<PAGE> 1
As Filed With the Securities and Exchange Commission on March 4, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
filed pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 16, 1996
LITTON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 1-3998 95-1775499
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
</TABLE>
21240 Burbank Boulevard, Woodland Hills, California 91367-6675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 589-5000
Page 1 of 21
Exhibit Index appears on Page 2
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
- - - - - - - - - - - - - - - - - - - - - - - -
On February 16, 1996, Litton Industries Inc. (the "Company" or "Litton")
acquired all of the issued and outstanding stock of PRC Inc. ("PRC"), a
subsidiary of The Black & Decker Corporation, pursuant to a Stock Purchase
Agreement dated December 13, 1995. PRC designs, develops, integrates and
supports computer-based information systems and is also involved in the
re-engineering of business processes, mainly for the U.S. Government and its
agencies. This acquisition will be accounted for under the purchase method
of accounting.
The preliminary purchase consideration of $425 million was paid for in cash.
The Company borrowed funds, totaling $400 million, under a revolving credit
agreement with a group of banks. Such credit agreement, along with an amendment
thereto, was filed as Exhibit 4.3 to the Company's 1995 Annual Report on Form
10-K. This agreement is further amended by Exhibit 4 to this filing.
On February 8, 1996, the Company agreed to acquire Steerage Corp. ("Steerage"),
an investment partnership led by J.F. Lehman & Company. Steerage, through its
wholly-owned subsidiary, Sperry Marine Inc., provides advanced electronic
navigation and guidance systems to commercial and military customers for marine
and aircraft applications. Litton will issue approximately 2.2 million shares of
Common stock to affect this combination to be accounted for under the pooling of
interests method. This transaction is expected to close in the third quarter of
the Company's fiscal year 1996.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(a) Financial Statements of Business Acquired:
Audited consolidated financial statements of the business and operations of
PRC Inc. as of December 31, 1995 and for the year ended December 31, 1995.
(b) Pro Forma Financial Information:
Page Number
- - - - - -
17 Introduction to Unaudited Pro Forma Combined Financial
Statements
18 Unaudited Pro Forma Combined Statement of Operations
Six months ended January 31, 1996
19 Unaudited Pro Forma Combined Balance Sheet as of
January 31, 1996
20 Unaudited Pro Forma Combined Statement of Operations
Year ended July 31, 1995
21 Notes to Unaudited Pro Forma Combined Financial Statements
(c) Exhibits:
Exhibit 4: Amendment No. 2 to the Amended and Restated Credit Agreement
dated December 22, 1994, among Litton Industries, Inc., a
group of banks and Morgan Guaranty Trust Company of New York,
as Agent, and Wells Fargo Bank, N.A., as Co-Agent.
Exhibit 23: Consent of Independent Auditors
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LITTON INDUSTRIES, INC.
(Registrant)
By /s/ CAROL A. WIESNER
-----------------------------
Carol A. Wiesner
Vice President and Controller
(Chief Accounting Officer)
March 4, 1996
3
<PAGE> 4
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder of PRC Inc.
We have audited the accompanying consolidated balance sheet of the business and
operations of PRC Inc. (which were purchased by Litton Industries, Inc. on
February 16, 1996) as of December 31, 1995 and the related consolidated
statement of operations, changes in stockholders' 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 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.
As discussed in Note 1, Litton Industries, Inc. completed its purchase of the
business and operations of PRC Inc. from The Black & Decker Corporation on
February 16, 1996.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
business and operations of PRC Inc. (which were purchased by Litton Industries,
Inc. on February 16, 1996) at December 31, 1995, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
February 27, 1996
4
<PAGE> 5
PRC INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 1,052
Receivables, net (Note 3)............................... 245,342
Inventories (Note 4).................................... 12,132
Prepaid expenses and other .............................. 23,433
--------
Total Current Assets................................ 281,959
--------
Property and equipment, net (Note 5)......................... 21,797
Goodwill, net (Note 2)....................................... 40,111
Other assets (Note 6)........................................ 46,194
Deferred income taxes (Note 9)............................... 40,000
--------
Total Assets........................................ $430,061
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable......................................... $ 97,642
Amounts due to Black & Decker (Note 11).................. 65,537
Other current liabilities (Note 7)....................... 42,189
--------
Total Current Liabilities .......................... 205,368
--------
Notes payable to Black & Decker (Notes 1, 11)................ 197,700
Other long term liabilities ................................. 4,916
--------
Total Liabilities................................... 407,984
--------
Commitments and Contingencies (Note 12)
Stockholder's Equity
Common stock ............................................ 1
Capital surplus.......................................... 12,145
Retained earnings........................................ 9,931
--------
Total Stockholder's Equity.......................... 22,077
--------
Total Liabilities and Stockholder's Equity.......... $430,061
========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
5
<PAGE> 6
PRC INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
REVENUES ............................................................................... $ 712,000
EXPENSES
Direct costs....................................................................... 555,190
Indirect operating costs, general and administrative expenses...................... 126,154
Allocated Black & Decker overhead.................................................. 3,750
Amortization of goodwill........................................................... 1,953
---------
Total Operating Expenses....................................................... 687,047
---------
OPERATING INCOME........................................................................ 24,953
Intercompany interest to Black & Decker............................................ (22,932)
Other income, net (Note 8)......................................................... 3,321
---------
INCOME BEFORE INCOME TAXES.............................................................. 5,342
INCOME TAX BENEFIT (Note 9)............................................................. 10,712
---------
NET INCOME.............................................................................. $ 16,054
=========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
6
<PAGE> 7
PRC INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON CAPITAL EARNINGS
STOCK SURPLUS (DEFICIT) TOTAL
------ ------- --------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1995.................................. $ 1 $12,145 $(6,123) $ 6,023
Net income....................................... - - 16,054 16,054
----- ------- ------- -------
Balance, December 31, 1995................................ $ 1 $12,145 $ 9,931 $22,077
===== ======= ======= =======
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
7
<PAGE> 8
PRC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ............................................................................. $ 16,054
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 18,924
Deferred taxes..................................................................... (13,484)
Non-cash transactions with Black & Decker,
principally interest........................................................... 27,937
Loss on sale of property and equipment............................................. 81
Changes in assets and liabilities:
(Increases) decreases in assets:
Receivables............................................................... (12,065)
Inventories............................................................... 9,618
Prepaid expenses and other current assets................................. (1,671)
Non-current assets, net................................................... (13,247)
Increases (decreases) in liabilities:
Accounts payable.......................................................... (14,707)
Other current liabilities................................................. 1,736
Other long-term liabilities............................................... (118)
---------
Net cash provided by operating activities............................................... 19,058
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures............................................................... (12,155)
Proceeds from sale of property and equipment....................................... 457
---------
Net cash used in investing activities................................................... (11,698)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net cash remitted to Black & Decker................................................ (6,887)
---------
Net cash used in financing activities................................................... (6,887)
---------
INCREASE IN CASH AND CASH EQUIVALENTS................................................... 473
Cash and cash equivalents at beginning of year..................................... 579
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................................ $ 1,052
=========
</TABLE>
Interest in the amount of $193 was paid to third parties during the year ended
December 31, 1995. Certain intercompany transactions, including interest on
intercompany indebtedness, were recorded through the intercompany account with
Black & Decker and did not require a payment of cash by the Company.
The notes to the consolidated financial statements are an integral part of these
statements.
8
<PAGE> 9
PRC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position and the consolidated results of operations of the business and
operations of PRC Inc. purchased by Litton Industries Inc. (Litton) on
February 16, 1996. Such business and operations of PRC Inc. purchased by Litton
are herein referred to as the "Company." Prior to February 16, 1996, the
Company was an indirect wholly owned subsidiary of The Black & Decker
Corporation (Black & Decker).
On December 13, 1995, Black & Decker entered into an agreement with Litton to
sell the Company for $425 million in cash. The sale was completed on February
16, 1996. In connection with the sale, the Federal Trade Commission will require
the Company to divest its PMS400D contract with the U.S. Navy within 90 days of
the sale due to an organizational conflict of interest. This contract generated
revenues of $10,543 in 1995 and is not material to the financial position or
operations of the Company.
In connection with the sale of PRC, notes payable to Black & Decker of $197,700
and accrued interest thereon of $44,281 were contributed to the Company's equity
on January 16, 1996. The following table sets forth as of December 31, 1995 the
pro forma capitalization of the Company after giving effect to the contribution
of capital by Black & Decker:
<TABLE>
<CAPTION>
AS PRO FORMA AS
REPORTED ADJUSTMENT ADJUSTED
-------- ---------- --------
<S> <C> <C> <C>
Amounts due to Black & Decker.......................... $ 65,537 $ (44,281) $ 21,256
Notes Payable to Black & Decker........................ 197,700 (197,700) -
Stockholder's Equity:
Common stock.................................. 1 1
Capital surplus............................... 12,145 241,981 254,126
Retained earnings ............................ 9,931 9,931
-------- --------- --------
Total stockholder's equity ................... 22,077 241,981 264,058
-------- --------- --------
Capitalization......................................... $219,777 $264,058
======== ========
</TABLE>
As part of the sale transaction, Black & Decker has agreed to retain certain
liabilities reflected on the accompanying consolidated balance sheet. Such
liabilities total approximately $6.5 million at December 31, 1995.
The Company operates in one dominant business segment, supplying
business-oriented information and other computer-based systems and providing
systems integration, systems engineering, software development and other
professional services. The Company's primary customers are agencies of the
federal government.
9
<PAGE> 10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the entities
comprising the Company as described in Note 1. All significant intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions, in particular estimates of contract costs and revenues used in
the earnings recognition process, that affect the amounts reported in the
financial statements and accompanying notes. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
REVENUE RECOGNITION
The majority of the Company's revenues are derived from cost plus fixed fee,
cost plus award fee, firm fixed price, fixed price incentive or time and
materials contracts.
Revenues from cost plus fixed or award fee contracts are recognized as costs are
incurred and include an estimate of applicable fees earned. Revenues from fixed
price and fixed price incentive contracts are recognized on the percentage of
completion method on the basis of costs incurred in relation to estimated total
cost or upon delivery of specific products or services, when appropriate.
Revenues from time and materials contracts are computed by multiplying the
number of direct labor hours expended in the performance of the contract by the
contract billing rates plus other billable direct costs. In certain
circumstances, revenues are recognized, when appropriate, to the extent that
work has been authorized and performed but formal contract amendments have not
been finalized.
Performance incentives are incorporated in certain contracts, which provide
increased or decreased revenues based on actual performance compared to
established targets. Incentives based upon cost performance are recorded
currently and other incentives and awards are recorded when the amounts can be
reasonably determined or are awarded. Provisions for estimated losses on
contracts are recorded when specifically identified.
RECEIVABLE VALUATION ALLOWANCES
Receivable valuation allowances include amounts to provide for doubtful accounts
and for the potential disallowance of billed or unbilled costs. Allowances to
provide for doubtful accounts are based on a specific review of past due
non-government accounts. Allowances to provide for the potential disallowance of
billed or unbilled costs are made based on ongoing assessments of contract
claims, disputes, Defense Contract Audit Agency (DCAA) audits, and other matters
that could potentially result in claimed costs being determined to be ineligible
for reimbursement.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, and short-term
investments with maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market and principally consist of
material acquired for performance under contracts. The cost of inventories is
primarily based on the first-in, first-out (FIFO) method.
10
<PAGE> 11
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses consist of purchased software licenses, rents, deferred
contract and other costs which are expected to be expensed within one year.
The cost of purchased software licenses and deferred contract costs are charged
to expense based on the revenue recognized or units delivered in relation to
total estimated revenues or units expected to be sold.
PROPERTY AND EQUIPMENT
Property and equipment is stated on an historical cost basis, net of accumulated
depreciation. Property and equipment is depreciated over its estimated useful
life, on the straight-line basis except the double declining balance basis is
used for some computer equipment. In general, the estimated useful lives are as
follows:
Computers and related equipment 4-5 years
Furniture and office equipment 5-7 years
Leasehold improvements Shorter of lease term or
useful life
Machinery and other equipment 5-7 years
RESEARCH AND DEVELOPMENT COSTS
Costs associated with the development of new products and changes to existing
products are included in the consolidated statement of operations as indirect
operating costs, general and administrative expenses as incurred. Product
development costs that are specific to negotiated contracts and are directly
chargeable to and recoverable under the terms of the contracts are included in
direct costs as incurred. During 1995, research and development costs of $1,775
were expensed.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred in connection with specific contracts are
charged to the contract and accounted for in accordance with the terms of the
contract. For products developed for sale outside a specific contract, costs
incurred prior to establishing technological feasibility are charged to expense
as incurred. Costs incurred subsequent to establishing technological feasibility
but prior to general release, including interest costs have been capitalized.
Upon general release, capitalized software development costs are amortized using
the greater of 1) the ratio of current revenues to the total of current and
anticipated revenues or 2) the straight-line method over the product's estimated
useful life. Capitalized software development costs of pre-release software
utilized in contracts in process before the product is available for general
release have been amortized based on such contracts' percentage of revenues to
total anticipated revenues associated with the product. The carrying value of
the deferred development costs are periodically evaluated in consideration of
their net realizable value.
OTHER ASSETS
Other assets consist primarily of purchased software licenses, capitalized
development costs of software to be sold, and deferred contracts' costs related
to various contracts. Long-term deferred contract costs and purchased software
licenses are not expected to be charged to expense within one year.
GOODWILL
Goodwill represents the Company's allocable share of the excess of Black &
Decker's purchase price for the Company over the net assets acquired. The
allocated goodwill is being amortized on the straight-line basis over a period
of 40 years. In the accompanying consolidated balance sheet, goodwill is shown
net of accumulated amortization of $14,376.
11
<PAGE> 12
FINANCIAL INSTRUMENTS
Financial instruments with potential credit risk consist principally of
non-government receivables. At December 31, 1995, the Company had no significant
concentrations of credit risk.
EARNINGS PER SHARE
Earnings per share data has been omitted from the consolidated statements of
operations as the Company was operated as an indirect, wholly owned subsidiary
of Black & Decker.
NOTE 3 - RECEIVABLES
Receivables consist of the following:
<TABLE>
<S> <C>
Amounts billed to customers............................................................. $114,024
Unbilled amounts:
Billable amounts not invoiced...................................................... 65,114
Amounts billable at stipulated stages of completion of contract work............... 65,740
Unbilled amounts pending negotiation or receipt of contract modification........... 3,875
Cost and fee retention billable upon audit of total contract costs................. 7,438
--------
Total unbilled amounts............................................................. 142,167
Receivable valuation allowances......................................................... (10,849)
--------
$245,342
========
</TABLE>
Unbilled receivables at December 31, 1995, include $140,240 under long term
contracts, of which $5,430 is not expected to be collected within one year, and
in accordance with industry practice, has been classified as current in the
accompanying consolidated balance sheet. Approximately 83% of total revenues and
90% of total receivables are related to United States Government contracts.
NOTE 4 - INVENTORIES
All inventories relate to long-term contracts or programs. The classification of
inventories consists of the following:
<TABLE>
<S> <C>
Raw materials and work-in process....................................................... $12,882
Finished goods.......................................................................... 799
Reserve ................................................................................ (1,549)
-------
$12,132
=======
</TABLE>
12
<PAGE> 13
NOTE 5 - PROPERTY AND EQUIPMENT
Major classes of property and equipment are summarized as follows:
<TABLE>
<S> <C>
Computers and related equipment ............................... $ 54,430
Furniture and office equipment ................................ 13,295
Leasehold improvements ........................................ 13,471
Machinery and other equipment ................................. 241
--------
$ 81,437
Less accumulated depreciation and amortization ................ (59,640)
--------
$ 21,797
========
</TABLE>
Depreciation and amortization expense for the year ended December 31, 1995 was
$12,162.
NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Included in other assets is $26,147 of capitalized software development costs,
net of $7,365 of accumulated amortization. Approximately $13,474 of such costs
relate to software products not available for general release at December 31,
1995.
Amortization expense of capitalized development costs of software to be sold for
the year ended December 31, 1995 was $3,967.
The Company capitalized $1,293 of interest cost incurred during 1995 in
connection with the production of software to be sold.
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<S> <C>
Salaries, wages and related payroll taxes ....................... $20,924
Accrued pension/employee benefits ............................... 8,443
Other ........................................................... 12,822
-------
$42,189
=======
</TABLE>
NOTE 8 - OTHER INCOME
Other income primarily represents management service fee income earned during
1995 from a former affiliate. This income will not be earned in the future.
NOTE 9 - INCOME TAXES
Black & Decker files a consolidated federal income tax return that includes all
of its eligible subsidiaries, including the Company. Black & Decker's
consolidated income tax expense is computed under the liability method. The tax
provision included in the consolidated statement of operations has been prepared
on the separate return method except that the change in the deferred tax asset
valuation reserve represents the push down of the portion of the change in the
Black & Decker consolidated deferred tax asset valuation reserve
13
<PAGE> 14
attributable to the Company. Based upon the terms of the sale, Black & Decker's
tax basis in the assets and liabilities of the Company do not survive closing.
Deferred tax assets primarily represent tax basis intangibles with no
corresponding book basis and book reserves. As part of a consolidated group,
current taxes payable are reflected in the Amounts due to Black & Decker on the
consolidated balance sheet.
A reconciliation of income taxes at the federal statutory rate to the Company's
income taxes for the year ended December 31, 1995 is as follows:
<TABLE>
<S> <C>
Income taxes at federal statutory rate ........................ $ 1,870
Goodwill amortization ......................................... 684
Change in deferred tax asset valuation reserve ................ (13,484)
Other, net .................................................... 218
--------
Income taxes .................................................. $(10,712)
========
</TABLE>
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has various defined contribution pension plans covering
substantially all employees, some of which provide for discretionary
contributions by the Company. The expense related to these pension plans for the
year ended December 31, 1995 was $5,167. In addition, the Company sponsors a
401(k) savings plan, which provides for a partial Company match of employee
contributions. Expenses relating to the savings plan for the year ended December
31, 1995 totaled $3,523. These plans are funded on a current basis. Accrued
liabilities for current contributions reflected on the balance sheet are $2,348.
No other significant post employment benefits are provided by the Company,
except as noted in the following paragraph.
The Company maintains an unfunded, supplemental executive retirement plan (SERP)
which provides defined benefits for certain former senior executives. All
participants in the SERP became fully vested upon Black & Decker's acquisition
of the Company. At December 31, 1995, the projected benefit obligation relating
to the SERP was $3,863 and is included in other long-term liabilities in the
accompanying consolidated balance sheet; however, this liability will not be
assumed by Litton. The accumulated benefit obligation did not differ materially
from the projected benefit obligation. The determination of the projected
benefit obligations for 1995 assumed a discount rate of 7%. Net periodic pension
expense recognized by the Company in connection with the SERP for the year ended
December 31, 1995, consisting primarily of an interest component, was $400.
Prior to acquisition of the Company by Black & Decker, a trust was established
to distribute benefits of the SERP. The trust assets remain the property of
Black & Decker and are subject to the claims of general creditors in the event
of insolvency of Black & Decker. Accordingly, the assets of the trust have not
been included in the consolidated balance sheet of the Company. Earnings of the
trust for the year ended December 31, 1995 in the amount of $82, which accrue to
the benefit of Black & Decker, have been allocated to the Company by Black &
Decker through the intercompany account and have been reflected in the
consolidated statement of operations as a reduction of the net periodic pension
expense described above.
14
<PAGE> 15
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company receives services provided by Black & Decker that include cash
management, tax reporting, risk management, and internal audit. Allocated
expenses for such services, amounting to $3,750 for the year ended December 31,
1995, have been included in the Company's costs and expenses. The allocation of
these amounts for all years presented has been based on a method consistent with
Federal Acquisition Regulations and Cost Accounting Standards, which method
provides for the allocation of Black & Decker overhead based primarily on the
relationship of the Company's revenues, payroll and net tangible property to
Black & Decker's consolidated results and conforms to the allocation of Black &
Decker overhead which is recovered in revenue by the Company under government
contracts.
The Company issued a series of notes payable on demand to Black & Decker in the
amount of $290,500 in connection with the issuance of a dividend in 1989. The
notes bear interest at the rate of 12.25% per annum. The principal balance of
the notes at December 31, 1995 is $197,700.
The amounts due to Black & Decker included in the accompanying consolidated
balance sheet represent net balances with Black & Decker as a result of various
intercompany transactions. There are no terms of settlement or interest charges
associated with this intercompany account with Black & Decker. The balance is
primarily the result of the Company's participation in Black & Decker's
centralized cash management program, wherein substantially all of the Company's
cash receipts are remitted to Black & Decker and all of the Company's cash
disbursements are funded by Black & Decker. In addition, certain specific
expenses are paid by Black & Decker on behalf of the Company, including certain
business and workers' compensation insurances, income taxes, and payroll taxes.
Charges to the Company for these expenses represent the actual cost incurred by
Black & Decker or are allocated based upon direct usage by the Company. An
analysis of transactions in this intercompany account for the year ended
December 31, 1995 is as follows:
<TABLE>
<S> <C>
Balance payable at beginning of year .......................... $44,487
Net cash remitted to Black & Decker ...................... (6,887)
Interest expense of notes payable to Black & Decker ...... 24,197
Allocation of Black & Decker overhead .................... 3,750
Insurance expense ........................................ 3,149
Income tax provision ..................................... 2,772
Other non-cash (net) ..................................... (5,931)
-------
Non-cash activity .................................... 27,937
-------
Net Activity ............................................. 21,050
-------
Balance payable at end of year ................................ $65,537
=======
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings and claims with private
and governmental parties, including those relating to contract claims and
disputes, investigation of compliance with government contract regulations, and
employment related matters. In the opinion of management, based upon information
presently available, after consideration
15
<PAGE> 16
of existing accruals, none of these proceedings is likely to have a material
adverse effect upon the consolidated financial position of the Company.
CONTRACT COSTS SUBJECT TO AUDIT
All of the costs incurred by the Company that are directly or indirectly
allocable to United States government contracts or subcontracts are subject to
audit by the DCAA or other government agencies. Payments to the Company under
the terms of its cost reimbursable government contracts, which represent
approximately 35% of total revenues, are subject to adjustment (including
refunds to the government) in the event that claimed costs are determined to be
ineligible for reimbursement.
DCAA or other government agencies' audits of the Company's incurred costs have
been completed for all years through 1993. Final audit reports have been issued
and the Company has reached tentative agreement with the government for all
years through 1991. Future audits and final adjustments are not expected to have
a material effect on the Company's future financial position.
LEASE OBLIGATIONS
The Company is obligated under various non-cancelable leases for office
facilities and equipment. These leases generally provide for renewal options
and, in the case of facilities leases, for periodic rate increases based upon
economic factors. All non-cancelable leases with an initial term greater than
one year have been categorized as either capital or operating leases in
conformity with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases." Capital leases are immaterial in amount.
Future minimum payments under non-cancelable operating leases with initial terms
of one year or more as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 ................................... $ 18,501
1997 ................................... 16,606
1998 ................................... 15,245
1999 ................................... 13,741
2000 ................................... 12,276
Thereafter ............................. 33,159
--------
Total Minimum Lease Payments ........... 109,528
Minimum sublease rentals due ........... (128)
--------
Total future minimum lease payments, net $109,400
========
</TABLE>
Rental expense on operating leases for the year ended December 31, 1995 was
$20,323.
LETTERS OF CREDIT AND GUARANTEES
As of December 31, 1995, and in the ordinary course of business, the Company was
contingently liable for $64.4 million of contract performance or bid bonds with
respect to contracts with state and local governments. Black & Decker has
provided guarantees and indemnities to the issuers of these contract performance
or bid bonds. In addition, Black & Decker has provided guarantees in the amount
of $152.5 million relating to the Company's performance or obligations under
various contracts. Under the terms of the sale agreement, Litton will assume
these guarantees within 60 days of the sale; Black & Decker is indemnified
against claims during this interim period.
16
<PAGE> 17
LITTON INDUSTRIES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial statements have been prepared from
the historical financial statements of Litton, PRC and Steerage. On February
16, 1996, Litton acquired all of the issued and outstanding shares of PRC for a
preliminary purchase price of $425 million in cash. This acquisition will be
accounted for under the purchase method of accounting. The acquisition cost will
be allocated among the net assets of PRC based upon their estimated fair market
values. However, this allocation process has not yet been completed.
Accordingly, the excess purchase price over PRC's net book values is presented
as a separate caption in the pro forma combined balance sheet.
On February 8, 1996, Litton agreed to acquire Steerage, an investment
partnership led by J.F. Lehman & Company. Litton will issue approximately
2.2 million shares of Common stock to affect the acquisition, which will be
accounted for under the pooling of interests method. Accordingly, the amounts
presented herein represent historical amounts with certain reclassifications
made to conform with Litton's presentation.
The operations of PRC and Steerage for the 12 months ended June 30, 1995 have
been combined with Litton's operations for the fiscal year ended July 31, 1995
and the operations for the six months ended December 31, 1995 have been combined
with Litton's operations for the six months ended January 31, 1996. Steerage
results for the prior periods have been excluded because Steerage was previously
subject to a purchase acquisition in November 1993; accordingly, the basis of
its net assets was adjusted to the then fair market values, rendering prior
period operating results incomparable. The following pro forma combined
statements of operations give effect to the combinations as if they had occurred
on August 1, 1994. The pro forma combined balance sheet gives effect to the
combinations as if they had occurred on January 31, 1996. The pro forma
adjustments described in the accompanying notes reflect preliminary estimates
and assumptions that management believes are reasonable in the circumstances.
The pro forma combined financial statements are not necessarily indicative of
what the financial position or results of operations would have been if the
combinations had occurred on the above-mentioned dates. Additionally, they are
not indicative of future results of operations or financial position. The pro
forma combined financial statements should be read in conjunction with Litton's
historical consolidated financial statements and notes thereto, along with PRC's
financial statements for the year ended December 31, 1995 included herein.
17
<PAGE> 18
LITTON INDUSTRIES, INC.
Unaudited Pro Forma Combined Statement of Operations
Six Months Ended January 31, 1996
(thousands of dollars)
<TABLE>
<CAPTION>
Litton PRC Steerage
Historical Historical Historical Pro Forma Combined
At 1-31-96 At 12-31-95 At 12-31-95 Adjustments(10) Total
<S> <C> <C> <C> <C> <C>
Sales and Service Revenues $1,575,639 $400,770 $78,310 $2,054,719
Costs and Expenses
Cost of sales 1,230,620 314,533 57,303 1,602,456
Selling, general and administrative 178,708 58,273 10,177 247,158
Depreciation and amortization 49,620 9,821 2,002 $ 2,615 (5) 64,058
Intercompany interest to Black &
Decker - 10,897 - (10,897)(9) -
Other interest - net 39 - 1,836 12,855 (6) 14,730
---------- -------- ------- -------- ----------
Total 1,458,987 393,524 71,318 4,573 1,928,402
---------- -------- ------- -------- ----------
Earnings before Taxes on Income 116,652 7,246 6,992 (4,573) 126,317
Taxes on Income (47,244) 10,712 (3,021) (11,781)(7) (51,334)
---------- -------- ------- -------- ----------
Net Earnings $ 69,408 $ 17,958 $ 3,971 $(16,354) $ 74,983
========== ======== ======= ======== ==========
Earnings per Share (8):
Primary $ 1.45 $ 1.50
========== ==========
Fully Diluted $ 1.45 $ 1.50
========== ==========
</TABLE>
See accompanying notes.
18
<PAGE> 19
LITTON INDUSTRIES, INC.
Unaudited Pro Forma Combined Balance Sheet
January 31, 1996
(thousands of dollars)
<TABLE>
<CAPTION>
Litton PRC Steerage
Historical Historical Historical Pro Forma Combined
At 1-31-96 At 12-31-95 At 12-31-95 Adjustments(10) Total
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and marketable securities $ 133,846 $ 1,052 $ 226 $ (90,592)(1),(3),(4) $ 44,532
Accounts receivable, net 412,292 245,342 31,832 689,466
Inventories less progress billings 537,948 12,132 32,645 582,725
Deferred tax assets 363,948 - 2,714 366,662
Prepaid expenses 21,705 23,433 1,349 46,487
---------- -------- -------- --------- ----------
Total Current Assets 1,469,739 281,959 68,766 (90,592) 1,729,872
---------- -------- -------- --------- ----------
Property, Plant and Equipment, net 618,087 21,797 29,882 669,766
Goodwill and Other Intangibles, net 240,337 40,111 17,708 (40,111)(5) 258,045
Excess of Purchase Price over Net Assets
Acquired - - - 213,297 (1),(5) 213,297
Other Assets and Long-Term Investments 273,126 46,194 3,285 (1,781)(3) 320,824
---------- -------- -------- --------- ----------
Total Assets $2,601,289 $390,061 $119,641 $ 80,813 $3,191,804
========== ======== ======== ========= ==========
Liabilities and Shareholders' Investment
Current Liabilities
Accounts payable $ 677,307 $110,464 $ 26,161 $ (2,000)(11) $ 811,932
Intercompany amounts due to
Black & Decker - 65,537 - (65,537)(9) -
Payrolls and related expenses 240,731 29,367 2,985 273,083
Taxes on income 97,681 - 1,976 99,657
Notes payable and current portion of
long-term obligations 29,441 - 12,050 (12,050)(3) 29,441
Other current liabilities 250,390 - 7,078 257,468
---------- -------- -------- --------- ----------
Total Current Liabilities 1,295,550 205,368 50,250 (79,587) 1,471,581
---------- -------- -------- --------- ----------
Intercompany notes payable to
Black & Decker - 197,700 - (197,700)(9) -
Long-term Obligations 93,272 4,916 47,530 350,050 (1),(3),(11) 495,768
Postretirement Benefit Obligations Other
than Pensions 206,211 - - 206,211
Deferred Tax Liabilities 58,127 (40,000) 2,699 40,000 (5) 60,826
Other Long-term Liabilities 120,590 - - 120,590
Redeemable Cumulative Preferred Stock - - 8,092 (8,092)(4) -
Shareholders' Investment
Capital Stock
Non-voting convertible preferred stock - - 140 (140)(2) -
Voting preferred stock - Series B 2,053 - - 2,053
Common stock 46,318 1 10 2,189 (1),(2) 48,518
Additional paid-in capital 287,538 12,145 5,740 (14,195)(1),(2) 291,228
Retained earnings 520,856 9,931 3,682 (11,712)(1),(3) 522,757
Cumulative currency translation
adjustment (29,226) - 1,498 (27,728)
---------- -------- -------- --------- ----------
Total Shareholders' Investment 827,539 22,077 11,070 (23,858) 836,828
---------- -------- -------- --------- ----------
Total Liabilities and Shareholders'
Investment $2,601,289 $390,061 $119,641 $ 80,813 $3,191,804
========== ======== ======== ========= ==========
</TABLE>
See accompanying notes.
19
<PAGE> 20
LITTON INDUSTRIES, INC.
Unaudited Pro Forma Combined Statement of Operations
Fiscal Year Ended July 31, 1995
(thousands of dollars)
<TABLE>
<CAPTION>
Litton PRC Steerage
Historical Historical Historical Pro Forma Combined
At 7-31-95 At 6-30-95 At 6-30-95 Adjustments(10) Total
<S> <C> <C> <C> <C> <C>
Sales and Service Revenues $3,319,725 $714,072 $134,738 $4,168,535
Costs and Expenses
Cost of sales 2,646,342 543,048 94,684 3,284,074
Selling, general and administrative 348,014 123,786 23,101 494,901
Depreciation and amortization 95,356 16,442 4,277 $ 5,042 (5) 121,117
Intercompany interest to Black & Decker - 23,981 - (23,981)(9) -
Other interest - net 3,053 - 4,286 25,837 (6) 33,176
---------- -------- -------- -------- ----------
Total 3,092,765 707,257 126,348 6,898 3,933,268
---------- -------- -------- -------- ----------
Earnings before Taxes on Income 226,960 6,815 8,390 (6,898) 235,267
Taxes on Income (91,945) - (4,256) 33 (7) (96,168)
---------- -------- -------- -------- ----------
Net Earnings $ 135,015 $ 6,815 $ 4,134 $ (6,865) $ 139,099
========== ======== ======== ======== ==========
Earnings per Share (8):
Primary $ 2.84 $ 2.80
========== ==========
Fully Diluted $ 2.84 $ 2.80
========== ===========
</TABLE>
See accompanying notes.
20
<PAGE> 21
LITTON INDUSTRIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) To record the acquisition of PRC for $25 million in cash and $400 million
in long-term borrowings under the purchase method of accounting.
(2) To record issuance of Litton Common stock to affect the acquisition of
Steerage under the pooling of interests method.
(3) To reflect repayment of Steerage's notes and term loan payable at
acquisition.
(4) To reflect the mandatory redemption of Steerage's outstanding cumulative
preferred stock at acquisition.
(5) The allocation of the excess PRC purchase price over the net assets
acquired between tangibles, intangibles with a definite life and
intangibles with an indefinite life has not been completed. The pro forma
statements of operations presented herein reflect the amortization of this
excess amount over an estimated composite life of 30 years, net of PRC's
historical goodwill amortization.
(6) To record interest expense on long-term borrowings incurred in connection
with the PRC acquisition and reduction in interest income on the cash
portion of the purchase price. The estimated effective rates used were
based on the weighted-average of the applicable rates in effect during
fiscal year 1995 and the six months ended January 31, 1996, respectively.
The effects of a .125% change in the interest rates would be approximately
$500 thousand for the fiscal year ended July 31, 1995 and approximately
$250 thousand for the six months ended January 31, 1996.
(7) To provide for income taxes on pro forma adjustments and PRC's earnings at
an estimated combined statutory tax rate of 40%.
(8) Pro forma earnings per share is based on historical weighted average
common shares outstanding and common stock equivalent shares plus the
estimated number of shares, 2,200,000, to be issued in connection with the
Steerage acquisition. The historical number of primary and fully diluted
shares for fiscal year ended July 31, 1995 were 47,187,934 and 47,261,898,
respectively. The corresponding historical shares for the six months
ended January 31, 1996 were 47,490,275 and 47,644,726.
(9) To eliminate PRC intercompany debt due to its former parent which was
not assumed by Litton and to eliminate related intercompany interest
expense on the pro forma combined statements of operations.
(10) The transaction costs to be incurred by Litton and Steerage, which are
estimated to be $400 thousand and $3 million, respectively, have not been
reflected in the pro forma combined statements of operations presented
herein. These costs will be expensed at the time of closing.
(11) To exclude PRC liabilities totalling $6.5 million not assumed.
21
<PAGE> 1
Exhibit 4
[CONFORMED COPY]
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT dated as of November 30, 1995 among LITTON INDUSTRIES, INC.
(the "Borrower"), the BANKS listed on the signature pages hereof (the "Banks"),
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent") and WELLS
FARGO BANK, N.A., as Co-Agent (the "Co-Agent"):
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into an Amended and
Restated Credit Agreement dated as of December 22, 1994 (as heretofore amended,
the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement to extend the
term thereof and to modify the rates of interest and fees payable thereunder.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. Amendment of Section 1.01 of the Agreement. Section 1.01
of the Agreement is amended by replacing the date "December 22, 1999" in the
definition of Termination Date with the date "December 22, 2000."
SECTION 3. Pricing Schedule. The Agreement is further amended by
replacing the existing Pricing Schedule with the attached Pricing Schedule.
<PAGE> 2
SECTION 4. Representations and Warranties. The Borrower hereby
represents and warrants that as of the date hereof and after giving effect
hereto:
(a) no Default under the Agreement has occurred and is continuing; and
(b) each representation and warranty of the Borrower set forth in the
Agreement is true and correct as though made on and as of this date.
SECTION 5. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6. Counterparts; Conditions to Effectiveness. This Amendment
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment shall become effective as of the date hereof when
the Agent shall have received duly executed counterparts hereof signed by the
Borrower and all of the Banks (or, in the case of any party as to which an
executed counterpart shall not have been received, the Agent shall have received
telegraphic, telex or other written confirmation from such party of execution
of a counterpart hereof by such party).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
LITTON INDUSTRIES, INC.
By: /s/ Timothy G. Paulson
---------------------------
Title: Vice President and
Treasurer
2
<PAGE> 3
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ Diana H. Imhof
--------------------------------
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Lori Y. Kannegieter
--------------------------------
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Craig J. Rethmeyer
--------------------------------
Title: Vice President
CHEMICAL BANK
By: /s/ James B. Treger
--------------------------------
Title: Vice President
UNION BANK OF SWITZERLAND,
Los Angeles Branch
By: /s/ James I. Chu
--------------------------------
Title: Assistant Vice
President
By: /s/ L. Scott Summers
--------------------------------
Title: Vice President
3
<PAGE> 4
WELLS FARGO BANK, N.A.
By: /s/ Craig T. Ingram
---------------------------------
Title: Vice President
THE BANK OF NOVA SCOTIA
By: /s/ M. Van Otterloo
---------------------------------
Title: Senior Relationship
Manager
CIBC INC.
By: /s/ Paul M. Mohme
---------------------------------
Title: Associate Director
CREDIT SUISSE
By: /s/ Stephen M. Flynn
---------------------------------
Title: Member of Senior
Management
By: /s/ Deborah A. Shea
---------------------------------
Title: Associate
DRESDNER BANK AG
By: /s/ Jon M. Bland
---------------------------------
Title: Senior Vice President
By: /s/ Barbara J. Readick
---------------------------------
Title: Vice President
4
<PAGE> 5
MELLON BANK, N.A.
By: /s/ Lawrence C. Ivey
-----------------------------------
Title: Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/ Tom F. Scharfenberg
-----------------------------------
Title: Vice President
SWISS BANK CORPORATION,
San Francisco Branch
By: /s/ Jamie Dillon
-----------------------------------
Title: Director -
Merchant Banking
By: /s/ Hans-Ueli Surber
-----------------------------------
Title: Executive Director -
Merchant Banking
BANK OF HAWAII
By: /s/ D. Edward Wohlleb
-----------------------------------
Title: Vice President
FIRST INTERSTATE BANK OF
CALIFORNIA
By: /s/ Daniel H. Hom
-----------------------------------
Title: Vice President
5
<PAGE> 6
NBD BANK, N.A.
By: /s/ James R. Frye
--------------------------------
Title: First Vice President
THE NORTHERN TRUST COMPANY
By: /s/ James F.T. Monhart
--------------------------------
Title: Vice President
TORONTO DOMINION (TEXAS), INC.
By: /s/ Frederick B. Hawley
--------------------------------
Title: Vice President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By: /s/ Diana H. Imhof
--------------------------------
Title: Vice President
WELLS FARGO BANK, N.A.,
as Co-Agent
By: /s/ Craig T. Ingram
--------------------------------
Title: Vice President
6
<PAGE> 7
PRICING SCHEDULE
The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any
day are the respective percentages set forth below in the applicable row under
the column corresponding to the Status that exists on such day:
<TABLE>
<CAPTION>
Level Level Level Level Level
Status I II III IV V
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Euro Dollar .16% .20% .30% .375% .50%
Margin
- -------------------------------------------------------------
CD Margin .285% .325% .425% .50% .625%
- -------------------------------------------------------------
Facility Fee .09% .10% .125% .175% .25%
Rate
- -------------------------------------------------------------
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings:
"D&P" means Duff & Phelps Credit Rating Co., and its successors.
"Level I Status" exists at any date if, at such date, the Borrower's
long-term debt is rated A-/A3 or higher by at least two Rating Agencies.
"Level II Status" exists at any date if, at such date, (i) the
Borrower's long-term debt is rated BBB+/Baa1 or higher by at least two Rating
Agencies and (ii) Level I Status does not exist at such date.
"Level III Status" exists at any date if, at such date, (i) the
Borrower's long-term debt is rated BBB/Baa2 or higher by at least two Rating
Agencies and (ii) neither Level I Status nor Level II Status exists at such
date.
"Level IV Status" exists at any date if, at such date, (i) the
Borrower's long-term debt is rated BBB-/Baa3 or higher by at least two Rating
Agencies and (ii) none of Level I Status, Level II Status or Level III Status
exists at such date.
"Level V Status" exists at any date, if at the close of business on
such date, none of Level I Status,
7
<PAGE> 8
Level II Status, Level III Status and Level IV Status exists.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Rating Agencies" means D&P, Moody's and S&P.
"S&P" means Standard & Poor's Ratings Group, and its successors.
"Status" refers to the determination of which of Level I Status, Level
II Status, Level III Status, Level IV Status or Level V Status exists at any
date.
The credit ratings to be utilized for purposes of determining a Status
hereunder are those assigned to the senior unsecured long-term debt of the
Borrower without third-party credit enhancement, and any rating assigned to any
other debt of the Borrower shall be disregarded; provided that if at any time
the Borrower's senior unsecured long-term debt is rated by exactly two Rating
Agencies and the ratings assigned to such debt by such two Rating Agencies are
more than one full rating category apart, Status shall be determined based on a
rating one category higher than the lower of such two ratings (e.g., if the S&P
rating is BBB+, the Moody's rating is Baa3 and there is no D&P rating, then
Level III Status shall exist); provided further that if at any time the
Borrower's senior unsecured long-term debt, without third party credit
enhancement, is not rated by at least two Rating Agencies, then Status shall be
Level V Status. The rating in effect at any date is that in effect at the close
of business on such date.
8
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) Registration Statement No.
2-93044 on Form S-8, (ii) Registration Statement No. 33-27467 on Form S-8, (iii)
Registration Statement No. 33-27468 on Form S-8, (iv) Registration Statement No.
33-44684 on Form S-3 and (v) Registration Statement No. 33-55944 on Form S-8 of
Litton Industries, Inc. of our report dated February 27, 1996, with respect to
the consolidated financial statements of the business and operations of PRC Inc.
(which were purchased by Litton Industries, Inc. on February 16, 1996) included
in this Current Report on Form 8-K/A to be filed with the Securities and
Exchange Commission on or about March 1, 1996.
/s/ Ernst & Young LLP
Washington, D.C.
February 27, 1996
