Initial Notes, the "Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. DEFINITIONS.
"144A Global Note" means the global note in the form of
Exhibit A hereto bearing the Global Note Legend and the Private Placement
Legend and deposited with and registered in the name of the Depositary or its
nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold in reliance on Rule 144A.
"1997 Indenture" means the indenture, dated as of April 30,
1997, among The Bank of New York, as trustee, and the Company, with respect to
the 1997 Notes.
"1997 Notes" means the $225,000,000 in aggregate principal
amount of the Company's 10 3/8% Senior Subordinated Notes due 2007, issued
pursuant to the 1997 Indenture on April 30, 1997.
"Additional Notes" means up to $100.0 million in aggregate
principal amount of Notes (other than the Initial Notes) issued under this
Indenture in accordance with Sections 2.02 and 4.09 hereof.
"Acquired Debt" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms
<PAGE>
2
"controlling", "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement
or otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Applicable Procedures" means, with respect to any transfer
or exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depositary, Euroclear and Cedel that apply to such transfer
or exchange.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets or rights (including, without limitation, by way of a
sale and leaseback) other than sales of inventory in the ordinary course of
business (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole shall be governed by the covenant contained in
Section 4.15 and/or the covenant contained in Section 5.01 and not by the
covenant contained in Section 4.10), and (ii) the issue or sale by the Company
or any of its Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (A) that have a fair
market value in excess of $1.0 million or (B) for net proceeds in excess of
$1.0 million. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company
or to another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii)
a Restricted Payment that is permitted by the covenant contained in Section
4.07 and (iv) a disposition of Cash Equivalents in the ordinary course of
business shall not be deemed to be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback
transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Bankruptcy Law" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors.
"Board of Directors" means the Board of Directors of the
Company, or any authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of
a capital lease that would at such time be required to be capitalized on a
balance sheet in accordance with GAAP.
<PAGE>
3
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than one year from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic financial
institution to the Senior Credit Facilities or with any domestic commercial
bank having capital and surplus in excess of $500.0 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's or S&P and in each case
maturing within six months after the date of acquisition, (vi) investment funds
investing 95% of their assets in securities of the types described in clauses
(i)-(v) above, and (vii) readily marketable direct obligations issued by any
State of the United States of America or any political subdivision thereof
having maturities of not more than one year from the date of acquisition and
having one of the two highest rating categories obtainable from either Moody's
or S&P.
"Cedel" means Cedel Bank, societe anonyme.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is used
in Section 13(d)(3) of the Exchange Act) other than the Principals or their
Related Parties (as defined below), (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly
or indirectly, of more than 50% of the Voting Stock of the Company (measured by
voting power rather than number of shares) or (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person
for any period, the Consolidated Net Income of such Person for such period plus
(i) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale (to the extent such losses were deducted in
computing such Consolidated Net Income), plus (ii) provision for taxes based on
income or profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period,
<PAGE>
4
whether paid or accrued and whether or not capitalized (including, without
limitation, original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill, debt issuance
costs and other intangibles but excluding amortization of other prepaid cash
expenses that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or amortization of
a prepaid cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income, minus (v) non-cash items (excluding any items that
were accrued in the ordinary course of business) increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis and
determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof that is a Guarantor, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded, (v) the Net Income of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to the Company or one
of its Restricted Subsidiaries, and (vi) the Net Income of any Restricted
Subsidiary shall be calculated after deducting preferred stock dividends
payable by such Restricted Subsidiary to Persons other than the Company and its
other Restricted Subsidiaries.
"Consolidated Tangible Assets" means, with respect to the
Company, the total consolidated assets of the Company and its Restricted
Subsidiaries, less the total intangible assets of the Company and its
Restricted Subsidiaries, as shown on the most recent internal consolidated
balance sheet of the Company and such Restricted Subsidiaries calculated on a
consolidated basis in accordance with GAAP.
"Continuing Directors" means, as of any date of
determination, any member of the Board of Directors of the Company who (i) was
a member of such Board of Directors on the Issue Date or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
<PAGE>
5
nomination or election.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 11.02 hereof or such other address
as to which the Trustee may give notice to the Company.
"Credit Facilities" means, with respect to the Company, one
or more debt facilities (including, without limitation, the Senior Credit
Facilities) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of
time or the giving of notice or both would be, an Event of Default.
"Definitive Note" means a certificated Note registered in the
name of the Holder thereof and issued in accordance with Article 2 hereof,
substantially in the form of Exhibit A hereto, except that such Note shall not
bear the Global Note Legend and shall not have the "Schedule of Exchanges of
Interests in the Global Note" attached thereto.
"Depositary" means, with respect to the Notes issuable or
issued in whole or in part in global form, the Person specified in Section 2.03
hereof as the Depositary with respect to the Notes, until a successor shall
have been appointed and become such pursuant to the applicable provision of
this Indenture, and, thereafter, "Depositary" shall mean or include such
successor.
"Designated Senior Debt" means (i) any Indebtedness
outstanding under the Senior Credit Facilities and (ii) any other Senior Debt
permitted under the Indenture the principal amount of which is $25.0 million or
more and that has been designated by the Company as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible, or for
which it is exchangeable, at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with Section 4.07 hereof; and
provided further, that if such Capital Stock is issued to any plan for the
benefit of employees of the Company or its Subsidiaries or by any such plan to
such employees, such Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations.
<PAGE>
6
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity
securities (excluding Disqualified Stock) of the Company or Holdings, other
than any private sales to an Affiliate of the Company or Holdings.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear system.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Notes" means the Notes issued in the Exchange Offer
pursuant to Section 2.06(f).
"Exchange Offer" has the meaning set forth in the
Registration Rights Agreement.
"Existing Indebtedness" means any Indebtedness of the Company
(other than Indebtedness under the Senior Credit Facilities and the Notes) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations, but excluding amortization of debt issuance costs) and (ii) the
consolidated interest of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (A) all dividend payments, whether or not in cash, on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable solely
in Equity Interests of the Company, times (B) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Fixed Charge Coverage Ratio" means with respect to any
Person for any period, the ratio of the Consolidated Cash Flow of such Person
for such period to the Fixed Charges of such Person and its Restricted
Subsidiaries for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness
(other than revolving credit borrowings) or issues preferred stock subsequent
to the commencement of the
<PAGE>
7
period for which the Fixed Charge Coverage Ratio is being calculated but on or
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Company or any of its Restricted Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii)
the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary of the
Company that was not organized or existing under the laws of the United States,
any state thereof, the District of Columbia or any territory thereof or that
has not guaranteed or otherwise provided direct credit support for any
Indebtedness of the Company.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which were in effect April 30, 1997.
"Global Notes" means, individually and collectively, each of
the Restricted Global Notes and the Unrestricted Global Notes, substantially in
the form of Exhibit A hereto issued in accordance with Article 2 hereof.
"Global Note Legend" means the legend set forth in Section
2.06(g)(ii) to be placed on all Global Notes issued under this Indenture.
"Government Securities" means direct obligations of, or
obligations guaranteed by, the United States of America for the payment of
which guarantee or obligations the full faith and credit of the United States
is pledged.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
<PAGE>
8
"Guarantors" means each Person listed in the preamble to the
Indenture and each Subsidiary of the Company that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) currency exchange or interest rate swap
agreements, interest rate cap agreements and currency exchange or interest rate
collar agreements and (ii) other agreements or arrangements designed to protect
such Person against fluctuations in currency exchange rates or interest rates.
"Holder" means a Person in whose name a Note is registered.
"Holdings" means L-3 Communications Holdings, Inc.
"IAI Global Note" means the global Note in the form of
Exhibit A hereto bearing the Global Note Legend and the Private Placement
Legend and deposited with and registered in the name of the Depositary or its
nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold to Institutional Accredited Investors.
"Indebtedness" means, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, as well
as all indebtedness of others secured by a Lien on any asset of such Person
(whether or not such indebtedness is assumed by such Person) and, to the extent
not otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness.
"Indenture" means this Indenture, as amended or supplemented
from time to time.
"Indirect Participant" means a Person who holds a beneficial
interest in a Global Note through a Participant.
"Initial Notes" means $200,000,000 in aggregate principal
amount of Notes issued under this Indenture on the date hereof.
"Institutional Accredited Investor" means an institution that
is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of direct or indirect loans (including guarantees of Indebtedness or other
obligations), advances or capital contributions (excluding commission, travel,
<PAGE>
9
moving and similar loans or advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the last paragraph
of the covenant contained in Section 4.07.
"Issue Date" means December 11, 1998.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in The City of New York or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that
place on the next succeeding day that is not a Legal Holiday, and no interest
shall accrue for the intervening period.
"Lehman Investor" means Lehman Brothers Holdings Inc. and any
of its Affiliates.
"Letter of Transmittal" means the letter of transmittal to be
prepared by the Company and sent to all Holders of the Initial Notes for use by
such Holders in connection with the Exchange Offer.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all liquidated damages then owing
pursuant to Section 5 of the Registration Rights Agreement.
"Marketable Securities" means, with respect to any Asset
Sale, any readily marketable equity securities that are (i) traded on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market;
and (ii) issued by a corporation having a total equity market capitalization of
not less than $300.0 million; provided that the excess of (A) the aggregate
amount of securities of any one such corporation held by the Company and any
Restricted Subsidiary over (B) ten times the average daily trading volume of
such securities during the 20 immediately preceding trading days shall be
deemed not to be Marketable Securities; as determined on the date of the
contract relating to such Asset Sale.
"May 1998 Notes" means the $180,000,000 in aggregate
principal amount of the Company's 8 1/2% Senior Subordinated Notes due 2008,
issued pursuant to the May 1998 Notes
<PAGE>
10
Indenture on May 22, 1998.
"May 1998 Notes Indenture" means the indenture, dated as of
May 22, 1998, among The Bank of New York, as trustee, and the Company, with
respect to the May 1998 Notes.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net
income (loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain or loss, together with any related provision for taxes thereon, realized
in connection with (A) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (B) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain or loss, together
with any related provision for taxes on such extraordinary gain or loss and
(iii) the cumulative effect of a change in accounting principles.
"Net Proceeds" means the aggregate cash proceeds received by
the Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which
neither the Company nor any of its Restricted Subsidiaries (A) provides credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (B) is directly or indirectly liable (as a
guarantor or otherwise), or (C) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than Indebtedness incurred under Credit Facilities) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Non-U.S. Person" means a person who is not a U.S. Person.
"Note Custodian" means the Trustee, as custodian with respect
to the Notes in global form, or any successor entity thereto.
"Obligations" means any principal, premium (if any), interest
(including interest
<PAGE>
11
accruing on or after the filing of any petition in bankruptcy or for
reorganization, whether or not a claim for post-filing interest is allowed in
such proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages (including Liquidated Damages), guarantees
and other liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereto.
"Offering" means the Offering of the Notes by the Company.
"Officer" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary, any Assistant Secretary or any Vice-President of
such Person.
"Officers' Certificate" means a certificate signed on behalf
of the Company by two Officers of the Company, one of whom must be the
principal executive officer, the principal financial officer, the treasurer or
the principal accounting officer of the Company, that meets the requirements of
Section 11.05 hereof.
"Opinion of Counsel" means an opinion from legal counsel who
is reasonably acceptable to the Trustee, that meets the requirements of Section
11.05 hereof. The counsel may be an employee of or counsel to the Company, any
Subsidiary of the Company or the Trustee.
"Participant" means, with respect to DTC, Euroclear or Cedel,
a Person who has an account with DTC, Euroclear or Cedel, respectively (and,
with respect to DTC, shall include Euroclear and Cedel).
"Permitted Investments" means (i) any Investment in the
Company or in a Restricted Subsidiary of the Company that is a Guarantor; (ii)
any Investment in cash or Cash Equivalents; (iii) any Investment by the Company
or any Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (A) such Person becomes a Restricted Subsidiary of the Company and a
Guarantor or (B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company that is
a Guarantor; (iv) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with Section 4.07 or any disposition of assets not constituting an
Asset sale; (v) any acquisition of assets solely in exchange for the issuance
of Equity Interests (other than Disqualified Stock) of the Company; (vi)
advances to employees not to exceed $2.5 million at any one time outstanding;
(vii) any Investment acquired in connection with or as a result of a workout or
bankruptcy of a customer or supplier; (viii) Hedging Obligations permitted to
be incurred under Section 4.09; (ix) any Investment in a Similar Business that
is not a Restricted Subsidiary; provided that the aggregate fair market value
of all Investments outstanding pursuant to this clause (ix) (valued on the date
each such Investment was made and without giving effect to subsequent changes
in value) may not at any one time exceed 10% of the Consolidated Tangible
Assets of the Company; and (x) other Investments in any Person having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (x) that are at the
time outstanding, not to exceed $15.0
<PAGE>
12
million.
"Permitted Joint Venture" means any joint venture,
partnership or other Person designated by the Board of Directors (until
designation by the Board of Directors to the contrary); provided that (i) at
least 25% of the Capital Stock thereof with voting power under ordinary
circumstances to elect directors (or Persons having similar or corresponding
powers and responsibilities) is at the time owned (beneficially or directly) by
the Company and/or by one or more Restricted Subsidiaries of the Company and
(ii) such joint venture, partnership or other Person is engaged in a Similar
Business. Any such designation or designation to the contrary shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Permitted Junior Securities" means Equity Interests in the
Company or debt securities that are subordinated to all Senior Debt (and any
debt securities issued in exchange for Senior Debt) to substantially the same
extent as, or to a greater extent than, the Notes and the Subsidiary Guarantees
are subordinated to Senior Debt pursuant to Article 10 of this Indenture.
"Permitted Liens" means (i) Liens securing Senior Debt of the
Company or any Guarantor that was permitted by the terms of this Indenture to
be incurred; (ii) Liens in favor of the Company or any Guarantor; (iii) Liens
on property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company; (iv) Liens on property
existing at the time of acquisition thereof by the Company or any Subsidiary of
the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any other assets of the
Company or any of its Restricted Subsidiaries; (v) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance bonds
or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of Section 4.09
covering only the assets acquired with such Indebtedness; (vii) Liens existing
on the Issue Date; (viii) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be required
in conformity with GAAP shall have been made therefor; (ix) Liens incurred in
the ordinary course of business of the Company or any Restricted Subsidiary of
the Company with respect to obligations that do not exceed $5.0 million at any
one time outstanding; (x) Liens on assets of Guarantors to secure Senior Debt
of such Guarantors that was permitted by this Indenture to be incurred; (xi)
Liens securing Permitted Refinancing Indebtedness, provided that any such Lien
does not extend to or cover any property, shares or debt other than the
property, shares or debt securing the Indebtedness so refunded, refinanced or
extended; (xii) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature, in each case incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money); (xiii)
Liens upon specific items of inventory or other goods and proceeds of any
Person securing such Person's obligations in respect
<PAGE>
13
of bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other goods
in the ordinary course of business; (xiv) Liens encumbering customary initial
deposits and margin deposits, and other Liens incurred in the ordinary course
of business that are within the general parameters customary in the industry,
in each case securing Indebtedness under Hedging Obligations; and (xv) Liens
encumbering deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory or regulatory, contractual or
warranty requirements of the Company or its Subsidiaries for which a reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made.
"Permitted Refinancing Indebtedness" means any Indebtedness
of the Company or any of its Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses and prepayment premiums incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date no earlier than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness is subordinated in right of
payment to the Notes on terms at least as favorable to the Holders of Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Permitted Securities" means, with respect to any Asset Sale,
Voting Stock of a Person primarily engaged in one or more Similar Businesses;
provided that after giving effect to the Asset Sale such Person shall become a
Restricted Subsidiary and a Guarantor.
"Person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or agency or political subdivision thereof
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"Principals" means any Lehman Investor, Lockheed Martin
Corporation, Frank C. Lanza and Robert V. LaPenta.
"Private Placement Legend" means the legend set forth in
Section 2.07(g)(i) to be placed on all Notes issued under this Indenture except
as otherwise permitted by the provisions of this Indenture.
"Purchase Agreement" means the Purchase Agreement, dated as
of December 11, 1998, among the Company, the Guarantors, Lehman Brothers Inc.
and NationsBanc Montgomery Securities LLC.
<PAGE>
14
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of December 11, 1998, by and among the Company, the
Guarantors, Lehman Brothers Inc. and NationsBanc Montgomery Securities LLC, as
such agreement may be amended, modified or supplemented from time to and, with
respect to any Additional Notes, one or more registration rights agreements
between the Company and the other parties thereto, as such agreement(s) may be
amended, modified or supplemented from time to time, relating to rights given
by the Company to the purchasers of Additional Notes to register such
Additional Notes under the Securities Act.
"Regulation S" means Regulation S promulgated under the
Securities Act.
"Regulation S Global Note" means a global Note bearing the
Private Placement Legend and deposited with and registered in the name of the
Depositary or its nominee that will be issued in a denomination equal to the
outstanding principal amount of the Notes sold in reliance on Regulation S.
"Related Party" with respect to any Principal means (i) any
controlling stockholder, 50% (or more) owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Principal or (ii) any
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a more than 50%
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (i).
"Representative" means the indenture trustee or other
trustee, agent or representative for any Senior Debt.
"Responsible Officer" when used with respect to the Trustee,
means any officer within the Corporate Trust Administration of the Trustee (or
any successor group of the Trustee) or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate
trust matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Definitive Note" means a Definitive Note bearing
the Private Placement Legend.
"Restricted Global Notes" means the 144A Global Note, the IAI
Global Note and the Regulation S Global Note, each of which shall bear the
Private Placement Legend.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Period" means the 40-day restricted period as
defined in Regulation S.
"Restricted Subsidiary" means, with respect to any Person,
each Subsidiary of such Person that is not an Unrestricted Subsidiary.
<PAGE>
15
"Rule 144" means Rule 144 under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"Rule 903" means Rule 903 under the Securities Act.
"Rule 904" means Rule 904 under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Facilities" means the credit agreement, as in
effect on the Issue Date among the Company and a syndicate of banks and other
financial institutions led by Lehman Commercial Paper Inc., as syndication
agent, and any related notes, collateral documents, letters of credit and
guarantees, including any appendices, exhibits or schedules to any of the
foregoing (as the same may be in effect from time to time), in each case, as
such agreements may be amended, modified, supplemented or restated from time to
time, or refunded, refinanced, restructured, replaced, renewed, repaid or
extended from time to time (whether with the original agents and lenders or
other agents and lenders or otherwise, and whether provided under the original
credit agreement or other credit agreements or otherwise).
"Senior Debt" means (i) all Indebtedness of the Company or
any of its Restricted Subsidiaries outstanding under Credit Facilities and all
Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted
to be incurred by the Company or any of its Restricted Subsidiaries under the
terms of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in
right of payment to the Notes and (iii) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (i) any liability for federal, state, local or other
taxes owed or owing by the Company, (ii) any Indebtedness of the Company to any
of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any
Indebtedness that is incurred in violation of the Indenture.
"Shelf Registration Statement" means the Shelf Registration
Statement as defined in the Registration Rights Agreement.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Similar Business" means a business, a majority of whose
revenues in the most recently ended calendar year were derived from (i) the
sale of defense products, electronics, communications systems, aerospace
products, avionics products and/or communications products, (ii) any services
related thereto, (iii) any business or activity that is reasonably similar
thereto or a reasonable extension, development or expansion thereof or
ancillary thereto, and (iv) any combination of any of the foregoing.
<PAGE>
16
"Stated Maturity" means, with respect to any installment of
interest or principal on any series of Indebtedness, the date on which such
payment of interest or principal was scheduled to be paid in the original
documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (A) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (B) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"S&P" means Standard and Poor's Corporation.
"TIA" means the Trust Indenture Act of 1939
(15 U.S.C.ss.ss.77aaa-77bbbb) as in effect on the date on which this Indenture
is qualified under TIA.
"Transaction Documents" means the Indenture, the Notes, the
Purchase Agreement and the Registration Rights Agreement.
"Transfer Restricted Securities" means securities that bear
or are required to bear the Private Placement Legend set forth in Section
2.06(g)(i) hereof.
"Trustee" means the party named as such above until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means the successor serving hereunder.
"Unrestricted Global Note" means one or more global Notes, in
the form of Exhibit A attached hereto, that do not and are not required to bear
the Private Placement Legend and are deposited with and registered in the name
of the Depositary or its nominee.
"Unrestricted Definitive Note" means one or more Definitive
Notes that do not and are not required to bear the Private Placement Legend.
"Unrestricted Subsidiary" means any Subsidiary that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to
a Board Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (iii) is a Person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (A) to subscribe for additional Equity Interests
or (B) to maintain or preserve such Person's financial
<PAGE>
17
condition or to cause such Person to achieve any specified levels of operating
results; (iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (v) has at least one director on its board of directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by Section
4.07. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of this Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under Section 4.09, the Company shall
be in default of such covenant). The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under Section 4.09, calculated
on a pro forma basis as if such designation had occurred at the beginning of
the four-quarter reference period, and (ii) no Default or Event of Default
would be in existence following such designation.
"U.S. Person" means a U.S. person as defined in Rule 902(o)
under the Securities Act.
"Voting Stock" of any Person as of any date means the Capital
Stock of such Person that is at the time entitled to vote in the election of
the Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to
any Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (A) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity, in respect thereof, by (B)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned" means, when used with respect to any
Subsidiary or Restricted Subsidiary of a Person, a Subsidiary (or Restricted
Subsidiary, as appropriate) of such Person all of the outstanding Capital Stock
or other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries (or Wholly Owned Restricted Subsidiaries, as appropriate) of such
Person and one or more Wholly Owned Subsidiaries (or Wholly Owned Restricted
Subsidiaries, as appropriate) of such Person.
<PAGE>
18
SECTION 1.02. OTHER DEFINITIONS.
Defined in
Term Section
"Affiliate Transaction"................................................. 4.11
"Asset Sale Offer"...................................................... 3.09
"Bankruptcy Law"........................................................ 4.01
"Change of Control Offer"............................................... 4.15
"Change of Control Payment"............................................. 4.15
"Change of Control Payment Date"........................................ 4.15
"Covenant Defeasance"................................................... 8.03
"Event of Default"...................................................... 6.01
"Global Note Legend".................................................... 2.06
"Excess Proceeds"....................................................... 4.10
"incur"................................................................. 4.09
"Legal Defeasance"...................................................... 8.02
"Offer Amount".......................................................... 3.09
"Offer Period".......................................................... 3.09
"Paying Agent".......................................................... 2.03
"Purchase Date"......................................................... 3.09
"Registrar"............................................................. 2.03
"Remaining Excess Proceeds"............................................. 4.10
"Restricted Payments"................................................... 4.07
"Secondary Asset Sale Offer"............................................ 4.10
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"indenture securities" means the Notes;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee;
"obligor" on the Notes means the Company and any successor
obligor upon the Notes.
All other terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule
under the TIA have the meanings so assigned to them.
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19
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) references to sections of or rules under the
Securities Act shall be deemed to include substitute, replacement of
successor sections or rules adopted by the SEC from time to time.
ARTICLE 2.
THE NOTES
SECTION 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Notes may be issued
in the form of Definitive Notes or Global Notes, as specified by the Company.
The Notes may have notations, legends or endorsements required by law, stock
exchange rule or usage. Each Note shall be dated the date of its
authentication. The Notes shall be in denominations of $1,000 and integral
multiples thereof.
The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby. However,
to the extent any provision of any Note conflicts with the express provisions
of this Indenture, the provisions of this Indenture shall govern and be
controlling.
Notes issued in global form shall be substantially in the
form of Exhibit A attached hereto (including the Global Note Legend and the
"Schedule of Exchanges in the Global Note" attached thereto). Notes issued in
definitive form shall be substantially in the form of Exhibit A attached hereto
(but without the Global Note Legend and without the "Schedule of Exchanges of
Interests in the Global Note" attached thereto). Each Global Note shall
represent such of the outstanding Notes as shall be specified therein and each
shall provide that it shall represent the aggregate principal amount of
outstanding Notes from time to time endorsed thereon and that the aggregate
principal amount of outstanding Notes represented thereby may from time to time
be reduced or increased, as appropriate, to reflect exchanges and redemptions.
Any endorsement of a Global Note to reflect the amount of any increase or
decrease in the aggregate principal amount of outstanding Notes represented
thereby shall be made by the Trustee or the Note Custodian, at the
<PAGE>
20
direction of the Trustee, in accordance with instructions given by the Holder
thereof as required by Section 2.06 hereof.
The provisions of the "Operating Procedures of the Euroclear
System" and "Terms and Conditions Governing Use of Euroclear" and the "General
Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall
be applicable to interests in the Regulation S Global Notes that are held by
the Agent Members through Euroclear or Cedel Bank.
SECTION 2.02. EXECUTION AND AUTHENTICATION
Two Officers shall sign the Notes for the Company by manual
or facsimile signature. The Company's seal shall be reproduced on the Notes and
may be in facsimile form.
If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed
by two Officers, authenticate Notes for original issue up to the aggregate
principal amount stated in paragraph 4 of the Notes. The aggregate principal
amount of Notes outstanding at any time may not exceed such amount except as
provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of the Company.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes
may be presented for registration of transfer or for exchange ("Registrar") and
an office or agency where Notes may be presented for payment ("Paying Agent").
The Registrar shall keep a register of the Notes and of their transfer and
exchange. The Company may appoint one or more co-registrars and one or more
additional paying agents. The term "Registrar" includes any co-registrar and
the term "Paying Agent" includes any additional paying agent. The Company may
change any Paying Agent or Registrar without notice to any Holder. The Company
shall notify the Trustee in writing of the name and address of any Agent not a
party to this Indenture. If the Company fails to appoint or maintain another
entity as Registrar or Paying Agent, the Trustee shall act as such. The Company
or any of its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company
("DTC") to act as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent
<PAGE>
21
and to act as Note Custodian with respect to the Global Notes.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the
payment of principal, premium or Liquidated Damages, if any, or interest on the
Notes, and will notify the Trustee of any default by the Company in making any
such payment. While any such default continues, the Trustee may require a
Paying Agent to pay all money held by it to the Trustee. The Company at any
time may require a Paying Agent to pay all money held by it to the Trustee.
Upon payment over to the Trustee, the Paying Agent (if other than the Company
or a Subsidiary) shall have no further liability for the money. If the Company
or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate
trust fund for the benefit of the Holders all money held by it as Paying Agent.
Upon any bankruptcy or reorganization proceedings relating to the Company, the
Trustee shall serve as Paying Agent for the Notes.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the
Trustee is not the Registrar, the Company shall furnish to the Trustee at least
five Business Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of the Holders of
Notes and the Company shall otherwise comply with TIA ss. 312(a).
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes. A Global Note may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary, by a nominee of the Depositary to the Depositary or to another
nominee of the Depositary, or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary. All Global
Notes will be exchanged by the Company for Definitive Notes if (i) the Company
delivers to the Trustee notice from the Depositary that it is unwilling or
unable to continue to act as Depositary or that it is no longer a clearing
agency registered under the Exchange Act and, in either case, a successor
Depositary is not appointed by the Company within 120 days after the date of
such notice from the Depositary or (ii) the Company in its sole discretion
determines that the Global Notes (in whole but not in part) should be exchanged
for Definitive Notes and delivers a written notice to such effect to the
Trustee. Upon the occurrence of either of the preceding events in (i) or (ii)
above, Definitive Notes shall be issued in such names as the Depositary shall
instruct the Trustee. Global Notes also may be exchanged or replaced, in whole
or in part, as provided in Sections 2.07 and 2.11 hereof. Every Note
authenticated and made available for delivery in exchange for, or in lieu of, a
Global Note or any portion thereof, pursuant to Section 2.07 or 2.11 hereof,
shall be authenticated and made available for delivery in the form of, and
shall be, a Global Note. A Global Note may not be exchanged for another Note
other than as provided in this Section 2.06(a), however beneficial interests in
a Global Note may be transferred and exchanged as provided in Section 2.06(b),
(c) or
<PAGE>
22
(f) hereof.
(b) Transfer and Exchange of Beneficial Interests in the
Global Notes. The transfer and exchange of beneficial interests in the Global
Notes shall be effected through the Depositary, in accordance with the
provisions of this Indenture and the procedures of the Depositary therefor.
Beneficial interests in the Restricted Global Notes shall be subject to
restrictions on transfer comparable to those set forth herein to the extent
required by the Securities Act. The Trustee shall have no obligation to
ascertain the Depositary's compliance with any such restrictions on transfer.
Transfers of beneficial interests in the Global Notes also shall require
compliance with either subparagraph (i) or (ii) below, as applicable, as well
as one or more of the other following subparagraphs as applicable:
(i) Transfer of Beneficial Interests in the Same Global Note.
Beneficial interests in any Restricted Global Note may be transferred
to Persons who take delivery thereof in the form of a beneficial
interest in the same Restricted Global Note in accordance with the
transfer restrictions set forth in the Private Placement Legend;
provided, however, that prior to the expiration of the Restricted
Period transfers of beneficial interests in the Regulation S Global
Note may not be made to a U.S. Person or for the account or benefit of
a U.S. Person (other than an Initial Purchaser). Beneficial interests
in any Unrestricted Global Note may be transferred only to Persons who
take delivery thereof in the form of a beneficial interest in an
Unrestricted Global Note. No written orders or instructions shall be
required to be delivered to the Registrar to effect the transfers
described in this Section 2.06(b)(i).
(ii) All Other Transfers and Exchanges of Beneficial
Interests in Global Notes. In connection with all transfers and
exchanges of beneficial interests (other than transfers of beneficial
interests in a Global Note to Persons who take delivery thereof in the
form of a beneficial interest in the same Global Note), the transferor
of such beneficial interest must deliver to the Registrar either (A)
(1) a written order from a Participant or an Indirect Participant
given to the Depositary in accordance with the Applicable Procedures
directing the Depositary to credit or cause to be credited a
beneficial interest in the specified Global Note in an amount equal to
the beneficial interest to be transferred or exchanged and (2)
instructions given in accordance with the Applicable Procedures
containing information regarding the Participant account to be
credited with such increase or (B) (1) a written order from a
Participant or an Indirect Participant given to the Depositary in
accordance with the Applicable Procedures directing the Depositary to
cause to be issued a Definitive Note in an amount equal to the
beneficial interest to be transferred or exchanged and (2)
instructions given by the Depositary to the Registrar containing
information regarding the Person in whose name such Definitive Note
shall be registered to effect the transfer or exchange referred to in
(1) above. Upon an Exchange Offer by the Company in accordance with
Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii)
shall be deemed to have been satisfied upon receipt by the Registrar
of the instructions contained in the Letter of Transmittal delivered
by the Holder of such beneficial interests in the Restricted Global
Notes. Upon satisfaction of all of the requirements for transfer or
exchange of beneficial interests in Global Notes contained in this
Indenture, the Notes and otherwise applicable under the Securities
Act, the Trustee shall adjust the principal amount of the relevant
Global
<PAGE>
23
Note(s) pursuant to Section 2.06(h) hereof.
(iii) Transfer of Beneficial Interests to Another Restricted
Global Note. Beneficial interests in any Restricted Global Note may be
transferred to Persons who take delivery thereof in the form of a
beneficial interest in another Restricted Global Note if the Registrar
receives the following:
(A) if the transferee will take delivery in the form
of a beneficial interest in the 144A Global Note, then the
transferor must deliver a certificate in the form of Exhibit
B hereto, including the certifications in item (1) thereof;
(B) if the transferee will take delivery in the form
of a beneficial interest in the Regulation S Global Note,
then the transferor must deliver a certificate in the form of
Exhibit B hereto, including the certifications in item (2)
thereof; and
(C) if the transferee will take delivery in the form
of a beneficial interest in the IAI Global Note, then the
transferor must deliver (x) a certificate in the form of
Exhibit B hereto, including the certifications in item (3)
thereof, (y) to the extent required by item 3(d) of Exhibit B
hereto, an Opinion of Counsel in form reasonably acceptable
to the Company to the effect that such transfer is in
compliance with the Securities Act and such beneficial
interest is being transferred in compliance with any
applicable blue sky securities laws of any State of the
United States and (z) if the transfer is being made to an
Institutional Accredited Investor and effected pursuant to an
exemption from the registration requirements of the
Securities Act other than Rule 144A under the Securities Act,
Rule 144 under the Securities Act or Rule 904 under the
Securities Act, a certificate from the transferee in the form
of Exhibit D hereto.
(iv) Transfer and Exchange of Beneficial Interests in a
Restricted Global Note for Beneficial Interests in the Unrestricted
Global Note. Beneficial interests in any Restricted Global Note may be
exchanged by any holder thereof for a beneficial interest in the
Unrestricted Global Note or transferred to Persons who take delivery
thereof in the form of a beneficial interest in the Unrestricted
Global Note if:
(A) such exchange or transfer is effected pursuant
to the Exchange Offer in accordance with the Registration
Rights Agreement and the holder, in the case of an exchange,
or the transferee, in the case of a transfer, is not (1) a
broker-dealer, (2) a Person participating in the distribution
of the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights
Agreement; or
<PAGE>
24
(D) the Registrar receives the following:
(1) if the holder of such beneficial
interest in a Restricted Global Note proposes to exchange
such beneficial interest for a beneficial interest in the
Unrestricted Global Note, a certificate from such holder in
the form of Exhibit C hereto, including the certifications in
item (1 )(a) thereof;
(2) if the holder of such beneficial
interest in a Restricted Global Note proposes to transfer
such beneficial interest to a Person who shall take delivery
thereof in the form of a beneficial interest in the
Unrestricted Global Note, a certificate from such holder in
the form of Exhibit B hereto, including the certifications in
item (4) thereof;
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form reasonably
acceptable to the Registrar to the effect that such exchange
or transfer is in compliance with the Securities Act, that
the restrictions on transfer contained herein and in the
Private Placement Legend are not required in order to
maintain compliance with the Securities Act, and such
beneficial interest is being exchanged or transferred in
compliance with any applicable blue sky securities laws of
any State of the United States.
If any such transfer is effected pursuant to subparagraph (B)
or (D) above at a time when an Unrestricted Global Note has not yet been
issued, the Company shall issue and, upon receipt of an authentication order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of beneficial interests transferred pursuant to subparagraph
(B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the form
of, a beneficial interest in any Restricted Global Note.
(c) Transfer or Exchange of Beneficial Interests for
Definitive Notes.
(i) If any holder of a beneficial interest in a Restricted
Global Note proposes to exchange such beneficial interest for a
Definitive Note or to transfer such beneficial interest to a Person
who takes delivery thereof in the form of a Definitive Note, then,
upon receipt by the Registrar of the following documentation (all of
which may be submitted by facsimile):
(A) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial
interest for a Definitive Note, a certificate from such
holder in the form of Exhibit C hereto, including the
certifications in item (2)(a) thereof;
(B) if such beneficial interest is being transferred
to a QIB in accordance with Rule 144A under the Securities
Act, a certificate to the effect set forth in Exhibit
<PAGE>
25
B hereto, including the certifications in item (1) thereof;
(C) if such beneficial interest is being transferred
to a Non-U.S. Person in an offshore transaction in accordance
with Rule 904 under the Securities Act, a certificate to the
effect set forth in Exhibit B hereto, including the
certifications in item (2) thereof;
(D) if such beneficial interest is being transferred
pursuant to an exemption from the registration requirements
of the Securities Act in accordance with Rule 144 under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(a)
thereof;
(E) if such beneficial interest is being transferred
to an Institutional Accredited Investor in reliance on an
exemption from the registration requirements of the
Securities Act other than those listed in subparagraphs (B)
through (D) above, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(d)
thereof, a certificate from the transferee to the effect set
forth in Exhibit D hereof and, to the extent required by item
3(d) of Exhibit B, an Opinion of Counsel from the transferee
or the transferor reasonably acceptable to the Company to the
effect that such transfer is in compliance with the
Securities Act and such beneficial interest is being
transferred in compliance with any applicable blue sky
securities laws of any State of the United States;
(F) if such beneficial interest is being transferred
to the Company or any of its Subsidiaries, a certificate to
the effect set forth in Exhibit B hereto, including the
certifications in item (3)(b) thereof; or
(G) if such beneficial interest is being transferred
pursuant to an effective registration statement under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(c)
thereof, the Trustee shall cause the aggregate principal
amount of the applicable Global Note to be reduced
accordingly pursuant to Section 2.06(h) hereof, and the
Company shall execute and the Trustee shall authenticate and
deliver to the Person designated in the instructions a
Definitive Note in the appropriate principal amount.
Definitive Notes issued in exchange for beneficial interests
in a Restricted Global Note pursuant to this Section 2.06(c)
shall be registered in such names and in such authorized
denominations as the holder shall instruct the Registrar
through instructions from the Depositary and the Participant
or Indirect Participant. The Trustee shall deliver such
Definitive Notes to the Persons in whose names such Notes are
so registered. Definitive Notes issued in exchange for a
beneficial interest in a Restricted Global Note pursuant to
this Section 2.06(c)(i) shall bear the Private Placement
Legend and shall be subject to all restrictions on transfer
contained therein.
(ii) Notwithstanding 2.06(c)(i), a holder of a beneficial
interest in a Restricted Global Note may exchange such beneficial
interest for an Unrestricted Definitive Note or may transfer such
beneficial interest to a Person who takes delivery thereof in the form
of an
<PAGE>
26
Unrestricted Definitive Note only if:
(A) such exchange or transfer is effected pursuant
to the Exchange Offer in accordance with the Registration
Rights Agreement and the holder, in the case of an exchange,
or the transferee, in the case of a transfer, is not (1) a
broker-dealer, (2) a Person participating in the distribution
of the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights
Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial
interest in a Restricted Global Note proposes to exchange
such beneficial interest for a Definitive Note that does not
bear the Private Placement Legend, a certificate from such
holder in the form of Exhibit C hereto, including the
certifications in item (1)(b) thereof;
(2) if the holder of such beneficial
interest in a Restricted Global Note proposes to transfer
such beneficial interest to a Person who shall take delivery
thereof in the form of a Definitive Note that does not bear
the Private Placement Legend, a certificate from such holder
in the form of Exhibit B hereto, including the certifications
in item (4) thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form reasonably
acceptable to the Company, to the effect that such exchange
or transfer is in compliance with the Securities Act, that
the restrictions on transfer contained herein and in the
Private Placement Legend are not required in order to
maintain compliance with the Securities Act, and such
beneficial interest in a Restricted Global Note is being
exchanged or transferred in compliance with any applicable
blue sky securities laws of any State of the United States.
(iii) If any holder of a beneficial interest in an
Unrestricted Global Note proposes to exchange such beneficial interest
for a Definitive Note or to transfer such beneficial interest to a
Person who takes delivery thereof in the form of a Definitive Note,
then, upon satisfaction of the conditions set forth in Section
2.06(b)(ii), the Trustee shall cause the aggregate principal amount of
the applicable Global Note to be reduced accordingly pursuant to
Section 2.06(h) hereof, and the Company shall execute and the Trustee
shall authenticate and deliver to the Person designated in the
instructions a Definitive Note in the appropriate principal amount.
Definitive Notes issued in exchange for a beneficial interest pursuant
to this Section 2.06(c)(iii) shall be registered in such names and in
such authorized denominations as the holder shall instruct the
Registrar through instructions from the
<PAGE>
27
Depositary and the Participant or Indirect Participant. The Trustee
shall deliver such Definitive Notes to the Persons in whose names such
Notes are so registered. Definitive Notes issued in exchange for a
beneficial interest pursuant to this section 2.06(c)(iii) shall not
bear the Private Placement Legend. Beneficial interests in an
Unrestricted Global Note cannot be exchanged for a Definitive Note
bearing the Private Placement Legend or transferred to a Person who
takes delivery thereof in the form of a Definitive Note bearing the
Private Placement Legend.
(d) Transfer or Exchange of Definitive Notes for Beneficial
Interests.
(i) If any Holder of Restricted Definitive Notes proposes to
exchange such Notes for a beneficial interest in a Restricted Global
Note or to transfer such Definitive Notes to a Person who takes
delivery thereof in the form of a beneficial interest in a Restricted
Global Note, then, upon receipt by the Registrar of the following
documentation (all of which may be submitted by facsimile):
(A) if the Holder of such Restricted Definitive
Notes proposes to exchange such Notes for a beneficial
interest in a Restricted Global Note, a certificate from such
Holder in the form of Exhibit C hereto, including the
certifications in item (2)(b) thereof;
(B) if such Definitive Notes are being transferred
to a QIB in accordance with Rule 144A under the Securities
Act, a certificate to the effect set forth in Exhibit B
hereto, including the certifications in item (1) thereof;
(C) if such Definitive Notes are being transferred
to a Non-U.S. Person in an offshore transaction in accordance
with Rule 904 under the Securities Act, a certificate to the
effect set forth in Exhibit B hereto, including the
certifications in item (2) thereof;
(D) if such Definitive Notes are being transferred
pursuant to an exemption from the registration requirements
of the Securities Act in accordance with Rule 144 under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(a)
thereof;
(E) if such Definitive Notes are being transferred
to an Institutional Accredited Investor in reliance on an
exemption from the registration requirements of the
Securities Act other than those listed in subparagraphs (B)
through (D) above, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(d)
thereof, a certificate from the transferee to the effect set
forth in Exhibit D hereof and, to the extent required by item
3(d) of Exhibit B, an Opinion of Counsel from the transferee
or the transferor reasonably acceptable to the Company to the
effect that such transfer is in compliance with the
Securities Act and such Definitive Notes are being
transferred in compliance with any applicable blue sky
securities laws of any State of the United States;
<PAGE>
28
(F) if such Definitive Notes are being transferred
to the Company or any of its Subsidiaries, a certificate to
the effect set forth in Exhibit B hereto, including the
certifications in item (3)(b) thereof; or
(G) if such Definitive Notes are being transferred
pursuant to an effective registration statement under the
Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(c)
thereof,
the Trustee shall cancel the Definitive Notes, increase or cause to be
increased the aggregate principal amount of, in the case of clause (A)
above, the appropriate Restricted Global Note, in the case of clause
(B) above, the 144A Global Note, in the case of clause (C) above, the
Regulation S Global Note, and in all other cases, the IAI Global Note.
(ii) A Holder of Restricted Definitive Notes may exchange
such Notes for a beneficial interest in the Unrestricted Global Note
or transfer such Restricted Definitive Notes to a Person who takes
delivery thereof in the form of a beneficial interest in the
Unrestricted Global Note only if:
(A) such exchange or transfer is effected pursuant
to the Exchange Offer in accordance with the Registration
Rights Agreement and the Holder, in the case of an exchange,
or the transferee, in the case of a transfer, is not (1) a
broker-dealer, (2) a Person participating in the distribution
of the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights
Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Definitive Notes
proposes to exchange such Notes for a beneficial interest in
the Unrestricted Global Note, a certificate from such Holder
in the form of Exhibit C hereto, including the certifications
in item (1)(c) thereof;
(2) if the Holder of such Definitive Notes
proposes to transfer such Notes to a Person who shall take
delivery thereof in the form of a beneficial interest in the
Unrestricted Global Note, a certificate from such Holder in
the form of Exhibit B hereto, including the certifications in
item (4) thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form reasonably
acceptable to the Company to the effect that such exchange or
transfer is in compliance with the Securities Act, that the
restrictions on transfer contained herein and in the Private
Placement Legend are not
<PAGE>
29
required in order to maintain compliance with the Securities
Act, and such Definitive Notes are being exchanged or
transferred in compliance with any applicable blue sky
securities laws of any State of the United States.
Upon satisfaction of the conditions of any of the subparagraphs in
this Section 2.06(d)(ii), the Trustee shall cancel the Definitive
Notes and increase or cause to be increased the aggregate principal
amount of the Unrestricted Global Note.
(iii) A Holder of Unrestricted Definitive Notes may exchange
such Notes for a beneficial interest in the Unrestricted Global Note
or transfer such Definitive Notes to a Person who takes delivery
thereof in the form of a beneficial interest in the Unrestricted
Global Note. Upon receipt of a request for such an exchange or
transfer, the Trustee shall cancel the Unrestricted Definitive Notes
and increase or cause to be increased the aggregate principal amount
of the Unrestricted Global Note.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an authentication order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of beneficial interests transferred pursuant to subparagraphs
(ii)(B), (ii)(D) or (iii) above.
(e) Transfer and Exchange of Definitive Notes. Upon request
by a Holder of Definitive Notes and such Holder's compliance with the
provisions of this Section 2.06(e), the Registrar shall register the transfer
or exchange of Definitive Notes. Prior to such registration of transfer or
exchange, the requesting Holder shall present or surrender to the Registrar the
Definitive Notes duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by such Holder or
by his attorney, duly authorized in writing. In addition, the requesting Holder
shall provide any additional certifications, documents and information, as
applicable, pursuant to the provisions of this Section 2.06(e).
(i) Restricted Definitive Notes may be transferred to and
registered in the name of Persons who take delivery thereof if the
Registrar receives the following:
(A) if the transfer will be made pursuant to Rule
144A under the Securities Act, then the transferor must
deliver a certificate in the form of Exhibit B hereto,
including the certifications in item (1) thereof;
(B) if the transfer will be made pursuant to Rule
904, then the transferor must deliver a certificate in the
form of Exhibit B hereto, including the certifications in
item (2) thereof; and
(C) if the transfer will be made pursuant to any
other exemption from the registration requirements of the
Securities Act, then the transferor must deliver (x) a
certificate in the form of Exhibit B hereto, including the
certifications in item (3) thereof, (y) to the extent
required by item 3(d) of Exhibit B hereto, an Opinion of
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30
Counsel in form reasonably acceptable to the Company to the
effect that such transfer is in compliance with the
Securities Act and such beneficial interest is being
transferred in compliance with any applicable blue sky
securities laws of any State of the United States and (z) if
the transfer is being made to an Institutional Accredited
Investor and effected pursuant to an exemption from the
registration requirements of the Securities Act other than
Rule 144A under the Securities Act, Rule 144 under the
Securities Act or Rule 904 under the Securities Act, a
certificate from the transferee in the form of Exhibit D
hereto.
(ii) Restricted Definitive Notes may be exchanged by any
Holder thereof for an Unrestricted Definitive Note or transferred to
Persons who take delivery thereof in the form of an Unrestricted
Definitive Note if:
(A) such exchange or transfer is effected pursuant
to the Exchange Offer in accordance with the Registration
Rights Agreement and the holder, in the case of an exchange,
or the transferee, in the case of a transfer, is not (1) a
broker-dealer, (2) a Person participating in the distribution
of the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the
Shelf Registration Statement in accordance with the
Registration Rights Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration
Statement in accordance with the Registration Rights
Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted
Definitive Notes proposes to exchange such Notes for an
Unrestricted Definitive Note, a certificate from such Holder
in the form of Exhibit C hereto, including the certifications
in item (1)(a) thereof;
(2) if the Holder of such Restricted
Definitive Notes proposes to transfer such Notes to a Person
who shall take delivery thereof in the form of an
Unrestricted Definitive Note, a certificate from such Holder
in the form of Exhibit B hereto, including the certifications
in item (4) thereof; and
(3) in each such case set forth in this
subparagraph (D), an Opinion of Counsel in form reasonably
acceptable to the Company to the effect that such exchange or
transfer is in compliance with the Securities Act, that the
restrictions on transfer contained herein and in the Private
Placement Legend are not required in order to maintain
compliance with the Securities Act, and such Restricted
Definitive Note is being exchanged or transferred in
compliance with any applicable blue sky securities laws of
any State of the United States.
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31
(iii) A Holder of Unrestricted Definitive Notes may transfer
such Notes to a Person who takes delivery thereof in the form of an
Unrestricted Definitive Note. Upon receipt of a request for such a
transfer, the Registrar shall register the Unrestricted Definitive
Notes pursuant to the instructions from the Holder thereof.
Unrestricted Definitive Notes cannot be exchanged for or transferred
to Persons who take delivery thereof in the form of a Restricted
Definitive Note.
(f) Exchange Offer. Upon the occurrence of the Exchange Offer
in accordance with the Registration Rights Agreement, the Company shall issue
and, upon receipt of an authentication order in accordance with Section 2.02,
the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an
aggregate principal amount equal to the principal amount of the beneficial
interests in the Restricted Global Notes tendered for acceptance by persons
that are not (x) broker-dealers, (y) Persons participating in the distribution
of the Exchange Notes or (z) Persons who are affiliates (as defined in Rule
144) of the Company and accepted for exchange in the exchange Offer and (ii)
Definitive Notes in an aggregate principal amount equal to the principal amount
of the Restricted Definitive Notes accepted for exchange in the Exchange Offer.
Concurrent with the issuance of such Notes, the Trustee shall cause the
aggregate principal amount of the applicable Restricted Global Notes to be
reduced accordingly, and the Company shall execute and the Trustee shall
authenticate and make available for delivery to the Persons designated by the
Holders of Definitive Notes so accepted Definitive Notes in the appropriate
principal amount.
(g) Legends. The following legends shall appear on the face
of all Global Notes and Definitive Notes issued under this Indenture unless
specifically stated otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend.
(A) Except as permitted by subparagraph (b) below,
each Global Note and each Definitive Note (and all Notes
issued in exchange therefor or substitution thereof) shall
bear the legend in substantially the following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY
EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISION OF SECTION 5 OF THE SECURITIES ACT
PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED
HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) TO A
PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
<PAGE>
32
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES
ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE."
(B) Notwithstanding the foregoing, any Global Note
or Definitive Note issued pursuant to subparagraphs (b)(iv),
(c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or
(f) to this Section 2.06 (and all Notes issued in exchange
therefor or substitution thereof) shall not bear the Private
Placement Legend.
(ii) Global Note Legend. Each Global Note shall bear a legend
in substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE
BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO
ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY
MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07
OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT
NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS
GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE
TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT
OF THE COMPANY."
(h) Cancellation and/or Adjustment of Global Notes. At such
time as all beneficial interests in a particular Global Note have been
exchanged for Definitive Notes or a particular Global Note has been redeemed,
repurchased or canceled in whole and not in part, each such Global Note shall
be returned to or retained and canceled by the Trustee in accordance with
Section 2.11 hereof. At any time prior to such cancellation, if any beneficial
interest in a Global Note is exchanged for or transferred to a Person who will
take delivery thereof in the form of a beneficial interest in another Global
Note or for Definitive Notes, the principal amount of Notes represented by such
Global Note shall be reduced accordingly and an endorsement shall be made on
such Global Note, by the Trustee or by the Depositary at the direction of the
Trustee, to reflect such reduction; and if the beneficial interest is being
exchanged for or transferred to a Person who will take delivery thereof in the
form of a beneficial interest in another Global Note, such other Global Note
shall be
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33
increased accordingly and an endorsement shall be made on such Global Note, by
the Trustee or by the Depositary at the direction of the Trustee, to reflect
such increase.
(i) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Global Notes
and Definitive Notes upon the Company's order or at the Registrar's
request.
(ii) No service charge shall be made to a holder of a
beneficial interest in a Global Note or to a Holder of a Definitive
Note for any registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other
than any such transfer taxes or similar governmental charge payable
upon exchange or transfer pursuant to Sections 2.10, 3.06, 4.10, 4.15
and 9.05 hereof).
(iii) The Registrar shall not be required to register the
transfer of or exchange any Note selected for redemption in whole or
in part, except the unredeemed portion of any Note being redeemed in
part.
(iv) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive
Notes shall be the valid obligations of the Company, evidencing the
same debt, and entitled to the same benefits under this Indenture, as
the Global Notes or Definitive Notes surrendered upon such
registration of transfer or exchange.
(v) The Company shall not be required (A) to issue, to
register the transfer of or to exchange Notes during a period
beginning at the opening of business 15 days before the day of any
selection of Notes for redemption under Section 3.02 hereof and ending
at the close of business on the day of selection, (B) to register the
transfer of or to exchange any Note so selected for redemption in
whole or in part, except the unredeemed portion of any Note being
redeemed in part or (C) to register the transfer of or to exchange a
Note between a record date and the next succeeding Interest Payment
Date.
(vi) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and the Company may deem
and treat the Person in whose name any Note is registered as the
absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Notes and for all other purposes,
and none of the Trustee, any Agent or the Company shall be affected by
notice to the contrary.
(vii) The Trustee shall authenticate Global Notes and
Definitive Notes in accordance with the provisions of Section 2.02
hereof.
SECTION 2.07. REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee, or the
Company and the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Note, the Company shall
<PAGE>
34
issue and the Trustee, upon the written order of the Company signed by two
Officers of the Company, shall authenticate a replacement Note if the Trustee's
requirements are met. If required by the Trustee or the Company, an indemnity
bond must be supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if a Note is
replaced. The Company may charge for its expenses in replacing a Note.
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those canceled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Note
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section
2.09 hereof, a Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or
an Affiliate of any thereof) holds, on a redemption date or maturity date,
money sufficient to pay Notes payable on that date, then on and after that date
such Notes shall be deemed to be no longer outstanding and shall cease to
accrue interest.
SECTION 2.09. TREASURY NOTES.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by the Company, or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company,
shall be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes that a Trustee knows are so owned
shall be so disregarded.
SECTION 2.10. TEMPORARY NOTES.
Until Definitive Notes are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Notes upon a written
order of the Company signed by two Officers of the Company. Temporary Notes
shall be substantially in the form of Definitive Notes but may have variations
that the Company considers appropriate for temporary Notes and as shall be
reasonably acceptable to the Trustee. Without unreasonable delay, the Company
shall prepare and
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35
the Trustee shall authenticate Definitive Notes in exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
canceled Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all canceled Notes shall be delivered
to the Company. The Company may not issue new Notes to replace Notes that it
has paid or that have been delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the
Notes, it shall pay the defaulted interest in any lawful manner plus, to the
extent lawful, interest payable on the defaulted interest, to the Persons who
are Holders on a subsequent special record date, in each case at the rate
provided in the Notes and in Section 4.01 hereof. The Company shall notify the
Trustee in writing of the amount of defaulted interest proposed to be paid on
each Note and the date of the proposed payment. The Company shall fix or cause
to be fixed each such special record date and payment date, provided that no
such special record date shall be less than 10 days prior to the related
payment date for such defaulted interest. At least 15 days before the special
record date, the Company (or, upon the written request of the Company, the
Trustee in the name and at the expense of the Company) shall mail or cause to
be mailed to Holders a notice that states the special record date, the related
payment date and the amount of such interest to be paid.
SECTION 2.13. CUSIP NUMBERS.
The Company in issuing the Notes may use CUSIP numbers (if
then generally in use), and, if so, the Trustee shall use CUSIP numbers in
notices of redemption as a convenience to Holders; provided that any such
notice may state that no representation is made as to the correctness of such
numbers either as printed on the Notes or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Notes, and any such redemption shall not be affected by
any defect in or omission of such numbers. The Company will promptly notify the
Trustee of any change in the CUSIP numbers.
ARTICLE 3.
REDEMPTION AND PREPAYMENT
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the
optional redemption provisions of Section 3.07 hereof, it shall furnish to the
Trustee, at least 30 days but not more than 60 days before a redemption date,
an Officers' Certificate setting forth (i) the clause of this Indenture
<PAGE>
36
pursuant to which the redemption shall occur, (ii) the redemption date, (iii)
the principal amount of Notes to be redeemed and (iv) the redemption price.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption shall be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof shall be
issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Note selected for
partial redemption, the principal amount thereof to be redeemed. Notes and
portions of Notes selected shall be in amounts of $1,000 or whole multiples of
$1,000; except that if all of the Notes of a Holder are to be redeemed, the
entire outstanding amount of Notes held by such Holder, even if not a multiple
of $1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
SECTION 3.03. NOTICE OF REDEMPTION.
Subject to the provisions of Section 3.09 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address.
The notice shall identify the Notes to be redeemed (including
CUSIP Numbers, if any) and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion shall be issued upon cancellation of the original
Note;
(d) the name and address of the Paying Agent;
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37
(e) that Notes called for redemption must be surrendered to
the Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such
redemption payment, interest on Notes called for redemption ceases to accrue on
and after the redemption date;
(g) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being redeemed;
and
(h) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed on the
Notes.
At the Company's request, the Trustee shall give the notice
of redemption in the Company's name and at its expense; provided, however, that
the Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as
provided in the preceding paragraph.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with
Section 3.03 hereof, Notes called for redemption become irrevocably due and
payable on the redemption date at the redemption price. A notice of redemption
may not be conditional.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
Prior to 11:00 a.m. on the Business Day prior to the
redemption date, the Company shall deposit with the Trustee or with the Paying
Agent money sufficient to pay the redemption price of and accrued interest on
all Notes to be redeemed on that date. The Trustee or the Paying Agent shall
promptly return to the Company any money deposited with the Trustee or the
Paying Agent by the Company in excess of the amounts necessary to pay the
redemption price of, and accrued interest on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after an interest record date but on or prior to the related interest
payment date, then any accrued and unpaid interest shall be paid to the Person
in whose name such Note was registered at the close of business on such record
date. If any Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Company to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, from the redemption
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case at the rate provided in the Notes
and in Section 4.01 hereof.
SECTION 3.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the
Company shall issue and, upon the Company's written request, the Trustee shall
authenticate for the Holder at the expense of the
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38
Company a new Note equal in principal amount to the unredeemed portion of the
Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION.
(a) Except as set forth in clause (b) of this Section 3.7,
the Notes shall not be redeemable at the Company's option prior to December 1,
2003. Thereafter, the Notes shall be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 1 of the years
indicated below:
YEAR.......................................................PERCENTAGE
2003.........................................................104.000%
2004.........................................................102.667%
2005.........................................................101.333%
2006 and thereafter..........................................100.000%
(b) Notwithstanding the foregoing clause (a), during the
first 36 months after the Issue Date, the Company may on any one or more
occasions redeem up to an aggregate of 35% of the Notes originally issued at a
redemption price of 108.000% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the redemption date,
with the net cash proceeds of one or more Equity Offerings by the Company or
the net cash proceeds of one or more Equity Offerings by Holdings that are
contributed to the Company as common equity capital; provided that at least 65%
of the Notes originally issued remain outstanding immediately after the
occurrence of each such redemption; and provided, further, that any such
redemption must occur within 120 days of the date of the closing of such Equity
Offering.
SECTION 3.08. MANDATORY REDEMPTION.
Except as set forth under Sections 4.10 and 4.15, the Company
is not required to make mandatory redemption or sinking fund payments with
respect to the Notes.
SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an offer to all Holders to purchase Notes
(an "Asset Sale Offer"), it shall follow the procedures specified below.
The Asset Sale Offer shall remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Offer Period"). No
later than five Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount of Notes
required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount")
or, if less than the Offer Amount has been tendered, all Notes tendered in
response to the Asset Sale Offer. Payment for any Notes so purchased shall be
made in the same manner as interest payments are made.
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39
If the Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the
Holders, with a copy to the Trustee. The notice shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The
notice, which shall govern the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this
Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale
Offer shall remain open;
(b) the Offer Amount, the purchase price and the Purchase
Date;
(c) that any Note not tendered or accepted for payment shall
continue to accrete or accrue interest;
(d) that, unless the Company defaults in making such payment,
any Note accepted for payment pursuant to the Asset Sale Offer shall cease to
accrete or accrue interest after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant
to an Asset Sale Offer may only elect to have all of such Note purchased and
may not elect to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant
to any Asset Sale Offer shall be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to the Company, a depositary, if
appointed by the Company, or a Paying Agent at the address specified in the
notice at least three days before the Purchase Date;
(g) that Holders shall be entitled to withdraw their election
if the Company, the depositary or the Paying Agent, as the case may be,
receives, not later than the expiration of the Offer Period, a facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Note the Holder delivered for purchase and a statement that such
Holder is withdrawing his election to have such Note purchased;
(h) that, if the aggregate principal amount of Notes
surrendered by Holders exceeds the Offer Amount, the Company shall select the
Notes to be purchased on a pro rata basis (with such adjustments as may be
deemed appropriate by the Company so that only Notes in denominations of
$1,000, or integral multiples thereof, shall be purchased); and
(i) that Holders whose Notes were purchased only in part
shall be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered (or transferred by book-entry transfer).
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40
On or before the Purchase Date, the Company shall, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or if less than the Offer Amount has been tendered, all Notes
tendered, and shall deliver to the Trustee an Officers' Certificate stating
that such Notes or portions thereof were accepted for payment by the Company in
accordance with the terms of this Section 3.09. The Company, the Depositary or
the Paying Agent, as the case may be, shall promptly (but in any case not later
than five days after the Purchase Date) mail or deliver to each tendering
Holder an amount equal to the purchase price of the Notes tendered by such
Holder and accepted by the Company for purchase, and the Company shall promptly
issue a new Note, and the Trustee, upon written request from the Company shall
authenticate and mail or deliver such new Note to such Holder, in a principal
amount equal to any unpurchased portion of the Note surrendered. Any Note not
so accepted shall be promptly mailed or delivered by the Company to the Holder
thereof. The Company shall publicly announce the results of the Asset Sale
Offer on the Purchase Date.
Other than as specifically provided in this Section 3.09, any
purchase pursuant to this Section 3.09 shall be made pursuant to the provisions
of Sections 3.01 through 3.06 hereof.
ARTICLE 4.
COVENANTS
SECTION 4.01. PAYMENT OF NOTES.
The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than the Company
or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date
money deposited by the Company in immediately available funds and designated
for and sufficient to pay all principal, premium, if any, and interest then
due. The Company shall pay all Liquidated Damages, if any, in the same manner
on the dates and in the amounts set forth in the Registration Rights Agreement.
The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal at
the rate equal to 1% per annum in excess of the then applicable interest rate
on the Notes to the extent lawful; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest and Liquidated Damages (without regard to any
applicable grace period) at the same rate to the extent lawful.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, The
City of New York, an office or agency (which may be an office of the Trustee or
an affiliate of the Trustee, Registrar or co-registrar) where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company
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41
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York for such purposes. The Company shall
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of
the Trustee as one such office or agency of the Company in accordance with
Section 2.03.
Section 4.03. Reports.
Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act or otherwise
report on an annual and quarterly basis on forms provided for such annual and
quarterly reporting pursuant to rules and regulations promulgated by the SEC,
the Company shall file with the SEC (and provide the Trustee and Holders with
copies thereof), without cost to each Holder, within 15 days after it files
them with the SEC:
(a) within 90 days after the end of each fiscal year, annual
reports on Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such successor or
comparable form);
(b) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year, reports on Form 10-Q (or any successor or
comparable form);
(c) promptly from time to time after the occurrence of an
event required to be therein reported, such other reports on Form 8-K (or any
successor or comparable form); and
(d) any other information, documents and other reports which
the Company would be required to file with the SEC if it were subject to
Section 13 or 15(d) of the Exchange Act; provided, however, the Company shall
not be so obligated to file such reports with the SEC if the SEC does not
permit such filing, in which event the Company will make available such
information to prospective purchasers of Notes, in addition to providing such
information to the Trustee and the Holders, in each case within 15 days after
the time the Company would be required to file such information with the SEC,
if it were subject to Sections 13 or 15(d) of the Exchange Act.
Subject to the provisions of Article 7, delivery of such
reports, information and documents to the Trustee is for informational purposes
only and the Trustee's receipt of such shall not constitute constructive notice
of any information contained therein or determinable from
<PAGE>
42
information contained therein, including the Company's compliance with any of
its covenants hereunder (as to which the Trustee is entitled to rely
exclusively on Officers' Certificates).
Section 4.04. Compliance Certificate.
(a) The Company shall deliver to the Trustee, within 90 days
after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of the Company and its Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in
the performance or observance of any of the terms, provisions and conditions of
this Indenture (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge and what action the Company is taking or proposes to take with
respect thereto) and that to the best of his or her knowledge no event has
occurred and remains in existence by reason of which payments on account of the
principal of or interest, if any, on the Notes is prohibited or if such event
has occurred, a description of the event and what action the Company is taking
or proposes to take with respect thereto.
(b) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
year-end financial statements delivered pursuant to Section 4.03(a) above shall
be accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial
statements, nothing has come to their attention that would lead them to believe
that the Company has violated any provisions of Article 4 or Article 5 hereof
or, if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such accountants shall not be
liable directly or indirectly to any Person for any failure to obtain knowledge
of any such violation.
(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, as soon as possible and in any event
within five Business Days after any Officer becoming aware of any Default or
Event of Default, an Officers' Certificate specifying such Default or Event of
Default and what action the Company is taking or proposes to take with respect
thereto.
Section 4.05. Taxes.
The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Holders of the Notes.
Section 4.06. [Intentionally Omitted]
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43
Section 4.07. Restricted Payments.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's or
any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than (A) dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company or (B) dividends or distributions by a
Restricted Subsidiary so long as, in the case of any dividend or distribution
payable on or in respect of any class or series of securities issued by a
Restricted Subsidiary other than a Wholly Owned Restricted Subsidiary, the
Company or a Restricted Subsidiary receives at least its pro rata share of such
dividend or distribution in accordance with its Equity Interests in such class
or series of securities); (ii) purchase, redeem or otherwise acquire or retire
for value (including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or any
direct or indirect parent of the Company; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of Section 4.09; and
(c) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and its
Restricted Subsidiaries since April 30, 1997 (excluding Restricted
Payments permitted by clauses (ii) through (vii) of the next
succeeding paragraph or of the kind contemplated by such clauses that
were made prior to the date of the Indenture), is less than the sum of
(i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from July 1, 1997 to the end of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate
net cash proceeds received by the Company since April 30, 1997 from a
contribution to its common equity capital or the issue or sale of
Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company that have been
<PAGE>
44
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a
Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that
was made after April 30, 1997 is sold for cash or otherwise liquidated
or repaid for cash, the amount of cash received in connection
therewith (or from the sale of Marketable Securities received in
connection therewith), plus (iv) to the extent not already included in
such Consolidated Net Income of the Company for such period and
without duplication, (A) 100% of the aggregate amount of cash received
as a dividend from an Unrestricted Subsidiary, (B) 100% of the cash
received upon the sale of Marketable Securities received as a dividend
from an Unrestricted Subsidiary, and (C) 100% of the net assets of any
Unrestricted Subsidiary on the date that it becomes a Restricted
Subsidiary.
The foregoing provisions shall not prohibit: (i) the payment
of any dividend within 60 days after the date of declaration thereof, if at
said date of declaration such payment would have complied with the provisions
of this Indenture; (ii) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness (other than
intercompany Indebtedness) in exchange for, or with the net cash proceeds from
an incurrence of, Permitted Refinancing Indebtedness; (iv) the repurchase,
retirement or other acquisition or retirement for value of common Equity
Interests of the Company or Holdings held by any future, present or former
employee, director or consultant of the Company or any Subsidiary or Holdings
issued pursuant to any management equity plan or stock option plan or any other
management or employee benefit plan or agreement; provided, however, that the
aggregate amount of Restricted Payments made under this clause (iv) does not
exceed $1.5 million in any calendar year and provided further that cancellation
of Indebtedness owing to the Company from members of management of the Company
or any of its Restricted Subsidiaries in connection with a repurchase of Equity
Interests of the Company shall not be deemed to constitute a Restricted Payment
for purposes of this covenant or any other provision of this Indenture; (v)
repurchases of Equity Interests deemed to occur upon exercise of stock options
upon surrender of Equity Interests to pay the exercise price of such options;
(vi) payments to Holdings (A) in amounts equal to the amounts required for
Holdings to pay franchise taxes and other fees required to maintain its legal
existence and provide for other operating costs of up to $500,000 per fiscal
year and (B) in amounts equal to amounts required for Holdings to pay federal,
state and local income taxes to the extent such income taxes are actually due
and owing; provided that the aggregate amount paid under this clause (B) does
not exceed the amount that the Company would be required to pay in respect of
the income of the Company and its Subsidiaries if the Company were a stand
alone entity that was not owned by Holdings; and (vii) other Restricted
Payments in an aggregate amount since May 22, 1998 not to exceed $20.0 million.
The Board of Directors of the Company may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default. For purposes of
<PAGE>
45
making such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated shall be deemed to be Restricted Payments at the time of such
designation and shall reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments shall be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation. Such designation shall only
be permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall
be the fair market value on the date of the Restricted Payment of the asset(s)
or securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by Section 4.07 were computed.
Section 4.08. Dividend And Other Payment Restrictions Affecting Subsidiaries.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(A) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (B) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries, or (iii) transfer any of its properties
or assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (A) the provisions
of security agreements that restrict the transfer of assets that are subject to
a Lien created by such security agreements, (B) the provisions of agreements
governing Indebtedness incurred pursuant to clause (v) of the second paragraph
of Section 4.09, (C) this Indenture, the Notes, the 1997 Indenture, the 1997
Notes, the May 1998 Notes Indenture and the May 1998 Notes, (D) applicable law,
(E) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time
of such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of this Indenture to be incurred, (F) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (G) purchase money
obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in this clause (iii) on the
property so acquired, (H) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (I) contracts for the sale of
assets,
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46
including, without limitation, customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary, (J) agreements relating to secured Indebtedness otherwise permitted
to be incurred pursuant to 4.09 and 4.12 that limit the right of the debtor to
dispose of the assets securing such Indebtedness, (K) restrictions on cash or
other deposits or net worth imposed by customers under contracts entered into
in the ordinary course of business, or (L) customary provisions in joint
venture agreements and other similar agreements entered into in the ordinary
course of business.
Section 4.09. Incurrence Of Indebtedness And Issuance Of Preferred Stock.
The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company shall not issue any Disqualified Stock and
shall not permit any of its Subsidiaries to issue any shares of preferred
stock; provided, however, that the Company and any Restricted Subsidiary may
incur Indebtedness (including Acquired Debt) or issue shares of preferred stock
if the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such preferred stock is issued would have been at least 2.0 to 1.0,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the preferred stock had been issued, as the case may be, at the beginning of
such four-quarter period.
The provisions of the first paragraph of this Section 4.09
shall not apply to the incurrence of any of the following items of Indebtedness
(collectively, "Permitted Debt"):
(i) the incurrence by the Company of additional Indebtedness
under Credit Facilities (and the guarantee thereof by the Guarantors)
in an aggregate principal amount outstanding pursuant to this clause
(i) at any one time (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the
Company and its Restricted Subsidiaries thereunder), including all
Permitted Refinancing Indebtedness then outstanding incurred to
refund, refinance or replace any other Indebtedness incurred pursuant
to this clause (i), not to exceed $375.0 million less the aggregate
amount of all Net Proceeds of Asset Sales applied to repay any such
Indebtedness pursuant to Section 4.10;
(ii) the incurrence by the Company and its Restricted
Subsidiaries of the Existing Indebtedness;
(iii) the incurrence by the Company and the Guarantors of
$200.0 million in aggregate principal amount of the Notes and the
Subsidiary Guarantees thereof;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase
<PAGE>
47
money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of
the Company or such Restricted Subsidiary, in an aggregate principal
amount, including all Permitted Refinancing Indebtedness then
outstanding incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (iv), not to exceed
$30.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of
assets or a new Restricted Subsidiary; provided that such Indebtedness
was incurred by the prior owner of such assets or such Restricted
Subsidiary prior to such acquisition by the Company or one of its
Restricted Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by the Company or one of its
Restricted Subsidiaries; and provided further that the principal
amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness incurred pursuant to
this clause (v), does not exceed $10.0 million;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or
the net proceeds of which are used to refund, refinance or replace,
Indebtedness that was permitted by this Indenture to be incurred
(other than intercompany Indebtedness or Indebtedness incurred
pursuant to clause (i) above);
(vii) Indebtedness incurred by the Company or any of its
Restricted Subsidiaries constituting reimbursement obligations with
respect to letters of credit issued in the ordinary course of business
in respect of workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims; provided, however, that upon the drawing
of such letters of credit or the incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
incurrence;
(viii) Indebtedness arising from agreements of the Company or
a Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, assets or
a Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or a
Subsidiary for the purpose of financing such acquisition; provided,
however, that (A) such Indebtedness is not reflected on the balance
sheet of the Company or any Restricted Subsidiary (contingent
obligations referred to in a footnote to financial statements and not
otherwise reflected on the balance sheet shall not be deemed to be
reflected on such balance sheet for purposes of this clause (A)) and
(B) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
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48
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company
and any of its Restricted Subsidiaries; provided, however, that (A) if
the Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Notes and (B)(1) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or one of
its Restricted Subsidiaries and (2) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or one of
its Restricted Subsidiaries shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be;
(x) the incurrence by the Company or any of the Guarantors of
Hedging Obligations that are incurred for the purpose of (A) fixing,
hedging or capping interest rate risk with respect to any floating
rate Indebtedness that is permitted by the terms of this Indenture to
be outstanding or (B) protecting the Company and its Restricted
Subsidiaries against changes in currency exchange rates;
(xi) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted to be incurred by another provision of this Section
4.09;
(xii) the incurrence by the Company's Unrestricted
Subsidiaries of Non-Recourse Debt, provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted
Subsidiary, such event shall be deemed to constitute an incurrence of
Indebtedness by a Restricted Subsidiary of the Company that was not
permitted by this clause (xii), and the issuance of preferred stock by
Unrestricted Subsidiaries;
(xiii) obligations in respect of performance and surety bonds
and completion guarantees provided by the Company or any Restricted
Subsidiaries in the ordinary course of business; and
(xiv) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal
amount (or accreted value, as applicable) at any time outstanding,
including all Permitted Refinancing Indebtedness then outstanding
incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (xiv), not to exceed $50.0 million.
For purposes of determining compliance with this Section
4.09, in the event that an item of Indebtedness meets the criteria of more than
one of the categories of Permitted Debt described in clauses (i) through (xiv)
above or is entitled to be incurred pursuant to the first paragraph of this
Section 4.09, the Company shall, in its sole discretion, classify, or later
reclassify, such item of Indebtedness in any manner that complies with this
covenant. Accrual of interest, the accretion of accreted value and the payment
of interest in the form of additional Indebtedness shall not be deemed to be an
incurrence of Indebtedness for purposes of this Section 4.09.
<PAGE>
49
Section 4.10. Asset Sales.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or
the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by
an Officers' Certificate delivered to the Trustee which will include a
resolution of the Board of Directors with respect to such fair market value in
the event such Asset Sale involves aggregate consideration in excess of $5.0
million) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 80% of the consideration therefor received by the Company
or such Restricted Subsidiary, as the case may be, consists of cash, Cash
Equivalents and/or Marketable Securities; provided, however, that (A) the
amount of any Senior Debt of the Company or such Restricted Subsidiary that is
assumed by the transferee in any such transaction and (B) any consideration
received by the Company or such Restricted Subsidiary, as the case may be, that
consists of (1) all or substantially all of the assets of one or more Similar
Businesses, (2) other long-term assets that are used or useful in one or more
Similar Businesses and (3) Permitted Securities shall be deemed to be cash for
purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an
Asset Sale, the Company may apply such Net Proceeds, at its option, (i) to
repay Indebtedness under a Credit Facility, or (ii) to the acquisition of
Permitted Securities, all or substantially all of the assets of one or more
Similar Businesses, or the making of a capital expenditure or the acquisition
of other long-term assets in a Similar Business. Pending the final application
of any such Net Proceeds, the Company may temporarily reduce Indebtedness under
a Credit Facility or otherwise invest such Net Proceeds in any manner that is
not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph
shall be deemed to constitute "Excess Proceeds". When the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Company shall make an offer to all
holders of 1997 Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of 1997 Notes that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest to the date of purchase, in accordance with
the procedures set forth in the 1997 Indenture. To the extent that the
aggregate amount of 1997 Notes tendered pursuant to an Asset Sale Offer is less
than the remaining Excess Proceeds ("Remaining Excess Proceeds") and the sum of
(A) such amount of Remaining Excess Proceeds and (B) the Remaining Excess
Proceeds from any subsequent Asset Sale Offers exceeds $3.0 million, the
Company will be required to make an offer to all Holders of Notes and any other
Indebtedness that ranks pari passu with the Notes (including the May 1998
Notes) that, by its terms, requires the Company to offer to repurchase such
Indebtedness with such Remaining Excess Proceeds (a "Secondary Asset Sale
Offer") to purchase the maximum principal amount of Notes and pari passu
Indebtedness that may be purchased out of such Remaining Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, to the date of purchase, in
accordance with the procedures set forth in this Indenture. To the extent that
the aggregate amount of Notes or pari passu Indebtedness tendered pursuant to a
Secondary Asset Sale Offer is less than the Remaining Excess Proceeds, the
Company may use any Remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of Notes or pari passu Indebtedness
surrendered by
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50
Holders thereof exceeds the amount of Remaining Excess Proceeds in a Secondary
Asset Sale Offer, the Company shall repurchase such Indebtedness on a pro rata
basis and the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
Section 4.11. Transactions With Affiliates.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
Trustee (A) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of
the disinterested members of the Board of Directors and (B) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $15.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing.
The foregoing provisions shall not prohibit: (i) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business; (ii) any transaction with a
Lehman Investor; (iii) any transaction between or among the Company and/or its
Restricted Subsidiaries; (iv) transactions between the Company or any of its
Restricted Subsidiaries, on the one hand, and Lockheed Martin or any of its
Subsidiaries or a Permitted Joint Venture, on the other hand, on terms that are
not materially less favorable to the Company or the applicable Restricted
Subsidiary of the Company than those that could have been obtained from an
unaffiliated third party; provided that (A) in the case of any such transaction
or series of related transactions pursuant to this clause (iv) involving
aggregate consideration in excess of $5.0 million but less than $25.0 million,
such transaction or series of transactions (or the agreement pursuant to which
the transactions were executed) was approved by the Company's Chief Executive
Officer or Chief Financial Officer and (B) in the case of any such transaction
or series of related transactions pursuant to this clause (iv) involving
aggregate consideration equal to or in excess of $25.0 million, such
transaction or series of related transactions (or the agreement pursuant to
which the transactions were executed) was approved by a majority of the
disinterested members of the Board of Directors; (v) any transaction pursuant
to and in accordance with the provisions of the Transaction Documents as the
same are in effect on the Issue Date; and (vi) any Restricted Payment that is
permitted by the provisions of Section 4.07.
Section 4.12. Liens.
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51
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien securing Indebtedness on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
Section 4.13. Future Subsidiary Guarantees.
If the Company or any of its Subsidiaries shall acquire or
create a Subsidiary (other than a Foreign Subsidiary or an Unrestricted
Subsidiary) after the date of the Indenture, then such Subsidiary shall execute
a Subsidiary Guarantee, in the form of the Supplemental Indenture attached
hereto as Exhibit E, and the Form of Notation on Senior Subordinated Note,
attached hereto as Exhibit F, and deliver an opinion of counsel as to the
validity of such Subsidiary Guarantee, in accordance with the terms of this
Indenture. The Subsidiary Guarantee of each Guarantor will be subordinated to
the prior payment in full of all Senior Debt of such Guarantor, which would
include the guarantees of amounts borrowed under the Senior Credit Facilities.
The obligations of each Guarantor under its Subsidiary Guarantee will be
limited so as not to constitute a fraudulent conveyance under applicable law.
No Guarantor may consolidate with or merge with or into
(whether or not such Guarantor is the surviving Person) another Person (except
the Company or another Guarantor) unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation
or merger (if other than such Guarantor) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of such Guarantor pursuant to a supplemental indenture in
form and substance reasonably satisfactory to the Trustee, under the Notes and
this Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; (iii) the Company (A) would be permitted by
virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
Section 4.09 or (B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same four-quarter
period without giving pro forma effect to such transaction.
Notwithstanding the foregoing paragraph, (i) any Guarantor
may consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (ii) any Guarantor may merge with an Affiliate that
has no significant assets or liabilities and was incorporated solely for the
purpose of reincorporating such Guarantor in another State of the United States
so long as the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby.
In the event of a sale or other disposition of all of the
assets of any Guarantor, by way of merger, consolidation or otherwise, or a
sale or other disposition of all of the capital stock of any Guarantor, then
such Guarantor (in the event of a sale or other disposition, by way of such a
merger, consolidation or otherwise, of all of the capital stock of such
Guarantor) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Guarantor) will be released and
relieved of any obligations under its Subsidiary
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52
Guarantee; provided that the Net Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of Section 4.10.
Section 4.14. Corporate Existence.
Subject to Article 5 hereof, the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect (i)
its corporate existence, and the corporate, partnership or other existence of
each of its Restricted Subsidiaries, in accordance with the respective
organizational documents (as the same may be amended from time to time) of the
Company or any such Restricted Subsidiary and (ii) the rights (charter and
statutory), licenses and franchises of the Company and its Restricted
Subsidiaries; provided, however, that the Company shall not be required to
preserve any such right, license or franchise, or the corporate, partnership or
other existence of any of its Restricted Subsidiaries, if the Board of
Directors shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and its Restricted Subsidiaries,
taken as a whole, and that the loss thereof is not adverse in any material
respect to the Holders of the Notes.
Section 4.15. Offer To Repurchase Upon Change Of Control.
(a) Upon the occurrence of a Change of Control, each Holder
of Notes shall have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101 % of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase (the "Change of Control Payment"). Within ten days following
any Change of Control, the Company shall mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the date specified in such notice,
which date shall be no earlier than 30 days and no later than 60 days from the
date such notice is mailed (the "Change of Control Payment Date"). Such notice,
which shall govern the terms of the Change of Control offer, shall state: (i)
that the Change of Control Offer is being made pursuant to this Section 4.15
and that all Notes tendered will be accepted for payment; (ii) the purchase
price and the purchase date; (iii) that any Note not tendered will continue to
accrue interest; (iv) that, unless the Company defaults in the payment of the
Change of Control Payment, all Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date; (v) that Holders electing to have any Notes purchased
pursuant to a Change of Control Offer will be required to surrender the Notes,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Notes completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change
of Control Payment Date; (vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of Notes delivered for purchase, and a statement
that such Holder is withdrawing his election to have the Notes purchased; and
(vii) that Holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered, which unpurchased portion must be equal to $1,000 in principal
amount or an
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53
integral multiple thereof. The Company shall comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of Notes in connection with a Change of Control.
(b) On the Change of Control Payment Date, the Company shall,
to the extent lawful, (i) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent an amount equal to the Change of Control Payment in respect of
all Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent shall promptly mail to each
Holder of Notes so tendered the Change of Control Payment for such Notes, and
the Trustee shall promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note shall be in a principal amount of $1,000 or an integral multiple
thereof. Prior to mailing a Change of Control Offer, but in any event within 90
days following a Change of Control, the Company shall either repay all
outstanding Senior Debt or offer to repay all Senior Debt and terminate all
commitments thereunder of each lender who has accepted such offer or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of Notes required by this Section 4.15. The
Company shall publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
Section 4.16. No Senior Subordinated Debt.
The Company shall not incur, create, issue, assume, guarantee
or otherwise become liable for any Indebtedness that is subordinate or junior
in right of payment to any Senior Debt and senior in any respect in right of
payment to the Notes. No Guarantor shall incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment to any Senior Debt of a Guarantor and senior in
any respect in right of payment to any of the Subsidiary Guarantees.
Section 4.17. Payments For Consent.
Neither the Company nor any of its Subsidiaries shall,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders of the Notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
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54
ARTICLE 5.
SUCCESSORS
Section 5.01. Merger, Consolidation, Or Sale Of Assets.
The Company may not consolidate or merge with or into
(whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes and this Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made, after giving pro forma effect to such
transaction as if such transaction had occurred at the beginning of the most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding such transaction either (A)
would be permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first paragraph of
Section 4.09 or (B) would have a pro forma Fixed Charge Coverage Ratio that is
greater than the actual Fixed Charge Coverage Ratio for the same four-quarter
period without giving pro forma effect to such transaction.
Notwithstanding clause (iv) in the immediately foregoing
paragraph, (i) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company and (ii) the
Company may merge with an Affiliate that has no significant assets or
liabilities and was incorporated solely for the purpose of reincorporating the
Company in another State of the United States so long as the amount of
Indebtedness of the Company and its Restricted Subsidiaries is not increased
thereby.
Section 5.02. Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in accordance with Section 5.01 hereof, the successor
corporation formed by such consolidation or into or with which the Company is
merged or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the successor corporation and not to the Company), and may
exercise every right and power of the Company
<PAGE>
55
under this Indenture with the same effect as if such successor Person had been
named as the Company herein; provided, however, that the predecessor Company
shall not be relieved from the obligation to pay the principal of and interest
on the Notes except in the case of a sale of all of the Company's assets that
meets the requirements of Section 5.01 hereof.
ARTICLE 6.
DEFAULTS AND REMEDIES
Section 6.01. Events of Default.
An "Event of Default" occurs if:
(a) the Company defaults in the payment when due of interest
on, or Liquidated Damages, if any, with respect to, the Notes and such default
continues for a period of 30 days (whether or not prohibited by the
subordination provisions of this Indenture);
(b) the Company defaults in the payment when due of the
principal of or premium, if any, on the Notes (whether or not prohibited by the
subordination provisions of this Indenture);
(c) the Company fails to comply with any of the provisions of
Section 4.10, 4.15, or 5.01 hereof;
(d) the Company fails to observe or perform any other
covenant, representation, warranty or other agreement in this Indenture or the
Notes for 60 days after notice to the Company by the Trustee or the Holders of
at least 25% in aggregate principal amount of the Notes then outstanding;
(e) a default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries), whether such Indebtedness or guarantee
now exists, or is created after the date of this Indenture, which default
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness, together with the principal
amount of any other such Indebtedness, the maturity of which has been so
accelerated, aggregates $10.0 million or more;
(f) the Company or any of its Restricted Subsidiaries is
subject to a final judgments aggregating in excess of $10.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
(g) the Company or any of its Significant Subsidiaries or any
group of Subsidiaries that, taken as a whole, would constitute a Significant
Subsidiary pursuant to or within the meaning of Bankruptcy Law:
(i) commences a voluntary case,
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56
(ii) consents to the entry of an order for relief against it
in an involuntary case,
(iii) consents to the appointment of a Custodian of it or for
all or substantially all of its property,
(iv) makes a general assignment for the benefit of its
creditors, or
(v) generally is not paying its debts as they become due;
(h) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or
any of its Significant Subsidiaries or any group of
Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary in an involuntary case;
(ii) appoints a Custodian of the Company or
any of its Significant Subsidiaries or any group of
Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary or for all or substantially all of the
property of the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary; or
(iii) orders the liquidation of the Company
or any of its Significant Subsidiaries or any group of
Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days; or
(iv) Except as permitted herein, any
Subsidiary Guarantee shall be held in any judicial proceeding
to be unenforceable or invalid.
The Holders of a majority in aggregate principal amount of
the Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes waive any existing Default or Event of Default and
its consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
Section 6.02. Acceleration.
If any Event of Default occurs and is continuing, the Trustee
or the Holders of at least 25% in principal amount of the then outstanding
Notes may declare all the Notes to be due and payable immediately; provided,
however, that so long as any Designated Senior Debt is outstanding, such
declaration shall not become effective until the earlier of (i) the day which
is five Business Days after receipt by the Representatives of Designated Senior
Debt of such notice of acceleration or (ii) the date of acceleration of any
Designated Senior Debt. Notwithstanding the foregoing, in the case of an Event
of Default arising from certain events of bankruptcy or insolvency, with
respect to the Company or any Restricted Subsidiary, all outstanding Notes will
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57
become due and payable without further action or notice. Holders of the Notes
may not enforce this Indenture or the Notes except as provided in this
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice
of any continuing Default or Event of Default (except a Default or Event of
Default relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of
any willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Notes
pursuant to the optional redemption provisions of this Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes. If an Event of Default
occurs prior to August 1, 2003 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding the prohibition on redemption of the Notes prior to August 1, 2003,
then the premium specified below shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes during the
twelve-month period ending on December 1 of the years indicated below:
YEAR PERCENTAGE
1998................................................. 112.000%
1999................................................. 110.667%
2000................................................. 109.333%
2001................................................. 108.000%
2002................................................. 106.667%
2003................................................. 105.333%
Section 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal, premium,
if any, and interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
Section 6.04. Waiver of Past Defaults.
Holders of not less than a majority in aggregate principal
amount of the then outstanding Notes by notice to the Trustee may on behalf of
the Holders of all of the Notes waive an existing Default or Event of Default
and its consequences hereunder, except a continuing
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58
Default or Event of Default in the payment of the principal of, premium and
Liquidated Damages, if any, or interest on, the Notes (including in connection
with an offer to purchase) (provided, however, that the Holders of a majority
in aggregate principal amount at maturity of the then outstanding Notes may
rescind an acceleration and its consequences, including any related payment
default that resulted from such acceleration). Upon any such waiver, such
Default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
Section 6.05. Control By Majority.
Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability.
Section 6.06. Limitation On Suits.
A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice
of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the
then outstanding Notes make a written request to the Trustee to pursue the
remedy;
(c) such Holder of a Note or Holders of Notes offer and, if
requested, provide to the Trustee indemnity satisfactory to the Trustee against
any loss, liability or expense;
(d) the Trustee does not comply with the request within 60
days after receipt of the request and the offer and, if requested, the
provision of indemnity; and
(e) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
Section 6.07. Rights of Holders of Notes to Receive Payment.
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal, premium and
Liquidated Damages, if any, and interest on the Note, on or after the
respective due dates expressed in the Note (including in connection with an
offer to purchase), or to bring suit for the enforcement of any such payment on
or after such
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59
respective dates, shall not be impaired or affected without the consent of such
Holder.
Section 6.08. Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(a) or (b)
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company for the whole
amount of principal of, premium and Liquidated Damages, if any, and interest
remaining unpaid on the Notes and interest on overdue principal and, to the
extent lawful, interest and such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
Section 6.09. Trustee May File Proofs Of Claim.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and the Holders of the Notes allowed in any judicial proceedings relative to
the Company (or any other obligor upon the Notes), its creditors or its
property and shall be entitled and empowered to collect, receive and distribute
any money or other property payable or deliverable on any such claims and any
custodian in any such judicial proceeding is hereby authorized by each Holder
to make such payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 7.07 hereof. To the extent that the
payment of any such compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof out of the estate in any such proceeding, shall be denied
for any reason, payment of the same shall be secured by a Lien on, and shall be
paid out of, any and all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder, or to authorize the Trustee to vote in respect of the
claim of any Holder in any such proceeding.
Section 6.10. Priorities.
If the Trustee collects any money pursuant to this Article,
it shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Section 7.07 hereof, including payment of all compensation, expense
and liabilities incurred, and all advances made, by the Trustee and the costs
and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the
Notes for
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principal, premium and Liquidated Damages, if any, and interest, ratably,
without preference or priority of any kind, according to the amounts due and
payable on the Notes for principal, premium and Liquidated Damages, if any and
interest, respectively; and
Third: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
Section 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more
than 10% in principal amount of the then outstanding Notes.
ARTICLE 7.
TRUSTEE
Section 7.01. Duties Of Trustee.
(a) If an Event of Default has occurred and is continuing,
the Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be
determined solely by the express provisions of this Indenture
and the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others, and
no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(ii) in the absence of bad faith or
negligence on its part, the Trustee may conclusively rely, as
to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions
furnished to the Trustee and conforming to the requirements
of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they
conform to the requirements of this Indenture (but need not
confirm or investigate the accuracy of mathematical
calculations or other facts stated therein).
(c) The Trustee may not be relieved from liabilities for its
own negligent
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action, its own negligent failure to act, or its own willful misconduct, except
that:
(i) this paragraph does not limit the
effect of paragraph (b) of this Section;
(ii) the Trustee shall not be liable for
any error of judgment made in good faith by a Responsible
Officer, unless it is proved that the Trustee was negligent
in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with
respect to any action it takes or omits to take in good faith
in accordance with a direction received by it pursuant to
Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject
to paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or incur any liability. The Trustee shall be
under no obligation to exercise any of its rights and powers under this
Indenture at the request of any Holders, unless such Holder shall have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
Section 7.02. Rights Of Trustee.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in such
document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel and the written advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent
appointed with due care.
(d) The Trustee shall not be liable for any action it takes
or omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
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(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient
if signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
(g) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by
it hereunder.
(h) The Trustee shall not be deemed to have notice of any
Default or Event of Default unless a Responsible Officer of the Trustee has
actual knowledge thereof or unless written notice of any event which is in fact
such a default is received by the Trustee at the Corporate Trust Office of the
Trustee, and such notice references the Notes and this Indenture.
(i) Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed in writing with the Company.
Section 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may
become the owner or pledgee of Notes and may otherwise deal with the Company or
any Affiliate of the Company with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee or resign. Any Agent may do the same with
like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11
hereof.
Section 7.04. Trustee's Disclaimers.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes,
it shall not be accountable for the Company's use of the proceeds from the
Notes or any money paid to the Company or upon the Company's direction under
any provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
Section 7.05. Notice of Defaults.
If a Default or Event of Default occurs and is continuing and
if it is known to the
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Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or
Event of Default within 90 days after it occurs. Except in the case of a
Default or Event of Default in payment of principal of, premium, if any, or
interest on any Note, the Trustee may withhold the notice if and so long as a
committee of its Responsible Officers in good faith determines that withholding
the notice is in the interests of the Holders of the Notes.
Section 7.06. Reports by Trustee to Holders of the Notes.
Within 60 days after each May 15 beginning with the May 15
following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA ss. 313(a) (but if no
event described in TIA ss. 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail
all reports as required by TIA ss. 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Company and filed with the SEC and each
stock exchange on which the Notes are listed in accordance with TIA ss. 313(d).
The Company shall promptly notify the Trustee when the Notes are listed on any
stock exchange.
Section 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time such
compensation as the Company and the Trustee shall from time to time agree in
writing for its acceptance of this Indenture and services hereunder. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee promptly
upon request for all reasonable disbursements, advances and expenses incurred
or made by it in addition to the compensation for its services. Such expenses
shall include the reasonable compensation, disbursements and expenses of the
Trustee's agents and counsel.
The Company shall indemnify the Trustee or any predecessor
Trustee against any and all losses, liabilities or expenses incurred by it
arising out of or in connection with the acceptance or administration of its
duties under this Indenture, including the costs and expenses of enforcing this
Indenture against the Company (including this Section 7.07) and defending
itself against any claim (whether asserted by the Company or any Holder or any
other person) or liability in connection with the exercise or performance of
any of its powers or duties hereunder, except to the extent any such loss,
liability or expense may be attributable to its negligence or bad faith. The
Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve
the Company of its obligations hereunder. The Company shall defend the claim
and the Trustee shall cooperate in the defense. The Trustee may have separate
counsel and the Company shall pay the reasonable fees and expenses of such
counsel. The Company need not pay for any settlement made without its consent,
which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.07 shall
survive the satisfaction and discharge of this Indenture.
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When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(g) or (h) hereof occurs, the
expenses and the compensation for the services (including the fees and expenses
of its agents and counsel) are intended to constitute expenses of
administration under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA ss.
313(b)(2) to the extent applicable.
Section 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. The
Holders of Notes of a majority in principal amount of the then outstanding
Notes may remove the Trustee by so notifying the Trustee and the Company in
writing. The Company may remove the Trustee if:
(a) the Trustee fails to comply with
Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or
an insolvent or an order for relief is entered with respect
to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes
charge of the Trustee or its property; or
(d) the Trustee becomes incapable of
acting.
If the Trustee resigns or is removed or if a vacancy exists
in the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 30 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in principal amount of the
then outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and
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65
duties of the Trustee under this Indenture. The successor Trustee shall mail a
notice of its succession to Holders of the Notes. The retiring Trustee shall
promptly transfer all property held by it as Trustee to the successor Trustee,
provided all sums owing to the Trustee hereunder have been paid and subject to
the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of
the Trustee pursuant to this Section 7.08, the Company's obligations under
Section 7.07 hereof shall continue for the benefit of the retiring Trustee.
Section 7.09. Successor Trustee by Merger, Etc.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
Section 7.10. Eligibility; Disqualification.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
ss. 310(b).
Section 7.11. Preferential Collection of Claims Against Company.
The Trustee is subject to TIA ss. 311(a), excluding any
creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or
been removed shall be subject to TIA ss. 311(a) to the extent indicated
therein.
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
Section 8.02. Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.02, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to
have been discharged from its obligations with respect to all outstanding Notes
on the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall
be deemed to
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have paid and discharged the entire Indebtedness represented by the outstanding
Notes, which shall thereafter be deemed to be "outstanding" only for the
purposes of Section 8.05 hereof and the other Sections of this Indenture
referred to in (a) and (b) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following provisions which shall
survive until otherwise terminated or discharged hereunder: (a) the rights of
Holders of outstanding Notes to receive solely from the trust fund described in
Section 8.04 hereof, and as more fully set forth in such Section, payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due, (b) the Company's obligations with respect to such Notes
under Sections 2.06, 2.07, 2.10 and 4.02 hereof, (c) the rights, powers,
trusts, duties and immunities of the Trustee hereunder and the Company's
obligations in connection therewith and (d) this Article 8. Subject to
compliance with this Article 8, the Company may exercise its option under this
Section 8.02 notwithstanding the prior exercise of its option under Section
8.03 hereof.
Section 8.03. Covenant defeasance.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.03, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, be released
from its obligations under Sections 4.03, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12,
4.13, 4.15 and 4.16 and Article 5 hereof with respect to the outstanding Notes
on and after the date the conditions set forth below are satisfied
(hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed
not "outstanding" for the purposes of any direction, waiver, consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall not
be deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Notes, the Company may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein
or in any other document and such omission to comply shall not constitute a
Default or an Event of Default under Section 6.01 hereof, but, except as
specified above, the remainder of this Indenture and such Notes shall be
unaffected thereby. In addition, upon the Company's exercise under Section 8.01
hereof of the option applicable to this Section 8.03 hereof, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, Sections
6.01(d) through 6.01(f) hereof shall not constitute Events of Default.
Section 8.04. Conditions to Legal or Covenant Defeasance.
The following shall be the conditions to the application of
either Section 8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in
trust, for the
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benefit of the Holders, cash in United States dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium and Liquidated Damages, if any, and interest
on the outstanding Notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be;
(b) in the case of an election under Section 8.02 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.03 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the incurrence of Indebtedness all or a portion of the
proceeds of which will be used to defease the Notes pursuant to this Article 8
concurrently with such incurrence) or insofar as Sections 6.01(g) or 6.01(h)
hereof is concerned, at any time in the period ending on the 91st day after the
date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company or any
of its Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that on the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(g) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company; and
(h) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to
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68
the Legal Defeasance or the Covenant Defeasance have been complied with.
Section 8.05. Deposited Money and Government Securities to be held in Trust;
Other Miscellaneous Provisions.
Subject to Section 8.06 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as Paying Agent) as the Trustee may determine, to the Holders of such
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the cash or
non-callable Government Securities deposited pursuant to Section 8.04 hereof or
the principal and interest received in respect thereof other than any such tax,
fee or other charge which by law is for the account of the Holders of the
outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request of the Company any money or non-callable Government Securities held by
it as provided in Section 8.04 hereof which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.04(a) hereof), are in excess of the amount thereof
that would then be required to be deposited to effect an equivalent Legal
Defeasance or Covenant Defeasance.
Section 8.06. Repayment to Company.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of,
premium, if any, or interest on any Note and remaining unclaimed for two years
after such principal, and premium, if any, or interest has become due and
payable shall be paid to the Company on its request or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Note shall
thereafter, as a secured creditor, look only to the Company for payment
thereof, and all liability of the Trustee or such Paying Agent with respect to
such trust money, and all liability of the Company as trustee thereof, shall
thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once, in The New York Times and The Wall Street
Journal (national edition), notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such notification or publication, any unclaimed balance of such money
then remaining will be repaid to the Company.
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Section 8.07. Reinstatement.
If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company's obligations under this
Indenture and The Notes shall be revived and reinstated as though no deposit
had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if
the Company makes any payment of principal of, premium, if any, or interest on
any Note following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money held by the Trustee or Paying Agent.
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01. Without Consent of Holders of Notes.
Notwithstanding Section 9.02 of this Indenture, the Company
and the Trustee may amend or supplement this Indenture or the Notes without the
consent of any Holder of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(c) to provide for the assumption of the Company's
obligations to the Holders of the Notes in the case of a merger or
consolidation pursuant to Article 5 hereof;
(a) to make any change that would provide any additional
rights or benefits to the Holders of the Notes or that does not adversely
affect the legal rights hereunder of any Holder of the Note; or
(b) to comply with requirements of the SEC in order to effect
or maintain the qualification of this Indenture under the TIA.
Upon the request of the Company accompanied by a resolution
of its Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon receipt by the Trustee of the documents
described in Section 7.02 hereof, the Trustee shall join with the Company in
the execution of any amended or supplemental Indenture authorized or permitted
by the terms of this Indenture and to make any further appropriate agreements
and stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into such amended or supplemental Indenture that affects its
own rights, duties or immunities under this Indenture or otherwise.
Section 9.02. With Consent of Holders of Notes.
Except as provided below in this Section 9.02, the Company
and the Trustee may
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amend or supplement this Indenture (including Section 3.09, 4.10 and 4.15
hereof) and the Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for the Notes), and, subject to Sections 6.04 and 6.07 hereof,
any existing Default or Event of Default (other than a Default or Event of
Default in the payment of the principal of, premium, if any, or interest on the
Notes, except a payment default resulting from an acceleration that has been
rescinded) or compliance with any provision of this Indenture or the Notes may
be waived with the consent of the Holders of a majority in principal amount of
the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for the Notes).
Upon the request of the Company accompanied by a resolution
of its Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders of Notes as
aforesaid, and upon receipt by the Trustee of the documents described in
Section 7.02 hereof, the Trustee shall join with the Company in the execution
of such amended or supplemental Indenture unless such amended or supplemental
Indenture affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise, in which case the Trustee may in its discretion, but
shall not be obligated to, enter into such amended or supplemental Indenture.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Persons entitled to consent to any
indenture supplemental hereto. If a record date is fixed, the Holders on such
record date, or their duly designated proxies, and only such Persons, shall be
entitled to consent to such supplemental indenture, whether or not such Holders
remain Holders after such record date; provided, that unless such consent shall
have become effective by virtue of the requisite percentage having been
obtained prior to the date which is 180 days after such record date, any such
consent previously given shall automatically and without further action by any
Holder be canceled and of no further effect.
It shall not be necessary for the consent of the Holders of
Notes under this Section 9.02 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the
Holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance in a particular instance by the Company with
any provision of this Indenture or the Notes. However, without the consent of
each Holder affected, an amendment or waiver may not (with respect to any Notes
held by a non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
<PAGE>
71
(b) reduce the principal of or change the fixed maturity of
any Note or alter or waive any of the provisions with respect to the redemption
of the Notes except as provided above with respect to Sections 4.10 and 4.15
hereof;
(c) reduce the rate of or change the time for payment of
interest, including default interest, on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a rescission
of acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the then outstanding Notes and a waiver of the payment
default that resulted from such acceleration);
(e) make any Note payable in money other than that stated in
the Notes;
(f) make any change in the provisions of this Indenture
relating to waivers of past Defaults or the rights of Holders of Notes to
receive payments of principal of or interest on the Notes; or
(g) waive a redemption payment with respect to any Note
(other than a payment required by Sections 3.09, 4.10 and 4.15 hereof).
(h) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions.
Section 9.03. Compliance with Trust Indenture Act.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in a amended or supplemental Indenture that complies with
the TIA as then in effect.
Section 9.04. Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent
Holder of a Note may revoke the consent as to its Note if the Trustee receives
written notice of revocation before the date the waiver, supplement or
amendment becomes effective. An amendment, supplement or waiver becomes
effective in accordance with its terms and thereafter binds every Holder.
Section 9.05. Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall authenticate
new Notes that reflect the amendment, supplement or waiver.
<PAGE>
72
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
Section 9.06. Trustee to Sign Amendments, Etc.
The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental Indenture until the Board
of Directors approves it. In executing any amended or supplemental indenture,
the Trustee shall be entitled to receive and (subject to Section 7.01) shall be
fully protected in relying upon, an Officer's Certificate and an Opinion of
Counsel stating that the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture.
ARTICLE 10.
SUBORDINATION
Section 10.01. Agreement to Subordinate.
The Company agrees, and each Holder by accepting a Note
agrees, that the Indebtedness evidenced by the Notes is subordinated in right
of payment, to the extent and in the manner provided in this Article 10, to the
prior payment in full in cash of all Senior Debt (whether outstanding on the
date hereof or hereafter created, incurred, assumed or guaranteed), and that
the subordination is for the benefit of the holders of Senior Debt.
Section 10.02. Liquidation; Dissolution; Bankruptcy.
Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, the holders of Senior Debt shall be entitled
to receive payment in full in cash of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Debt, whether or not an
allowable claim in any such proceeding) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes, and until all
Obligations with respect to Senior Debt are paid in full in cash, any
distribution to which the Holders of Notes would be entitled shall be made to
the holders of Senior Debt (except, in each case, that Holders of Notes may
receive Permitted Junior Securities and payments made from the trust described
under Article 8).
Section 10.03. Default on Designated Senior Debt.
The Company may not make any payment or distribution to the
Trustee or any Holder in respect of Obligations with respect to the Notes and
may not acquire from the Trustee or any Holder any Notes for cash or property
(other than (i) securities that are subordinated to at least the same extent as
the Notes to (a) Senior Debt and (b) any securities issued in exchange for
<PAGE>
73
Senior Debt and (ii) payments and other distributions made from any defeasance
trust created pursuant to Section 8.01 hereof) until all principal and other
Obligations with respect to the Senior Debt have been paid in full if:
(i) a default in the payment of any principal or other
Obligations with respect to Designated Senior Debt occurs and is
continuing; or
(ii) a default, other than a payment default, on Designated
Senior Debt occurs and is continuing that then permits holders of the
Designated Senior Debt to accelerate its maturity and the Trustee
receives a notice of the default (a "Payment Blockage Notice") from
the Company or a Representative with respect to such Designated Senior
Debt. If the Trustee receives any such Payment Blockage Notice, no
subsequent Payment Blockage Notice shall be effective for purposes of
this Section unless and until (i) at least 360 days shall have elapsed
since the effectiveness of the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any,
and interest on the Notes that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee shall be, or
be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been waived or cured for a period of not less
than 90 days.
The Company may and shall resume payments on and
distributions in respect of the Notes and may acquire them upon the earlier of:
(1) the date upon which the default is
cured or waived, or
(2) in the case of a default referred to in
Section 10.03(ii) hereof, 179 days pass after notice is
received if the maturity of such Designated Senior Debt has
not been accelerated,
if this Article otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
Section 10.04. Acceleration of Securities.
If payment of the Securities is accelerated because of an
Event of Default, the Company shall promptly notify holders of Senior Debt of
the acceleration.
Section 10.05. When Distribution Must Be Paid Over.
In the event that the Trustee or any Holder receives any
payment of any Obligations with respect to the Notes at a time when the Trustee
or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Article 10 hereof, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, upon written request, to, the holders of Senior Debt as their
interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, for application to the
<PAGE>
74
payment of all Obligations with respect to Senior Debt remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Debt.
With respect to the holders of Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Trustee shall pay over or distribute to or on behalf of
Holders or the Company or any other Person money or assets to which any holders
of Senior Debt shall be entitled by virtue of this Article 10, except if such
payment is made as a result of the willful misconduct or negligence of the
Trustee.
Section 10.06. Notice by Company
The Company shall promptly notify the Trustee and the Paying
Agent of any facts known to the Company that would cause a payment of any
Obligations with respect to the Notes to violate this Article 10, but failure
to give such notice shall not affect the subordination of the Notes to the
Senior Debt as provided in this Article 10.
The Trustee shall be entitled to rely on the delivery to it
of a written notice by a person representing himself to be a holder of Senior
Debt (or a trustee or agent on behalf of such holder) to establish that such
notice has been given by a holder of Senior Debt (or a trustee or agent on
behalf of any such holder). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any person
as holder of Senior Debt to participate in any payment or distribution pursuant
to this Article 10, the Trustee may request such person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior Debt held
by such person, the extent to which such person is entitled to participate in
such evidence is not furnish, the Trustee may defer any payment which it may be
required to make for the benefit of such person pursuant to the terms of this
Indenture pending judicial determination as to the rights of such person to
receive such payment.
Section 10.07. Subrogation.
After all Senior Debt is paid in full in cash and until the
Notes are paid in full, Holders of Notes shall be subrogated (equally and
ratably with all other Indebtedness pari passu with the Notes) to the rights of
holders of Senior Debt to receive distributions applicable to Senior Debt to
the extent that distributions otherwise payable to the Holders of Notes have
been applied to the payment of Senior Debt. A distribution made under this
Article 10 to holders of Senior Debt that otherwise would have been made to
Holders of Notes is not, as between the Company and Holders, a payment by the
Company on the Notes.
Section 10.08. Relative Rights.
This Article 10 defines the relative rights of Holders of
Notes and holders of Senior Debt. Nothing in this Indenture shall:
<PAGE>
75
(1) impair, as between the Company and
Holders of Notes, the obligation of the Company, which is
absolute and unconditional, to pay principal of and interest
on the Notes in accordance with their terms;
(2) affect the relative rights of Holders
of Notes and creditors of the Company other than their rights
in relation to holders of Senior Debt; or
(3) prevent the Trustee or any Holder of
Notes from exercising its available remedies upon a Default
or Event of Default, subject to the rights of holders and
owners of Senior Debt to receive distributions and payments
otherwise payable to Holders of Notes.
If the Company fails because of this Article 10 to pay
principal of or interest on a Note on the due date, the failure is still a
Default or Event of Default.
Section 10.09. Subordination May Not Be Impaired by Company.
No right of any holder of Senior Debt to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Company or any Holder or by the failure of the
Company or any Holder to comply with this Indenture.
Section 10.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to
holders of Senior Debt, the distribution may be made and the notice given to
their Representative.
Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders of Notes shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt
and other Indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 10.
Section 10.11. Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article 10 or any
other provision of this Indenture, the Trustee shall not be charged with
knowledge of the existence of any facts that would prohibit the making of any
payment or distribution by the Trustee, and the Trustee and the Paying Agent
may continue to make payments on the Notes, unless the Trustee shall have
received at its Corporate Trust Office at least three Business Days prior to
the date of such payment written notice of facts that would cause the payment
of any Obligations with respect to the Notes to violate this Article 10. Only
the Company or a Representative may give the notice. Nothing in this Article 10
shall impair the claims of, or payments to, the Trustee under or pursuant to
Section 7.07 hereof.
<PAGE>
76
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
Section 10.12. Authorization to Effect Subordination.
Each Holder of Notes, by the Holder's acceptance thereof,
authorizes and directs the Trustee on such Holder's behalf to take such action
as may be necessary or appropriate to effectuate the subordination as provided
in this Article 10, and appoints the Trustee to act as such Holder's
attorney-in-fact for any and all such purposes. If the Trustee does not file a
proper proof of claim or proof of debt in the form required in any proceeding
referred to in Section 6.09 hereof at least 30 days before the expiration of
the time to file such claim, the credit agents are hereby authorized to file an
appropriate claim for and on behalf of the Holders of the Notes.
Section 10.13. Amendments.
The provisions of this Article 10 shall not be amended or
modified without the written consent of the holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of Holders of Notes.
ARTICLE 11.
MISCELLANEOUS
Section 11.01. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by TIA ss.318(c), the imposed duties shall
control.
Section 11.02. Notices.
Any notice or communication by the Company or the Trustee to
the others is duly given if in writing and delivered in Person or mailed by
first class mail (registered or certified, return receipt requested),
telecopier or overnight air courier guaranteeing next day delivery, to the
others' address:
If to the Company or any Guarantor:
L-3 Communications Corporation
600 Third Avenue, 34th Floor,
New York, New York 10016
Attention: Vice President-Finance (Fax: 212-805-5470)
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Vincent Pagano Jr. (Fax: 212-455-2502)
<PAGE>
77
If to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration (Fax: 212-815-5915)
The Company or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and
the next Business Day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on
the register kept by the Registrar. Any notice or communication shall also be
so mailed to any Person described in TIA ss. 313(c), to the extent required by
the TIA. Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the
addressee receives it.
If the Company mails a notice or communication to Holders, it
shall mail a copy to the Trustee and each Agent at the same time.
Section 11.03. Communications By Holders of Notes with Other Holders of Notes.
Holders may communicate pursuant to TIA ss. 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection
of TIA ss. 312(c).
Section 11.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 11.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
<PAGE>
78
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 11.05 hereof) stating that, in the opinion of such counsel, all such
conditions precedent and covenants have been satisfied.
Section 11.05. Statements required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA
ss. 314(e) and shall include:
(a) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or
she has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been satisfied.
Section 11.06. Rule by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
Section 11.07. No Personal Liability of Directors, Officers, Employees and
Stockholders.
No director, officer, employee, incorporator or stockholder
of the Company, as such, shall have any liability for any obligations of the
Company under the Notes and this Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
Section 11.08. Governing Law.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
<PAGE>
79
Section 11.09. No Adverse Interpretation of other Agreements.
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company or its Subsidiaries or of any
other Person. Any such indenture, loan or debt agreement may not be used to
interpret this Indenture.
Section 11.10. Successors.
All agreements of the Company in this Indenture and the Notes
shall bind its successors. All agreements of the Trustee in this Indenture
shall bind its successors.
Section 11.11. Severability.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
Section 11.12. Counterpart Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
Section 11.13. Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
[Signatures on following pages]
<PAGE>
SIGNATURES
Dated as of December 11, 1998
L-3 COMMUNICATIONS CORPORATION
By:
-----------------------------
Name:
Title:
GUARANTORS:
HYGIENETICS ENVIRONMENTAL SERVICES, INC.
By:
-----------------------------
Name:
Title:
L-3 COMMUNICATIONS ILEX SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
SOUTHERN CALIFORNIA MICROWAVE, INC.
By:
-----------------------------
Name:
Title:
L-3 COMMUNICATIONS SPD TECHNOLOGIES, INC.
By:
-----------------------------
Name:
Title:
S-1
<PAGE>
L-3 COMMUNICATIONS ESSCO, INC.
By:
-----------------------------
Name:
Title:
STORM CONTROL SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
DBS MICROWAVE, INC.
By:
-----------------------------
Name:
Title:
SPD ELECTRICAL SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
SPD SWITCHGEAR INC.
By:
-----------------------------
Name:
Title:
PAC ORD INC.
By:
-----------------------------
Name:
Title:
S-2
<PAGE>
HENSCHEL INC.
By:
-----------------------------
Name:
Title:
SPD HOLDINGS, INC.
By:
-----------------------------
Name:
Title:
POWER PARAGON, INC.
By:
-----------------------------
Name:
Title:
THE BANK OF NEW YORK,
as Trustee
By:
------------------------------
Name:
Title:
S-3
<PAGE>
EXHIBIT A
(Face of Note)
===============================================================================
CUSIP/CINS __________
8% Senior Subordinated Notes due 2008
No. ___ $_________
L-3 COMMUNICATIONS CORPORATION
promises to pay to
or registered assigns,
the principal sum of
Dollars on Auguest 1, 2008.
Interest Payment Dates: February 1 and August 1.
Record Dates: January 15 and July 15.
Dated: December 11, 1998
L-3 Communications Corporation
By:
-----------------------------
Name:
Title:
By:
-----------------------------
Name:
Title:
This is one of the [Global]
Notes referred to in the (SEAL)
within-mentioned Indenture:
Dated: December 11, 1998
THE BANK OF NEW YORK,
as Trustee
By:
----------------------------------
Name:
Title:
===============================================================================
(Back of Note)
<PAGE>
8% Senior Subordinated Notes due 2008
[THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE
BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY
BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE
MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE
INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR
CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL
NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN
CONSENT OF THE COMPANY.]1
[THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISION OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) TO A PERSON WHOM
THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN
PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE
SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT, IN EACH CASE, IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.]2
- ---------------------
1 This paragraph should be included only if the Note is issued in global form.
2 This paragraph should be included only if applicable pursuant to the terms
of the Indenture.
A-2
<PAGE>
Capitalized terms used herein shall have the meanings
assigned to them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. L-3 Communications Corporation, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at 8%
per annum from December 11, 1998 until maturity and shall pay the Liquidated
Damages payable pursuant to Section 5 of the Registration Rights Agreement
referred to below. The Company will pay interest and Liquidated Damages, if
any, semi-annually on February 1 and August 1 of each year, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"), with the same force and effect as if made on the date for such
payment. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
issuance; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to
on the face hereof and the next succeeding Interest Payment Date, interest
shall accrue from such next succeeding Interest Payment Date; provided,
further, that the first Interest Payment Date shall be February 1, 1999. The
Company shall pay interest (including post-petition interest in any proceeding
under any Bankruptcy Law) on overdue principal and premium, if any, from time
to time on demand at a rate that is 1% per annum in excess of the rate then in
effect; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages (without regard to any applicable grace periods) from time
to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except
defaulted interest) and Liquidated Damages to the Persons who are registered
Holders of Notes at the close of business on the January 15 or July 15 next
(whether or not a Business Day) preceding the Interest Payment Date, even if
such Notes are canceled after such record date and on or before such Interest
Payment Date, except as provided in Section 2.12 of the Indenture with respect
to defaulted interest. The Notes will be payable as to principal, premium and
Liquidated Damages, if any, and interest at the office or agency of the Company
maintained for such purpose within The City and State of New York, or, at the
option of the Company, payment of interest and Liquidated Damages may be made
by check mailed to the Holders at their addresses set forth in the register of
Holders; provided that payment by wire transfer of immediately available funds
will be required with respect to principal of and interest, premium and
Liquidated Damages on, all Global Notes and all other Notes the Holders of
which shall have provided wire transfer instructions to the Company or the
Paying Agent if such Holders shall be registered Holders of at least $250,000
in principal amount of the Notes. Such payment shall be in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
A-3
<PAGE>
4. INDENTURE. The Company issued the Notes under an Indenture dated as of
December 11, 1998 ("Indenture") among the Company, the Guarantors named therein
and the Trustee. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to
all such terms, and Holders are referred to the Indenture and such Act for a
statement of such terms. To the extent any provision of this Note conflicts
with the express provisions of the Indenture, the provisions of the Indenture
shall govern and be controlling. The Notes issuable under the Indenture are
obligations of the Company limited to $300.0 million in aggregate principal
amount, plus amounts, if any, issued to pay Liquidated Damages on outstanding
Notes as set forth in Paragraph 2 hereof.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in clause (b) of this paragraph 5,
the Notes shall not be redeemable at the Company's option prior to August 1,
2003. Thereafter, the Notes shall be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on August 1 of the years
indicated below:
YEAR PERCENTAGE
2003.................................... 104.000%
2004.................................... 102.667%
2005.................................... 101.333%
2006 and thereafter..................... 100.000%
(b) Notwithstanding the foregoing, during the first 36 months
after the date of the Indenture, the Company may on any one or more occasions
redeem up to an aggregate of 35% of the Notes originally issued at a redemption
price of 108% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages thereon, if any, to the redemption date, with the net
cash proceeds of one or more Equity Offerings by the Company or the net cash
proceeds of one or more Equity Offerings by Holdings that are contributed to
the Company as common equity capital; provided that at least 65% of the Notes
originally issued remain outstanding immediately after the occurrence of each
such redemption; and provided, further, that any such redemption must occur
within 120 days of the date of the closing of such Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall
not be required to make mandatory redemption payments with respect to the
Notes.
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7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be
required to make an offer (a "Change of Control Offer") to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of each Holder's
Notes at a purchase price equal to 101% of aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase (in either
case, the "Change of Control Payment"). Within 10 days following any Change of
Control, the Company shall mail a notice to each Holder setting forth the
procedures governing the Change of Control Offer as required by the Indenture.
(b) If the Company or a Subsidiary consummates any Asset
Sales, within five Business Days of each date on which the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Company shall commence an offer to
all holders of 1997 Notes (an "Asset Sale Offer") pursuant to Section 3.09 of
the Indenture to purchase the maximum principal amount of 1997 Notes that may
be purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
to the date of purchase, in accordance with the procedures set forth in the
1997 Indenture. To the extent that the aggregate amount of 1997 Notes tendered
pursuant to an Asset Sale Offer is less than the remaining Excess Proceeds
("Remaining Excess Proceeds") and the sum of (A) such amount of Remaining
Excess Proceeds and (B) the Remaining Excess Proceeds from any subsequent Asset
Sale Offers exceeds $3.0 million, the Company will be required to make an offer
to all Holders of Notes and any other Indebtedness that ranks pari passu with
the Notes (including the May 1998 Notes) that, by its terms, requires the
Company to offer to repurchase such Indebtedness with such Remaining Excess
Proceeds (a "Secondary Asset Sale Offer") to purchase the maximum principal
amount of Notes and pari passu Indebtedness that may be purchased out of such
Remaining Excess Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid interest thereon, if
any, to the date of purchase, in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount of Notes or pari passu
Indebtedness tendered pursuant to a Secondary Asset Sale Offer is less than the
Remaining Excess Proceeds, the Company may use any Remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of Notes or
pari passu Indebtedness surrendered by Holders thereof exceeds the amount of
Remaining Excess Proceeds in a Secondary Asset Sale Offer, the Company shall
repurchase such Indebtedness on a pro rata basis and the Trustee shall select
the Notes to be purchased on a pro rata basis. Holders of Notes that are the
subject of an offer to purchase will receive an Asset Sale Offer from the
Company prior to any related purchase date and may elect to have such Notes
purchased by completing the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Notes are to be redeemed at its registered address. Notes in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000, unless all of the Notes held by a Holder are to be redeemed. On and
after the redemption date interest ceases to accrue on Notes or portions
thereof called for redemption.
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<PAGE>
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000.
The transfer of Notes may be registered and Notes may be exchanged as provided
in the Indenture. The Registrar and the Trustee may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, it need not
exchange or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed or during the period between a record date
and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated
as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the
Indenture or the Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the then outstanding
Notes, and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes. Without the consent
of any Holder of a Note, the Indenture or the Notes may be amended or
supplemented to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of the Notes
in case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
12. DEFAULTS AND REMEDIES. An "Event of Default" occurs if: (i) default
for 30 days in the payment when due of interest on, or Liquidated Damages with
respect to, the Notes (whether or not prohibited by the subordination
provisions of the Indenture); (ii) default in payment when due of the principal
of or premium, if any, on the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (iii) failure by the Company to
comply with the covenants contained in sections 4.10, 4.15 or 5.10 of the
Indenture; (iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the Indenture or the Notes; (v) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the Issue Date, which
default results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness the maturity
of which has been so accelerated, aggregates $10.0 million or more; (vi)
failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $10.0 million, which
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<PAGE>
judgments are not paid, discharged or stayed for a period of 60 days; (vii)
certain events of bankruptcy or insolvency with respect to the Company or any
of its Significant Subsidiaries; and (viii) except as permitted by the
Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to
be unenforceable or invalid.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, however,
that so long as any Designated Senior Debt is outstanding, such declaration
shall not become effective until the earlier of (i) the day which is five
Business Days after receipt by the Representatives of Designated Senior Debt of
such notice of acceleration or (ii) the date of acceleration of any Designated
Senior Debt. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company or any Restricted Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
August 1, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to August 1, 2003, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all
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<PAGE>
such liability. The waiver and release are part of the consideration for the
issuance of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES. In
addition to the rights provided to Holders of Notes under the Indenture,
Holders of Transferred Restricted Securities shall have all the rights set
forth in the A/B Exchange Registration Rights Agreement dated as of December
11, 1998, between the Company and the parties named on the signature pages
thereof (the "Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
19. GOVERNING LAW. The internal law of the State of New York shall govern
and be used to construe this Note, without regard to the principles of
conflicts of laws.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
L-3 Communications Corporation
600 Third Avenue, 34th Floor,
New York, New York 10016
Attention: Vice President-Finance (Fax: 212-805-5470)
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<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we)
assign and transfer this Note to
(Insert assignee's soc. sec. or tax I.D. no.)
(Print or type assignee's name, address and zip code)
and irrevocably appoint
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date:
Your Signature:
(Sign exactly as your name appears
on the face of this Note)
Signature Guarantee.
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<PAGE>
Option of Holder to Elect Purchase
If you want to elect to have this Note purchased by the Company pursuant
to Section 4.10 or 4.15 of the Indenture, check the box below:
Section 4.10 Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $
Date: Your Signature:
(Sign exactly as your name appears on
the Note)
Tax Identification No.:
Signature Guarantee.
A-10
<PAGE>
Schedule of Exchanges of Interests in the Global Note3
The following exchanges of a part of this Global Note for an interest in
another Global Note or for a Definitive Note, or exchanges of a part of another
Global Note or Definitive Note for an interest in this Global Note, have been
made:
<TABLE>
<CAPTION>
Principal Amount of
this Global Note Signature of
Amount of decrease Amount of increase following such authorized officer
in Principal Amount in Principal Amount decrease of Trustee or Note
Date of Exchange of this Global Note of this Global Note (or increase) Custodian
<S> <C> <C> <C> <C>
</TABLE>
- -----------------------
3 This should be included only if the Note is issued in global form.
A-11
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
L-3 Communications Corporation
600 Third Avenue, 34th Floor,
New York, New York 10016
[Registrar address block]
Re: 8% Senior Subordinated Notes, Due 2008.
Reference is hereby made to the Indenture, dated as of December 11, 1998
(the "Indenture"), among L-3 Communications Corporation, as issuer (the
"Company"), the Guarantors named therein and The Bank of New York, as trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.
, (the "Transferor") owns and proposes to transfer the
Note[s] or interest in such Note[s] specified in Annex A hereto, in the
principal amount of $ in such Note[s] or interests (the "Transfer"),
to (the "Transferee"), as further specified in Annex A hereto. In
connection with the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. CHECK IF TRANSFEREE WILL TAKE DELIVERY OF BOOK-ENTRY
INTERESTS IN THE 144A GLOBAL NOTE OR DEFINITIVE NOTES PURSUANT TO RULE 144A.
The Transfer is being effected pursuant to and in accordance with Rule 144A
under the United States Securities Act of 1933, as amended (the "Securities
Act"), and, accordingly, the Transferor hereby further certifies that the
Book-Entry Interests or Definitive Notes are being transferred to a Person that
the Transferor reasonably believes is purchasing the Book-Entry Interests or
Definitive Notes for its own account, or for one or more accounts with respect
to which such Person exercises sole investment discretion, and such Person and
each such account is a "qualified institutional buyer" within the meaning of
Rule 144A in a transaction meeting the requirements of Rule 144A and such
Transfer is in compliance with any applicable blue sky securities laws of any
state of the United States. Upon consummation of the proposed Transfer in
accordance with the terms of the Indenture, the transferred Book-Entry Interest
or Definitive Note will be subject to the restrictions on transfer enumerated
in the Private Placement Legend printed on the 144A Global Note and/or the
Definitive Note and in the Indenture and the Securities Act.
2. CHECK IF TRANSFEREE WILL TAKE DELIVERY OF BOOK-ENTRY
INTERESTS IN THE TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL
NOTE OR DEFINITIVE NOTES PURSUANT TO REGULATION S. The Transfer is being
effected pursuant to and in accordance with Rule 903 or Rule 904 under the
Securities Act and, accordingly, the Transferor hereby further certifies that
(i) the Transfer is not being made to a person in the United States and (x) at
the time the buy order was originated, the Transferee was outside the United
States or such Transferor and any Person
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<PAGE>
acting on its behalf reasonably believed and believes that the Transferee was
outside the United States or (y) the transaction was executed in, on or through
the facilities of a designated offshore securities market and neither such
Transferor nor any Person acting on its behalf knows that the transaction was
prearranged with a buyer in the United States, (ii) no directed selling efforts
have been made in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S under the Securities Act and (iii) the transaction is
not part of a plan or scheme to evade the registration requirements of the
Securities Act and (iv) if the proposed transfer is being made prior to the
expiration of the Restricted Period, the transfer is not being made to a U.S.
Person or for the account or benefit of a U.S. Person (other than an Initial
Purchaser). Upon consummation of the proposed transfer in accordance with the
terms of the Indenture, the transferred Book-Entry Interest or Definitive Note
will be subject to the restrictions on Transfer enumerated in the Private
Placement Legend printed on the Regulation S Global Note and/or the Definitive
Note and in the Indenture and the Securities Act.
3. CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF
BOOK-ENTRY INTERESTS IN THE IAI GLOBAL NOTE OR DEFINITIVE NOTES PURSUANT TO ANY
PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The
Transfer is being effected in compliance with the transfer restrictions
applicable to Book-Entry Interests in Restricted Global Notes and Definitive
Notes bearing the Private Placement Legend and pursuant to and in accordance
with the Securities Act and any applicable blue sky securities laws of any
State of the United States, and accordingly the Transferor hereby further
certifies that (check one):
(a) such Transfer is being effected pursuant to and in
accordance with Rule 144 under the Securities Act;
or
(b) such Transfer is being effected to the Company or a
subsidiary thereof,
or
(c) such Transfer is being effected pursuant to an effective
registration statement under the Securities Act;
or
(d) such Transfer is being effected to an Institutional
Accredited Investor and pursuant to an exemption from the registration
requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904,
and the Transferor hereby further certifies that the Transfer complies with the
transfer restrictions applicable to Book-Entry Interests in a Restricted Global
Note or Definitive Notes bearing the Private Placement Legend and the
requirements of the exemption claimed, which certification is supported by (x)
if such Transfer is in respect of a principal amount of Notes at the time of
Transfer of $250,000 or more, a certificate executed by the Transferee in the
form of Exhibit D to the Indenture, or (y) if such Transfer is in respect of a
principal amount of
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<PAGE>
Notes at the time of transfer of less than $250,000, (1) a certificate executed
by the Transferee in the form of Exhibit D to the Indenture and (2) an Opinion
of Counsel provided by the Transferor or the Transferee (a copy of which the
Transferor has attached to this certification), to the effect that (1) such
Transfer is in compliance with the Securities Act and (2) such Transfer
complies with any applicable blue sky securities laws of any state of the
United States. Upon consummation of the proposed transfer in accordance with
the terms of the Indenture, the transferred Book-Entry Interest or Definitive
Note will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the IAI Global Note and/or the Definitive Notes and
in the Indenture and the Securities Act.
4. CHECK IF TRANSFEREE WILL TAKE DELIVERY OF BOOK-ENTRY
INTERESTS IN THE UNRESTRICTED GLOBAL NOTE OR IN DEFINITIVE NOTES THAT DO NOT
BEAR THE PRIVATE PLACEMENT LEGEND.
(a) CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The
Transfer is being effected pursuant to and in accordance with Rule 144 under
the Securities Act and in compliance with the transfer restrictions contained
in the Indenture and any applicable blue sky securities laws of any state of
the United States and (ii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act. Upon consummation of the proposed
Transfer in accordance with the terms of the Indenture, the transferred
Book-Entry Interests or Definitive Notes will no longer be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on
the Restricted Global Notes, on Definitive Notes bearing the Private Placement
Legend and in the Indenture.
(b) CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The
Transfer is being effected pursuant to and in accordance with Rule 903 or Rule
904 under the Securities Act and in compliance with the transfer restrictions
contained in the Indenture and any applicable blue sky securities laws of any
state of the United States and (ii) the restrictions on transfer contained in
the Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act. Upon consummation of the proposed
Transfer in accordance with the terms of the Indenture, the transferred
Book-Entry Interests or Definitive Notes will no longer be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on
the Restricted Global Notes, on Definitive Notes bearing the Private Placement
Legend and in the Indenture.
(c) CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The
Transfer is being effected pursuant to and in compliance with an exemption from
the registration requirements of the Securities Act other than Rule 144, Rule
903 or Rule 904 and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any State of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred Book-Entry
Interests or Definitive Notes will not be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the Restricted
Global Notes or
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<PAGE>
Definitive Notes bearing the Private Placement Legend and in
the Indenture.
This certificate and the statements contained herein are made
for your benefit and the benefit of the Company.
[Insert Name of Transferor]
By:
--------------------------------
Name:
Title:
Dated: ,
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<PAGE>
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
[CHECK ONE OF (a) OR (b)]
(a) Book-Entry Interests in the:
(i) 144A Global Note (CUSIP ), or
(ii) Regulation S Global Note (CUSIP ), or
(iii) IAI Global Note (CUSIP ); or
(b) Restricted Definitive Notes.
2. After the Transfer the Transferee will hold:
[CHECK ONE]
(a) Book-Entry Interests in the:
(i) 144A Global Note (CUSIP ), or
(ii) Regulation S Global Note (CUSIP ), or
(iii) IAI Global Note (CUSIP ); or
(iv) Unrestricted Global Note (CUSIP ); or
(b) Restricted Definitive Notes; or
(c) Definitive Notes that do not bear the Private Placement Legend,
in accordance with the terms of the Indenture.
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<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
L-3 Communications Corporation
600 Third Avenue, 34th Floor,
New York, New York 10016
Attention: Vice President-Finance (Fax: 212-805-5470)
Re: 8% Senior Subordinated Notes, Due 2008
(CUSIP )
Reference is hereby made to the Indenture, dated as of
December 11, 1998 (the "Indenture"), among L-3 Communications Corporation, as
issuer (the "Company"), the Guarantors named therein and The Bank of New York,
as trustee. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
, (the "Holder") owns and proposes to exchange
the Note[s] or interest in such Note[s] specified herein, in the principal
amount of $ in such Note[s] or interests (the "Exchange"). In
connection with the Exchange, the Holder hereby certifies that:
1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR RESTRICTED BOOK-ENTRY INTERESTS
FOR DEFINITIVE NOTES THAT DO NOT BEAR THE PRIVATE PLACEMENT LEGEND OR
UNRESTRICTED BOOK-ENTRY INTERESTS
(a) CHECK IF EXCHANGE IS FROM RESTRICTED BOOK-ENTRY INTEREST TO
UNRESTRICTED BOOK-ENTRY INTEREST. In connection with the Exchange of the
Holder's Restricted Book-Entry Interest for Unrestricted Book-Entry Interests
in an equal principal amount, the Holder hereby certifies (i) the Unrestricted
Book-Entry Interests are being acquired for the Holder's own account without
transfer, (ii) such Exchange has been effected in compliance with the transfer
restrictions applicable to the Global Notes and pursuant to and in accordance
with the United States Securities Act of 1933, as amended (the "Securities
Act"), (iii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act and (iv) the Unrestricted Book-Entry Interests are being
acquired in compliance with any applicable blue sky securities laws of any
state of the United States.
(b) CHECK IF EXCHANGE IS FROM RESTRICTED BOOK-ENTRY INTEREST TO DEFINITIVE
NOTES THAT DO NOT BEAR THE PRIVATE PLACEMENT LEGEND. In connection with the
Exchange of the Holder's Restricted Book-Entry Interests for Definitive Notes
that do not bear the Private Placement Legend, the Holder hereby certifies (i)
the Definitive Notes are being acquired for the Holder's own account without
transfer, (ii) such Exchange has been effected in compliance with the transfer
restrictions applicable to the Restricted Global Notes and pursuant to and in
accordance with the Securities Act, (iii) the restrictions on transfer
contained in the Indenture and the Private
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Placement Legend are not required in order to maintain compliance with the
Securities Act and (iv) the Definitive Notes are being acquired in compliance
with any applicable blue sky securities laws of any state of the United States.
(c) CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTES TO UNRESTRICTED
BOOK-ENTRY INTERESTS. In connection with the Holder's Exchange of Restricted
Definitive Notes for Unrestricted Book-Entry Interests, (i) the Unrestricted
Book-Entry Interests are being acquired for the Holder's own account without
transfer, (ii) such Exchange has been effected in compliance with the transfer
restrictions applicable to Restricted Definitive Notes and pursuant to and in
accordance with the Securities Act, (iii) the restrictions on transfer
contained in the Indenture and the Private Placement Legend are not required in
order to maintain compliance with the Securities Act and (iv) the Unrestricted
Book-Entry Interests are being acquired in compliance with any applicable blue
sky securities laws of any state of the United States.
(d) CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTES TO DEFINITIVE
NOTES THAT DO NOT BEAR THE PRIVATE PLACEMENT LEGEND. In connection with the
Holder's Exchange of a Restricted Definitive Note for Definitive Notes that do
not bear the Private Placement Legend, the Holder hereby certifies (i) the
Definitive Notes that do not bear the Private Placement Legend are being
acquired for the Holder's own account without transfer, (ii) such Exchange has
been effected in compliance with the transfer restrictions applicable to
Restricted Definitive Notes and pursuant to and in accordance with the
Securities Act, (iii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the Notes are being acquired in
compliance with any applicable blue sky securities laws of any state of the
United States.
2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR RESTRICTED BOOK-ENTRY INTERESTS
FOR RESTRICTED DEFINITIVE NOTES OR RESTRICTED BOOK-ENTRY INTERESTS
(a) CHECK IF EXCHANGE IS FROM RESTRICTED BOOK-ENTRY INTERESTS TO
RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Holder's
Restricted Book-Entry Interest for Restricted Definitive Notes with an equal
principal amount, (i) the Restricted Definitive Notes are being acquired for
the Holder's own account without transfer and (ii) such Exchange has been
effected in compliance with the transfer restrictions applicable to the
Restricted Global Notes and pursuant to and in accordance with the Securities
Act, and in compliance with any applicable blue sky securities laws of any
state of the United States. Upon consummation of the proposed Exchange in
accordance with the terms of the Indenture, the Restricted Definitive Notes
issued will be subject to the restrictions on transfer enumerated in the
Private Placement Legend printed on the Restricted Definitive Notes and in the
Indenture and the Securities Act.
(b) CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTES TO RESTRICTED
BOOK-ENTRY INTERESTS. In connection with the Exchange of the Holder's
Restricted Definitive Note for Restricted Book-Entry Interests in the [CHECK
ONE] 144A Global Note, Regulation S Global Note, IAI Global Note with an equal
principal amount, (i) the Definitive Notes are being
C-2
<PAGE>
acquired for the Holder's own account without transfer and (ii) such Exchange
has been effected in compliance with the transfer restrictions applicable to
the Restricted Definitive Note and pursuant to and in accordance with the
Securities Act, and in compliance with any applicable blue sky securities laws
of any state of the United States. Upon consummation of the proposed Exchange
in accordance with the terms of the Indenture, the Book-Entry Interests issued
will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the relevant Restricted Global Note and in the
Indenture and the Securities Act.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.
[Insert Name of Transferor]
By:
---------------------------------
Name:
Title:
Dated: ,
C-3
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
L-3 Communications Corporation
600 Third Avenue, 34th Floor,
New York, New York 10016
Attention: Vice President-Finance (Fax: 212-805-5470)
Re: 8% Senior Subordinated Notes Due 2008
Reference is hereby made to the Indenture, dated as of
December 11, 1998 (the "Indenture"), among L-3 Communications Corporation, as
issuer (the "Company"), the Guarantors named therein and The Bank of New York,
as trustee. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
In connection with our proposed purchase of $
aggregate principal amount at maturity of:
(a) Book-Entry Interests, or
(b) Definitive Notes,
we confirm that:
1. We understand that any subsequent transfer of the Notes or
any interest therein is subject to certain restrictions and conditions set
forth in the Indenture and the undersigned agrees to be bound by, and not to
resell, pledge or otherwise transfer the Notes or any interest therein except
in compliance with, such restrictions and conditions and the United States
Securities Act of 1933, as amended (the "Securities Act").
2. We understand that the offer and sale of the Notes have
not been registered under the Securities Act, and that the Notes and any
interest therein may not be offered or sold except as permitted in the
following sentence. We agree, on our own behalf and on behalf of any accounts
for which we are acting as hereinafter stated, that if we should sell the Notes
or any interest therein, we will do so only (A) to the Company or any
subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act
to a "qualified institutional buyer" (as defined therein), (C) to an
institutional "accredited investor" (as defined below) that, prior to such
transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to
you and to the Company a signed letter substantially in the form of this letter
and, if such transfer is in respect of a principal amount of Notes, at the time
of transfer of less than $250,000, an Opinion of Counsel in form reasonably
acceptable to the Company to the effect that such transfer is in compliance
with the Securities Act, (D) outside the United States in accordance with Rule
904 of Regulation S under the Securities Act, (E) pursuant to the provisions of
Rule 144 under the
D-1
<PAGE>
Securities Act or (F) pursuant to an effective registration statement under the
Securities Act, and we further agree to provide to any person purchasing the
Definitive Notes or Book-Entry Interests from us in a transaction meeting the
requirements of clauses (A) through (E) of this paragraph a notice advising
such purchaser that resales thereof are restricted as stated herein.
3. We understand that, on any proposed resale of the Notes or
Book-Entry Interests, we will be required to furnish to you and the Company
such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by
us will bear a legend to the foregoing effect. We further understand that any
subsequent transfer by us of the Notes or Book-Entry Interests therein acquired
by us must be effected through one of the Placement Agents.
4. We are an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
and have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of our investment in the Notes,
and we and any accounts for which we are acting are each able to bear the
economic risk of our or its investment.
5. We are acquiring the Notes or Book-Entry Interests
purchased by us for our own account or for one or more accounts (each of which
is an institutional "accredited investor") as to each of which we exercise sole
investment discretion.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby.
[Insert Name of Accredited Investor]
By:
----------------------------------
Name:
Title:
Dated: ,
D-2
<PAGE>
EXHIBIT E
FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED
BY GUARANTEEING SUBSIDIARY
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated
as of , between (the "Guaranteeing
Subsidiary"), a subsidiary of L-3 Communications Corporation (or its permitted
successor), a Delaware corporation (the "Company"), the Company, the other
Guarantors (as defined in the Indenture referred to herein) and The Bank of New
York, as trustee under the indenture referred to below (the "Trustee").
WITNESSETH
WHEREAS, the Company has heretofore executed and delivered to
the Trustee an indenture (the "Indenture"), dated as of December 11, 1998
providing for the issuance of an aggregate principal amount of up to
$300,000,000 of 8% Senior Subordinated Notes due 2008 (the "Notes");
WHEREAS, the Indenture provides that under certain
circumstances the Guaranteeing Subsidiary shall execute and deliver to the
Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary
shall unconditionally guarantee all of the Company's Obligations under the
Notes and the Indenture on the terms and conditions set forth herein (the
"Subsidiary Guarantee"); and
WHEREAS, pursuant to Section 4.13 of the Indenture, the
Trustee is authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the Guaranteeing Subsidiary and the Trustee mutually covenant and
agree for the equal and ratable benefit of the Holders of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. The Guaranteeing Subsidiary hereby
agrees as follows:
(a) The Guaranteeing Subsidiary, jointly and severally with all
other Guaranteeing Subsidiaries, if any, unconditionally
guarantees to each Holder of a Note authenticated and
delivered by the Trustee and to the Trustee and its
successors and assigns, regardless of the validity and
enforceability of the Indenture, the Notes or the Obligations
of the
E-1
<PAGE>
Company under the Indenture or the Notes, that:
(i) the principal of, premium and interest on
the Notes will be promptly paid in full
when due, whether at maturity, by
acceleration, redemption or otherwise, and
interest on the overdue principal of,
premium and interest on the Notes, to the
extent lawful, and all other Obligations of
the Company to the Holders or the Trustee
thereunder or under the Indenture will be
promptly paid in full, all in accordance
with the terms thereof; and
(ii) in case of any extension of time for
payment or renewal of any Notes or any of
such other Obligations, that the same will
be promptly paid in full when due in
accordance with the terms of the extension
or renewal, whether at stated maturity, by
acceleration or otherwise.
(b) Notwithstanding the foregoing, in the event that this
Subsidiary Guarantee would constitute or result in a
violation of any applicable fraudulent conveyance or similar
law of any relevant jurisdiction, the liability of the
Guaranteeing Subsidiary under this Supplemental Indenture and
its Subsidiary Guarantee shall be reduced to the maximum
amount permissible under such fraudulent conveyance or
similar law.
3. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES.
(a) To evidence its Subsidiary Guarantee set forth in this
Supplemental Indenture, the Guaranteeing Subsidiary hereby
agrees that a notation of such Subsidiary Guarantee
substantially in the form of Exhibit F to the Indenture shall
be endorsed by an officer of such Guaranteeing Subsidiary on
each Note authenticated and delivered by the Trustee after
the date hereof.
(b) Notwithstanding the foregoing, the Guaranteeing Subsidiary
hereby agrees that its Subsidiary Guarantee set forth herein
shall remain in full force and effect notwithstanding any
failure to endorse on each Note a notation of such Subsidiary
Guarantee.
(c) If an Officer whose signature is on this Supplemental
Indenture or on the Subsidiary Guarantee no longer holds that
office at the time the Trustee authenticates the Note on
which a Subsidiary Guarantee is endorsed, the Subsidiary
Guarantee shall be valid nevertheless.
E-2
<PAGE>
(d) The delivery of any Note by the Trustee, after the
authentication thereof under the Indenture, shall constitute
due delivery of the Subsidiary Guarantee set forth in this
Supplemental Indenture on behalf of the Guaranteeing
Subsidiary.
(e) The Guaranteeing Subsidiary hereby agrees that its
obligations hereunder shall be unconditional, regardless of
the validity, regularity or enforceability of the Notes or
the Indenture, the absence of any action to enforce the same,
any waiver or consent by any Holder of the Notes with respect
to any provisions of the Notes or the Indenture, the recovery
of any judgment against the Company, any action to enforce
the same or any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a
guarantor.
(f) The Guaranteeing Subsidiary hereby waives diligence,
presentment, demand of payment, filing of claims with a court
in the event of insolvency or bankruptcy of the Company, any
right to require a proceeding first against the Company,
protest, notice and all demands whatsoever and covenants that
its Subsidiary Guarantee made pursuant to this Supplemental
Indenture will not be discharged except by complete
performance of the obligations contained in the Notes and the
Indenture.
(g) If any Holder or the Trustee is required by any court or
otherwise to return to the Company or the Guaranteeing
Subsidiary, or any Custodian, Trustee, liquidator or other
similar official acting in relation to either the Company or
the Guaranteeing Subsidiary, any amount paid by either to the
Trustee or such Holder, the Subsidiary Guarantee made
pursuant to this Supplemental Indenture, to the extent
theretofore discharged, shall be reinstated in full force and
effect.
(h) The Guaranteeing Subsidiary agrees that it shall not be
entitled to any right of subrogation in relation to the
Holders in respect of any obligations guaranteed hereby until
payment in full of all obligations guaranteed hereby. The
Guaranteeing Subsidiary further agrees that, as between the
Guaranteeing Subsidiary, on the one hand, and the Holders and
the Trustee, on the other hand:
(i) the maturity of the obligations guaranteed
hereby may be accelerated as provided in
Article 6 of the Indenture for the purposes
of the Subsidiary Guarantee made pursuant
to this Supplemental Indenture,
notwithstanding any stay, injunction or
other prohibition preventing such
acceleration in respect of the obligations
guaranteed hereby; and
E-3
<PAGE>
(ii) in the event of any declaration of
acceleration of such obligations as
provided in Article 6 of the Indenture,
such obligations (whether or not due and
payable) shall forthwith become due and
payable by the Guaranteeing Subsidiary for
the purpose of the Subsidiary Guarantee
made pursuant to this Supplemental
Indenture.
(i) The Guaranteeing Subsidiary shall have the right to seek
contribution from any other non-paying Guaranteeing
Subsidiary so long as the exercise of such right does not
impair the rights of the Holders or the Trustee under the
Subsidiary Guarantee made pursuant to this Supplemental
Indenture.
4. GUARANTEEING SUBSIDIARY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS.
(a) Except as set forth in Articles 4 and 5 of
the Indenture, nothing contained in the
Indenture, this Supplemental Indenture or
in the Notes shall prevent any
consolidation or merger of the Guaranteeing
Subsidiary with or into the Company or any
other Guaranteeing Subsidiary or shall
prevent any transfer, sale or conveyance of
the property of the Guaranteeing Subsidiary
as an entirety or substantially as an
entirety, to the Company or any other
Guaranteeing Subsidiary.
(b) Except as set forth in Article 4 of the
Indenture, nothing contained in the
Indenture, this Supplemental Indenture or
in the Notes shall prevent any
consolidation or merger of the Guaranteeing
Subsidiary with or into a corporation or
corporations other than the Company or any
other Guaranteeing Subsidiary (in each
case, whether or not affiliated with the
Guaranteeing Subsidiary), or successive
consolidations or mergers in which a
Guaranteeing Subsidiary or its successor or
successors shall be a party or parties, or
shall prevent any sale or conveyance of the
property of a Guaranteeing Subsidiary as an
entirety or substantially as an entirety,
to a corporation other than the Company or
any other Guaranteeing Subsidiary (in each
case, whether or not affiliated with the
Guaranteeing Subsidiary) authorized to
acquire and operate the same; provided,
however, that the Guaranteeing Subsidiary
hereby covenants and agrees that (i)
subject to the Indenture, upon any such
consolidation, merger, sale or conveyance,
the due and punctual performance and
observance of all of the covenants and
conditions of the Indenture and this
Supplemental Indenture to be performed by
such Guaranteeing Subsidiary, shall be
expressly assumed (in the event that the
Guaranteeing Subsidiary is not the
surviving corporation in the merger), by
supplemental indenture satisfactory in form
to the Trustee, executed and delivered to
the Trustee, by the corporation formed by
such consolidation, or into which the
Guaranteeing Subsidiary
E-4
<PAGE>
shall have been merged, or by the
corporation which shall have acquired such
property and (ii) immediately after giving
effect to such consolidation, merger, sale
or conveyance no Default or Event of
Default exists.
(c) In case of any such consolidation, merger,
sale or conveyance and upon the assumption
by the successor corporation, by
supplemental indenture, executed and
delivered to the Trustee and satisfactory
in form to the Trustee, of the Subsidiary
Guarantee made pursuant to this
Supplemental Indenture and the due and
punctual performance of all of the
covenants and conditions of the Indenture
and this Supplemental Indenture to be
performed by the Guaranteeing Subsidiary,
such successor corporation shall succeed to
and be substituted for the Guaranteeing
Subsidiary with the same effect as if it
had been named herein as the Guaranteeing
Subsidiary. Such successor corporation
thereupon may cause to be signed any or all
of the Subsidiary Guarantees to be endorsed
upon the Notes issuable under the Indenture
which theretofore shall not have been
signed by the Company and delivered to the
Trustee. All the Subsidiary Guarantees so
issued shall in all respects have the same
legal rank and benefit under the Indenture
and this Supplemental Indenture as the
Subsidiary Guarantees theretofore and
thereafter issued in accordance with the
terms of the Indenture and this
Supplemental Indenture as though all of
such Subsidiary Guarantees had been issued
at the date of the execution hereof.
5. RELEASES.
(a) Concurrently with any sale of
assets (including, if applicable,
all of the Capital Stock of the
Guaranteeing Subsidiary), all
Liens, if any, in favor of the
Trustee in the assets sold thereby
shall be released; provided that
in the event of an Asset Sale, the
Net Proceeds from such sale or
other disposition are treated in
accordance with the provisions of
Section 4.10 of the Indenture. If
the assets sold in such sale or
other disposition include all or
substantially all of the assets of
the Guaranteeing Subsidiary or all
of the Capital Stock of the
Guaranteeing Subsidiary, then the
Guaranteeing Subsidiary (in the
event of a sale or other
disposition of all of the Capital
Stock of such Guaranteeing
Subsidiary) or the Person
acquiring the property (in the
event of a sale or other
disposition of all or
substantially all of the assets of
such Guaranteeing Subsidiary)
shall be released from and
relieved of its obligations under
this Supplemental Indenture and
its Subsidiary Guarantee made
pursuant hereto; provided that in
the event of an Asset Sale, the
Net Proceeds from such sale or
other disposition are
E-5
<PAGE>
treated in accordance with the provisions
of Section 4.10 of the Indenture. Upon
delivery by the Company to the Trustee of
an Officers' Certificate to the effect that
such sale or other disposition was made by
the Company or the Guaranteeing Subsidiary,
as the case may be, in accordance with the
provisions of the Indenture and this
Supplemental Indenture, including without
limitation, Section 4.10 of the Indenture,
the Trustee shall execute any documents
reasonably required in order to evidence
the release of the Guaranteeing Subsidiary
from its obligations under this
Supplemental Indenture and its Subsidiary
Guarantee made pursuant hereto. If the
Guaranteeing Subsidiary is not released
from its obligations under its Subsidiary
Guarantee, it shall remain liable for the
full amount of principal of and interest on
the Notes and for the other obligations of
such Guaranteeing Subsidiary under the
Indenture as provided in this Supplemental
Indenture.
(b) Upon the designation of a
Guaranteeing Subsidiary as an
Unrestricted Subsidiary in
accordance with the terms of the
Supplemental Indenture, such
Guaranteeing Subsidiary shall be
released and relieved of its
obligations under its Subsidiary
Guarantee and this Supplemental
Indenture. Upon delivery by the
Company to the Trustee of an
Officers' Certificate and an
Opinion of Counsel to the effect
that such designation of such
Guaranteeing Subsidiary as an
Unrestricted Subsidiary was made
by the Company in accordance with
the provisions of this
Supplemental Indenture, also
including without limitation
Section 4.07 of the Indenture, the
Trustee shall execute any
documents reasonably required in
order to evidence the release of
such Guaranteeing Subsidiary from
its obligations under its
Subsidiary Guarantee. Any
Guaranteeing Subsidiary not
released from its obligations
under its Subsidiary Guarantee
shall remain liable for the full
amount of principal of and
interest on the Notes and for the
other obligations of any
Guaranteeing Subsidiary under the
Indenture as provided in Article 10.
6. NO RECOURSE AGAINST OTHERS. No past, present or future director,
officer, employee, incorporator, stockholder or agent of the Guaranteeing
Subsidiary, as such, shall have any liability for any obligations of the
Company or any Guaranteeing Subsidiary under the Notes, any Subsidiary
Guarantees, the Indenture or this Supplemental Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of the Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
E-6
<PAGE>
7. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL
GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
8. COUNTERPARTS. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
9. EFFECT OF HEADINGS. The Section headings herein are
for convenience only and shall not affect the construction
hereof.
10. THE TRUSTEE. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this
Supplemental Indenture or for or in respect of the recitals contained herein,
all of which recitals are made solely by the Guaranteeing Subsidiary and the
Company.
E-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed and attested, all as of the date
first above written.
Dated: , [GUARANTEEING SUBSIDIARY]
By:
-----------------------------
Name:
Title:
L-3 COMMUNICATIONS CORPORATION
By:
-----------------------------
Name:
Title:
[EXISTING GUARANTORS]
By:
-----------------------------
Name:
Title:
Dated: ,
THE BANK OF NEW YORK,
as Trustee
By:
-------------------------
Name:
Title:
E-8
<PAGE>
EXHIBIT F
FORM OF NOTATION ON SENIOR SUBORDINATED NOTE RELATING TO SUBSIDIARY GUARANTEE
Pursuant to the Indenture (the "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 "Trustee"), each Guarantor
(i) has jointly and severally unconditionally guaranteed (a) the due and
punctual payment of the principal of, and premium, interest and Liquidated
Damages on the Notes, whether at maturity or an interest payment date, by
acceleration, call for redemption or otherwise, (b) the due and punctual
payment of interest on the overdue principal and premium of, and interest and
Liquidated Damages on the Notes, and (c) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, the same will
be promptly paid in full when due in accordance with the terms of the extension
or renewal, whether at stated maturity, by acceleration or otherwise and (ii)
has agreed to pay any and all costs and expenses (including reasonable
attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights
under this Subsidiary Guarantee.
Notwithstanding the foregoing, in the event that the
Subsidiary Guarantee of any Guarantor would constitute or result in a violation
of any applicable fraudulent conveyance or similar law of any relevant
jurisdiction, the liability of such Guarantor under its Subsidiary Guarantee
shall be reduced to the maximum amount permissible under such fraudulent
conveyance or similar law.
No past, present or future director, officer, employee,
agent, incorporator, stockholder or agent of any Guarantor, as such, shall have
any liability for any obligations of the Company or any Guarantor under the
Notes, any Subsidiary Guarantee, the Indenture, any supplemental indenture
delivered pursuant to the Indenture by such Guarantor or any Subsidiary
Guarantees, or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Holder by accepting a Note waives and
releases all such liability.
This Subsidiary Guarantee shall be binding upon each
Guarantor and its successors and assigns and shall inure to the benefit of the
successors and assigns of the Trustee and the Holders and, in the event of any
transfer or assignment of rights by any Holder or the Trustee, the rights and
privileges herein conferred upon that party shall automatically extend to and
be vested in such transferee or assignee, all subject to the terms and
conditions hereof.
This Subsidiary Guarantee shall not be valid or obligatory
for any purpose until the certificate of authentication on the Note upon which
this Subsidiary Guarantee is noted have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
Capitalized terms used herein have the meaning assigned to them in the
Indenture.
F-1
<PAGE>
HYGIENETICS ENVIRONMENTAL SERVICES, INC.
By:
---------------------------------
Name:
Title:
L-3 COMMUNICATIONS ILEX SYSTEMS, INC.
By:
---------------------------------
Name:
Title:
SOUTHERN CALIFORNIA MICROWAVE, INC.
By:
---------------------------------
Name:
Title:
SOUTHERN CALIFORNIA MICROWAVE, INC.
By:
---------------------------------
Name:
Title:
L-3 COMMUNICATIONS SPD TECHNOLOGIES, INC.
By:
---------------------------------
Name:
Title:
L-3 COMMUNICATIONS ESSCO, INC.
By:
---------------------------------
Name:
Title:
F-2
<PAGE>
STORM CONTROL SYSTEMS, INC.
By:
---------------------------------
Name:
Title:
DBS MICROWAVE, INC.
By:
---------------------------------
Name:
Title:
SPD ELECTRICAL SYSTEMS, INC.
By:
---------------------------------
Name:
Title:
SPD SWITCHGEAR INC.
By:
---------------------------------
Name:
Title:
PAC ORD INC.
By:
---------------------------------
Name:
Title:
HENSCHEL INC.
By:
---------------------------------
Name:
Title:
F-3
<PAGE>
SPD HOLDINGS, INC.
By:
---------------------------------
Name:
Title:
POWER PARAGON, INC.
By:
---------------------------------
Name:
Title:
[NAME]
By:
---------------------------------
Name:
Title:
F-4
<PAGE>
===============================================================================
A/B EXCHANGE
REGISTRATION RIGHTS AGREEMENT
Dated as of December 11, 1998
by and among
L-3 COMMUNICATIONS CORPORATION
THE GUARANTORS LISTED ON THE SIGNATURE PAGES HERETO
AND
LEHMAN BROTHERS INC.
and
NATIONSBANC MONTGOMERY SECURITIES LLC
===============================================================================
<PAGE>
A/B EXCHANGE REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 11, 1998 by and among L-3 Communications
Corporation, a Delaware corporation (the "Company"), Hygienetics Environmental
Services, Inc., a Delaware corporation, L-3 Communications ILEX Systems, Inc.,
a Delaware corporation, Southern California Microwave, Inc., a California
corporation, L-3 Communications SPD Technologies, Inc., a Delaware corporation,
L-3 Communications ESSCO, Inc., a Delaware corporation, Storm Control Systems,
Inc., a California corporation, DBS Microwave, Inc., a California corporation,
SPD Electrical Systems, Inc., a Delaware corporation, SPD Switchgear Inc., a
Delaware corporation, Pac Ord Inc., a Delaware corporation, Henschel Inc., a
Delaware corporation, Power Paragon, Inc., a Delaware corporation, and SPD
Holdings, Inc., a Delaware corporation (collectively, the "Existing
Guarantors"), and Lehman Brothers Inc. and NationsBanc Montgomery Securities
LLC (together, the "Initial Purchasers"), each of whom has agreed to purchase
the Company's 8% Senior Subordinated Notes due 2008 (the "Series A Notes")
pursuant to the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated as of
December 11, 1998 (the "Purchase Agreement"), by and among the Company, the
Existing Guarantors and the Initial Purchasers. In order to induce the Initial
Purchasers to purchase the Series A Notes, the Company and the Existing
Guarantors have agreed to provide the registration rights set forth in this
Agreement. The execution and delivery of this Agreement is a condition to the
obligations of the Initial Purchasers set forth in Section 3 of the Purchase
Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Act: The Securities Act of 1933, as amended.
Additional Guarantor: Any subsidiary of the Company that executes a
Subsidiary Guarantee under the Indenture after the date of this Agreement.
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
Broker-Dealer Transfer Restricted Securities: Series B Notes
(including the Subsidiary Guaranteess) that are acquired by a Restricted
Broker-Dealer for its own account as a result of market-making activities or
other trading activities.
Closing Date: The date of this Agreement.
Commission: The Securities and Exchange Commission.
<PAGE>
Consummate: A Registered Exchange Offer shall be deemed "Consummated"
for purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Series B Notes to be issued in the Exchange Offer, (ii) the
maintenance of such Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than the minimum
period required pursuant to Section 3(b) hereof, and (iii) the delivery by the
Company to the Registrar under the Indenture of Series B Notes in the same
aggregate principal amount as the aggregate principal amount of Series A Notes
that were tendered by Holders thereof pursuant to the Exchange Offer.
Damages Payment Date: With respect to the Series A Notes, each
Interest Payment Date.
Effectiveness Target Date: As defined in Section 5.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Offer: The registration by the Company under the Act of the
Series B Notes (including the Subsidiary Guaranteess) pursuant to a
Registration Statement pursuant to which the Company offers the Holders of all
outstanding Transfer Restricted Securities the opportunity to exchange all such
outstanding Transfer Restricted Securities held by such Holders for Series B
Notes and registered Subsidiary Guarantees in an aggregate principal amount
equal to the aggregate principal amount of the Transfer Restricted Securities
tendered in such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement
relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers
propose to sell the Series A Notes to (i) certain "qualified institutional
buyers," as such term is defined in Rule 144A under the Act, (ii) to certain
institutional "accredited investors," as such term is defined in Rule
501(a)(1), (2), (3) and (7) under the Act ("Accredited Institutions") and (iii)
outside the United States to Persons other than U.S. Persons in offshore
transactions meeting the requirements of rule 904 of Regulation S under the
Act.
Guarantor: The Additional Guarantors and the Existing Guarantors.
Holders: As defined in Section 2(b) hereof.
Indemnified Holder: As defined in Section 8(a) hereof.
Indenture: The Indenture, dated as of the date hereof, among the
Company, the Existing Guarantors and The Bank of New York, as trustee (the
"Trustee"), pursuant to which the Notes are to be issued, as such Indenture is
amended or supplemented from time to time in accordance with the terms thereof.
Initial Purchasers: As defined in the preamble hereto.
Interest Payment Date: As defined in the Indenture and the Notes.
Market-Maker Prospectus: As defined in Section 4 hereof.
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NASD: National Association of Securities Dealers, Inc.
Notes: The Series A Notes and the Series B Notes.
Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
Prospectus: The prospectus included in a Registration Statement
including, without limitation, a Market-Maker Prospectus, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
Record Holder: With respect to any Damages Payment Date relating to
Notes, each Person who is a Holder of Notes on the record date with respect to
the Interest Payment Date on which such Damages Payment Date shall occur.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any Registration Statement of the Company
relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or
(b) the registration for resale of Transfer Restricted Securities pursuant to
the Shelf Registration Statement, which is filed pursuant to the provisions of
this Agreement including the registration for resale of Broker-Dealer Transfer
Restricted Securities, in each case including the Prospectus included therein,
all amendments and supplements thereto (including post-effective amendments)
and all exhibits and material incorporated by reference therein.
Restricted Broker-Dealer: Any Broker-Dealer that is an affiliate of
the Company that holds Broker-Dealer Transfer Restricted Securities.
Series B Notes: The Company's 8% Senior Subordinated Notes due 2008 to
be issued pursuant to the Indenture in the Exchange Offer.
Shelf Filing Deadline: As defined in Section 4 hereof.
Shelf Registration Statement: As defined in Section 4 hereof.
Subsidiary Guarantee: The Guarantee by a Guarantor of the Company's
obligations under the Notes and Indenture.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb)
as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Note (including the Subsidiary
Guarantees), until the earliest to occur of (a) the date on which such Note is
exchanged in the Exchange Offer and entitled to be resold to the public by the
Holder thereof without complying with the prospectus delivery requirements of
the Act, (b) the date on which such Note (including the Subsidiary Guarantees)
has been effectively registered under the Act and disposed of in accordance
with a Shelf Registration
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Statement and (c) the date on which such Note (including the Subsidiary
Guarantees) is distributed to the public pursuant to Rule 144 under the Act or
by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein).
Underwritten Registration or Underwritten Offering: A registration in
which securities of the Company are sold to an underwriter for reoffering to
the public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
2.1 Transfer Restricted Securities and Broker-Dealer Transfer
Restricted Securities. The securities entitled to the benefits of this
Agreement are the Transfer Restricted Securities and Broker-Dealer Transfer
Restricted Securities.
2.2 Holders of Transfer Restricted Securities. A Person is deemed to
be a holder of Transfer Restricted Securities (each, a "Holder") whenever such
Person owns Transfer Restricted Securities.
2.3 Holders of Broker-Dealer Transfer Restricted Securities. A
Restricted Broker-Dealer is deemed to be a holder of Broker-Dealer Transfer
Restricted Securities (each, a "Holder") whenever such Restricted Broker-Dealer
owns Broker-Dealer Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
3.1 Unless the Exchange Offer shall not be permissible under
applicable law or Commission policy (after the procedures set forth in Section
6(a) below have been complied with), the Company and the Guarantors shall (i)
cause to be filed with the Commission as soon as practicable after the Closing
Date, but in no event later than 90 days after the Closing Date, a Registration
Statement under the Act relating to the Series B Notes (including the
Subsidiary Guarantees) and the Exchange Offer, (ii) use all commercially
reasonable efforts to cause such Registration Statement to become effective at
the earliest possible time, but in no event later than 150 days after the
Closing Date (which 150-day period shall be extended for a number of days equal
to the number of business days, if any, the Commission is officially closed
during such period), (iii) in connection with the foregoing, file (A) all
pre-effective amendments to such Registration Statement as may be necessary in
order to cause such Registration Statement to become effective, (B) if
applicable, a post-effective amendment to such Registration Statement pursuant
to Rule 430A under the Act and (C) cause all necessary filings in connection
with the registration and qualification of the Series B Notes (including the
Subsidiary Guarantees) to be made under the Blue Sky laws of such
jurisdictions as are necessary to permit Consummation of the Exchange Offer,
and (iv) upon the effectiveness of such Registration Statement, commence the
Exchange Offer. The Exchange Offer shall be on the appropriate form permitting
registration of the Series B Notes (including the Subsidiary Guarantees) to be
offered in exchange for the Transfer Restricted Securities and to permit
resales of Notes held by Broker-Dealers as contemplated by Section 3(c) below.
3.2 The Company and the Guarantors shall cause the Exchange Offer
Registration Statement to be effective continuously and shall keep the Exchange
Offer open for a period of not less than the minimum period required under
applicable federal and state securities laws to
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Consummate the Exchange Offer; provided, however, that in no event shall such
period be less than 20 business days. The Company and the Guarantors shall
cause the Exchange Offer to comply with all applicable federal and state
securities laws. No securities other than the Notes (including the Subsidiary
Guaranteess) shall be included in the Exchange Offer Registration Statement.
The Company and the Guarantors shall use their best efforts to cause the
Exchange Offer to be Consummated on the earliest practicable date after the
Exchange Offer Registration Statement has become effective, but in no event
later than 30 business days thereafter.
3.3 The Company and the Guarantors shall indicate in a "Plan of
Distribution" section contained in the Prospectus contained in the Exchange
Offer Registration Statement that any Broker-Dealer who holds Series A Notes
that are Transfer Restricted Securities and that were acquired for its own
account as a result of market-making activities or other trading activities
(other than Transfer Restricted Securities acquired directly from the Company),
may exchange such Series A Notes pursuant to the Exchange Offer; however, such
Broker-Dealer may be deemed to be an "underwriter" within the meaning of the
Act and must, therefore, deliver a Prospectus meeting the requirements of the
Act in connection with any resales of the Series B Notes received by such
Broker-Dealer in the Exchange Offer, which Prospectus delivery requirement may
be satisfied by the delivery by such Broker-Dealer of the Prospectus contained
in the Exchange Offer Registration Statement. Such "Plan of Distribution"
section shall also contain all other information with respect to such resales
by Broker-Dealers that the Commission may require in order to permit such
resales pursuant thereto, but such "Plan of Distribution" shall not name any
such Broker-Dealer or disclose the amount of Notes held by any such
Broker-Dealer except to the extent required by the Commission.
The Company and the Guarantors shall use all commercially reasonable
efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended as required by the provisions of Section
6(d) below to the extent necessary to ensure that it is available for resales
of Notes acquired by Broker-Dealers for their own accounts as a result of
market-making activities or other trading activities, and to ensure that it
conforms with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of 180 days from the date on which the Exchange Offer Registration
Statement is declared effective.
The Company and the Guarantors shall provide sufficient copies of the
latest version of such Prospectus to Broker-Dealers promptly upon request at
any time during such 180 day period in order to facilitate such resales.
SECTION 4. SHELF REGISTRATION; MARKET-MAKER
PROSPECTUS
4.1 Shelf Registration. If (i) the Company and the Guarantors are not
required to file an Exchange Offer Registration Statement or to Consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy (after the procedures set forth in Section 6(a) below have
been complied with) or (ii) if any Holder of Transfer Restricted Securities
that is a "qualified institutional buyer," as such term is defined in Rule 144A
under the Act or an institutional "accredited investor," as such term is
defined in Rule 501(a)(1), (2), (3) and
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(7) under the Act shall notify the Company prior to the 20th business day
following the Consummation of the Exchange Offer that such Holder alone or
together with holders who hold in the aggregate at least $1.0 million in
principal amount of Series A Notes (A) is prohibited by applicable law or
Commission policy from participating in the Exchange Offer, or (B) may not
resell the Series B Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and that the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder, or (C) is a Broker-Dealer and holds Series A Notes
acquired directly from the Company or one of its affiliates, then the Company
and the Guarantors shall
(x) cause to be filed a shelf Registration Statement pursuant to Rule
415 under the Act, which may be an amendment to the Exchange Offer
Registration Statement (in either event, the "Shelf Registration
Statement") on or prior to the earliest to occur of (1) the 30th day after
the date on which the Company determines that it is not required to file
the Exchange Offer Registration Statement, or permitted to Consummate the
Exchange Offer and (2) the 30th day after the date on which the Company
receives notice from a Holder of Transfer Restricted Securities as
contemplated by clause (ii) of paragraph (a) above (such earliest date
being the "Shelf Filing Deadline"), which Shelf Registration Statement
shall provide for resales of all Transfer Restricted Securities the
Holders of which shall have provided the information required pursuant to
Section 4(b) hereof; and
(y) use all commercially reasonable efforts to cause such Shelf
Registration Statement to be declared effective by the Commission on or
before the 90th day after the Shelf Filing Deadline.
The Company and the Guarantors shall use all commercially reasonable efforts to
keep such Shelf Registration Statement continuously effective, supplemented and
amended as required by the provisions of Sections 6(b) and (d) hereof to the
extent necessary to ensure that it is available for resales of Notes by the
Holders of Transfer Restricted Securities entitled to the benefit of this
Section 4(a), and to ensure that it conforms with the requirements of this
Agreement, the Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period of at least two years following the
Closing Date or such shorter period that will terminate when all Notes covered
by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement or become eligible for resale pursuant to Rule 144
without volume or other restrictions.
4.2 Provision by Holders of Certain Information in Connection with the
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 10 business days after receipt of a request
therefor, such information as the Company may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. No Holder of Transfer Restricted Securities shall
be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until
such Holder shall have used its best efforts to provide all such reasonably
requested information. Each Holder as to which any Shelf Registration Statement
is being effected agrees to furnish promptly to the Company all information
required to be disclosed in order to make the information previously furnished
to the Company by such Holder not materially misleading.
4.3 Market-Maker Prospectus. The Company and the Guarantors
acknowledge that any Restricted Broker-Dealer holding Broker-Dealer Transfer
Restricted Securities may not
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resell such Broker-Dealer Transfer Restricted Securities without delivering a
Prospectus. Consequently, on the date that the Exchange Offer Registration
Statement is filed with the Commission, the Company and the Guarantors shall
file a Registration Statement (which may be the Exchange Offer Registration
Statement or the Shelf Registration Statement if permitted by the rules and
regulations of the Commission) and shall use their best efforts to cause such
Registration Statement to be declared effective by the Commission on or prior
to the Consummation of the Exchange Offer. The Company and the Guarantors shall
use all commercially reasonable efforts to keep such Registration Statement
continuously effective, supplemented and amended as required by the provisions
of Sections 6(c) and (d) hereof to the extent necessary to ensure that it is
available for resales of Broker-Dealer Transfer Restricted Securities by
Restricted Broker-Dealers, and to ensure that it conforms with the requirements
of this Agreement, the Act and the policies, rules and regulations of the
Commission as announced from time to time, until such time as all Restricted
Broker-Dealers determine in their judgment that they are no longer required to
deliver a Prospectus in connection with sales of Broker-Dealer Transfer
Restricted Securities. The Prospectus included in such Registration Statement
is referred to in this Agreement as a "Market-Maker Prospectus."
SECTION 5. LIQUIDATED DAMAGES
If (i) any of the Registration Statements required by this Agreement
is not filed with the Commission on or prior to the date specified for such
filing in sections 3(a), 4(a), and 4(c), as applicable, (ii) any of such
required Registration Statements has not been declared effective by the
Commission on or prior to the date specified for such effectiveness in sections
3(a), 4(a), and 4(c), as applicable, (the "Effectiveness Target Date"), (iii)
the Exchange Offer has not been Consummated within 30 business days after the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) any Registration Statement required by this Agreement is
filed and declared effective but shall thereafter cease to be effective or fail
to be usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such failure
and that is itself immediately declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Company and the
Guarantors jointly and severally agree to pay liquidated damages to each Holder
of Transfer Restricted Securities with respect to the first 90-day period
immediately following the occurrence of such Registration Default, in an amount
equal to $.05 per week per $1,000 principal amount of Transfer Restricted
Securities held by such Holder for each week or portion thereof that the
Registration Default continues. The amount of the liquidated damages shall
increase by an additional $.05 per week per $1,000 in principal amount of
Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
liquidated damages of $.50 per week per $1,000 principal amount of Transfer
Restricted Securities. All accrued liquidated damages shall be paid to Record
Holders by the Company and the Guarantors by wire transfer of immediately
available funds or by federal funds check on each Damages Payment Date, as
provided in the Indenture. Following the cure of all Registration Defaults
relating to any particular Transfer Restricted Securities, the accrual of
liquidated damages with respect to such Transfer Restricted Securities will
cease.
All payment obligations of the Company and the Guarantors set forth in
the preceding paragraph that are outstanding with respect to any Transfer
Restricted Security at the time such security ceases to be a Transfer
Restricted Security shall survive until such time as all such payment
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obligations with respect to such Security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
6.1 Exchange Offer Registration Statement. In connection with the
Exchange Offer, the Company and the Guarantors shall comply with all of the
provisions of Section 6(d) below, shall use all commercially reasonable efforts
to effect such exchange to permit the sale of Transfer Restricted Securities
being sold in accordance with the intended method or methods of distribution
thereof, and shall comply with all of the following provisions:
(a) If in the reasonable opinion of counsel to the Company and the
Guarantors there is a question as to whether the Exchange Offer is
permitted by applicable law, the Company and the Guarantors hereby agree
to seek a no-action letter or other favorable decision from the Commission
allowing the Company and the Guarantors to Consummate an Exchange Offer
for such Series A Notes. The Company and the Guarantors hereby agree to
pursue the issuance of such a decision to the Commission staff level but
shall not be required to take commercially unreasonable action to effect a
change of Commission policy. The Company and the Guarantors hereby agree
however, to (A) participate in telephonic conferences with the Commission,
(B) deliver to the Commission staff an analysis prepared by counsel to the
Company and the Guarantors setting forth the legal bases, if any, upon
which such counsel has concluded that such an Exchange Offer should be
permitted and (C) diligently pursue a resolution (which need not be
favorable) by the Commission staff of such submission.
(b) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer
Restricted Securities shall furnish, upon the request of the Company,
prior to the Consummation thereof, a written representation to the Company
and the Guarantors (which may be contained in the letter of transmittal
contemplated by the Exchange Offer Registration Statement) to the effect
that (A) it is not an affiliate of the Company, (B) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding
with any person to participate in, a distribution of the Series B Notes to
be issued in the Exchange Offer and (C) it is acquiring the Series B Notes
in its ordinary course of business. In addition, all such Holders of
Transfer Restricted Securities shall otherwise cooperate in the Company's
and the Guarantors' preparations for the Exchange Offer. Each Holder
hereby acknowledges and agrees that any Broker-Dealer and any such Holder
using the Exchange Offer to participate in a distribution of the
securities to be acquired in the Exchange Offer (1) could not under
Commission policy as in effect on the date of this Agreement rely on the
position of the Commission enunciated in Morgan Stanley and Co., Inc.
(available June 5, 1991) and Exxon Capital Holdings Corporation (available
May 13, 1988), as interpreted in the Commission's letter to Shearman &
Sterling dated July 2, 1993, and similar no-action letters (including any
no-action letter obtained pursuant to clause (i) above), and (2) must
comply with the registration and prospectus delivery requirements of the
Act in connection with a secondary resale transaction and that such a
secondary resale transaction should be covered by an effective
Registration Statement containing the selling security holder information
required by Item 507 or 508, as applicable, of Regulation S-K if the
resales are of Series B Notes obtained by such Holder in exchange for
Series A Notes acquired by such Holder directly from the Company.
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(c) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company and the Guarantors shall provide a supplemental
letter to the Commission (A) stating that the Company and the Guarantors
are registering the Exchange Offer in reliance on the position of the
Commission enunciated in Exxon Capital Holdings Corporation (available May
13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) and, if
applicable, any no-action letter obtained pursuant to clause (i) above and
(B) including a representation that neither the Company nor any Guarantor
has entered into any arrangement or understanding with any Person to
distribute the Series B Notes to be received in the Exchange Offer and
that, to the best of the Company's and each Guarantor's information and
belief, each Holder participating in the Exchange Offer is acquiring the
Series B Notes in its ordinary course of business and has no arrangement
or understanding with any Person to participate in the distribution of the
Series B Notes received in the Exchange Offer.
6.2 (a) Shelf Registration Statement. In connection with the Shelf
Registration Statement, the Company and the Guarantors shall comply with all
the provisions of Section 6(d) below and shall use all commercially reasonable
efforts to effect such registration to permit the sale of the Transfer
Restricted Securities being sold in accordance with the intended method or
methods of distribution thereof, and pursuant thereto the Company and the
Guarantors will as expeditiously as possible prepare and file with the
Commission a Registration Statement relating to the registration on any
appropriate form under the Act, which form shall be available for the sale of
the Transfer Restricted Securities in accordance with the intended method or
methods of distribution thereof.
6.3 Market-Maker Prospectus. In connection with any Registration
Statement filed pursuant to Section 4(c) of this Agreement, the Company and the
Guarantors will comply with all of the provisions of Section 6(d) below (other
than sub-sections (xiii), (xiv), (xv), (xvii) and (xx)) until such time as all
Restricted Broker-Dealers determine in their judgment that they are no longer
required to deliver Market-Maker Prospectuses in connection with sales of
Broker-Dealer Transfer Restricted Securities. The Company and the Guarantors
shall use all commercially reasonable efforts to deliver Market-Maker
Prospectuses to all Restricted Broker-Dealers immediately upon the
effectiveness of the Registration Statement and from time to time thereafter
upon request, in such quantities as such Restricted Broker-Dealer shall
require.
6.4 General Provisions. In connection with any Registration Statement
and any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities (including, without limitation, any Registration
Statement and the related Prospectus required to permit resales of Notes by
Broker-Dealers) and Broker-Dealer Transfer Restricted Securities, the Company
and the Guarantors shall:
(a) use all commercially reasonable efforts to keep such Registration
Statement continuously effective and provide all requisite financial
statements (including, if required by the Act or any regulation
thereunder, financial statements of any Guarantors) for the period
specified in Section 3 or 4 of this Agreement, as applicable; upon the
occurrence of any event that would cause any such Registration Statement
or the Prospectus contained therein (A) to contain a material misstatement
or omission or (B) not to be effective and usable for resale of Transfer
Restricted Securities or Broker-Dealer Transfer
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Restricted Securities during the period required by this Agreement, the Company
and the Guarantors shall file promptly an appropriate amendment to such
Registration Statement, in the case of clause (A), correcting any such
misstatement or omission, and, in the case of either clause (A) or (B), use all
commercially reasonable efforts to cause such amendment to be declared
effective and such Registration Statement and the related Prospectus to become
usable for their intended purpose(s) as soon as practicable thereafter.
Notwithstanding the foregoing, at any time after Consummation of the Exchange
Offer, the Company and the Guarantors may allow the Shelf Registration
Statement or Market-Maker Prospectus and the related Registration Statement to
cease to become effective and usable if (x) the board of directors of the
Company determines in good faith that it is in the best interests of the
Company not to disclose the existence of or facts surrounding any proposed or
pending material corporate transaction involving the Company and the
Guarantors, and the Company notifies the Holders within two business days after
the Board of Directors makes such determination, or (y) the Prospectus
contained in the Shelf Registration Statement or the Market-Maker Prospectus,
as the case may be, contains an untrue statement of the material fact or omits
to state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided
that the two-year period referred to in Section 4(a) hereof during which the
Shelf Registration Statement is required to be effective and usable shall be
extended by the number of days during which such Registration Statement was not
effective or usable pursuant to the foregoing provisions;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for the applicable
period set forth in Section 3 or 4 hereof, as applicable; cause the
Prospectus to be supplemented by any required Prospectus supplement, and
as so supplemented to be filed pursuant to Rule 424 under the Act, and to
comply fully with the applicable provisions of Rules 424 and 430A under
the Act in a timely manner; and comply with the provisions of the Act with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended
method or methods of distribution by the sellers thereof set forth in such
Registration Statement or supplement to the Prospectus;
(c) advise the underwriter(s), if any, and selling Holders of
Transfer Restricted Securities and, following the Consummation of the
Exchange Offer, Holders of Broker Dealer Transfer Restricted Securities,
promptly and, if requested by such Persons, to confirm such advice in
writing, (A) when the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to any
Registration Statement or any post-effective amendment thereto, when the
same has become effective, (B) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements to
the Prospectus or for additional information relating thereto, (C) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement under the Act or of the suspension by any
state securities commission of the qualification of the Transfer
Restricted Securities or Broker-Dealer Transfer Restricted Securities, as
applicable, for offering or sale in any jurisdiction, or the initiation of
any proceeding for any of the preceding purposes, (D) of the existence of
any fact or the happening of any event that makes any statement of a
material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any document
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incorporated by reference therein untrue, or that requires the making of
any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading. If at
any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities
commission or other regulatory authority shall issue an order suspending
the qualification or exemption from qualification of the Transfer
Restricted Securities or Broker-Dealer Transfer Restricted Securities, as
applicable, under state securities or Blue Sky laws, the Company and the
Guarantors shall use all commercially reasonable efforts to obtain the
withdrawal or lifting of such order at the earliest possible time;
(d) furnish to each of the selling Holders of Transfer Restricted
Securities or Holders of Broker-Dealer Transfer-Restricted Securities and
each of the underwriter(s), if any, before filing with the Commission,
copies of any Registration Statement or any Prospectus included therein or
any amendments or supplements to any such Registration Statement or
Prospectus (including all documents incorporated by reference after the
initial filing of such Registration Statement), which documents will be
subject to the review of such Holders and underwriter(s), if any, for a
period of at least five business days, and the Company and the Guarantors
will not file any such Registration Statement or Prospectus or any
amendment or supplement to any such Registration Statement or Prospectus
(including all such documents incorporated by reference) if a selling
Holder of Transfer Restricted Securities or a Holder of Broker-Dealer
Transfer Restricted Securities, as applicable, covered by such
Registration Statement or the underwriter(s), if any, shall not have had
an opportunity to participate in the preparation thereof;
(e) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to the selling Holders or the Holders of
Broker-Dealer Transfer Restricted Securities, as applicable, and to the
underwriter(s), if any, make the Company's and the Guarantors'
representatives available for discussion of such document and other
customary due diligence matters, and include such information in such
document prior to the filing thereof as such selling Holders or the
Holders of Broker-Dealer Transfer Restricted Securities, as applicable, or
underwriter(s), if any, reasonably may request;
(f) make available at reasonable times at the Company's principal
place of business for inspection by the selling Holders of Transfer
Restricted Securities, any underwriter participating in any disposition
pursuant to such Registration Statement, and any attorney or accountant
retained by such selling Holders or any of the underwriter(s) who shall
certify to the Company and the Guarantors that they have a current
intention to sell Transfer Restricted Securities or Broker-Dealer Transfer
Restricted Securities pursuant to a Shelf Registration Statement or
Market-Maker Prospectus, and, following the Consummation of the Exchange
Offer, the Holders of Broker-Dealer Transfer Restricted Securities, such
financial and other information of the Company and the Guarantors as
reasonably requested and cause the Company's and the Guarantors' officers,
directors and employees to respond to such inquiries as shall be
reasonably necessary, in the reasonable judgment of counsel to such
Holders, to conduct a reasonable investigation; provided, however, that
each such party shall be required to maintain in confidence and not to
disclose to any other person any
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information or records reasonably designated by the Company in writing as
being confidential, until such time as (A) such information becomes a
matter of public record (whether by virtue of its inclusion in such
Registration Statement or otherwise), or (B) such person shall be required
so to disclose such information pursuant to the subpoena or order of any
court or other governmental agency or body having jurisdiction over the
matter (subject to the requirements of such order, and only after such
person shall have given the Company prompt prior written notice of such
requirement), or (C) such information is required to be set forth in such
Registration Statement or the Prospectus included therein or in an
amendment to such Registration Statement or an amendment or supplement to
such Prospectus in order that such Registration Statement, Prospectus,
amendment or supplement, as the case may be, does not contain an untrue
statement of a material fact or omit to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(g) if requested by any selling Holders of Transfer Restricted
Securities or Holders of Broker-Dealer Transfer Restricted Securities, as
applicable, or the underwriter(s), if any, promptly incorporate in any
Registration Statement or Prospectus, pursuant to a supplement or
post-effective amendment if necessary, such information as such selling
Holders and underwriter(s), if any, may reasonably request to have
included therein, including, without limitation, information relating to
the "Plan of Distribution" of the Transfer Restricted Securities or
Broker-Dealer Transfer Restricted Securities, as applicable, information
with respect to the principal amount of Transfer Restricted Securities or
Broker- Dealer Transfer Restricted Securities, as applicable, being sold
to such underwriter(s), the purchase price being paid therefor and any
other terms of the offering of the Transfer Restricted Securities or
Broker-Dealer Transfer-Restricted Securities, as applicable, to be sold in
such offering; and make all required filings of such Prospectus supplement
or post-effective amendment as soon as practicable after the Company is
notified of the matters to be incorporated in such Prospectus supplement
or post-effective amendment;
(h) furnish to each selling Holder of Transfer Restricted Securities
or Holders of Broker-Dealer Transfer Restricted Securities, as applicable,
and each of the underwriter(s), if any, without charge, at least one copy
of the Registration Statement, as first filed with the Commission, and of
each amendment thereto, including all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by
reference);
(i) deliver to each selling Holder of Transfer Restricted Securities
and each of the underwriter(s), if any, and each Holder of Broker-Dealer
Transfer Restricted Securities, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment or
supplement thereto as such Persons reasonably may request; the Company and
the Guarantors hereby consent to the use of the Prospectus and any
amendment or supplement thereto by each of the selling Holders and each of
the underwriter(s), if any, and each Holder of Broker-Dealer Transfer
Restricted Securities, in connection with the offering and the sale of the
Transfer Restricted Securities and Broker-Dealer Transfer Restricted
Securities, as applicable, covered by the Prospectus or any amendment or
supplement thereto;
(j) enter into such agreements (including an underwriting agreement),
and make such representations and warranties, and take all such other
actions in connection
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therewith in order to expedite or facilitate the disposition of the
Transfer Restricted Securities and Broker-Dealer Transfer Restricted
Securities, as applicable, pursuant to any Registration Statement
contemplated by this Agreement, all to such extent as may be requested by
the Initial Purchaser or, in the case of registration for resale of
Transfer Restricted Securities pursuant to the Shelf Registration
Statement, by any Holder or Holders of Transfer Restricted Securities who
hold at least 25% in aggregate principal amount of such class of Transfer
Restricted Securities or, in the case of Broker-Dealer Transfer Restricted
Securities, by any Holder of Broker-Dealer Transfer Restricted Securities;
provided, that, the Company and the Guarantors shall not be required to
enter into any such agreement more than once with respect to all of the
Transfer Restricted Securities and, in the case of a Shelf Registration
Statement, may delay entering into such agreement if the Board of
Directors of the Company determines in good faith that it is in the best
interests of the Company and the Guarantors not to disclose the existence
of or facts surrounding any proposed or pending material corporate
transaction involving the Company and the Guarantors; and whether or not
an underwriting agreement is entered into and whether or not the
registration is an Underwritten Registration, the Company and the
Guarantors shall:
(A) furnish to the Initial Purchaser, the Holders of Transfer
Restricted Securities who hold at least 25% in aggregate principal
amount of such class of Transfer Restricted Securities (in the case
of a Shelf Registration Statement), each Holder of Broker-Dealer
Transfer Restricted Securities and each underwriter, if any, in such
substance and scope as they may request and as are customarily made
in connection with an offering of debt securities pursuant to a
Registration Statement (i) upon the effective date of any
Registration Statement (and if such Registration Statement
contemplates an Underwritten Offering of Transfer Restricted
Securities or Broker-Dealer Transfer Restricted Securities, as
applicable, upon the date of the closing under the underwriting
agreement related thereto) and (ii) upon the filing of any amendment
or supplement to any Registration Statement or any other document
that is incorporated in any Registration Statement by reference and
includes financial data with respect to a fiscal quarter or year:
(1) a certificate, dated the date of effectiveness of the
Shelf Registration Statement signed by (y) the respective
Chairman of the Board, the respective President or any Vice
President and (z) the respective Chief Financial Officer of the
Company and each of the Guarantors confirming, as of the date
thereof, the matters set forth in paragraph (j) of Section 7 of
the Purchase Agreement and such other matters as such parties
may reasonably request;
(2) an opinion, dated the date of effectiveness of the
Shelf Registration Statement, as the case may be, of counsel for
the Company covering the matters set forth in paragraphs (c) (d)
and (e) of Section 7 of the Purchase Agreement and such other
matter as such parties may reasonably request, and in any event
including a statement to the effect that such counsel has
participated in conferences with officers and other
representatives of the Company, representatives of the
independent public accountants for the Company, the Initial
Purchasers' representatives and the Initial Purchasers' counsel
in connection with the preparation
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<PAGE>
of such Registration Statement and the related Prospectus and
have considered the matters required to be stated therein and
the statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of
such statements; and that such counsel advises that, on the
basis of the foregoing (relying as to materiality to a large
extent upon facts provided to such counsel by officers and other
representatives of the Company and without independent check or
verification), no facts came to such counsel's attention that
caused such counsel to believe that the applicable Registration
Statement, at the time such Registration Statement or any
post-effective amendment thereto became effective, and, in the
case of the Exchange Offer Registration Statement, as of the
date of Consummation, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or that the Prospectus contained in such
Registration Statement as of its date and, in the case of the
opinion dated the date of Consummation of the Exchange Offer, as
of the date of Consummation, contained an untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such
counsel may state further that such counsel assumes no
responsibility for, and has not independently verified, the
accuracy, completeness or fairness of the financial statements,
notes and schedules and other financial data included in any
Registration Statement contemplated by this Agreement or the
related Prospectus; and
(3) a customary comfort letter, dated as of the date of
Consummation of the Exchange Offer or the date of effectiveness
of the Shelf Registration Statement, as the case may be, from
the Company's independent accountants, in the customary form and
covering matters of the type customarily covered in comfort
letters by underwriters in connection with primary underwritten
offerings, and affirming the matters set forth in the comfort
letters delivered pursuant to Section 7 of the Purchase
Agreement, without exception;
(B) set forth in full or incorporated by reference in the
underwriting agreement, if any, the indemnification provisions and
procedures of Section 8 hereof with respect to all parties to be
indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by such parties to evidence compliance with
clause (A) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company
and the Guarantors pursuant to this clause (x), if any.
(k) prior to any public offering of Transfer Restricted Securities,
or Broker-Dealer Transfer Restricted Securities, as applicable, cooperate
with the selling Holders of Transfer Restricted Securities, the Holders of
Broker-Dealer Transfer Restricted Securities, the underwriter(s), if any,
and their respective counsel in connection with the registration and
qualification of the Transfer Restricted Securities or Broker-Dealer
Transfer Restricted Securities, as applicable, under the securities or
Blue Sky laws of such jurisdictions as the selling Holders of Transfer
Restricted Securities or Holders of Broker-Dealer Transfer Restricted
Securities or underwriter(s) may reasonably request and do any and all
other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Transfer Restricted Securities or Broker-Dealer
Transfer Restricted
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<PAGE>
Securities, as applicable, covered by the Shelf Registration Statement
filed pursuant to Section 4 hereof; provided, however, that the Company
and the Guarantors shall not be required to register or qualify as a
foreign corporation where it is not now so qualified or to take any action
that would subject it to the service of process in suits or to taxation,
other than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject;
(l) shall issue, upon the request of any Holder of Series A Notes
covered by the Shelf Registration Statement, Series B Notes, having an
aggregate principal amount equal to the aggregate principal amount of
Series A Notes surrendered to the Company by such Holder in exchange
therefor or being sold by such Holder; such Series B Notes to be
registered in the name of such Holder or in the name of the purchaser(s)
of such Notes, as the case may be; in return, the Series A Notes held by
such Holder shall be surrendered to the Company for cancellation;
(m) cooperate with the selling Holders of Transfer Restricted
Securities and the underwriter(s), if any, to facilitate the timely
preparation and delivery of certificates representing Transfer Restricted
Securities to be sold and not bearing any restrictive legends; and enable
such Transfer Restricted Securities to be in such denominations and
registered in such names as the Holders or the underwriter(s), if any, may
request at least two business days prior to any sale of Transfer
Restricted Securities made by such underwriter(s);
(n) use its best efforts to cause the Transfer Restricted Securities
or Broker-Dealer Transfer Restricted Securities, as applicable, covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriter(s), if any, to consummate the
disposition of such Transfer Restricted Securities, subject to the proviso
contained in clause (xi) above;
(o) if any fact or event contemplated by clause (d)(iii)(D) above
shall exist or have occurred, prepare a supplement or post-effective
amendment to the Registration Statement or related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, or Broker-Dealer Transfer Restricted Securities, as
applicable, the Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(p) provide a CUSIP number for all Transfer Restricted Securities not
later than the effective date of the Registration Statement and provide
the Trustee under the Indenture with printed certificates for the Transfer
Restricted Securities which are in a form eligible for deposit with the
Depository Trust Company;
(q) cooperate and assist in any filings required to be made with the
NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of
the NASD;
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<PAGE>
(r) otherwise use their best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to
its security holders, as soon as practicable, a consolidated earnings
statement meeting the requirements of Rule 158 (which need not be audited)
for the twelve-month period (A) commencing at the end of any fiscal
quarter in which Transfer Restricted Securities are sold to underwriters
in a firm or best efforts Underwritten Offering or (B) if not sold to
underwriters in such an offering, beginning with the first month of the
Company's first fiscal quarter commencing after the effective date of the
Registration Statement;
(s) cause the Indenture to be qualified under the TIA not later than
the effective date of the first Registration Statement required by this
Agreement, and, in connection therewith, cooperate with the Trustee and
the Holders of Notes to effect such changes to the Indenture as may be
required for such Indenture to be so qualified in accordance with the
terms of the TIA; and execute, and use all commercially reasonable efforts
to cause the Trustee to execute, all documents that may be required to
effect such changes and all other forms and documents required to be filed
with the Commission to enable such Indenture to be so qualified in a
timely manner;
(t) provide promptly to each Holder upon request each document filed
with the Commission pursuant to the requirements of Section 13 and Section
15 of the Exchange Act; and
(u) cause each Additional Guarantor upon the creation or acquisition
by the Company of such Additional Guarantor, to execute a counterpart to
this Agreement in the form attached hereto as Annex A and to deliver such
counterpart, together with an opinion of counsel as to the enforceability
thereof against such entity, to the Initial Purchasers no later than five
business days following the execution thereof.
Each Holder agrees by acquisition of a Transfer Restricted Security
or Broker-Dealer Transfer Restricted Securities, as applicable, that, upon
receipt of any notice from the Company of the existence of any fact of the kind
described in Section 6(d)(iii)(D) hereof, such Holder will forthwith
discontinue disposition of Transfer Restricted Securities or Broker-Dealer
Transfer Restricted Security pursuant to the applicable Registration Statement
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 6(d)(xvi) hereof, or until it is advised in
writing (the "Advice") by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings that
are incorporated by reference in the Prospectus. If so directed by the Company,
each Holder will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in such Holder's possession, of the
Prospectus covering such Transfer Restricted Securities or Broker-Dealer
Transfer Restricted Security, as applicable, that was current at the time of
receipt of such notice. In the event the Company shall give any such notice,
the time period regarding the effectiveness of such Registration Statement set
forth in Section 3 or 4 hereof, as applicable, shall be extended by the number
of days during the period from and including the date of the giving of such
notice pursuant to Section 6(d)(iii)(D) hereof to and including the date when
each selling Holder covered by such Registration Statement shall have received
the copies of the supplemented or amended Prospectus contemplated by Section
6(d)(xv) hereof or shall have received the Advice.
The Company and the Guarantors may require each Holder of Transfer
Restricted Securities or Broker-Dealer Transfer Restricted Securities as to
which any registration is being
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<PAGE>
effected to furnish to the Company such information regarding such Holder and
such Holder's intended method of distribution of the applicable Transfer
Restricted Securities or Broker-Dealer Transfer Restricted Securities as the
Company may from time to time reasonably request in writing, but only to the
extent that such information is required in order to comply with the Act. Each
such Holder agrees to notify the Company as promptly as practicable of (i) any
inaccuracy or change in information previously furnished by such Holder to the
Company or (ii) the occurrence of any event, in either case, as a result of
which any Prospectus relating to such registration contains or would contain an
untrue statement of a material fact regarding such Holder or such Holder's
intended method of distribution of the applicable Transfer Restricted
Securities or Broker-Dealer Transfer Restricted Securities or omits to state
any material fact regarding such Holder or such Holder's intended method of
distribution of the applicable Transfer Restricted Securities or Broker-Dealer
Transfer Restricted Securities required to be stated therein or necessary to
make the statements therein not misleading and promptly to furnish to the
Company any additional information required to correct and update any
previously furnish to the Company any additional information required to
correct and update any previously furnished information or required so that
such Prospectus shall not contain, with respect to such Holder or the
distribution of the applicable Transfer Restricted Securities or Broker-Dealer
Transfer Restricted Securities 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.
SECTION 7. REGISTRATION EXPENSES
All expenses incident to the Company's and the Guarantors' performance
of or compliance with this Agreement will be borne by the Company regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses (including
filings made by any Initial Purchaser or Holder with the NASD (and, if
applicable, the fees and expenses of any "qualified independent underwriter"
and its counsel that may be required by the rules and regulations of the
NASD)); (ii) all fees and expenses of compliance with federal securities and
state Blue Sky or securities laws; (iii) all expenses of printing (including
printing certificates for the Series B Notes to be issued in the Exchange Offer
and printing of Prospectuses), messenger and delivery services; (iv) all fees
and disbursements of counsel for the Company and the Guarantors and the Holders
of Transfer Restricted Securities; and (v) all fees and disbursements of
independent certified public accountants of the Company (including the expenses
of any special audit and comfort letters required by or incident to such
performance).
The Company will, in any event, bear its and the Guarantors' internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses of
any annual audit and the fees and expenses of any Person, including special
experts, retained by the Company or the Guarantors.
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<PAGE>
SECTION 8. INDEMNIFICATION
8.1 The Company and the Guarantors shall, jointly and severally,
indemnify and hold harmless each Holder of Transfer Restricted Securities or
Broker Dealer Transfer Restricted Securities, its officers and employees and
each person, if any, who controls any such Holders, 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, sales and
registration of Notes), to which that Holder, 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 (A) in any Registration Statement or Prospectus or in any amendment
or supplement thereto or (B) in any blue sky application or other document
prepared or executed by the Company or any Guarantor (or based upon any written
information furnished by the Company or any Guarantor) specifically for the
purpose of qualifying any or all of the Notes under the securities laws of any
state or other jurisdiction (any such application, document or information
being hereinafter called a "Blue Sky Application"), (ii) the omission or
alleged omission to state in any Registration Statement or 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 Holder in connection with, or relating in any manner to,
the Notes 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 Guarantors 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 Holder through its gross negligence or willful misconduct), and
shall reimburse each Holder and each such officer, employee or controlling
person promptly upon demand for any legal or other expenses reasonably incurred
by that Holder, 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 Guarantors 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 Registration Statement or Prospectus, or in any
such amendment or supplement, or in any Blue Sky Application, in reliance upon
and in conformity with written information concerning such Holder furnished to
the Company by or on behalf of any Holder specifically for inclusion therein.
The foregoing indemnity agreement is in addition to any liability which the
Company and the Guarantors may otherwise have to any Holder or to any officer,
employee or controlling person of that Holder.
8.2 Each Holder, severally and not jointly, shall indemnify and hold
harmless the Company and the Guarantors, their respective officers and
employees, each of their respective directors, and each person, if any, who
controls the Company or the Guarantors 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, the Guarantors or any
such director, officer 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 (A) in any Registration Statement
or Prospectus, or in any amendment or supplement thereto, or (B) in any Blue
Sky Application or (ii) the omission or
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<PAGE>
alleged omission to state in any Registration Statement or 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
Holders furnished to the Company by or on behalf of that Holder specifically
for inclusion therein, and shall reimburse the Company, the Guarantors and any
such director, officer or controlling person for any legal or other expenses
reasonably incurred by the Company, the Guarantors or any such director,
officer 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. The foregoing indemnity agreement is in addition
to any liability which any Holder may otherwise have to the Company, the
Guarantors or any such director, officer, employee or controlling person.
8.3 Promptly after receipt by an indemnified party under this Section
8 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 8, 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 8 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 8. 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 8 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
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, if the indemnified
parties under this Section 8 consist of any Initial Purchaser or any of their
respective officers, employees or controlling persons, or by the Company, if
the indemnified parties under this Section consist of the Company, the
Guarantors or any of their respective directors, officers, employees or
controlling persons. No indemnifying party shall (i) without the prior written
consent
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<PAGE>
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.
8.4 If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) 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 and the Guarantors, on the one hand, and the Holders on
the other, from the offering of the Notes 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 and the Guarantors, on the one
hand and the Holders 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 and the Guarantors, on the one hand and the
Holders 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 Series A
Notes purchased under the Purchase Agreement (before deducting expenses)
received by the Company and the Guarantors, on the one hand, and the total
discounts and commissions received by the Holders with respect to the Series A
Notes purchased under this Agreement, on the other hand, bear to the total
gross proceeds from the offering of the Series A Notes under the Purchase
Agreement, in each case as set forth in the table on the cover page of the
Offering Memorandum. 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 Guarantors or the Holders, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the Guarantors and the Holders agree
that it would not be just and equitable if contributions pursuant to this
Section 8(d) were to be determined by pro rata allocation (even if the Holders
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 shall be deemed to include, for purposes of
this Section 8(d), 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 8(d), no Holder shall
be required to contribute any amount in excess of the amount by which the net
proceeds received by it in connection with its sale of Notes exceeds the amount
of any damages which such Holder 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
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guilty of such fraudulent misrepresentation. The Holders' obligations to
contribute as provided in this Section 8(d) are several and not joint.
SECTION 9. RULE 144A
The Company and each Guarantor hereby agrees with each Holder of
Transfer Restricted Securities, during any period in which the Company or such
Guarantor is not subject to Section 13 or 15(d) of the Exchange Act within the
two-year period following the Closing Date, and each Holder of Broker-Dealer
Transfer Restricted Securities, for so long as any Broker-Dealer Transfer
Restricted Securities remain outstanding, to make available to any Holder or
beneficial owner of Transfer Restricted Securities or any Holder or
Broker-Dealer Transfer Restricted Securities, in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
from such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Act in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities or Broker-Dealer Transfer Restricted Securities, as applicable, on
the basis provided in any underwriting arrangements approved by the Persons
entitled hereunder to approve such arrangements and (b) completes and executes
all reasonable questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-up letters and other documents required under the terms of
such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering at such Holders' expense. In any such
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders
of a majority in aggregate principal amount of the Transfer Restricted
Securities included in such offering; provided, that such investment bankers
and managers must be reasonably satisfactory to the Company.
SECTION 12. MISCELLANEOUS
12.1 Remedies. The Company and the Guarantors agree that monetary
damages (including the liquidated damages contemplated hereby) would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agree to waive the defense in any
action for specific performance that a remedy at law would be adequate.
12.2 No Inconsistent Agreements. Neither the Company nor any Guarantor
will, on or after the date of this Agreement, enter into any agreement with
respect to its securities that is inconsistent with the rights granted to the
Holders in this Agreement or otherwise conflicts with the
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<PAGE>
provisions hereof. Except as disclosed in the Final Offering Memorandum,
neither the Company nor any Guarantor has previously entered into any agreement
granting any registration rights with respect to its securities to any Person.
The rights granted to the Holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Company's or
any Guarantor's securities under any agreement in effect on the date hereof.
12.3 Adjustments Affecting the Notes. The Company and the Guarantors
will not take any action, or permit any change to occur, with respect to the
Notes that would materially and adversely affect the ability of the Holders to
Consummate any Exchange Offer.
12.4 Amendments and Waivers. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to or departures
from the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders whose securities are being tendered pursuant to the Exchange
Offer and that does not affect directly or indirectly the rights of other
Holders whose securities are not being tendered pursuant to such Exchange Offer
may be given by the Holders of a majority of the outstanding principal amount
of Transfer Restricted Securities being tendered or registered.
12.5 Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(a) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(b) if to the Company or the Guarantors:
L-3 Communications Corporation
600 Third Avenue, 34th Floor,
New York, New York 10016,
Attention: Christopher C. Cambria (Fax: 212-805-5494),
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY, 10017
Attention: Vincent Pagano Jr. (Fax: 212-455-2502)
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
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<PAGE>
12.6 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties,
including without limitation and without the need for an express assignment,
subsequent Holders or Restricted Broker Dealers; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities or Broker Dealer Transfer Restricted Securities
from such Holder.
12.7 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
12.8 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
12.9 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
12.10 Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
12.11 Entire Agreement. This Agreement together with the other
Operative Documents (as defined in the Purchase Agreement) is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted by the
Company and the Guarantors with respect to the Transfer Restricted Securities.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
[Signature pages follow]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
L-3 COMMUNICATIONS CORPORATION
By:
-----------------------------
Name:
Title:
GUARANTORS:
HYGIENETICS ENVIRONMENTAL SERVICES, INC.
By:
-----------------------------
Name:
Title:
L-3 COMMUNICATIONS ILEX SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
SOUTHERN CALIFORNIA MICROWAVE, INC.
By:
-----------------------------
Name:
Title:
L-3 COMMUNICATIONS SPD TECHNOLOGIES, INC.
By:
-----------------------------
Name:
Title:
S-1
<PAGE>
L-3 COMMUNICATIONS ESSCO, INC.
By:
-----------------------------
Name:
Title:
STORM CONTROL SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
DBS MICROWAVE, INC.
By:
-----------------------------
Name:
Title:
SPD ELECTRICAL SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
SPD SWITCHGEAR INC.
By:
-----------------------------
Name:
Title:
PAC ORD INC.
By:
-----------------------------
Name:
Title:
HENSCHEL INC.
By:
-----------------------------
Name:
Title:
S-2
<PAGE>
SPD HOLDINGS, INC.
By:
-----------------------------
Name:
Title:
POWER PARAGON, INC.
By:
-----------------------------
Name:
Title:
LEHMAN BROTHERS INC.
NATIONSBANC MONTGOMERY SECURITES LLC
BY LEHMAN BROTHERS INC.
By:
---------------------------------------
Authorized Representative
<PAGE>
ANNEX A
COUNTERPART TO REGISTRATION RIGHTS AGREEMENT
The undersigned hereby absolutely, unconditionally and irrevocably
agrees (as a "Guarantor") to make all commercially reasonable efforts to
include its Subsidiary Guarantee in any Registration Statement required to be
filed by the Company and the Guarantors pursuant to the Registration Rights
Agreement, dated as of December 11, 1998, (the "Registration Rights Agreement")
by and among L-3 Communications Corporation, a Delaware corporation, the
guarantors named therein, Lehman Brothers Inc. and NationsBanc Montgomery
Securities LLC; to make all commercially reasonable efforts to cause such
Registration Statement to become effective as specified in the Registration
Rights Agreement; and to otherwise be bound by the terms and provisions of the
Registration Rights Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Counterpart as
of , 1998.
[NAME]
By:
-----------------------------
Name:
Title:
A-1
<PAGE>
L-3 COMMUNICATIONS CORPORATION
8% SENIOR SUBORDINATED NOTES DUE 2008
PURCHASE AGREEMENT
December 3, 1998
Lehman Brothers Inc.
NationsBanc Montgomery Securities LLC
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
L-3 Communications Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to you (the "Initial Purchasers") $200.0
million in aggregate principal amount of its 8% Senior Subordinated Notes due
2008 (the "Series A Notes") guaranteed (the "Series A Guarantees") by
Hygienetics Environmental Services, Inc., a Delaware corporation, L-3
Communications ILEX Systems, Inc., a Delaware corporation, Southern California
Microwave, Inc., a California corporation, L-3 Communications SPD Technologies,
Inc., a Delaware corporation, L-3 Communications ESSCO, Inc., a Delaware
corporation, Storm Control Systems, Inc., a California corporation, DBS
Microwave, Inc., a California corporation , SPD Electrical Systems, Inc., a
Delaware corporation, SPD Switchgear Inc., a Delaware corporation, Pac Ord
Inc., a Delaware corporation, Henschel Inc., a Delaware corporation, Power
Paragon, Inc., a Delaware corporation, and SPD Holdings, Inc., a Delaware
corporation (collectively, the "Guarantors"), pursuant to the terms of an
Indenture (the "Indenture") among the Company, the Guarantors and The Bank of
New York, as trustee (the "Trustee"), relating to the Series A Notes.
Capitalized terms used but not defined herein shall have the meanings given to
such terms in the Indenture.
The Series A Notes will be offered and sold to you pursuant
to an exemption from the registration requirements under the Securities Act of
1933, as amended (the "Act"). The Company has prepared a draft of the final
offering memorandum, dated December 3, 1998 (the "Draft Offering Memorandum")
and will prepare a final offering memorandum (the "Offering Memorandum"), to be
dated December 3, 1998, relating to the Company, the Series A Notes and the
Series A Guarantees. As described in the Offering Memorandum, the Company will
use all of the net proceeds from the offering of the Series A Notes to repay
substantially all of the existing indebtedness under the Company's senior
credit facilites provided by a syndicate of banks led by Bank of America
National Trust & Savings Association, as Administrative Agent (the "Senior
Credit Agreement"), and for general corporate purposes, including potential
acquisitions.
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<PAGE>
Upon original issuance thereof, and until such time as the
same is no longer required under the applicable requirements of the Securities
Act, the Series A Notes (and all securities issued in exchange therefor or in
substitution thereof) shall bear the following legend:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS
ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED
HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS
HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE
EXEMPTION FROM THE PROVISION OF SECTION 5 OF THE SECURITIES
ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE
COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED, ONLY (1) (a) TO A PERSON WHO THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
(AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN
PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904
UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE
COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND
(B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED
TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED
HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
You have advised the Company that you will make offers (the
"Exempt Resales") of the Series A Notes purchased by you hereunder on the terms
set forth in the Offering Memorandum, as amended or supplemented, solely to (i)
persons whom you reasonably believe to be "qualified institutional buyers" as
defined in Rule 144A under the Securities Act ("QIBs") and (ii) outside the
United States to persons other than U.S. Persons in offshore transactions
meeting the requirements of Rule 904 of Regulation S ("Regulations S") under
the Securities Act (such persons specified in clauses (i) and (ii) being
referred to herein as the "Eligible Purchasers"). As used herein, the terms
"offshore transaction," "United States" and "U.S. person" have the respective
meanings given to them in Regulation S. You will offer the Series A Notes to
Eligible Purchasers initially at a price equal to 99.686% of the principal
amount thereof. Such price may be changed at any time without notice.
2
<PAGE>
Holders (including subsequent transferees) of the Series A
Notes will have the registration rights set forth in the registration rights
agreement (the "Registration Rights Agreement"), to be dated December 11, 1998
(the "Closing Date"), in the form of Exhibit A hereto, for so long as such
Series A Notes constitute "Transfer Restricted Securities" (as defined in the
Registration Rights Agreement). Pursuant to the Registration Rights Agreement,
the Company and the Guarantors will agree to file with the Securities and
Exchange Commission (the "Commission") under the circumstances set forth
therein, (i) a registration statement under the Securities Act (the "Exchange
Offer Registration Statement") relating to the Company's 8% Senior Subordinated
Notes due 2008 (the "Series B Notes" and, together with the Series A Notes, the
"Notes") to be offered in exchange for the Series A Notes, (such offer to
exchange being referred to collectively as the "Registered Exchange Offer") and
(ii) a shelf registration statement pursuant to Rule 415 under the Securities
Act (the "Shelf Registration Statement") relating to the resale by certain
holders of the Series A Notes, and to use their best efforts to cause such
Registration Statements to be declared effective. This Agreement, the Notes,
the Guarantees (as defined herein), the Indenture and the Registration Rights
Agreement are hereinafter referred to collectively as the "Operative
Documents." This is to confirm the agreements concerning the purchase of the
Series A Notes from the Company by you.
1. Representations, Warranties and Agreements of the Company
and the Guarantors. The Company and the Guarantors, jointly and severally
represent, warrant and agree that:
(a) The Offering Memorandum will be prepared by the Company
for use by the Initial Purchasers in connection with the Exempt Resales and
will not differ substantially from the Draft Offering Memorandum, unless
otherwise agreed to by the Initial Purchasers. No order or decree preventing
the use of the Offering Memorandum, or any order asserting that the
transactions contemplated by this Agreement are subject to the registration
requirements of the Securities Act has been issued and no proceeding for that
purpose has commenced or is pending or, to the knowledge of the Company and the
Guarantors, is contemplated.
(b) The Offering Memorandum as of its date and as of the
Closing Date, will not contain an untrue statement of a material fact or omit
to state a material fact necessary, in order to make the statements, in light
of the circumstances under which they were made, not misleading, except that
this representation and warranty does not apply to statements in or omissions
from the Offering Memorandum made in reliance upon and in conformity with
information relating to the Initial Purchasers furnished to the Company in
writing by or on behalf of the Initial Purchasers expressly for use therein.
(c) The market-related and customer-related data and
estimates included in the Offering Memorandum 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 14 hereof) 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
3
<PAGE>
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) 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 Offering
Memorandum; 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 and (iii) 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
Offering Memorandum 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) The Company has all requisite power and authority to
execute, deliver and perform its obligations under this Agreement, the
Indenture, the Notes, the Guarantees and the Registration Rights Agreement.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and the Guarantors.
(h) The Registration Rights Agreement will be duly authorized
by the Company and each of the Guarantors, and when duly executed by the proper
officers of the Company and the Guarantors (assuming due execution and delivery
by the Initial Purchasers) and delivered by the Company and each Guarantor,
will constitute a valid and binding agreement of the Company and each
Guarantor, enforceable against the Company and each Guarantor in accordance
with its terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) or an implied covenant of good
faith and fair dealing and except as rights to indemnity and contribution
thereunder may be limited by Federal or state securities laws or principles of
public policy.
(i) The Indenture will be duly authorized, and when duly
executed by the proper officers of the Company (assuming due execution and
delivery by the Trustee) and delivered by the Company, will constitute a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) or an
implied covenant of good faith and fair dealing; no qualification of the
Indenture under the
4
<PAGE>
Trust Indenture Act of 1939, as amended (the "1939 Act") is required in
connection with the Exempt Resales.
(j) The Series A Notes will be duly and validly authorized by
the Company and when duly executed by the Company in accordance with the terms
of the Indenture and, assuming due authentication of the Series A Notes by the
Trustee, upon delivery to the Initial Purchasers against payment therefor in
accordance with the terms hereof will constitute valid and binding obligations
of the Company entitled to the benefits of the Indenture and enforceable
against the Company in accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) or an implied covenant of good faith and fair dealing; and the Series A
Notes, when issued and delivered, will conform to the description thereof
contained in the Offering Memorandum.
(k) The Series A Guarantees will be duly and validly
authorized by the Guarantors and when duly endorsed on the Series A Notes in
accordance with the terms of the Indenture and, assuming due authentication of
the Series A Notes by the Trustee, upon delivery to the Initial Purchasers
against payment therefor in accordance with the terms hereof will constitute
valid and binding obligations of each of the Guarantors entitled to the
benefits of the Indenture and enforceable against in accordance with their
terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered
in a proceeding in equity or at law) or an implied covenant of good faith and
fair dealing; and the Series A Guarantees, when issued and delivered, will
conform to the description thereof contained in the Offering Memorandum.
(l) The Series B Notes will be duly and validly authorized by
the Company and if and when duly issued and authenticated in accordance with
the terms of the Indenture and delivered in accordance with the Exchange Offer
provided for in the Registration Rights Agreement, will constitute valid and
binding obligations of the Company entitled to the benefits of the Indenture,
enforceable against the Company in accordance with their terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) or an implied covenant of good faith and fair dealing.
(m) The guarantees of the Series B Notes (the "Series B
Guarantees" and, together with the Series A Guarantees, the "Guarantees") will
be duly and validly authorized by the Guarantors and if and when duly endorsed
on the Series A Notes in accordance with the terms of the Indenture and
delivered in accordance with the Exchange Offer provided for in the
Registration Rights Agreement, will constitute valid and binding obligations of
each of the Guarantors entitled to the benefits of the Indenture and
enforceable against each of the Guarantors in accordance with their terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered
in a proceeding in equity or at law) or an implied covenant of good faith and
fair dealing.
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<PAGE>
(n) The execution, delivery and performance of this Agreement
and the other Operative Documents by the Company and the Guarantors and the
consummation of the transactions contemplated hereby or thereby; and the
consummation by the Company of the transactions contemplated 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 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 as may be required in connection with the
registration under the Securities Act of the Series B Notes in accordance with
the Registration Rights Agreement, qualification of the Indenture under the
1939 Act and compliance with the securities or Blue Sky laws of various
jurisdictions and except as required under the Senior Credit Agreement, 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 any of the Operative Documents by
the Company and the Guarantors, as applicable, and the consummation of the
transactions contemplated hereby and thereby.
(o) Except as described in the Offering Memorandum and except
as provided by the Registration Rights Agreement, 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 Offering Memorandum) to require
the Company to file a registration statement under the Securities Act with
respect to any debt 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 Exchange Offer Registration Statement, the Shelf
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act.
(p) Except as described in the Offering Memorandum, the
Company and the Guarantors have not sold or issued any securities with terms
that are substantially similar to the Notes and the Guarantees during the
six-month period preceding the date of the Offering Memorandum, including any
sales pursuant to Rule 144A under, or Regulations D or S of, the Securities
Act.
(q) Neither the Company nor any of its subsidiaries has
incurred, since the date of the latest audited financial statements included in
the Offering Memorandum, 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 Offering Memorandum;
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
6
<PAGE>
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
Offering Memorandum.
(r) The historical and pro forma financial statements,
together with related notes, set forth in the Offering Memorandum 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 Offering Memorandum and this
Agreement. The other financial and statistical information and data included in
the Offering Memorandum, 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 predecessors), except as disclosed therein.
(s) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company, whose report appears in the Offering
Memorandum and who will deliver the letter referred to in Section 7(f) hereof,
are independent public accountants under Rule 101 of the AICPA's Code of
Professional Conduct, and its interpretation and rulings; Ernst & Young LLP and
KPMG Peat Marwick LLP, whose reports appear in the Offering Memorandum and who
will deliver the letters referred to in Sections 7(g) and 7(h) hereof, are
independent accountants under Rule 101 of the AICPA's Code of Professional
Conduct, and its interpretation and rulings; and Grant Thornton LLP, who will
deliver the letter referred to in Section 7(i) hereof, are independent
accountants under Rule 101 of the AICPA's Code of Professional Conduct, and its
interpretation and rulings.
(t) The Company and each of its subsidiaries have good and
marketable title to all property (real and personal) described in the Offering
Memorandum as being owned by them, free and clear of all liens, claims,
security interests or other encumbrances except such as are described in the
Offering Memorandum 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 Offering Memorandum 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).
(u) 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 Offering
Memorandum 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
7
<PAGE>
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).
(v) Except as described in the Offering Memorandum, 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.
(w) There are no contracts or other documents which would be
required to be described in a prospectus contained in a registration statement
on Form S-1 by the Securities Act or by the rules and regulations thereunder
which have not been described in the Offering Memorandum.
(x) 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 Offering Memorandum.
(y) 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.
(z) Except as disclosed in the Offering Memorandum, 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.
(aa) 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.
(bb) Neither the Company nor any of its subsidiaries (i) is
in violation of its charter or by-laws or other organizational document, (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
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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.
(cc) 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.
(dd) 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.
(ee) Neither the Company nor any subsidiary is and upon sale
of the Series A Notes to be issued and sold thereby in accordance herewith and
the application of the net proceeds to the Company of such sale as described in
the Offering Memorandum under the caption "Use of Proceeds," will not be, 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.
(ff) Neither the Company nor any affiliate (as defined in
Rule 501(b) of Regulation D ("Regulation D") under the Securities Act) of the
Company has directly, or through any agent (provided that no representation is
made as to the Initial Purchasers or any person acting on its behalf), (i)
sold, offered for sale, solicited offers to buy or otherwise negotiated in
respect of, any security (as defined in the Securities Act) which is or could
be integrated with the offering and
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<PAGE>
sale of the Notes in a manner that would require the registration of the Series
A Notes under the Securities Act or (ii) engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D,
including, but not limited to, advertisements, articles, notices or other
communications published in any newspaper, magazine, or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising) in
connection with the offering of the Series A Notes.
(gg) Except as permitted by the Securities Act, the Company
has not distributed and, prior to the later to occur of the Closing Date and
completion of the distribution of the Series A Notes, will not distribute any
offering material in connection with the offering and sale of the Series A
Notes other than the Offering Memorandum.
(hh) When the Series A Notes are issued and delivered
pursuant to this Agreement, such Series A Notes will not be of the same class
(within the meaning of Rule 144A under the Securities Act) as securities of the
Company that are listed on a national securities exchange registered under
Section 6 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or that are quoted in a U.S. automated inter-dealer quotation system.
(ii) Assuming (i) that your representations and warranties in
Section 2 are true, (ii) compliance by you with your covenants set forth in
Section 2 and (iii) that each of the Eligible Purchasers is a QIB or a person
who is not a "U.S. person" who acquires the Series A Notes outside the United
States in an "offshore transaction" (within the meaning of Rule 904 of
Regulation S), the purchase of the Series A Notes by you pursuant hereto and
the resale of the Series A Notes pursuant hereto pursuant to the Exempt Resales
is exempt from the registration requirements of the Securities Act.
(jj) None of the Company or any of its affiliates or any
person acting on its or their behalf has engaged or will engage in any directed
selling efforts within the meaning of Regulation S with respect to the Notes,
and the Company and its affiliates and all persons acting on its of their
behalf have complied with and will comply with the offering restrictions
requirements of Regulation S in connection with the offering of the Notes
outside of the United States. The sales of the Series A Notes pursuant to
Regulation S are "offshore transactions" and are not part of a plan or scheme
to evade the registration provision of the Securities Act. The Company makes no
representation in this paragraph (jj) with respect to the Initial Purchasers.
(kk) The Company is a "reporting issuer" as defined in Rule
902 under the Securities Act.
2. Representations, Warranties and Agreements of the Initial
Purchasers. Each Initial Purchaser represents and warrants with respect to
itself that:
(a) Such Initial Purchaser is a QIB or an institutional
accredited investor as defined in Rule 501(a)(1), (2), (3) and (7) under the
Securities Act (each, an "Accredited Institution"), in either case with such
knowledge and experience in financial and business matters as are necessary in
order to evaluate the merits and risks of an investment in the Series A Notes.
10
<PAGE>
(b) Such Initial Purchaser (i) is not acquiring the Series A
Notes with a view to any distribution thereof or with any present intention of
offering or selling any of the Series A Notes in a transaction that would
violate the Securities Act or the securities laws of any State of the United
States or any other applicable jurisdiction; (ii) in connection with the Exempt
Resales, will solicit offers to buy the Notes only from, and will offer to sell
the Notes only to, the Eligible Purchasers in accordance with this Agreement
and on the terms contemplated by the Offering Memorandum; and (iii) will not
offer or sell the Notes, nor has it offered or sold the Notes by, or otherwise
engaged in, any form of general solicitation or general advertising (within the
meaning of Regulation D; including, but not limited to, advertisements,
articles, notices or other communications published in any newspaper, magazine,
or similar medium or broadcast over television or radio, or any seminar or
meeting whose attendees have been invited by any general solicitation or
general advertising) in connection with the offering of the Series A Notes.
(c) The Notes have not been and will not be registered under
the Securities Act and may not be offered or sold within the United States or
to, or for the account or benefit of, U.S. persons except in accordance with
Regulation S under the Securities Act or pursuant to an exemption from the
registration requirements of the Securities Act. The Initial Purchasers
represent that they have not offered, sold or delivered the Notes, and will not
offer, sell or deliver the Notes (i) as part of its distribution at any time or
(ii) otherwise until 40 days after the later of the commencement of the
offering of the Series A Notes and the Closing Date (such period, the
"Restricted Period"), within the United States or to, or for the account or
benefit of U.S. persons, except in accordance with Rule 144A under the
Securities Act, or to Accredited Institutions in transactions that are exempt
from the registration requirements of the Securities Act. Accordingly, each
Initial Purchaser represents and agrees that neither it, its affiliates nor any
persons acting on its or their behalf has engaged or will engage in any
directed selling efforts within the meaning of Rule 901(b) of Regulation S with
respect to the Notes, and it, its affiliates and all persons acting on its
behalf have complied and will comply with the offering restrictions
requirements of Regulation S.
(d) Such Initial Purchaser agrees that, at or prior to
confirmation of a sale of Notes (other than a sale pursuant to Rule 144A in
transactions that are exempt from the registration requirements of the
Securities Act), it will have sent to each distributor, dealer or person
receiving a selling concession, fee or other remuneration that purchases Notes
from it during the Restricted Period a confirmation or notice substantially to
the following effect:
"The Notes covered hereby have not been registered under the
U.S. Securities Act of 1933 (the "Securities Act") and may
not be offered and sold within the United States or to, or
for the account or benefit of, U.S. persons (i) as part of
their distribution at any time or (ii) otherwise until 40
days after the later of the commencement of the offering or
the closing date, except in either case in accordance with
Regulation S (or Rule 144A if available) under the Securities
Act. Terms used above have the meanings assigned to them in
Regulation S."
Such Initial Purchaser further agrees that it has not entered
and will not enter into any contractual arrangement with respect to the
distribution or delivery of the Notes, except with its affiliates or with the
prior written consent of the Company.
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<PAGE>
(e) Such Initial Purchaser further represents and agrees that
(i) it has not offered or sold and will not offer or sell any Notes to persons
in the United Kingdom prior to the expiry of the period of six months from the
issue date of the Notes, 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 Notes in, from or otherwise involving the United Kingdom,
and (iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance of
the Notes to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom the document may otherwise lawfully be issued or passed
on.
(f) Such Initial Purchaser agrees not to cause any
advertisement of the Notes to be published in any newspaper or periodical or
posted in any public place and not to issue any circular relating to the Notes,
except such advertisements as include the statements required by Regulation S.
(g) The sales of the Series A Notes pursuant to Regulation S
are "offshore transactions" and are not part of a plan or scheme to evade the
registration provisions of the Securities Act.
(h) Such Initial Purchaser understands that the Company and,
for purposes of the opinions to be delivered to you pursuant to Section 7
hereof, counsel to the Company, General Counsel to the Company and counsel to
the Initial Purchasers, will rely upon the accuracy and truth of the foregoing
representations and you hereby consent to such reliance.
The terms used in this Section 2 that have meanings assigned
to them in Regulation S are used herein as so defined.
Each Initial Purchaser further agrees that, in connection
with the Exempt Resales, it will solicit offers to buy the Series A Notes only
from, and will offer to sell the Series A Notes only to, the Eligible
Purchasers in Exempt Resales.
3. Purchase of the Notes and the Guarantees by the Initial
Purchasers. 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 the Series A Notes (and cause the Guarantors to issue the Series A
Guarantees) to the several Initial Purchasers and each of the Initial
Purchasers, severally and not jointly, agrees to purchase the aggregate
principal amount of Series A Notes set opposite that Initial Purchaser's name
in Schedule 1 hereto. Each Initial Purchaser will purchase such aggregate
principal amount of Series A Notes at an aggregate purchase price equal to
96.861% of the principal amount thereof (the "Purchase Price").
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<PAGE>
The Company shall not be obligated to deliver any of the
Series A Notes and Series A Guarantees to be delivered on the Closing Date (as
defined herein), except upon payment for all the Series A Notes to be purchased
on the Closing Date as provided herein.
4. Delivery of and Payment for the Notes and the Guarantees.
(a) Delivery of and payment for the Series A Notes and the
Series A Guarantees 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 sixth
full business day following the date of this Agreement or at such other date or
place as shall be determined by agreement between the Initial Purchasers and
the Company.
(b) On the Closing Date, one or more Series A Notes in
definitive form, registered in the name of Cede & Co., as nominee of the
Depository Trust Company ("DTC"), or such other names as the Initial Purchasers
may request upon at least one business days' notice to the Company, having an
aggregate principal amount corresponding to the aggregate principal amount of
Series A Note sold pursuant to Eligible Resales (collectively, the "Global
Note"), shall be delivered by the Company to the Initial Purchasers against
payment by the Initial Purchasers of the purchase price thereof by wire
transfer of immediately available funds as the Company may direct by written
notice delivered to you two business days prior to the Closing Date. The Global
Note in definitive form shall be made available to you for inspection not later
than 2:00 p.m. on the business day prior to the Closing Date.
(c) 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 Initial Purchaser hereunder.
5. Further Agreements of the Company. The Company agrees:
(a) To advise you promptly and, if requested by you, to
confirm such advice in writing, of (i) the issuance by any state securities
commission of any stop order suspending the qualification or exemption from
qualification of any Series A Notes or Series A Guarantees for offering or sale
in any jurisdiction, or the initiation or threatening of any proceeding for
such purpose by the Commission or any state securities commission or other
regulatory authority, and (ii) the happening of any event that makes any
statement of a material fact made in the Offering Memorandum untrue or which
requires the making of any additions to or changes in the Offering Memorandum
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company shall use all commercially
reasonable efforts to prevent the issuance of any stop order or order
suspending the qualification or exemption of the Series A Notes or Series A
Guarantees under any state securities or Blue Sky laws and, if at any time any
state securities commission shall issue any stop order suspending the
qualification or exemption of the Series A Notes or Series A Guarantees under
any state securities or Blue Sky laws, the Company shall use every reasonable
effort to obtain the withdrawal or lifting of such order at the earliest
possible time.
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<PAGE>
(b) To furnish to you, as many copies of the Offering
Memorandum, and any amendments or supplements thereto, as you may reasonably
request. Such copies shall be furnished without charge for use in connection
with the Exempt Resales for the nine month period immediately following the
Closing Date. The Company consents to the use of the Offering Memorandum, and
any amendments and supplements thereto required pursuant to this Agreement, by
you in connection with the Exempt Resales that are in compliance with this
Agreement.
(c) Not to amend or supplement the Offering Memorandum prior
to the Closing Date or during the period referred to in (d) below unless you
shall previously have been advised of, and shall not have reasonably objected
to, such amendment or supplement within a reasonable time, but in any event not
longer than five days after being furnished a copy of such amendment or
supplement. The Company shall promptly prepare, upon any reasonable request by
you, any amendment or supplement to the Offering Memorandum that may be
necessary or advisable in connection with Exempt Resales.
(d) If, in connection with any Exempt Resales or market
making transactions after the date of this Agreement and prior to the
consummation of the Exchange Offer, any event shall occur that, in the judgment
of the Company or in the judgment of counsel to you, makes any statement of a
material fact in the Offering Memorandum untrue or that requires the making of
any additions to or changes in the Offering Memorandum in order to make the
statements in the Offering Memorandum, in light of the circumstances under
which they were made at the time that the Offering Memorandum is delivered to
prospective Eligible Purchasers, not misleading, or if it is necessary to amend
or supplement the Offering Memorandum to comply with applicable law, the
Company shall promptly notify you of such event and prepare an appropriate
amendment or supplement to the Offering Memorandum so that (i) the statements
in the Offering Memorandum as amended or supplemented will, in light of the
circumstances under which they were made at the time that the Offering
Memorandum is delivered to prospective Eligible Purchasers, not be misleading
and (ii) the Offering Memorandum will comply with applicable law.
(e) Promptly from time to time to take such action as the
Initial Purchasers may reasonably request to qualify the Series A Notes and the
Series A Guarantees for offering and sale under the securities laws of such
jurisdictions as the Initial Purchasers 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 Series A Notes and the
Series A Guarantees.
(f) Prior to the Closing Date, to furnish to you, as soon as
they have been prepared, a copy of any internal consolidated financial
statements of the Company for any period subsequent to the period covered by
the financial statements appearing in the Offering Memorandum.
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<PAGE>
(g) To use all commercially reasonable efforts to do and
perform all things required to be done and performed under this Agreement by it
prior to or after the Closing Date and to satisfy all conditions precedent on
its part to the delivery of the Series A Notes.
(h) Not to sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the Securities
Act) that would be integrated with the sale of the Series A Notes in a manner
that would require the registration under the Securities Act of the sale to you
or the Eligible Purchasers of Series A Notes.
(i) During any period in which the Company is not subject to
Section 13 or 15(d) of the Exchange Act within the two year period following
the Closing Date, to make available to any registered holder or beneficial
owner of Series A Notes in connection with any sale thereof and any prospective
purchaser of such Series A Notes from such registered holder or beneficial
owner, the information required by Rule 144A(d)(4) under the Securities Act.
(j) To use all commercially reasonable efforts to effect the
inclusion of the Notes in the National Association of Securities Dealers, Inc.
Automated Quotation System - PORTAL ("PORTAL").
(k) To apply the net proceeds from the sale of the Series A
Notes being sold by the Company as set forth in the Offering Memorandum under
the caption "Use of Proceeds."
(l) 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.
(m) To assist the Initial Purchasers and counsel for the
Initial Purchasers in connection with their continuing due diligence.
(n) To take such steps as shall be necessary to ensure that
all the subsidiaries of the Company that are not designated as "unrestricted
subsidiaries" in accordance with the Indenture will be guarantors of the Notes.
(o) To use its reasonable best efforts to obtain a consent
under the Senior Credit Agreement to the issuance and sale of the Notes and the
use of proceeds therefrom.
6. Expenses. The Company agrees to pay: (a) the costs
incident to the authorization, issuance, sale and delivery of the Notes and the
Guarantees and any taxes payable in that connection; (b) the costs incident to
the preparation, printing and filing of the Offering Memorandum and any
amendments and supplements thereto; (c) the costs of distributing the Offering
Memorandum and any amendment or supplement to the Offering Memorandum, all as
provided in this Agreement; (d) the fees, disbursements and expenses of the
Company's counsel and accountants; (e) all expenses and listing fees in
connection with the application for quotation of the Series A Notes in PORTAL;
(f) all fees and expenses (including fees and expenses of counsel) of the
Company in connection with approval of the Notes by DTC for "book-entry"
transfer; (g) the
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<PAGE>
fees and expenses of qualifying the Notes and Guarantees under the securities
laws of the several jurisdictions as provided in Section 5(e) and of preparing,
printing and distributing a Blue Sky Memorandum (including related fees and
expenses of counsel to the Initial Purchaser); (h) any fees charged by
securities rating services for rating the Notes and Guarantees; (i) all costs
and expenses incident to the performance of the Company's obligations under
Section 9 and (j) all other costs and expenses incident to the performance of
the obligations of the Company and the Guarantors.
7. Conditions of Initial Purchasers' Obligations. The
respective obligations of the Initial Purchasers hereunder are subject to the
accuracy, when made and on the Closing Date, of the representations and
warranties of the Company and the Guarantors contained herein, to the
performance by the Company and the Guarantors of their obligations hereunder,
and to each of the following additional terms and conditions:
(a) No Initial Purchaser shall have discovered and disclosed
to the Company on or prior to the Closing Date that the Offering Memorandum or
any amendment or supplement thereto contains an untrue statement of a fact
which, in the opinion of Latham & Watkins, counsel for the Initial Purchasers,
is material or omits to state a fact which, in the opinion of such counsel, is
material and is necessary to make the statements, in the light of the
circumstances under which they were made, not misleading.
(b) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement, the other
Operative Documents, the Offering Memorandum, 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 Initial
Purchasers, and the Company shall have furnished to such counsel all documents
and information that they may reasonably request to enable them to pass upon
such matters.
(c) Simpson Thacher & Bartlett shall have furnished to the
Initial Purchasers, its written opinion, as counsel to the Company, addressed
to the Initial Purchasers and dated the Closing Date, in form and substance
reasonably satisfactory to the Initial Purchasers, to the effect that:
(i) The Company and each of the Delaware Guarantors 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 Offering Memorandum;
(ii) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid and non-assessable; and 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 our examination of
each such subsidiary's stock ledger and minute book, all such shares
are held of record by the Company and/or a subsidiary of the Company;
(iii) The Indenture has been duly authorized, executed and
delivered by the Company and, assuming that the Indenture is the valid
and legally binding obligation of the
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Trustee, constitutes a valid and legally binding obligation of the
Company enforceable against the Company in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating
to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) or
an implied covenant of good faith and fair dealing.
(iv) The Series A Notes have been duly authorized, executed
and issued by the Company and, assuming due authentication thereof by
the Trustee and upon payment and delivery in accordance with the terms
of the Purchase Agreement, will constitute valid and legally binding
obligations of the Company enforceable against the Company in
accordance with their terms and entitled to the benefits of the
Indenture subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating
to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) or
an implied covenant of good faith and fair dealing; and the Notes,
when issued and delivered, will conform to the description thereof
contained in the Prospectus.
(v) The Series A Guarantees have been duly authorized,
executed and issued by the respective Guarantors and, assuming due
authentication of the Series A Notes by the Trustee, upon payment and
delivery in accordance with the terms of the Purchase Agreement will
constitute valid and legally binding obligations of each of the
Guarantors enforceable in accordance with their terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) or an implied
covenant of good faith and fair dealing.
(vi) The Series B Notes and the Series B Guarantees have been
duly authorized.
(vii) The statements contained in the Offering Memorandum
under the captions "Risk Factors--Subordination," "Risk
Factors--Restrictions Imposed by the Senior Credit Facilities and the
Indentures," "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 the Notes" insofar as they describe
charter documents, contracts, statutes, rules and regulations and
other legal matters, constitute an accurate summary thereof in all
material respects;
(viii) The statements made in the Offering Memorandum under
the caption "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.
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(ix) To such counsel's knowledge, there are no contracts or
documents of a character required by the Securities Act or by the
rules and regulations thereunder to be described in a prospectus
included in a registration statement on Form S-1 which are not
described in the Offering Memorandum;
(x) This Agreement has been duly authorized, executed and
delivered by the Company and the Guarantors;
(xi) The Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and the Guarantors
and, assuming due authorization, execution and delivery thereof by the
Initial Purchasers, constitutes a valid and legally binding obligation
of the Company and each of the Guarantors enforceable against the
Company and each of the Guarantors in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating
to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) or
an implied covenant of good faith and fair dealing.
(xii) The issue and sale of the Series A Notes and the Series
A Guarantees being delivered on the Closing Date by the Company and
the Guarantors and the compliance by the Company and the Guarantors,
with all of the provisions of this Agreement and the other Operative
Documents 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 which was filed as an exhibit to the Company's most
recent Registration Statement on Form S-1 or is identified as such on
a list provided to such counsel 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, 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, 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, the Delaware General
Corporation Law is required for issuance and sale of the Notes by the
Company (and the guarantee of such Notes by the Guarantors), except
for the registration under the Securities Act of the Series B Notes in
accordance with the Registration Rights Agreement and the
qualification of the Indenture under the 1939 Act, and such consents,
approvals, authorizations, registrations or qualifications as may be
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required state securities or Blue Sky laws in connection with the
purchase and distribution of the Series A Notes and Series A
Guarantees by the Initial Purchasers. 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.
(xiii) No registration of the Series A Notes under the
Securities Act and no qualification of the Indenture under the 1939
Act is required for the offer and sale of the Series A Notes by the
Company to the Initial Purchasers or the reoffer and resale of the
Series A Notes by the Initial Purchasers to the initial purchasers
therefrom solely in the manner contemplated by the Offering
Memorandum, the Purchase Agreement and the Indenture.
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, the Delaware Limited Liability
Company Act and the Delaware General Corporation Law.
Such counsel shall also have furnished to the Initial Purchasers a
written statement, addressed to the Initial Purchasers and dated the
Closing Date. Such counsel has not independently verified the
accuracy, completeness or fairness of the statements made or included
in the Offering Memorandum and take no responsibility therefor, except
as and to the extent set forth in paragraph (vii) above. In the course
of the preparation by the Company of the Offering Memorandum, such
counsel participated in conferences with certain officers and
employees of the Company, with representatives of
PricewaterhouseCoopers LLP, Ernst & Young LLP, KPMG Peat Marwick LLP,
Grant Thornton LP and with counsel to the Company. Based upon such
counsel's examination of the Offering Memorandum, such counsel's
investigations made in connection with the preparation of the Offering
Memorandum and such counsel's participation in the conferences
referred to above, such counsel has no reason to believe that the
Offering Memorandum, as of its date and as of the Closing Date,
contains or contained any untrue statement of a material fact or omits
or omitted 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 Offering Memorandum.
(d) Christopher C. Cambria, General Counsel of the Company, shall have
furnished to the Initial Purchasers his written opinion, as General Counsel to
the Company, addressed to the Initial Purchasers and dated the Closing Date, in
form and substance reasonably satisfactory to the Initial Purchasers, to the
effect that:
(i) 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 Offering Memorandum as being owned by them,
free and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Offering Memorandum
or, to the extent that any such liens, claims, security interests or
other encumbrances would not have a Material Adverse Effect
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(individually or in the aggregate) and all the material property
described in the Offering Memorandum 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);
(ii) To such counsel's knowledge and except as otherwise
disclosed in the Offering Memorandum, 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;
(iii) To such counsel's knowledge and except as otherwise
disclosed in the Offering Memorandum, 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
Exchange Offer Registration Statement or the Shelf Registration
Statement;
(iv) None of the issue and sale of the Notes and Guarantees
being delivered on such Closing Date by the Company and the Guarantors
and the compliance by the Company and the Guarantors, as applicable,
with all of the provisions of this 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 contained in this paragraph (iv) may be delivered by other
counsel reasonably satisfactory to the Initial Purchasers).
(e) The Initial Purchasers shall have received from Latham & Watkins,
counsel for the Initial Purchasers, such opinion or opinions, dated the Closing
Date, with respect to the issuance and sale of the Series A Notes, the Series A
Guarantees, the Offering Memorandum and other related matters as the Initial
Purchasers 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.
(f) On the Closing Date, the Initial Purchasers shall have received
from PricewaterhouseCoopers LLP, a letter, in form and substance satisfactory
to the Initial Purchasers, addressed to the Initial Purchasers (i) confirming
that they are independent public accountants under Rule 101 of the AICPA's Code
of Professional Conduct, and its interpretation and rulings and (ii) stating,
as of the Closing Date, the conclusions and findings of such firm with respect
to the financial information and other matters ordinarily covered by
accountants' "comfort letters" to Initial Purchasers in connection with
registered public offerings.
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(g) On the Closing Date, the Initial Purchasers shall have received
from Ernst & Young LLP, a letter, in form and substance satisfactory to the
Initial Purchasers, addressed to the Initial Purchasers (i) confirming that
they are independent public accountants under Rule 101 of the AICPA's Code of
Professional Conduct, and its interpretation and rulings and (ii) stating, as
of the Closing Date, the conclusions and findings of such firm with respect to
the financial information and other matters ordinarily covered by accountants'
"comfort letters" to Initial Purchasers in connection with registered public
offerings.
(h) On the Closing Date, the Initial Purchasers shall have received
from KPMG Peat Marwick LLP, a letter, in form and substance satisfactory to the
Initial Purchasers, addressed to the Initial Purchasers (i) confirming that
they are independent public accountants under Rule 101 of the AICPA's Code of
Professional Conduct, and its interpretation and rulings and (ii) stating, as
of the Closing Date, the conclusions and findings of such firm with respect to
the financial information and other matters ordinarily covered by accountants'
"comfort letters" to Initial Purchasers in connection with registered public
offerings.
(i) On the Closing Date, the Initial Purchasers shall have received
from Grant Thornton LP, a letter, in form and substance satisfactory to the
Initial Purchasers, addressed to the Initial Purchasers (i) confirming that
they are independent public accountants under Rule 101 of the AICPA's Code of
Professional Conduct, and its interpretation and rulings and (ii) stating, as
of the Closing Date, the conclusions and findings of such firm with respect to
the financial information and other matters ordinarily covered by accountants'
"comfort letters" to Initial Purchasers in connection with registered public
offerings.
(j) The Company and the Guarantors shall have furnished to the Initial
Purchasers a certificate, dated the Closing Date, of their respective Chairman
of the Board, their respective President or a Vice President and their
respective chief financial officer stating that:
(i) The representations and warranties of the Company and the
Guarantors in Section 1 are true and correct as of the Closing Date;
the Company and the Guarantors have complied with all their agreements
contained herein; and the conditions set forth in Sections 7(a) and
7(k) have been fulfilled; and
(ii) They have carefully examined the Offering Memorandum
and, in their opinion (A) the Offering Memorandum as of its date and
as of the Closing Date, 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 date of the Offering Memorandum, no
event has occurred which should have been set forth in a supplement or
amendment to the Offering Memorandum.
(k) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Offering Memorandum 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 Offering Memorandum
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
21
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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 Offering Memorandum,
the effect of which, in any such case described in clause (i) or (ii), is, in
the judgment of the Initial Purchasers, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Notes and the Guarantees being delivered on the Closing Date on
the terms and in the manner contemplated in the Offering Memorandum.
(l) 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) under the
Securities Act 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.
(m) 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 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 the Initial Purchasers, impracticable or inadvisable to proceed
with the public offering or delivery of the Notes being delivered on the
Closing Date on the terms and in the manner contemplated in the Offering
Memorandum.
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 Initial Purchasers.
8. Indemnification and Contribution.
(a) The Company and the Guarantors shall jointly and severally
indemnify and hold harmless each Initial Purchaser, its officers and employees
and each person, if any, who controls any Initial Purchaser 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 Notes and Guarantees), to which that Initial Purchaser, 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 (A) in the Offering Memorandum or in any amendment or
supplement thereto or (B) in any blue sky
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application or other document prepared or executed by the Company (or based
upon any written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Series A Notes under the securities
laws of any state or other jurisdiction (any such application, document or
information being hereinafter called a "Blue Sky Application"), (ii) the
omission or alleged omission to state in the Offering Memorandum, 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 Initial Purchaser in connection with, or relating in any manner
to, the Notes 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 Guarantors 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 Initial Purchaser through its gross negligence or willful
misconduct), and shall reimburse each Initial Purchaser and each such officer,
employee or controlling person promptly upon demand for any legal or other
expenses reasonably incurred by that Initial Purchaser, 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 Guarantors
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
the Offering Memorandum, or in any such amendment or supplement, or in any Blue
Sky Application, in reliance upon and in conformity with written information
concerning such Initial Purchaser furnished to the Company by or on behalf of
any Initial Purchaser specifically for inclusion therein. The foregoing
indemnity agreement is in addition to any liability which the Company and the
Guarantors may otherwise have to any Initial Purchaser or to any officer,
employee or controlling person of that Initial Purchaser.
(b) Each Initial Purchaser, severally and not jointly, shall indemnify
and hold harmless the Company, the Guarantors, their officers and employees,
each of their directors, and each person, if any, who controls the Company and
the Guarantors 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, the Guarantors or any such director, officer 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 (A) in the Offering Memorandum or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in the Offering Memorandum, 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 Initial Purchaser furnished to the
Company by or on behalf of that Initial Purchaser specifically for inclusion
therein, and shall reimburse the Company, the Guarantors and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company, such Guarantor or any such director, officer 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. The foregoing indemnity agreement is in
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addition to any liability which any Initial Purchaser may otherwise have to the
Company, the Guarantors or any such director, officer, employee or controlling
person.
(c) Promptly after receipt by an indemnified party under this Section
8 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 8, 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 8 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 8. 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 8 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
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 8 consist of any Initial Purchaser or any of their respective
officers, employees or controlling persons, or by the Company, if the
indemnified parties under this Section consist of the Company, the Guarantors
or any of the Company's or the Guarantors' directors, officers, employees or
controlling persons. 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
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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.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) 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 and the Guarantors on the one hand and the Initial
Purchasers on the other from the offering of the Series A Notes and the Series
A Guarantees 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 and the Guarantors on the one hand and the
Initial Purchasers 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 and the Guarantors on the one hand and the
Initial Purchasers 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
Series A Notes purchased under this Agreement (before deducting expenses)
received by the Company and the Guarantors, on the one hand, and the total
discounts and commissions received by the Initial Purchasers with respect to
the Series A Notes and the Series A Guarantees purchased under this Agreement,
on the other hand, bear to the total gross proceeds from the offering of the
Series A Notes under this Agreement, in each case as set forth in the table on
the cover page of the Offering Memorandum. 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 Guarantors or the Initial
Purchasers, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Guarantors and the Initial Purchasers agree that it would not
be just and equitable if contributions pursuant to this Section 8(d) were to be
determined by pro rata allocation (even if the Initial Purchasers 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 shall be deemed to include, for purposes of this Section 8(d), 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 8(d), no Initial Purchaser shall
be required to contribute any amount in excess of the amount by which the total
price at which the Series A Notes purchased by it was resold to Eligible
Purchasers exceeds the amount of any damages which such Initial Purchaser 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 Initial Purchasers'
obligations to contribute as provided in this Section 8(d) are several in
proportion to their respective underwriting obligations and not joint.
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(e) The Initial Purchasers severally confirm and the Company and the
Guarantors acknowledge that the last paragraph on the cover page, the
stabilization legend on page iii and the last two paragraphs under the caption
"Plan of Distribution" constitute the only information concerning such Initial
Purchasers furnished in writing to the Company by or on behalf of the Initial
Purchasers specifically for inclusion in the Offering Memorandum.
9. Termination. The obligations of the Initial Purchasers hereunder
may be terminated by Lehman Brothers Inc. by notice given to and received by
the Company prior to delivery of and payment for the Series A Notes and the
Series A Guarantees if, prior to that time, any of the events described in
Sections 7(k), 7(m) or 7(n), shall have occurred, the lenders under the Senior
Credit Agreement shall not have consented to the issuance and sale of the Notes
and the use of proceeds therefrom or if the Initial Purchasers shall decline to
purchase the Series A Notes for any reason permitted under this Agreement. The
obligations of the Company and the Guarantors hereunder may be terminated by
the Company by notice given to and received by Lehman Brothers Inc. prior to
delivery of and payment for the Series A Notes and the Series A Guarantees if,
prior to that time, the lenders under the Senior Credit Agreement shall not
have consented to the issuance and sale of the Notes and the use of proceeds
therefrom.
10. Reimbursement of Initial Purchasers' Expenses. If the Company and
the Guarantors shall fail to tender the Series A Notes and the Series A
Guarantees for delivery to the Initial Purchasers by reason of any failure,
refusal or inability on the part of the Company and the Guarantors to perform
any agreement on its part to be performed, or because any other condition of
the Initial Purchasers' obligations hereunder required to be fulfilled by the
Company and the Guarantors is not fulfilled, the Company and the Guarantors
will reimburse the Initial Purchasers for all reasonable out-of-pocket expenses
(including fees and disbursements of counsel) incurred by the Initial
Purchasers in connection with this Agreement and the proposed purchase of the
Series A Notes and the Series A Guarantees, and upon demand the Company and the
Guarantors shall pay the full amount thereof to Lehman Brothers Inc.
11. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Initial Purchasers, 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 to Latham &
Watkins, 885 Third Avenue, New York, New York 10022, Attention: Kirk
A. Davenport (Fax: 212-751-4864) and, in the case of any notice
pursuant to Section 8, to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., Three World Financial Center,
10th Floor, New York, NY 10285; and
(b) if to the Company and the Guarantors, shall be delivered
or sent by mail, telex or facsimile transmission to L-3 Communications
Corporation, 600 Third Avenue, 34th Floor, New York, New York 10016,
Attention: Christopher C. Cambria (Fax: 212-805-5494), with a copy to
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
10017, Attention: Vincent Pagano, Jr. (Fax: (212) 455-2502).
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Any such statements, requests, notices or agreements shall take effect
at the time of receipt thereof. The Company shall be entitled to act and rely
upon any request, consent, notice or agreement given or made on behalf of the
Initial Purchasers by Lehman Brothers Inc.
12. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Initial Purchasers, the
Company, the Guarantors 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 Guarantors contained in this Agreement shall also be deemed
to be for the benefit of the person or persons, if any, who control any Initial
Purchaser within the meaning of Section 15 of the Securities Act and (B) the
indemnity agreement of the Initial Purchasers contained in Section 8(c) of this
Agreement shall be deemed to be for the benefit of directors of the Company and
the Guarantors and any person controlling the Company and the Guarantors 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 12, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
13. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Guarantors and the Initial Purchasers
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
Notes and the Guarantees 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.
14. 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 of the Commission under the Securities Act.
15. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
16. 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.
17. 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]
27
<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Guarantors and the Initial Purchasers, please indicate your acceptance in
the space provided for that purpose below.
Very truly yours,
L-3 Communications Corporation
By:
-----------------------------------------
Name:
Title:
Hygienetics Environmental Services, Inc.
By:
-----------------------------------------
Name:
Title:
L-3 Communications ILEX Systems, Inc.
By:
-----------------------------------------
Name:
Title:
Southern California Microwave, Inc.
By:
-----------------------------------------
Name:
Title:
L-3 Communications SPD Technologies, Inc.
By:
-----------------------------------------
Name:
Title:
28
<PAGE>
L-3 Communications ESSCO, Inc.
By:
-----------------------------------------
Name:
Title:
Storm Control Systems, Inc.
By:
-----------------------------------------
Name:
Title:
DBS Microwave, Inc.
By:
-----------------------------------------
Name:
Title:
SPD Electrical Systems, Inc.
By:
-----------------------------------------
Name:
Title:
SPD Switchgear Inc.
By:
-----------------------------------------
Name:
Title:
Pac Ord Inc.
By:
-----------------------------------------
Name:
Title:
29
<PAGE>
Henschel Inc.
By:
-----------------------------------------
Name:
Title:
SPD Holdings, Inc.
By:
-----------------------------------------
Name:
Title:
Power Paragon, Inc.
By:
-----------------------------------------
Name:
Title:
30
<PAGE>
Accepted:
Lehman Brothers Inc.
NationsBanc Montgomery Securities LLC
By: Lehman Brothers Inc.
By:
-----------------------------------
Authorized Representative
<PAGE>
SCHEDULE 1
Principal
Initial Purchaser: Amount of Notes
- ------------------ ---------------
Lehman Brothers Inc. $175,000,000
NationsBanc Montgomery Securities LLC. 25,000,000
------------
Total $200,000,000
============
32
<PAGE>
EXHIBIT 11
L-3 COMMUNICATIONS HOLDINGS, INC.
COMPUTATION OF BASIC EARNINGS PER COMMON SHARE
AND DILUTED EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED NINE MONTHS NINE MONTHS
-------------------- DECEMBER 31, ENDED ENDED
1998 1997 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------- --------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
BASIC:
Net income ...................... $ 15,100 $ 4,900 $ 16,400 $ 18,690 $ 12,305
======== ======= ======== ======== ========
Weighted average common
shares outstanding ............ 27,357 26,900 26,900 23,870 20,000
======== ======= ======== ======== ========
Basic earnings per common
share ......................... $ 0.55 $ 0.18 $ 0.61 $ 0.78 $ 0.62
======== ======= ======== ======== ========
DILUTED:
Net income ...................... $ 15,100 $ 4,900 $ 16,400 $ 18,690 $ 12,305
======== ======= ======== ======== ========
Common and potential
common shares:
Weighted average common
shares outstanding ............ 27,357 26,900 26,900 23,870 20,000
Assumed exercise of options ..... 2,802 1,646 1,867 2,802 2,482
Assumed purchase of common
shares for treasury ........... (1,555) (937) (1,063) (1,628) (2,470)
-------- ------- -------- -------- --------
Common and potential
common shares ................ 28,604 27,609 27,704 25,044 20,012
======== ======= ======== ======== ========
Diluted earnings per common
share ........................... $ 0.53 $ 0.18 $ 0.59 $ 0.75 $ 0.61
======== ======= ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 23.2
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".
PricewaterhouseCoopers LLP
New York, New York
January 4, 1999
<PAGE>
EXHIBIT 23.3
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 the Registration Statement on Form S-1 and
related Prospectus of L-3 Communications Holdings, Inc. for the registration of
its common stock.
Ernst & Young LLP
Washington, D.C.
January 4, 1999
<PAGE>
EXHIBIT 23.31
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 the Registration Statement on Form S-1 and related Prospectus
of L-3 Communications Holdings, Inc. for the registration of 9,250,000 shares
of its common stock.
Ernst & Young LLP
Melville, New York
January 4, 1999
<PAGE>
EXHIBIT 23.4
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.
KPMG Peat Marwick LLP
Mountain View, California
January 4, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 25, 1998 and February 28, 1997,
accompanying the financial statements of SPD Technologies, Inc. and
Subsidiaries contained in the Registration Statement and Prospectus. We Consent
to the use of the aforementioned reports in the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
"Experts".
Grant Thornton LLP
New York, New York
January 4, 1999
