<PAGE> 1
Filed Pursuant to Rule 424(b)4
Registration No. 333-05491
PROSPECTUS
5,710,672 Shares
TRACOR
COMMON STOCK
------------------------
OF THE 5,710,672 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 4,475,765 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 1,234,907 SHARES ARE BEING OFFERED INITIALLY OUTSIDE
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 5,710,672 SHARES OF COMMON STOCK BEING OFFERED
HEREBY, 2,143,400 SHARES ARE BEING SOLD BY THE COMPANY AND 3,567,272
SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "SELLING
STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS
FROM THE SALE OF THE SHARES BEING SOLD BY THE SELLING
STOCKHOLDERS. THE COMMON STOCK IS QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "TTRR." ON JULY 2,
1996, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $18.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 HEREOF FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $17 1/2 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
-------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Per Share....................... $ 17.500 $ .875 $ 16.625 $ 16.625
Total(3)........................ $99,936,760 $4,996,838 $35,634,025 $59,305,897
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) The Company has agreed to pay the expenses of the offering, estimated at
$481,500.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of 856,600
additional shares at the price to public less underwriting discounts and
commissions, for the purpose of covering over-allotments, if any. If the
U.S. Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to the Company and Proceeds
to Selling Stockholders will be $114,927,260, $5,746,363, $49,875,000 and
$59,305,897, respectively. See "Underwriters."
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Skadden,
Arps, Slate, Meagher & Flom, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about July 9, 1996, at the office of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in immediately available funds.
MORGAN STANLEY & CO.
Incorporated
BEAR, STEARNS & CO. INC.
BT SECURITIES CORPORATION
OPPENHEIMER & CO., INC.
July 2, 1996
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITERS."
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7 AND 10B-8 UNDER THE EXCHANGE ACT.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING
STOCKHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company, by the Selling Stockholders or by any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company, by the
Selling Stockholders and by the Underwriters to inform themselves about and to
observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 9
Westmark Acquisition.................................................................. 10
Use of Proceeds....................................................................... 11
Price Range of Common Stock and Series A Warrants..................................... 12
Dividend Policy....................................................................... 12
Capitalization........................................................................ 13
Selected Historical and Pro Forma Financial Data...................................... 14
Selected Historical Sales Percentages................................................. 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Business.............................................................................. 21
Management............................................................................ 33
Selling Stockholders.................................................................. 36
Shares Eligible for Future Sale....................................................... 38
Description of Capital Stock.......................................................... 39
Underwriters.......................................................................... 40
Legal Matters......................................................................... 42
Experts............................................................................... 43
Available Information................................................................. 43
Incorporation of Certain Documents By Reference....................................... 44
Index to Financial Statements......................................................... F-1
</TABLE>
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto included elsewhere or
incorporated by reference in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes no exercise of the U.S. Underwriters'
over-allotment option and no exercise of outstanding options. See
"Underwriters." Certain capitalized terms which are used but not defined in this
summary are defined elsewhere in this Prospectus.
THE COMPANY
Tracor, Inc. (collectively with its subsidiaries, "Tracor" or the
"Company") provides sophisticated electronic products, systems and services for
the U.S. Department of Defense ("DOD"), other U.S. government agencies, foreign
governments and commercial customers. The Company's business units operate
primarily in the U.S. and foreign defense electronics markets and largely
support existing high-priority DOD weapons, platforms and systems. The Company's
products and services enable defense customers to enhance the operational
performance and readiness of existing weapons as well as extend their useful
lives and survivability. As a result, the Company believes it is well positioned
to benefit from fundamental changes in national defense strategy precipitated by
the end of the Cold War. Since August 1993, the Company has made three
substantial acquisitions as part of its strategy to take advantage of a
consolidating defense industry. Largely as a result of such acquisitions,
Tracor's revenues and net income have increased from $261.8 million and $4.5
million, respectively, in 1992 to $998.1 million and $26.7 million,
respectively, on a pro forma basis in 1995.
A key component of the Company's strategy has been establishing itself as
an industry leader in several high-priority DOD program areas, including:
- Navy Systems Engineering and Integration: Tracor is a major
provider of systems engineering and integration services to the U.S.
Navy and is the principal systems integrator for certain key
programs, including both the radio communications suite for cruisers
and destroyers equipped with the AEGIS weapon system and the
submarine ballistic missile program. The Company has a similar
position in other key programs, including shipboard anti-air warfare
guided missile systems (including AEGIS) and the Tomahawk cruise
missile.
- Imagery Exploitation and Mission Planning: Tracor develops enhanced
image interpretation and mission planning systems for the DOD and
provides these high-priority systems to several critical areas
within the defense and intelligence markets.
- Countermeasures Dispensers: The Company designed, and currently is
the only manufacturer of, the most advanced and widely used
countermeasures dispenser systems in the U.S. and is a major
supplier of countermeasures expendables in the domestic and
international defense markets. These systems provide an important,
cost-effective means of protecting combat aircraft and crews.
- Drones: Tracor designs, modifies and converts military aircraft
into remotely controlled aerial targets ("drones") and produces
sub-scale drones, both of which are critical elements of weapons
testing and evaluation. To date, the Company has produced more
full-scale target drones than any other DOD contractor.
- Automatic Test Systems: The Company supplies avionics automatic
test equipment to the U.S. Air Force which substantially improves
the readiness of advanced military aircraft, including the F-16
fighter. Tracor also is supplying test equipment for the new
Japanese F-2 fighter.
The Company believes its established positions in high-priority program
areas are due, in part, to its longstanding, consistently high-quality
performance under existing contracts. Tracor has won substantially all material
contract recompetitions in which it has been involved in the last several years
and is the recipient of numerous performance awards, including more than 20 Blue
Ribbon awards, placing the Company among the approximately top one percent of
contractors who received the award based on their individual records for on-
schedule deliveries with no quality defects. For the high-priority AEGIS
program, Tracor provides primary
3
<PAGE> 4
support for a U.S. Navy unit which won an unprecedented thirteenth AEGIS
Excellence Award. All Tracor units emphasize continuous improvement to increase
efficiencies and enhance competitiveness. Two operations recently achieved ISO
9001 certification and a third achieved ISO 9002, enabling the Company to reduce
costs associated with military specifications and to comply with foreign
customer requirements. One of Tracor's major subsidiaries also achieved the
Software Engineering Institute ("SEI") Level 3 certification, placing it in the
elite class of the 10 percent of software companies which have adopted a
standard software process for both management and engineering activities. The
Company's competitive performance and cost structure have allowed it to develop
strong, long-lasting relationships with its major customers. The Company has
been the prime contractor for services and products for many of the U.S.
government's key existing programs for periods ranging from 15 to 40 years, and
in many cases has been involved in the evolution of a program or weapons class
since its inception. The Company currently is performing under approximately 740
contracts with approximately 105 separate agencies of the U.S. government. This
existing business base led to a firm backlog of $966 million on April 30, 1996.
The two other primary components of Tracor's business strategy are (i)
strategic acquisitions of companies with complementary business areas where
significant consolidation and cost reduction opportunities exist and (ii) the
expansion into new business areas which complement existing technological
expertise. The Company's recent acquisitions have broadened and strengthened the
Company's position in core business areas and have created significant
opportunities for cost savings. The acquisition of Vitro Corporation and its
subsidiaries (individually and collectively, "Vitro") in August 1993 established
the Company as a major provider of engineering and management support to the
U.S. Navy. The acquisition of GDE Holdings, Inc. and its subsidiaries
(individually and collectively, "GDE") in November 1994 established Tracor as a
major provider of advanced digital imagery and mission planning technology and
has made it the largest supplier of avionics automatic test equipment to the
U.S. Air Force. The acquisitions of Vitro and GDE also established Tracor as a
key supplier to the civilian and defense intelligence organizations of the U.S.
government. The acquisition of AEL Industries, Inc. ("AEL") in February 1996
strengthened Tracor's position in long-term electronic warfare production
programs and added key capabilities in radio frequency, antenna and microwave
technologies. The Company has a large employee base with special high-level
security clearances, which are critical for building a presence in the
intelligence market. The Company is also actively developing commercial and
other nondefense applications for its technology in a number of diverse markets.
The largest portion of Tracor's business is in the operations and
maintenance segment of the U.S. defense budget. Operations and maintenance now
exceeds procurement as the largest segment of the DOD budget. DOD operations and
maintenance expenditures emphasize maintaining the readiness of armed forces and
are concentrated on upgrading the effectiveness of existing combat systems and
on extending their useful lives. Because the Company is a major supplier of
systems and services which improve effectiveness, prolong the life of existing
weapons platforms and enhance the survivability of combat systems at a
relatively low cost, management believes the Company will benefit from these
priorities in the DOD budget. A modest increase in the procurement portion is
expected, and Tracor is well positioned to benefit from this upturn.
Tracor is organized under the laws of Delaware with principal executive
offices located at 6500 Tracor Lane, Austin, Texas 78725 (telephone number:
(512) 926-2800).
4
<PAGE> 5
MAJOR ACQUISITIONS
In recent years the Company has completed three important acquisitions in
connection with the implementation of its broader business strategy. In August
1993, Tracor acquired Vitro for approximately $92 million. This acquisition more
than doubled Company revenues and made the combined entity a major provider of
systems engineering and integration support to the U.S. Navy. In November 1994,
the Company purchased GDE for approximately $102 million (the "GDE
Acquisition"), which established the Company as a major provider of advanced
digital imagery technology to both the DOD and the intelligence community. In
February 1996, the Company purchased AEL for approximately $103 million (the
"AEL Acquisition") which strengthened Tracor's position in long-term electronic
warfare production programs and added key capabilities in radio frequency,
antenna and microwave technologies.
The acquisitions of Vitro, GDE and AEL have strengthened the Company's core
businesses and enhanced the Company's ability to compete in non-traditional
business areas. In particular, the Company expects to have an increased ability
to bid on contracts in new business areas which draw upon complementary
capabilities or customer relationships of any or all of the acquired companies.
In addition, since the acquisition of Vitro, significant cost savings have been
realized resulting from the consolidation of facilities, staff reductions,
process improvements and elimination of other duplicative costs. While a
substantial portion of such savings will also result in reductions in sales
under cost-reimbursement contracts, the Company's cost competitiveness should be
enhanced. The Company has also realized significant net cost savings in
connection with the GDE Acquisition and has identified substantial savings in
connection with the AEL Acquisition. Management believes the continuing
consolidation within the defense industry will result in additional
opportunities for the Company to make attractive acquisitions.
WESTMARK ACQUISITION
On June 13, 1996, the Company consummated the acquisition (the "Westmark
Acquisition") of substantially all of the assets of Westmark Systems, Inc.
("Westmark"). The purchase consideration paid by Tracor to Westmark in the
Westmark Acquisition included 8,267,435 shares of Common Stock. The principal
assets of Westmark acquired by Tracor in the Westmark Acquisition were 978,458
shares of Class A Common Stock, a Series B Warrant to purchase 5,249,428 shares
of Common Stock (the "Series B Warrant"), and a Series C Warrant to purchase
5,455,000 shares of Common Stock (the "Series C Warrant" and, together with the
Series B Warrant, the "Tracor Warrants"). The shares of the Class A Common Stock
and the Tracor Warrants were cancelled and will not be reissued. See "Westmark
Acquisition."
RISK FACTORS
An investment in the Common Stock involves certain risks that a prospective
investor should carefully consider, including risks associated with the
Company's high degree of leverage and reliance on acquisitions for growth, as
well as industry related risks associated with potential reductions or changes
in military expenditures and risks associated with government contracts.
Prospective investors should also consider the potential adverse effects of
substantial future sales of Common Stock, an issuance of preferred stock by the
Company and the application of certain provisions of state law which may
discourage parties from seeking to acquire the Company. See "Risk Factors."
5
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered(1):
Common Stock Offered by the Company........ 2,143,400 shares
Common Stock Offered by the Selling
Stockholders............................ 3,567,272 shares
Total Common Stock Offered......... 5,710,672 shares
U.S. Offering.............................. 4,475,765 shares
International Offering..................... 1,234,907 shares
Common Stock to be outstanding after the
Offering................................... 23,760,580 shares
Common Stock and Common Stock
Equivalents to be outstanding after the
Offering(2)................................ 26,741,778 shares
Use of proceeds by the Company............... To reduce indebtedness, which will provide the
Company with more financial flexibility to
pursue its ongoing strategies, including
appropriate acquisitions. The Company will not
receive any proceeds from the sale of shares
of Common Stock by the Selling Stockholders.
Nasdaq National Market symbol................ TTRR
</TABLE>
- ---------------
(1) Assumes no exercise of the U.S. Underwriters' over-allotment option. See
"Underwriters."
(2) Includes 1,753,410 shares of Common Stock issuable upon exercise of employee
stock options outstanding as of March 31, 1996, of which 618,250 were
exercisable as of March 31, 1996 and an additional 285,070 will become
exercisable on or before September 30, 1996. Also includes 1,227,788 shares
deliverable upon exercise of warrants. See "Shares Eligible for Future
Sale."
6
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary financial data should be read in conjunction with the
historical consolidated financial statements of Tracor, Inc. and the Unaudited
Pro Forma Condensed Combined Financial Information of Tracor, Inc. and AEL
Industries, Inc. and the related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," all of which are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- -------------------------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- -------------------- ---------- ------------------------------------------
1996(1)(2) 1996 1995 1995(1) 1995 1994(3) 1993(3) 1992
--------- --------- --------- ---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $245,900 $ 229,047 $ 211,241 $ 998,110 $ 886,920 $ 694,037 $ 407,495 $ 261,835
Cost of sales..................... 204,884 181,993 168,627 796,792 713,802 568,020 333,852 214,070
Selling, administrative, and
general expenses................ 30,849 27,607 26,239 125,709 104,928 78,201 49,889 36,639
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before interest and
income taxes.................... 10,167 19,447 16,375 75,609 68,190 47,816 23,754 11,126
Interest expense.................. 6,461 5,683 5,398 27,380 19,496 16,771 8,277 3,746
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes........ 3,706 13,764 10,977 48,229 48,694 31,045 15,477 7,380
Income taxes...................... 2,115 6,103 4,727 21,556 20,831 12,498 6,200 2,850
-------- -------- -------- -------- -------- -------- -------- --------
Net income........................ $ 1,591 $ 7,661 $ 6,250 $ 26,673 $ 27,863 $ 18,547 $ 9,277 $ 4,530
======== ======== ======== ======== ======== ======== ======== ========
SHARE DATA:
Historical and pro forma(4):
Net income per common and common
equivalent share:
Primary....................... $ .08 $ .32 $ .30 $ 1.18 $ 1.23 $ .96 $ .56 $ .32
Fully diluted................. $ .08 $ .32 $ .30 $ 1.18 $ 1.23 $ .93 $ .54 $ .32
Weighted average common and
common equivalent shares...... 24,878 24,878 23,138 24,168 24,168 22,113 22,069 21,953
As adjusted(5):
Net income per common and common
equivalent share:
Primary....................... $ .07 $ 1.18
Fully diluted................. $ .07 $ 1.18
Weighted average common and
common equivalent shares...... 23,418 22,645
OPERATING AND OTHER DATA:
EBITDA(6)......................... $ 17,685 $ 25,786 $ 22,018 $ 105,770 $ 91,044 $ 62,562 $ 33,368 $ 17,940
Capital expenditures.............. 3,884 2,754 1,721 18,890 13,676 11,007 8,435 7,360
Firm backlog...................... 995,960 995,960 785,163 1,001,378 923,978 806,228 590,366 301,502
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
AS ADJUSTED
FOR THE
WESTMARK
ACQUISITION
AND THE
HISTORICAL OFFERING(5)(7)
---------- --------------
(in thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $152,976 $151,476
Total assets........................... 616,370 615,034
Total long-term debt................... 306,699 271,547
Shareholders' equity................... 144,671 178,421
</TABLE>
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(1) The pro forma income statement data, share data and operating and other data
have been derived from the Unaudited Pro Forma Condensed Combined Financial
Information of Tracor, Inc. and AEL Industries, Inc. and give effect to the
AEL Acquisition (consummated February 22, 1996), the financing thereof and
the payment of fees and expenses in connection therewith, as if the
acquisition and related financing thereof had occurred as of January 1,
1995.
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<PAGE> 8
(2) Reflects charges to net income by AEL prior to the AEL Acquisition as
follows:
<TABLE>
<S> <C>
Charges to income before income taxes:
Provision for loss on fixed price contracts.............................. $ 8,403
Lower of cost or market inventory reserve................................ 800
Non-recurring compensation expense related to the sale of AEL............ 819
Other non-recurring costs related to the sale of AEL..................... 1,500
-------
Total charges to income before income taxes................................ 11,522
Tax effect of the above charges............................................ (4,109)
-------
Total charges to net income................................................ $ 7,413
=======
</TABLE>
(3) Reflects the acquisition of GDE on November 17, 1994 and the acquisition of
Vitro on August 25, 1993.
(4) Both primary and fully diluted net income per share amounts are computed in
accordance with the modified treasury stock method using the weighted
average common shares outstanding and equivalents assuming the exercise of
all outstanding warrants and options for common shares. The modified
treasury stock method of calculating earnings per share is used whenever the
number of shares of common stock obtainable upon the exercise of outstanding
options and warrants in the aggregate exceeds 20% of the number of common
shares outstanding at the end of the period. The modified treasury stock
method limits the Company's assumed purchase of common stock acquired to
satisfy option and warrant exercises to 20% of the outstanding common
shares. The balance of proceeds is assumed to be used to retire debt and any
remaining balances of funds are assumed to be reinvested in U.S. government
securities or commercial paper.
(5) In addition to giving effect to the AEL Acquisition, reflects the
cancellation of the Class A Common Stock, the Series B Warrant and the
Series C Warrant and the issuance of 8,267,435 shares of Common Stock in the
Westmark Acquisition, as if such shares had been issued on January 1, 1995.
Both primary and fully diluted net income per share amounts are computed in
accordance with the treasury stock method. The treasury stock method is used
rather than the modified treasury stock method discussed in footnote (4)
above, because the Company's outstanding options and warrants in the
aggregate after the Westmark Acquisition do not exceed 20% of the number of
common shares outstanding at the end of the period. Unlike the modified
treasury stock method, the treasury stock method does not limit the
Company's assumed purchase of common stock acquired to satisfy option and
warrant exercises.
(6) "EBITDA" represents, for any relevant period, earnings before interest and
income taxes, plus depreciation of property, plant and equipment and
amortization of intangible assets. EBITDA is not a measure of performance or
financial condition under generally accepted accounting principles, but is
presented to provide additional information related to debt service
capability. EBITDA should not be considered in isolation or as a substitute
for other measures of financial performance or liquidity under generally
accepted accounting principles.
(7) As adjusted to reflect the receipt of estimated net proceeds from the sale
of 2,143,400 shares of Common Stock offered by the Company hereby, at the
price to the public of $17 1/2 per share and after deducting underwriting
discounts and commissions and other estimated offering expenses. This
excludes net proceeds to the Company from the sale of shares of Common Stock
pursuant to the exercise of the Underwriters' over-allotment option.
8
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors prior to making an
investment in the Common Stock offered hereby.
HIGH LEVERAGE
The Company is highly leveraged. The Company's leverage could have the
following consequences for holders of the Common Stock: (a) additional financing
for working capital, capital expenditures, acquisitions, or other purposes may
be difficult to obtain; (b) a substantial portion of cash flow from operations
must be dedicated to the payment of principal and interest on indebtedness; and
(c) the Company may be more vulnerable to defense industry or general economic
downturns which may limit its ability to withstand competitive pressures.
As of March 31, 1996, the Company's total indebtedness and stockholders'
equity were $283.8 million and $144.7 million, respectively. See
"Capitalization." The Company's ability to meet debt service obligations and to
reduce total debt will be dependent upon its future performance, which, in turn,
will be subject to general conditions in the defense industry and to financial,
business and other factors affecting the operations of the Company, many of
which are beyond its control.
RELIANCE ON ACQUISITIONS FOR GROWTH
Expansion through acquisitions is an important component of the Company's
growth strategy. However, the Company's continued ability to grow by acquisition
is dependent upon, and may be limited by, the availability of acquisition
candidates at reasonable prices, limitations in the Company's existing debt
agreements and the Company's ability to obtain acquisition financing on
acceptable terms. Competition in making acquisitions may come from larger
companies with significantly greater resources. Without additional acquisitions
and successful expansions and diversifications, the Company's ability to
continue to grow successfully could be adversely affected. To the extent that
the Company issues shares of Common Stock to finance any acquisition, existing
stockholders may experience dilution. Further, there can be no assurance that
the Company's management will be able to maintain or enhance the profitability
of any acquired business or consolidate its operations to achieve cost savings.
See "-- High Leverage," "-- Risks of Reductions or Changes in Military
Expenditures" and "Business -- Company Strategy."
RISKS OF REDUCTIONS OR CHANGES IN MILITARY EXPENDITURES
The primary customers of the Company are the U.S. Navy, Air Force, Army and
other agencies of the DOD. Sales under contracts with the DOD or under
subcontracts that identified the DOD as the ultimate purchaser represented
approximately 81% of the Company's 1995 sales. The U.S. defense budget has been
declining in real terms since the mid-1980s, resulting in some delays in new
program starts, program stretch-outs and program cancellations. The U.S. defense
budget has begun to stabilize and, for the first time since the mid-1980s,
increased in 1996, excluding inflation. Approximately 70% of the Company's DOD
business is funded by the operations and maintenance portion of the defense
budget, which has declined less than any other segment and is expected to
comprise approximately one-third of the defense budget over the next decade. A
further significant decline in U.S. military expenditures, particularly in the
operations and maintenance portion of the defense budget, or a reapportioning of
such expenditures reducing the operations and maintenance segment, might
materially and adversely affect the Company's sales and earnings. The loss or
significant curtailment of the Company's material U.S. military contracts would
materially and adversely affect the Company's future sales and earnings. See
"Business -- Major Customers."
UNCERTAINTY ASSOCIATED WITH GOVERNMENT CONTRACTS
The Company's contracts with the U.S. government and its prime contractors
are subject to termination either upon default by the Company or at the
convenience of the U.S. government. Termination for convenience provisions
generally entitle the Company to recover costs incurred, settlement expenses and
profit on work completed prior to termination. In addition to the right of the
U.S. government to terminate, U.S.
9
<PAGE> 10
government contracts are conditioned upon the continuing availability of
congressional appropriations. 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 outset of a major program, the contract is
usually partially funded, and additional monies are normally, incrementally,
committed to the contract by the procuring agency from appropriations made by
Congress for future fiscal years. See "Business -- Government Contracts."
The Company in the ordinary course of its business occasionally performs
under contracts for which funding authorization from the U.S. government has
either expired or not been obtained. No assurance can be given that the Company
will realize the revenue expected from performing under such contracts.
Because the Company contracts to supply goods and services to the U.S.
government, it is also subject to other risks, including contract suspensions,
protests by disappointed bidders of contract awards which can result in the
re-opening of the bidding process and changes in government policies or
regulations. See "Business -- Government Contracts."
SHARES ELIGIBLE FOR FUTURE SALE
The 8,267,435 shares of Common Stock issued in the Westmark Acquisition are
eligible for sale in the public market, subject to certain limitations under the
Securities Act of 1933, as amended (the "Securities Act"), applicable to
affiliates of Westmark and certain agreements entered into among certain
affiliates of Westmark which limit the number of shares available to be sold by
such affiliates of Westmark to approximately one-half of the amount received by
them in the Westmark Acquisition during the two years following the consummation
of the Westmark Acquisition. Former shareholders of Westmark have two demand
registration rights and unlimited incidental and piggy-back registration rights.
Sales of substantial amounts of Common Stock (including shares that may be
issued upon the exercise of employee stock options or shares deliverable upon
exercise of warrants), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. In addition, the
timing and amount of sales of any additional shares of Common Stock by
stockholders may have an adverse effect on the Company's ability to raise
additional equity capital. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the Board of
Directors to issue preferred stock without stockholder approval. The Board of
Directors could use the preferred stock as a means to delay, defer or prevent a
takeover attempt that a stockholder might consider in the Company's best
interest. In addition, certain provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws might impede a merger, consolidation,
takeover or other business combination involving the Company, as well as
specified transactions with an interested stockholder. See "Description of
Capital Stock."
WESTMARK ACQUISITION
On June 13, 1996, the Company consummated the Westmark Acquisition. The
purchase consideration paid by Tracor to Westmark in the Westmark Acquisition
included 8,267,435 shares of Common Stock. The principal assets of Westmark
acquired by Tracor in the Westmark Acquisition were 978,458 shares of Class A
Common Stock and the Tracor Warrants. The shares of the Class A Common Stock and
the Tracor Warrants were cancelled and will not be reissued.
The Company's management believes the benefits of the Westmark Acquisition
include the following:
- - Simplified Capital Structure: The shares of Class A Common Stock and Tracor
Warrants acquired in the Westmark Acquisition have been cancelled and will not
be reissued, resulting in a simplified capital structure. In addition, the
cancellation of the Tracor Warrants will eliminate the requirement, for future
financial reporting periods, that the Company utilize the "modified treasury
method" of calculating earnings per share, a complex method not widely used or
understood.
10
<PAGE> 11
- - Orderly Distribution of Shares: The resale of shares by Selling Stockholders
pursuant to this Prospectus and pursuant to other registration rights granted
to holders of Common Stock received in connection with the Westmark
Acquisition will provide for an orderly distribution of shares of Common
Stock. Of the 8,267,435 shares of Common Stock issued to Westmark in the
Westmark Acquisition, approximately 3.9 million shares of Common Stock
(approximately 47% of the total issued to Westmark) are subject to resale
restrictions contained in agreements among certain former shareholders of
Westmark that restrict sales during the two-year period following consummation
of the transaction. Of the shares of Common Stock not subject to such resale
restrictions, 3,567,272 shares of Common Stock are being offered for sale
pursuant to this Prospectus.
- - Broader Stockholder Base: As a result of the liquidation of Westmark in
connection with the Westmark Acquisition, the shares of Common Stock issued in
the Westmark Acquisition are now held by approximately 64 stockholders rather
than one stockholder. Additionally, as a result of the sale of shares of
Common Stock by Selling Stockholders pursuant to this Prospectus, the
Company's stockholder base will be further broadened.
See "Selected Historical and Pro Forma Financial Data."
USE OF PROCEEDS
The net proceeds from the sale of the 2,143,400 shares of Common Stock
offered by the Company hereby are estimated to be approximately $35,152,525
million ($49,393,500 if the Underwriters' over-allotment option is exercised in
full). The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Stockholders.
The net proceeds to be received by the Company will be used to retire a
portion of its indebtedness under its amended and restated credit agreement (the
"Amended Credit Agreement"), which will provide the Company with more financial
flexibility to pursue its ongoing strategies, including appropriate
acquisitions. The Amended Credit Agreement provides for three term loan
facilities and the net proceeds to be received by the Company from the Offering
will be applied proportionately to partial repayment of these facilities. Such
loan facilities bear interest at the Eurodollar rate plus 2 1/2%, 3% and 3 1/4%,
respectively, resulting in a weighted average interest rate of 8.43% at July 2,
1996. The loan facilities mature on October 31, 1999, October 31, 2000, and
April 30, 2001, respectively. On February 22, 1996, the indebtedness under the
Amended Credit Agreement was increased by $135 million, primarily to finance the
AEL Acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
11
<PAGE> 12
PRICE RANGE OF COMMON STOCK AND SERIES A WARRANTS
The Common Stock and Series A Warrants are listed on the Nasdaq National
Market where they have traded since late 1992 under the symbols "TTRR" and
"TTRRW," respectively. Prior thereto, the Common Stock and Series A Warrants had
a limited trading market and were not listed on a national securities exchange.
The following table sets forth the high and low closing sales price of the
Common Stock and Series A Warrants reported by the Nasdaq National Market for
the periods indicated:
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK WARRANTS
-------------- --------------
1996
-----------------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter.............................................. $17 7/16 $14 $15 $11 7/8
Second Quarter............................................. 21 1/8 17 1/8 18 1/2 14 5/8
Third Quarter (through July 2, 1996)....................... 18 17 3/4 15 3/4 15 1/4
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter.............................................. $14 $10 $11 3/8 $ 7 1/2
Second Quarter............................................. 14 1/4 11 3/8 11 3/4 8 7/8
Third Quarter.............................................. 18 1/8 13 5/8 15 5/8 11 1/8
Fourth Quarter............................................. 16 7/8 14 1/2 14 5/8 11 7/8
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter.............................................. $10 1/8 $ 7 7/8 $ 7 1/2 $ 5 5/8
Second Quarter............................................. 8 1/2 615/16 6 1/8 5
Third Quarter.............................................. 8 3/4 7 1/8 7 1/8 5 1/4
Fourth Quarter............................................. 12 5/8 7 1/2 10 5 1/2
</TABLE>
On July 2, 1996, the last reported sales prices of the Company's Common
Stock and Series A Warrants on the Nasdaq National Market were $18 per share and
$15 3/4 per warrant, respectively. As of June 3, 1996, the Company had
approximately 6,992 holders of the Common Stock, of which 262 were stockholders
of record. As of June 3, 1996, the Company had 3 holders of record for the
Series A Warrants.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock, although
Tracor's predecessor company ("Old Tracor") paid dividends in certain years
prior to 1989. The Company currently intends to retain its earnings for the
foreseeable future to provide funds for the expansion of its business. The
payment of dividends in the future will be at the sole discretion of the Board
of Directors and will depend upon the Company's profitability, financial
condition, capital needs, future prospects, contractual restrictions and other
factors deemed relevant by the Board of Directors. The Amended Credit Agreement
and the indentures pursuant to which the Company's 10 7/8% Senior Subordinated
Notes due 2001 (the "Senior Subordinated Notes") and the 10 7/8% Senior
Subordinated Series A Notes due 2001 (the "Series A Notes") were issued
currently impose certain limitations on the payment of dividends. See Note G to
the Consolidated Financial Statements of Tracor, Inc.
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1996: (i) on a historical basis, (ii) as adjusted for the
Westmark Acquisition and (iii) as adjusted for the Westmark Acquisition and the
sale of shares by the Company offered hereby at the offering price to the public
of $17 1/2 per share. The table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
historical consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
AS ADJUSTED
FOR THE
AS ADJUSTED WESTMARK
FOR THE ACQUISITION
WESTMARK AND THE
HISTORICAL ACQUISITION OFFERING
---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Revolving loan......................................... $ -- $ -- $ --
Term loans............................................. 180,000 180,000 144,848
Senior Subordinated Notes.............................. 105,000 105,000 105,000
Series A Notes......................................... 10,947 10,947 10,947
Other.................................................. 10,752 10,752 10,752
-------- -------- --------
Total long-term debt................................ 306,699 306,699 271,547
Less current portion of long-term debt................. 22,921 22,921 22,921
-------- -------- --------
Long-term debt, net of current maturities........... 283,778 283,778 248,626
Shareholders' equity:
Preferred stock........................................ -- -- --
Common stock........................................... 132 215 236
Class A common stock................................... 10 -- --
Additional paid-in capital............................. 76,651 75,176 110,307
Retained earnings...................................... 67,878 67,878 67,878
-------- -------- --------
Total shareholders' equity.......................... 144,671 143,269 178,421
-------- -------- --------
Total capitalization..................................... $ 428,449 $ 427,047 $427,047
======== ======== ========
</TABLE>
- ---------------
Excludes net proceeds to the Company from the sale of shares of Common Stock
pursuant to the exercise of the U.S. Underwriters' over-allotment option.
At March 31, 1996, the Company had $40 million available under its revolving
loans facility.
13
<PAGE> 14
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain selected historical and pro forma
financial data of Tracor. The historical data as of December 31, 1995, 1994,
1993 and 1992 has been derived from the consolidated financial statements of the
Company. The historical data as of December 31, 1991 has been derived from the
combined financial statements of the Company's predecessor. The historical
financial data for the three months ended March 31, 1996 and 1995 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. The pro forma data has been derived
from the Unaudited Pro Forma Condensed Combined Statements of Income of Tracor
and AEL which are included elsewhere herein and reflects the acquisition of AEL
as if it had occurred on January 1, 1995. The information below should be read
in conjunction with the consolidated financial statements of the Company, the
pro forma condensed combined financial statements, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of GDE and AEL and the notes related thereto, all of which
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------- ---------------------------------------------------------------------
OLD TRACOR
HISTORICAL
PRE-REORGA-
HISTORICAL HISTORICAL NIZATION(4)
PRO FORMA ------------------- PRO FORMA ----------------------------------------- ------------
1996(1)(2) 1996 1995 1995(1) 1995 1994(3) 1993(3) 1992 1991
--------- -------- -------- ---------- -------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............. $245,900 $229,047 $211,241 $ 998,110 $886,920 $694,037 $407,495 $261,835 $253,610
Cost of sales......... 204,884 181,993 168,627 796,792 713,802 568,020 333,852 214,070 215,710
Selling,
administrative, and
general expenses.... 30,849 27,607 26,239 125,709 104,928 78,201 49,889 36,639 35,592
-------- -------- -------- --------- -------- -------- -------- -------- --------
Earnings before
interest and income
taxes............... 10,167 19,447 16,375 75,609 68,190 47,816 23,754 11,126 2,308
Reorganization
costs............... -- -- -- -- -- -- -- -- 13,803
Fresh start
adjustments......... -- -- -- -- -- -- -- -- 16,211
Interest expense...... 6,461 5,683 5,398 27,380 19,496 16,771 8,277 3,746 9,129
-------- -------- -------- --------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary
gain................ 3,706 13,764 10,977 48,229 48,694 31,045 15,477 7,380 (36,835)
Income taxes.......... 2,115 6,103 4,727 21,556 20,831 12,498 6,200 2,850 2,941
-------- -------- -------- --------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary
gain................ 1,591 7,661 6,250 26,673 27,863 18,547 9,277 4,530 (39,776)
Extraordinary gain
from forgiveness of
debt................ -- -- -- -- -- -- -- -- 428,427
-------- -------- -------- --------- -------- -------- -------- -------- --------
Net income............ $ 1,591 $ 7,661 $ 6,250 $ 26,673 $ 27,863 $ 18,547 $ 9,277 $ 4,530 $388,651
======== ======== ======== ========= ======== ======== ======== ======== ========
SHARE DATA:
Historical and pro
forma:
Net income per
share:
Primary........... $ .08 $ .32 $ .30 $ 1.18 $ 1.23 $ .96 $ .56 $ .32 --(5)
Fully diluted..... $ .08 $ .32 $ .30 $ 1.18 $ 1.23 $ .93 $ .54 $ .32 --(5)
Weighted average
common and common
equivalent
shares............ 24,878 24,878 23,138 24,168 24,168 22,113 22,069 21,953 --(5)
As adjusted(6):
Net income per
share:
Primary........... $ .07 $ 1.18
Fully diluted..... $ .07 $ 1.18
Weighted average
common and common
equivalent
shares............ 23,418 22,645
OPERATING AND OTHER
DATA:
Capital
expenditures........ $ 3,884 $ 2,754 $ 1,721 $ 18,890 $ 13,676 $ 11,007 $ 8,435 $ 7,360 $ 3,769
Depreciation and
amortization........ 7,518 6,339 5,643 30,161 22,854 14,746 9,614 6,814 10,495
Firm backlog.......... 995,960 995,960 785,163 1,001,378 923,978 806,228 590,366 301,502 286,901
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------
DECEMBER 31,
MARCH 31, --------------------------------------------------------
1996 1995 1994(3) 1993(3) 1992 1991
--------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................. $152,976 $129,129 $ 95,392 $ 87,140 $ 45,977 $ 41,828
Total assets..................................... 616,370 467,456 444,086 305,733 139,771 135,921
Total long-term debt............................. 306,699 191,175 205,738 144,302 50,194 62,113
Shareholders' equity............................. 144,671 136,965 90,592 63,167 52,345 41,542
</TABLE>
- ---------------
(1) The pro forma income statement data, share data and operating and other data
have been derived from the Unaudited Pro Forma Condensed Combined Financial
Information of Tracor, Inc. and AEL Industries, Inc. and give effect to the
AEL Acquisition (consummated February 22, 1996), the financing thereof and
the payment of fees and expenses in connection therewith, as if the
acquisition and related financing thereof had occurred as of January 1,
1995.
<TABLE>
<S> <C>
(2) Reflects charges to net income by AEL prior to the AEL Acquisition as
follows:
Charges to income before income taxes:
Provision for loss on fixed price contracts..................................................... $ 8,403
Lower of cost or market inventory reserve....................................................... 800
Non-recurring compensation expense related to the sale of AEL................................... 819
Other non-recurring costs related to the sale of AEL............................................ 1,500
-------
Total charges to income before income taxes....................................................... 11,522
Tax effect of the above charges................................................................... (4,109)
-------
Total charges to net income....................................................................... $ 7,413
=======
</TABLE>
(3) Reflects the acquisition of Vitro on August 25, 1993, and the acquisition of
GDE on November 17, 1994.
(4) Commission regulations require the presentation of pre-reorganization
(predecessor) data, which represents a different reporting entity and is
prepared on a different basis of accounting and, accordingly, has been
separated from post-reorganization data by vertical double lines.
(5) The combined entities shown in the pre-reorganization history did not have a
defined capital structure, and, accordingly, share data is not provided.
(6) In addition to giving effect to the AEL Acquisition, reflects the
cancellation of the Class A Common Stock, the Series B Warrant and the
Series C Warrant and the issuance of 8,267,435 shares of Common Stock in the
Westmark Acquisition, as if such shares had been issued on January 1, 1995.
15
<PAGE> 16
SELECTED HISTORICAL SALES PERCENTAGES
The following table presents certain income statement data as a percentage
of net sales for the three months ended March 31, 1996 and 1995 and for the
years ended December 31, 1995, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- -----------------------------------
1996 1995 1995 1994 1993 1992
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 79.5 79.8 80.5 81.8 81.9 81.8
----- ----- ----- ----- ----- -----
Gross profit.............................. 20.5 20.2 19.5 18.2 18.1 18.2
Operating expenses.......................... 11.0 11.4 10.8 10.9 11.9 14.0
Intangible amortization..................... 1.1 1.0 1.0 0.4 0.3 --
----- ----- ----- ----- ----- -----
Total selling, administrative, and general
expenses............................... 12.1 12.4 11.8 11.3 12.2 14.0
----- ----- ----- ----- ----- -----
Earnings before interest and income taxes... 8.5 7.8 7.7 6.9 5.8 4.2
Interest expense............................ 2.5 2.6 2.2 2.4 2.0 1.4
----- ----- ----- ----- ----- -----
Income before taxes......................... 6.0 5.2 5.5 4.5 3.8 2.8
Income taxes................................ 2.7 2.2 2.3 1.8 1.5 1.1
----- ----- ----- ----- ----- -----
Net income.................................. 3.3% 3.0% 3.1% 2.7% 2.3% 1.7%
===== ===== ===== ===== ===== =====
</TABLE>
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Approximately 88% of the products, systems, and services of Tracor, Inc.
and its subsidiaries ("Tracor" or the "Company") are sold to the U.S. government
through direct contracts, primarily with agencies of the U.S. Department of
Defense ("DOD"), or through subcontracts with other U.S. government contractors.
Beginning in the mid-1980s, the defense industry in general was negatively
impacted by the perceived reduction of threats from the former Soviet Union and
eastern European countries and, more recently, by competing demands upon the
federal budget. While this has resulted in a U.S. defense budget that has
decreased in real dollars, adjusted for inflation, over the last decade, it
recently began to stabilize. For the first time in many years, the total U.S.
defense budget increased in 1996, excluding inflation. Approximately 70% of the
Company's DOD sales are funded by the operations and maintenance segment of the
defense budget in areas which are among today's top DOD priorities. This segment
has declined less than other segments of the budget as readiness priorities have
emerged. It is now the largest segment of the defense budget and it is projected
to comprise about one-third of the defense budget over the next decade. The
procurement portion of the budget is expected to experience a modest increase
over this same time frame, and Tracor is also well positioned to benefit from
this upturn.
The contraction of the defense budget in recent years and the attendant
excess capacity and increase in competition for contracts among defense
companies has resulted in a significant consolidation in the industry.
Principally through several acquisitions, the Company has substantially
increased its revenue base and reduced combined overhead costs through staff
reductions, facilities consolidations, process improvements, and the elimination
of certain other duplicative costs. These efficiencies and increased revenue
base have enhanced Tracor's cost competitiveness in bidding on new contracts and
recompetes of existing contracts. Management is continuing to pursue its
acquisition strategy and believes the continuing consolidation within the
defense industry will result in opportunities to pursue additional selected
acquisitions, both large and small, which should allow the Company to continue
to expand its revenue base and further improve its cost-competitive position.
While the long-term impact of changes in the defense budget and the
industry consolidation cannot be predicted with certainty, management believes
the Company is well positioned to continue to leverage its strengths and
successes in the U.S. defense and intelligence marketplaces and increase its
ongoing diversification efforts into foreign defense markets, nondefense U.S.
government markets, and selected commercial markets.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996, Versus Three Months Ended March 31, 1995
The results of operations for the three months ended March 31, 1996,
include the operating results of AEL since the date of acquisition, February 22,
1996. AEL's results are not included in the comparative prior period of 1995.
Sales and operating profits increased approximately 8% and 19%,
respectively, due to improved operating results throughout the Company and the
acquisition of AEL. Sales increased approximately 4% as a result of the
acquisition of AEL. Other sales increases were due primarily to deliveries of
mission planning workstations and increased revenues from QF-4 drone production
and MQM-107E sub-scale drone development contracts. Operating profits increased
approximately 3% from the acquisition of AEL. Other operating profit increases
were the result of increased sales and slightly higher profit margins on those
sales.
Interest expense increased 5% compared to the first quarter of 1995 due
primarily to the additional term debt borrowed in conjunction with the AEL
Acquisition. This increase was reduced by lower interest expense on Series A
Notes due to a payment of $3.8 million in March 1995 and by increased investment
interest income.
17
<PAGE> 18
The effective tax rate increased from 43% to 44% due to an increase in
combined federal and state income tax rates.
The Company's results of operations were significantly affected by major
acquisitions completed in 1994 and 1993. The results of operations of the
acquired companies are included only from their respective dates of acquisition.
(See Note A to the Consolidated Financial Statements of Tracor, Inc.)
Year Ended December 31, 1995, Versus Year Ended December 31, 1994
On November 17, 1994, Tracor purchased all of the outstanding common stock
of GDE Holdings, Inc., including its wholly owned subsidiaries (individually and
collectively referred to as "GDE"). GDE designs, develops, manufactures, and
supports automatic test systems, imagery and information systems, and mission
planning systems. The acquisition was accounted for using the purchase method,
and, accordingly, the purchase price ($102 million) and the liabilities assumed
($76 million) were allocated to the assets acquired ($104 million) based on
their respective fair values at the date of the acquisition. The resulting
excess of the purchase price over the fair value of the net assets acquired ($74
million) is being amortized over 30 years.
Sales increased 28% for the year due to the acquisition of GDE, while
Tracor's sales from its preacquisition business remained relatively constant.
Increased revenues from a new contract for the production of sub-scale drones
and the production of drones under the QF-4 contract were offset by reductions
in existing and newly awarded engineering contracts.
Selling, general, and administrative expenses were 11.8% of sales in 1995,
up from 11.3% of sales in 1994. While total operating expenses included in
selling, general, and administrative expenses remained constant at 10.9% of
sales in 1995 and 1994, the operating expenses from Tracor's preacquisition
business decreased as a percent of sales from 10.7% in 1994 to 10.0% in 1995.
Amortization expense, also included in selling, general, and administrative
expenses, increased from less than .5% of sales in 1994 to 1% of sales in 1995
due to additional intangible assets arising from the acquisition of GDE. The
Company's operating profits increased 51% due primarily to the acquisition of
GDE. Excluding GDE's results, earnings increased 3% due to higher profit margins
on engineering contracts and electronic countermeasures systems.
Fully diluted earnings per share increased from $.93 in 1994 to $1.23 in
1995. A $1.2 million pretax gain on the sale of real estate contributed $.03 to
earnings per share in the third quarter of 1995. Weighted average common and
common equivalent shares used in the computations increased from 22.1 million in
1994 to 24.2 million in 1995 due primarily to a public offering of common stock
completed in May 1995.
Interest expense increased $4.4 million as a result of the issuance of
$10.9 million of 10 7/8% Senior Subordinated Series A Notes and $55 million
additional senior term debt borrowed in conjunction with the GDE Acquisition.
This increase was offset by a slight reduction in interest rates on the senior
term debt and by increased investment interest income of $1.7 million.
Income taxes were incurred at statutory federal, state, and foreign rates,
with an increase in the effective tax rate of 40% in 1994 to 42.7% in 1995. Such
increase is primarily the result of increased nondeductible amortization expense
of goodwill. At December 31, 1995, Tracor had a net deferred income tax asset of
$8.6 million, primarily arising from acquisitions. Based on the Company's prior
operating earnings and its forecast of future income, management believes it is
more likely than not that all net deferred income tax assets will be realized.
The realization of deferred tax assets will be evaluated periodically.
Year Ended December 31, 1994, Versus Year Ended December 31, 1993
On August 25, 1993, the Company purchased all of the outstanding common
stock of Vitro Corporation, including its wholly owned subsidiaries
(individually and collectively referred to as "Vitro"). Vitro provides
management and engineering expertise for the design, development, acquisition,
production, test, operation, maintenance, and modernization of ships,
submarines, missiles, aircraft, and complex computer systems. The acquisition
was accounted for using the purchase method, and, accordingly, the purchase
price ($92 million) and the liabilities assumed ($62 million) were allocated to
the assets acquired ($130 million) based on their
18
<PAGE> 19
respective fair values at the date of acquisition. The resulting excess of the
purchase price over the fair value of the net assets acquired ($24 million) is
being amortized over 25 years.
Sales increased 70%, consisting of an increase of 74% due to the
acquisitions of Vitro and GDE (previously discussed), offset partially by a
decrease of 4% in the operations of Tracor's pre-acquisition businesses.
Earnings before interest and income taxes increased a total of 101%
primarily resulting from an increase of 77% due to the acquisitions of Vitro and
GDE. Other increases of approximately 24% resulted primarily from higher profits
on deliveries of electronic countermeasures systems and, in general, from
reductions of combined overhead costs resulting from staff reductions,
facilities consolidation, process improvements, and the elimination of other
duplicative costs.
Fully diluted earnings per share, which increased from $.54 for 1993 to
$.93 for 1994, were based on the weighted average common and common equivalent
shares in both years of 22.1 million. Weighted average common and common
equivalent shares decreased during the year due to treasury purchases of 975,000
shares and increased with the issuance of approximately 1.9 million common
shares in conjunction with the acquisition of GDE. The net effect of these
changes in common shares outstanding had no material effect on fully diluted
earnings per share for the year of 1994.
Interest expense increased substantially with the full-year effect of the
issuance of $105 million of Senior Subordinated Notes in conjunction with the
Vitro acquisition, the issuance of $14.8 million of Series A Notes and
additional senior term debt borrowed in conjunction with the GDE Acquisition,
and higher average term debt interest rates for the year.
Income taxes were incurred at the statutory federal, state, and foreign
rates, with effective tax rates of 40% in both 1994 and 1993. The federal income
tax legislation enacted in 1993 is not expected to have a material impact on
liquidity, financial condition, or results of operations.
FINANCIAL CONDITION AND LIQUIDITY
Working capital increased to $153.2 million at March 31, 1996, compared to
$129.1 million at December 31, 1995, due primarily to the AEL Acquisition. The
ratio of current assets to current liabilities was 2.1 at March 31, 1996,
compared to 2.3 at December 31, 1995. Cash provided by operating activities
decreased in the first quarter of 1996 compared to the first quarter of 1995
primarily due to the timing of changes in accounts receivable, inventories, and
accounts payable. Accounts receivable decreased in the prior period due to the
accelerated collection of billings related to contract deliveries. Inventories
increased in the first quarter of 1996 in support of various programs and spare
parts inventories. Accounts payable decreased during the current quarter due to
the timing of subcontractor progress payments and the funding of insurance
programs. In addition to these working capital changes, cash increased in the
first quarter of 1995 due to the receipt of an income tax refund related to the
preacquisition period of an acquired company. Normal capital expenditures of
$2.8 million and scheduled long-term debt payments of $2.6 million were incurred
in the quarter. The proceeds from the Amended Credit Agreement and cash on hand
were used to finance the AEL Acquisition, to retire approximately $10 million of
debt assumed in the acquisition, and to pay approximately $5 million of
financing costs.
No borrowings were made from the Company's $40 million revolving loans
facility during the quarter. At March 31, 1996, the Company had outstanding
letters of credit of approximately $38.2 million, leaving $11.8 million
available under its $50 million letters of credit facility. If the $50 million
letters of credit facility should become fully utilized, $20 million of the
revolving loans facility, to the extent then available, can be used for issuance
of additional letters of credit. Existing letters of credit secure performance
commitments on certain contracts with foreign customers and serve as collateral
for certain insurance policies.
At March 31, 1996, the Company had firm backlog, which includes funded and
unfunded contractual commitments, of $996 million, as compared to $924 million
at December 31, 1995. Included in firm backlog at March 31, 1996, is $76.7
million of backlog attributable to AEL. Approximately 79% of firm backlog
represents contracts with agencies of the U.S. government or its prime
contractors, and about 78% is expected
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to be earned within one year. In addition, the Company's backlog of unexercised
contract options on U.S. government contracts was $1.1 billion at March 31,
1996, compared to $948.9 million at December 31, 1995.
The Company's operations typically do not require large capital
expenditures, and there were no material capital commitments at March 31, 1996.
Except for available amounts under the Amended Credit Agreement's revolving
loans and letters of credit facilities, the Company's present debt position
limits its ability to obtain substantial additional debt for operational
purposes in the near future. However, management believes the net proceeds from
the sale of Common Stock offered by the Company hereby, existing cash, funds
generated by continuing operations, and the Amended Credit Agreement will
provide sufficient resources to allow the Company to meet its obligations, fund
capital requirements, and continue to pursue its business strategy. Management
also believes it can obtain the necessary resources to pursue further
acquisitions in the ongoing U.S. defense industry consolidation.
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BUSINESS
GENERAL
Tracor provides a variety of sophisticated electronic products, systems and
services for the DOD, other U.S. government agencies, foreign governments and
commercial customers. The Company's business units operate primarily in the U.S.
and foreign defense electronics markets and have developed recognized
proficiency in designing, developing, producing and supporting high-priority
defense systems. The Company's products and services enable defense customers to
enhance the operational performance and readiness of existing systems and
platforms, as well as extend their useful lives and survivability.
INDUSTRY OVERVIEW
Beginning in the mid-1980s, the U.S. defense industry in general was
negatively impacted by the perceived reduction of threats from the former Soviet
Union and eastern European countries and, more recently, by competing demands
upon the federal budget. This has resulted in a U.S. defense budget that has
decreased in real dollars, adjusted for inflation, since the mid-1980s. For many
defense contractors, the defense budget decrease and the related DOD procurement
strategies have resulted in program cancellations, scope reductions, delays in
contract funding or awards and significant predatory pricing pressures
associated with increased competition and reduced funding. The defense budget
has begun to stabilize and, for the first time in many years, has increased in
1996, excluding inflation.
The U.S. defense budget may generally be divided into four major areas:
military personnel, operations and maintenance, procurement and research and
development. The Company's activities are primarily funded by the operations and
maintenance segment, relating primarily to systems, products and services which
support the readiness, improved performance and increased life expectancy of
existing platforms, weapons systems and military forces. Despite the sharp
overall decline in the defense budget, the operations and maintenance segment
has declined less sharply, as existing weapons platforms are upgraded and
maintained to provide a cost-effective means of supporting a smaller military
force. As a result, the operations and maintenance segment has become the
largest segment of the DOD budget. Management estimates the current DOD
operations and maintenance market to be approximately $92 billion per year, or
approximately one-third of the U.S. defense budget. Defense procurement relates
primarily to the development, production and acquisition of weapons platforms
such as aircraft, land vehicles and naval vessels. Until the last few years, the
procurement budget was the largest segment of the DOD budget. Over the past
decade, the declining U.S. defense budget has resulted in a significant decrease
in the military procurement budget as new generation weapons platforms have been
cancelled or delayed. DOD budget priorities over the next several years are
likely to emphasize the readiness (operations and maintenance) of a smaller
force structure and the need to extend the lives of existing weapons platforms
by incrementally upgrading their capabilities, while the procurement portion is
expected to experience a modest increase. Management believes Tracor is also
well positioned to benefit from this procurement upturn.
Declining defense budgets and increasing pressures for cost reductions have
precipitated a major consolidation in the defense industry. The Company believes
large diversified companies are likely to continue to make the decision to
divest non-strategic defense assets, as uncompetitive cost structures and lack
of critical mass and long-term commitment to the industry put such diversified
companies at a relative competitive disadvantage. In addition, smaller,
independent businesses may find it more difficult to compete effectively in the
changing defense environment and may become available for acquisition. The
Company believes this industry condition will continue for the next several
years and that businesses and product lines will become available for
acquisition on acceptable financial terms.
COMPANY STRATEGY
The Company's strategy in the evolving defense market consists of three key
elements: (i) protect and strengthen core businesses; (ii) expand and diversify
into new markets complementary to current operations; and (iii) make strategic
acquisitions of well-positioned companies which complement the existing business
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strategy. Key elements in support of this strategy are continued high-quality
performance and continued improvements in efficiency to remain highly
competitive.
PROTECT AND STRENGTHEN CORE BUSINESSES. The Company's strategy for
protecting and strengthening its core businesses is comprised of a number of key
elements.
Support high-priority programs. The foundations for Tracor's core
businesses are high-priority, long-term, stable programs in which Tracor
has performed for many years. Many of Tracor's systems, products and
services support key weapons platforms and systems which are expected to
continue their important roles in the U.S. defense strategy. These
platforms include the AEGIS cruisers and destroyers, the Trident
submarines, the Tomahawk missile and key aircraft including the F-16,
F/A-18, C-17, C-130, B-1, B-2 and most helicopters. In addition, Tracor has
been a long-term incumbent contractor in producing a large percentage of
the nation's full-scale target drones, in producing a variety of range
instrumentation systems for more than 20 years, in supplying high-quality
image exploitation and mission planning systems and in providing important
information systems expertise to a number of customers including national
intelligence agencies.
Tracor's strategy is to continue its excellent performance record in
its core business areas by supplying high-quality products, systems and
services at competitive prices. Because of the Company's long-term
established presence, experience and knowledge, quality performance and
cost competitiveness, management believes the Company is well positioned to
continue to support these stable, high-priority DOD programs.
Maintain the readiness of existing forces. The Company will continue
to compete for contracts to provide products, systems and services which
are suited to supporting the readiness of the military force, a major
thrust of the DOD's current defense strategy. A substantial portion of the
Company's operations are focused on extending the useful lives of existing
weapons systems through upgrades and modifications rather than the
procurement of costly new systems and providing a wide range of
capabilities which enhance the combat effectiveness and readiness of
military personnel and equipment.
Enhance survivability of weapons platforms and crews. The Company's
electronic warfare systems enhance the survivability of weapons platforms
and related personnel at a relatively low cost. Management expects demand
for these products to remain strong as customers seek effective,
cost-efficient means for protecting crews and high-value assets.
EXPAND AND DIVERSIFY INTO NEW MARKETS. The Company is experiencing success
in transferring its core technologies and competencies to new customers and
markets. The expansion of the Company's core businesses and its diversification
to new businesses generally require several years of planning, development and
marketing. The Company's diversification and expansion efforts have focused on
the following areas:
Nondefense U.S. Government. The Company has established an important
presence in the U.S. government nondefense market. Its information systems
specialists are providing advanced information systems capabilities to an
expanding set of U.S. intelligence customers. In 1993 and 1995, the Company
was awarded contracts from the Federal Aviation Administration (the "FAA")
to perform system engineering and integration for its new radar systems.
The Company has also received contracts from NASA.
International. The Company sells a wide range of products and
services to numerous friendly foreign governments. Products sold
internationally include countermeasures systems and expendables, radar and
electronic tracking systems, target drones, imagery systems and automatic
test equipment for F-16 aircraft acquired by foreign governments. In
addition, Tracor's aircraft avionics test equipment was expanded in 1995
with the win of a test equipment program for the new Japanese F-2 fighter.
International business accounted for 10% of total 1995 revenues.
New DOD Business. Tracor is constantly evaluating its technology to
identify areas of potential new business within the DOD. During 1995, the
Company won contracts with a total value of more than $270 million,
including unexercised options that represent new DOD business. Examples
include a program in
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support of the U.S. Army's battlefield digitization initiatives, a new
flare development program and a program to develop a minefield breaching
system. Tracor also won a key contract to upgrade an important Defense
Mapping Agency system and a contract from the Naval Air Warfare Center to
provide design engineering and software services for a variety of defense
systems.
Commercial. The Company has developed a number of commercial
applications of its technology in areas as diverse as automotive laser
detectors, artificial heart valve testing, digital photogrammetry, direct
broadcast television antenna materials and laser transmitters for fiber
optics communications. In addition, the Company has several contracts for
applying a range of sophisticated information systems capabilities to
commercial and state government customers.
ACQUIRE COMPLEMENTARY BUSINESSES. The Company's acquisition strategy is a
key component of its overall business strategy. Tracor management believes the
continuing consolidation within the defense industry will result in additional
opportunities for the Company to make attractive acquisitions.
Vitro Acquisition. On August 25, 1993, Tracor purchased all of the
outstanding common stock of Vitro, a provider of high-technology systems
engineering and integration, software engineering, and various other
services, from The Penn Central Corporation for approximately $92 million.
Tracor financed the Vitro acquisition and refinanced existing indebtedness
through the issuance of $105 million of Senior Subordinated Notes and a new
$78 million credit facility. As a result of the Vitro acquisition, the
Company is one of the major providers of systems and software engineering
support to the Navy and is one of the few companies capable of providing
the U.S. Navy with the expertise necessary for its most technologically
advanced communications and guided missile systems, including those for the
AEGIS cruisers and destroyers and the submarine ballistic missile programs.
The acquisition of Vitro also strengthened Tracor's position with key
nondefense U.S. government customers such as national intelligence
organizations and the FAA.
GDE Acquisition. On November 17, 1994, Tracor purchased all of the
outstanding common stock of GDE, which has a major presence in the
application of advanced digital imagery technology to key DOD and
intelligence systems and programs, from its shareholders for approximately
$102 million, including the effect of a post-closing amendment to the
acquisition that was finalized in March 1995. Tracor financed the GDE
Acquisition by borrowing $55 million in additional term loans under its
Amended Credit Agreement, issuing approximately $10.9 million of Series A
Notes, issuing 1,928,050 shares of Common Stock and using approximately
$19.9 million of the Company's cash on hand. As a result of the GDE
Acquisition, the Company has strengthened its position as a provider of
products and services to both the DOD and non-DOD intelligence communities.
GDE produces advanced digital technology products for imagery information
systems, mission planning and automatic ground test equipment.
AEL Acquisition. On February 22, 1996, Tracor purchased all of the
outstanding common shares of AEL, which designs and manufactures
sophisticated countermeasures, simulation and radar-warning receiver
systems, installs and integrates electronic avionics equipment in military
and commercial aircraft and provides state-of-the-art antenna, microwave
and integrated circuit components. The consideration paid to AEL
shareholders was approximately $99 million cash for the common shares.
AEL's long-term indebtedness prior to the acquisition totaled approximately
$20 million, of which approximately $10 million was retired and
approximately $10 million was assumed by Tracor. The financing of the
transaction and related expenses was obtained through an increase of the
Company's existing bank term credit facility and from cash on hand.
Cost Reductions. Historically, Tracor has identified substantial cost
savings following the integration of acquired businesses. Since the
acquisitions of Vitro and GDE, significant cost savings have been realized
resulting from the consolidation of facilities, staff reductions, process
improvements and elimination of other duplicative costs. A substantial
portion of these annualized cost reductions are shared with customers in
the form of reduced rates on cost-reimbursement contracts. These
efficiencies have enhanced the Company's profit and cost competitiveness in
bidding on new contracts and recompetes of existing contracts. While the
integration of the operations of AEL has just begun, and there can be no
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assurances as to the magnitude of cost reductions, management has
identified and implemented numerous cost reduction measures it believes
will result in significant cost reductions.
CORE BUSINESSES
The Company's core businesses are primarily in the U.S. and international
defense electronics markets. Approximately 70% of Tracor's DOD business is
funded by the operations and maintenance segment of the defense budget which
supports the operational readiness, effectiveness and the survivability,
upgrading and long-term viability of DOD defense systems. The many agencies of
the U.S. Navy are Tracor's largest customers within the operations and
maintenance segment of the budget. The major electronic products, systems and
services comprising the Company's core businesses are described below and the
approximate pro forma revenue and percentage of total pro forma revenue for 1995
and the approximate historical revenue and percentage of total revenue for 1995,
1994, 1993 and 1992 represented by each are as follows:
<TABLE>
<CAPTION>
1995 PRO
FORMA(1) 1995 1994 1993 1992
-------------- -------------- ---------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weapons and Combat Systems
Integration and Support..... $293,040 29% $293,040 33% $317,661 46% $158,988(3) 39% $ 78,173 30%
Electronic Warfare Systems.... 196,974 20 102,626 12 98,981 14 96,968 24 88,819 34
Weapons Testing Systems and
Support..................... 143,414 14 126,572 14 123,210 18 68,803(3) 17 29,171 11
Communications Systems........ 81,934 8 81,934 9 76,698 11 67,817 16 65,672 25
Intelligence Information
Systems..................... 58,139 6 58,139 7 50,362 7 14,919(3) 4 -- --
Imagery and Information
Systems..................... 66,210 7 66,210 7 7,667(2) 1 -- -- -- --
Mission Planning Systems...... 78,265 8 78,265 9 12,241(2) 2 -- -- -- --
Automatic Test Systems........ 80,134 8 80,134 9 7,217(2) 1 -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Tracor Net Revenue............ $998,110 100% $886,920 100% $694,037 100% $407,495 100% $261,835 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
- ---------------
(1) Assumes acquisition of AEL as of January 1, 1995.
(2) Reflects approximately 6 weeks of GDE revenue in 1994.
(3) Reflects approximately 4 months of Vitro revenue in 1993.
WEAPONS AND COMBAT SYSTEMS INTEGRATION AND SUPPORT. The Company provides
systems engineering and integration, software engineering and management and
technical capabilities for the operation, testing, maintenance, upgrade,
protection and extension of the lives of high-priority weapons and combat
systems including:
Submarine Ballistic Missile Weapon Systems. The Company has been the
systems integration contractor for submarine ballistic missile programs
since the mid-1950s. Tracor's role includes systems engineering, testing,
data analysis and logistics for the Polaris, Poseidon and TRIDENT weapon
systems. As the weapon systems integration contractor for the United States
and United Kingdom TRIDENT II system, Tracor ensures the major subsystems,
including missile, launcher, navigation and fire control, are fully
integrated and tested to perform as specified.
U.S. Navy Surface Combatant Systems. Tracor is the systems
engineering and integration contractor for shipboard anti-air warfare
guided missile systems such as the Terrier New Threat Upgrade, Tartar,
AEGIS, NATO SeaSparrow and Tomahawk. The Company has performed systems
engineering for every guided missile system installed on U.S. Navy ships
since World War II. The Company develops software for track control of the
Tomahawk missile and performs combat systems integration for the Tartar
system. Tracor also operates a remotely controlled quarter-scale submarine
used to test and evaluate various submarine component designs.
Anti-Submarine Warfare Systems. The Company has provided engineering,
software and testing capabilities for the U.S. Navy's anti-submarine
warfare ("ASW") systems since 1948. Complex systems engineering and
integration are provided for development, operation, quality control and
life cycle maintenance of the newest ASW systems. The Company performs
software engineering and systems
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integration for surface ship sonars; tests ASW weapons and combat systems;
develops acoustic signal processing software and test instrumentation and
conducts research and development in ASW sonar systems and related
oceanography. The Company also provides project management, engineering and
system assessment and evaluation for both the U.S. Navy's lightweight and
heavyweight torpedo programs.
U.S. Navy Aircraft. Tracor's systems engineering expertise is being
utilized with a new U.S. Navy customer to provide support for the U.S.
Navy's fighter and attack aircraft, helicopters, maritime
patrol/reconnaissance planes and weapons avionics systems. In this area,
the Company is developing software to support the common airborne
instrumentation system, which is the DOD's standard test and evaluation
data collection system. Tracor won a new design engineering and software
contract in 1995, supporting the entire acquisition life cycle of various
U.S. Navy avionics and electronic systems.
ELECTRONIC WARFARE SYSTEMS. Tracor designed, and is currently the only
manufacturer of, the most advanced and widely used countermeasures dispenser
systems in the U.S. and is a major supplier of expendables, which create false
targets for hostile radar-guided and heat-seeking missiles to protect aircraft,
land vehicles, naval vessels and personnel. The acquisition of AEL greatly
expanded the Company's electronic warfare capabilities. Tracor's primary
products in this market include:
Countermeasures Dispensers. The Company has a long history of
developing and producing aircraft countermeasures dispenser systems. Tracor
has developed and manufactured several generations of these systems during
the past 30 years, including the newest system, the AN/ALE-47, which is an
advanced, automatic and integrated dispenser system for use aboard U.S. Air
Force, Navy and Army tactical and transport aircraft and helicopters, as
well as aircraft of other governments. To date, Tracor has been the sole
producer of the AN/ALE-47 system, although the AN/ALE-47 program is subject
to recompetition procedures applicable to government contracts in general.
There can be no assurance that Tracor will be a provider to this program in
the future. The Company's systems dispense chaff and flares as decoys
against hostile missiles. These systems are also designed to dispense
certain active radio-frequency decoys to counter advanced anti-aircraft
threats.
Countermeasures Expendables. Tracor develops and manufactures chaff
and flare decoys, which are ejected from countermeasures dispenser systems
and provide protection for aircraft, ships and personnel when operating in
a missile threat environment. In 1995, Tracor acquired the chaff
manufacturing business of its only U.S. chaff-producing competitor, the
Lundy Division of TransTechnology Corporation. The Company is the leading
developer of infrared flares in the U.S. and won a program in 1995 to
develop next-generation flare expendables which decoy infrared-seeking
missiles incorporating the latest counter-countermeasures features.
Mine Neutralization and Detection Systems. The Company is developing
an Explosive Standoff Minefield Breacher (ESMB) system prototype for the
U.S. Army and Marine Corps. The prototype features a Tracor-designed
rocket-deployed net which expands to detonate and neutralize a large area
of surface or buried mines, clearing the way for rapid, safe vehicle and
personnel passage. In support of this area, the Company acquired the
shaped-charge munitions business unit of The Titan Corporation in 1995,
which provides the explosive shaped-charges used in the ESMB system and in
smaller systems for deactivating mines. Tracor is also under contract to
develop hand-held and vehicular platform mounted mine detection systems
which illuminate the ground with electromagnetic energy to measure field
disturbances, determining mine presence and location. In addition, Tracor
personnel have created products which work with standard ship navigation
devices and use sonar to identify the presence of mines at sea.
Communications and Electronic Countermeasures. Through its recent
acquisition of AEL, the Company continues its long and extensive experience
in the development and fielding of electronic countermeasures systems. The
TACJAM-A system provides the DOD with a common, modular, multiplatform
communication electronic attack capability into the 21st century. AEL's
Band 1, Band 2 and Band 9/10 transmitters are key components of the jamming
capability on the U.S. Navy's EA-6B and the U.S. Air Force's EF-111A
tactical countermeasures aircraft. Their reliability and effectiveness have
been dramatically demonstrated in operational service.
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Radar Warning Systems. Tracor's systems seek, identify and counter
radar systems across the spectrum of frequency and application. The
Company's integrated front-end technology provides expanded frequency
coverage, improved direction finding accuracy and dual polarization
detection for Radar Warning Receivers (RWR) and Electronic Warfare Support
Measures (ESM) systems, which detect, identify and locate hostile radar and
communication transmitters.
Head-up Displays. The ANVIS Head-up Display provides a
high-resolution, programmable display of critical flight data to the pilot
through night vision goggles, allowing the pilot to concentrate on the
outside environment while maintaining cognizance of the flight instruments.
The system is being installed in the U.S. Army UH-60A/L Blackhawk and the
CH-47D Chinook; the U.S. Marine Corps UH-1N Huey, CH-46E Sea Knight,
KC-130T Hercules and the CH-53E Sea King; and the U.S. Navy HH-60H Seahawk.
It is planned for installation in the UH-1H/V Huey, OH-58A/C Kiowa Warrior
and the AH-1F Cobra.
WEAPONS TESTING SUPPORT. The DOD is committed to sustaining the readiness
of weapons and adapting current weapons to counter future threats. Tracor
manufactures products for testing and evaluating weapons systems and supports
weapons testing operations to achieve these objectives. The Company's work in
this area includes:
Drones. The Company has been a major producer of target drones for
the DOD for more than 25 years and is the sole provider of the current
drone (the QF-4) for the U.S. Armed Forces. The Company designs,
manufactures and modifies retired military aircraft into full-scale drones
for use as targets in weapons system testing and evaluation and personnel
training. Tracor also won a contract to produce sub-scale target drones
with options through the year 2000, making the Company the largest target
drone supplier for the DOD. The Company also performs major upgrades and
modifications for military and commercial aircraft, including electronics
installation and systems integration.
Range Operations and Instrumentation. For more than 21 years, Tracor
has been a worldwide supplier of precision tracking radars, optical
tracking systems, radar-threat simulators and range instrumentation control
systems. This diverse array of capabilities for weapons systems test ranges
includes logistics support, on-site depot level maintenance, repair of
components and engineering design and fabrication. For more than 40 years,
the Company has performed operations and maintenance on high-technology
equipment and has supplied logistics and engineering support for research
and development programs for more than 146 radar systems at 28 test ranges.
Flight Testing and Training. Tracor performs a variety of flight
testing using both military and civilian aircraft. The Company uses its
tactical aircraft, equipped to launch guided and unguided weapons, to test
and evaluate weapons systems and tows targets for U.S. and foreign tactical
air forces to support air-to-air combat training. The Company's pilots also
fly aircraft for training naval aviation navigators.
Electronic Warfare Simulators. Tracor designs, develops and certifies
a variety of airborne radar threat emitters, simulators and jammers, both
pod and internally mounted. The Company also develops advanced signal
threat generators for laboratory testing of the defensive avionics systems
aboard a variety of U.S. military aircraft.
COMMUNICATIONS SYSTEMS. Tracor provides radio communications products,
systems and services to the DOD and other government customers. The Company
performs systems and design engineering, subsystem procurement, systems
integration, testing and installation for these systems. It also provides
logistics support, maintenance and technology upgrades for these high-priority
systems to maintain their operational readiness throughout their service life.
The Company's key systems include:
AEGIS Communications Systems. Tracor is the primary contractor of
turnkey radio communications systems for the U.S. Navy's newest class of
destroyers and cruisers which are equipped with AEGIS weapons systems.
Tracor's cost-effective performance has contributed to its winning every
recompetition for its AEGIS work over the past 20 years. The most recent
award covers all AEGIS ships to be constructed through 2001.
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Special Forces Communications Systems. The Company has designed,
produced, installed and maintained, for more than 13 years, communications
systems used by U.S. Navy Special Warfare and Joint Special Operations
Forces and national intelligence agencies. Systems range in size from
hand-held communications devices to full-scale communications suites for
special-purpose boats, planes and vans.
Command and Control Systems. For more than 20 years, the Company has
provided systems engineering and test and evaluation in connection with the
modernization and upgrading of the U.S. Navy's command and control systems
communications equipment and for the U.S. Navy's worldwide center for
airborne ASW flight planning and post-mission analyses. In addition, Tracor
provides engineering and technical communications support for the U.S. Army
worldwide military command and control systems. The Company also provides
software and systems engineering, signals intelligence and electronic
warfare engineering, and technical communications support services for U.S.
Army military command and control systems. In addition, Tracor won a
program in 1995 to provide engineering development and technical support
services to the U.S. Army Communications-Electronics Command Space and
Terrestrial Communications Directorate.
U.S. Navy Landing Systems. The Company has provided management,
engineering and research and development for the U.S. Navy's automatic
carrier landing systems and U.S. Marine air traffic control and landing
systems for 23 years. These systems assist naval and marine aviators in
achieving safe landings aboard aircraft carriers, shore stations and
expeditionary fields.
Identification Systems. For more than 21 years, the Company has
provided hardware and software design engineering and technical support for
shipboard and shore-based identification systems used by the U.S. Navy,
Marines and Coast Guard.
INTELLIGENCE INFORMATION SYSTEMS. An important component of the Company's
acquisition strategy has been to build a strong presence in the intelligence
information systems market. The acquisition of Quality Systems, Inc. ("QSI"), a
subsidiary of Vitro, was a major penetration into the intelligence market, and
the acquisition of GDE substantially expanded the Company's presence in a wide
range of intelligence areas. Tracor now has a large employee base with special
high-level security clearances, which are crucial for doing business in this
sector. Since the early 1980s, Tracor has provided systems engineering, software
engineering, systems management and training under numerous classified contracts
with U.S. intelligence community customers. The Company uses state-of-the-art
software engineering methods and has reengineered specialized intelligence
systems to provide customers with the tools required for on-demand, dynamic and
highly reliable data access and analysis.
IMAGERY AND INFORMATION SYSTEMS. The Company develops and integrates
systems which extract and analyze information from various types of imagery.
Tracor's expertise in the automation of information extraction satisfies the
sophisticated image-processing requirements of both government and commercial
customers worldwide. Applications for the Company's software, systems and
products include mapping, charting and geodesy (MC&G), image-processing
groundstations, interpretation and analysis centers, and other information
systems in which digital image processing is an essential technology. Currently,
Tracor has an installed base of more than 450 MC&G workstations, and its
software is employed in more than 100 interpretation and analysis centers
worldwide. In 1995, the Defense Mapping Agency selected Tracor as its prime
contractor for its front-end processing environment program, which will permit
the agency to efficiently use data from a wide variety of imaging sources. Other
projects include continued development of a digital photo interpretation ground
station system for a foreign customer and a multisource intelligence analysis
software package for use by operational forces, as well as maintenance and
enhancement of an entire digital production system at three production centers.
MISSION PLANNING SYSTEMS. The Company provides mission planning systems
for the U.S. Navy, Air Force and Strategic Command. Products include specialized
software used to plan and coordinate military aircraft and weapons, imagery
systems in support of targeting, planning and rehearsing military operations,
and government information systems. The Company provides imagery-based mission
planning systems for stealth aircraft and cruise missiles, which are expected to
continue to represent the U.S. Armed Forces' primary strike capability for the
foreseeable future. Management believes these products and services will benefit
from the
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DOD's increasing need for tactical intelligence in diverse areas of the world in
order to efficiently utilize and coordinate its increasingly sophisticated and
costly weapons systems. In 1995, the Company's Digital Imagery Workstation
Suite -- Afloat ("DIWS/A"), an important component of the Tomahawk cruise
missile planning system, was installed on two U.S. Navy aircraft carriers. These
systems are expected to be installed on all Navy aircraft carriers and
amphibious assault ships by the year 2000. A major new program win during 1995
has placed Tracor in a key role in the development of the U.S. Air Force's new
Theater Battle Management Core System. As a subcontractor to Loral Command and
Control Systems, Tracor will provide the mission planning and imagery
exploitation technologies and will supply other software integration
capabilities to support the U.S. Air Force's improvements to its command and
control infrastructure. The Company is also gaining prominence in the emerging
field of information warfare (IW) by winning contracts to develop mission
planning systems for the military's new family of high-altitude long-endurance
reconnaissance unmanned aerial vehicles. Tracor not only supports the collection
of IW information, but also offers state-of-the-art large screen display
systems. The first system was delivered to the U.S. Marine Corps in 1995, and
seven more are planned for 1996.
AUTOMATIC TEST SYSTEMS. The Company has designed and built automatic test
systems ("ATS") for more than 30 years and is a major supplier of ATS to the
U.S. Air Force. Principal ATS products include testers for U.S. and other air
forces for use with the F-16 fighter avionics and for the C-17 and C-5B
transport and B-1B and B-2 bomber avionics systems. The Company produces a new
generation of downsized, mobile testers, including the F-16 midlife update
program and the advanced support equipment portable, ruggedized test set. The
Company also provides diagnostic systems, test program sets and operations and
logistics for ATS products. Deliveries of the Company's core F-16 test systems
have declined during recent years due to reduced production of F-16 aircraft.
However, the F-16 remains the primary U.S. Air Force tactical fighter, and the
Company expects to continue to receive significant orders for program
maintenance and upgrades. Expanding this product line and the Company's
international presence, Tracor was awarded two contracts in 1995 to supply
avionics test equipment for the new Japanese F-2 fighter (formerly designated as
FS-X). The Company also supplies ATS equipment used with missile guidance and
control systems, including various air-to-surface precision guided weapons, and
builds avionics subsystems for Lockheed Martin's Atlas Launch Vehicle.
EXPANSION AND DIVERSIFICATION
Tracor has increased its sales to both established and new customers. The
Company has been successful in translating its technologies and products to
other military customers, other governmental agencies, the foreign marketplace
and select commercial customers. See "-- Core Businesses" and "-- Company
Strategy." Tracor's other expansion and diversification initiatives are
described below.
U.S. Army Programs. Over the past eight years, Tracor has expanded
its systems, software and technical capabilities to various U.S. Army areas
including the Global Command and Control System, signals
intelligence/electronic warfare, Communications-Electronics Command and
C(4)I support.
Camouflage, Concealment and Deception. In an extension of its
countermeasures technology, Tracor has developed coatings and camouflage
materials to conceal aircraft, ground-based installations and ships from
detection by radar, infrared scanners and other sensing systems.
Air Transportation Systems. The Company won a $66 million contract
with the FAA in 1993 to provide systems, hardware and software engineering
for the development, testing and operation of new air traffic control and
surveillance systems across the U.S. This seven-year contract emphasizes
Tracor's ability to transfer its radar engineering expertise to non-DOD
governmental agencies. In 1995, Tracor won an FAA contract to provide test
and evaluation engineering services for surveillance and weather radar
systems.
NASA Programs. Since 1988 the Company has provided engineering for
safety, reliability, maintainability and quality assurance for NASA's
manned and unmanned space flights.
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Public Information Systems. The Company has successfully translated
certain capabilities into new business in the public sector. For example,
signal processing expertise developed under U.S. Navy sonar programs and
advanced database systems are the foundation for a statewide regulatory and
compliance system, client server based order fulfillment system for
Hewlett-Packard, as well as for aircraft noise monitoring systems sold to
18 major U.S. airports.
Commercial. The Company has successfully applied its technologies to
a number of commercial products and services and continues to seek new
opportunities. Current commercial diversifications include:
Photogrammetry. Through its subsidiary, Helava, the Company
provides integrated digital stereo software which operates on commercial
computer hardware, principally in the commercial photogrammetry market.
Helava provides photogrammetric workstations and high-quality scanners
for map compilation, engineering regional planning, orthophoto
production, digital terrain collection and environmental management.
Through a distributorship agreement with Leica, Inc., a world leader in
surveying and photogrammetric systems, Tracor's systems are being sold
in 34 countries.
Remote Sensing. Tracor has entered the growing new market of
commercial remote sensing systems, having joined the Boeing-led
Resource21 team which is evaluating a business to offer a sophisticated
satellite imaging system to collect multispectral pictures of farmlands
and provide information to substantially improve crop yields. Employing
technologies developed in national security applications, Tracor will be
responsible for the ground data processing, image assessment, archiving
and product generation for this system. With the Company's proprietary
technologies in image processing and manipulation, coupled with the
leading edge satellite technologies provided by its teammates, Tracor
management believes it is well positioned in this emerging market.
Chaff. Tracor is under contract with the leading manufacturer of
direct broadcast satellite antennae, supplying its aluminum-coated glass
fibers (chaff) as an integral part of that firm's molded antennae. The
proprietary nature of Tracor's manufacturing process of chaff, typically
used in military applications, positions the Company to benefit from the
increasing popularity of direct broadcast television.
MAJOR CUSTOMERS
The net sales of Tracor are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. government. The various U.S.
government customers exercise independent purchasing decisions, and sales to the
U.S. government are generally not regarded as constituting sales to one
customer, but instead, each contracting entity is considered to be a separate
customer. As of March 31, 1996, Tracor was performing under approximately 740
contracts with approximately 105 customers within various U.S. government
agencies. Sales to all such agencies are subject to conditions unique to sales
to the U.S. government. See "Risk Factors -- Uncertainty Associated with
Government Contracts."
RESEARCH AND DEVELOPMENT
Tracor employs scientific, engineering and other personnel to improve
existing product lines and to develop new products in the same or related fields
under programs funded by the respective companies or, in the case of Tracor,
under customer contracts through which Tracor is reimbursed directly for its
efforts. Customer-sponsored programs sometimes lead to the development of
products which Tracor has the opportunity to produce for others.
During the past three fiscal years, Tracor has expended the following
amounts on Company-sponsored and customer-sponsored research and development
activities:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Customer-sponsored........................................ $132.3 $104.9 $71.8
Tracor-sponsored.......................................... 5.4 4.7 3.5
</TABLE>
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A significant portion of the increase in Tracor's customer-sponsored
research and development costs in 1994 and 1995 is attributable to the inclusion
of Vitro and GDE expenditures following their acquisition by the Company in
August 1993 and November 1994, respectively, the award of several new contracts,
and increased research and development efforts under several existing contracts.
COMPETITION
The Company experiences vigorous competition from industrial firms and U.S.
government agencies, some of which have substantially greater resources. A
majority of the sales of the Company is derived from contracts with the U.S.
government and its prime contractors, and such contracts are awarded on the
basis of negotiations or competitive bids. Management does not believe any one
competitor or a small number of competitors is dominant in any of the business
areas of the Company. Management believes the Company will continue to be able
to compete successfully based upon the quality and cost competitiveness of its
products and services.
GOVERNMENT CONTRACTS
Substantially all of the Company's revenues result from contracts with the
U.S. government and its prime contractors. System engineering and integration,
software engineering and other engineering and management support contracts are
generally cost-reimbursement fixed-fee type contracts. Product engineering and
development contracts are either cost-reimbursement fixed-fee type or
fixed-price type contracts. Contracts for the manufacture of products are
usually fixed-price type contracts. Cost-reimbursement type contracts provide
for the payment of actual allowable costs, plus a fee. Under fixed-price type
contracts, the contractor benefits from or shares in cost savings but generally
bears or shares the risk of cost overruns. Cost-reimbursement type contracts are
normally priced to realize lower margins than fixed-price type contracts. For
the year ended December 31, 1995, approximately 60% of the Company's revenues
were derived from cost-reimbursement type contracts, and approximately 40% of
the Company's revenues were derived from fixed-price contracts. For the year
ended December 31, 1995, approximately 78% of AEL's revenues were derived from
fixed-price contracts, and approximately 22% of AEL's revenues were derived from
cost-reimbursement type contracts.
Contracts with the U.S. government and its prime contractors contain
standard provisions for termination at the convenience of the U.S. government or
such prime contractor, pursuant to which the Company and AEL are generally
entitled to recover costs incurred, settlement expenses and profit on work
completed prior to termination. Contracts with the U.S. government do not
provide for renegotiation of profits.
Companies supplying products and services directly or indirectly to the
U.S. government are subject to other risks such as contract suspensions, changes
in policies or regulations and availability of funds. Any of these factors could
adversely affect the Company's and AEL's businesses with the U.S. government in
the future. See "Risk Factors -- Uncertainty Associated with Government
Contracts."
SALES TO FOREIGN CUSTOMERS
For 1995, 1994 and 1993, approximately $87.0 million, $63.6 million and
$47.8 million (representing 10%, 9% and 12%, respectively) of the net sales of
the Company were attributable to sales and services provided to foreign
customers. The percentage of net sales of the Company attributable to foreign
customers in 1994 decreased, primarily due to the acquisition of Vitro, even
though the total dollar amount of sales attributable to foreign customers
increased in 1994. Only $3.7 million of these sales in 1993 were attributable to
Vitro. The principal customers are governments of those countries in Western
Europe, the Middle East and the Pacific Rim region which are generally deemed to
be friendly to the government of the United States and to have relatively stable
governments. Each of the contracts with these customers is subject to the risks
inherent in dealing with foreign governments (e.g., changes of administration or
governmental form, economic problems). Although the loss of all of the Company's
foreign business could have a materially adverse impact on the Company's results
of operations and financial condition, it is management's opinion that this risk
is remote and that the loss of any single contract with a foreign government
would not be material.
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