<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): FEBRUARY 13, 1997
TRACOR, INC.
(Exact name of registrant as specified in charter)
DELAWARE 0-20227 74-2618088
---------------------------- ------------ -------------------
(State of Other Jurisdiction (Commission (IRS Employer
of Incorporation File Number) Identification No.)
6500 TRACOR LANE, AUSTIN, TEXAS 78725-2000
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
TRACOR, INC.
6500 TRACOR LANE
AUSTIN, TEXAS 78725
512/926-2800
-------------------
(Name, address, and telephone number,
including area code, of principal executive office)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Attached hereto as Exhibit 99.1 are audited financial statements for
the fiscal year ended December 31, 1996 as well as a discussion and analysis of
Tracor Inc.'s financial condition and its results of operations for the same
period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRACOR, INC.
DATE: February 13, 1997 BY: WOODY ENDSLEY
----------------------------
Vice President and Treasurer
----------------------------
<PAGE> 3
EXHIBIT INDEX
Exhibit 23.1 - Consent of Independent Auditors. . . . . . . . . . . . . . . .
Exhibit 27.1 - Financial Data Schedule . . . . . . . . . . . . . . . . . . .
Exhibit 99.1 - Audited Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations for the Fiscal Year Ended December 31, 1996 . . .
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-55624) pertaining to the Stock Option Plan for Employees of
Tracor, Inc. and Subsidiaries of our report dated January 27, 1997, with
respect to the consolidated financial statements of Tracor, Inc. for the year
ended December 31, 1996 included in this Form 8-K dated February 13, 1997.
Austin, Texas
February 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,758
<SECURITIES> 0
<RECEIVABLES> 224,845
<ALLOWANCES> 1,946
<INVENTORY> 12,456
<CURRENT-ASSETS> 320,014
<PP&E> 165,305
<DEPRECIATION> 47,842
<TOTAL-ASSETS> 744,954
<CURRENT-LIABILITIES> 179,584
<BONDS> 292,172
0
0
<COMMON> 247
<OTHER-SE> 222,670
<TOTAL-LIABILITY-AND-EQUITY> 744,954
<SALES> 1,082,505
<TOTAL-REVENUES> 1,082,505
<CGS> 866,234
<TOTAL-COSTS> 866,234
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,156
<INCOME-PRETAX> 66,120
<INCOME-TAX> 29,506
<INCOME-CONTINUING> 36,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,614
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
</TABLE>
<PAGE> 1
EXHIBIT 99.1
AUDITED FINANCIAL STATEMENTS
AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<PAGE> 2
TRACOR, INC.
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE> 3
TRACOR
AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Income Statements, years ended December 31,
1996, 1995 and 1994....................................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1995... F-4
Consolidated Statements of Shareholders' Equity, years ended
December 31, 1996, 1995 and 1994.......................... F-5
Consolidated Statements of Cash Flows, years ended December
31, 1996, 1995 and 1994................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 4
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Tracor, Inc.
We have audited the consolidated balance sheets of Tracor, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of Tracor's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tracor, Inc.
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Austin, Texas
January 27, 1997
F-2
<PAGE> 5
TRACOR
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Net sales................................................. $1,082,505 $886,920 $694,037
Cost of sales............................................. 866,234 713,802 568,020
---------- -------- --------
Gross profit.................................... 216,271 173,118 126,017
Selling, administrative and general expenses.............. 123,681 104,928 78,201
---------- -------- --------
Earnings before interest and income taxes....... 92,590 68,190 47,816
Interest expense.......................................... 30,156 22,440 18,033
Interest income........................................... 3,686 2,944 1,262
---------- -------- --------
Income before income taxes...................... 66,120 48,694 31,045
Income taxes.............................................. 29,506 20,831 12,498
---------- -------- --------
Net income................................................ $ 36,614 $ 27,863 $ 18,547
========== ======== ========
Net income per common and common equivalent share:
Primary................................................. $ 1.46 $ 1.23 $ .96
========== ======== ========
Fully diluted........................................... $ 1.46 $ 1.23 $ .93
========== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 6
TRACOR
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 36,758 $ 59,478
Accounts receivable....................................... 222,899 141,657
Inventories............................................... 12,456 4,695
Prepaid expenses and other................................ 17,542 7,988
Deferred income taxes..................................... 26,829 15,916
Net assets held for sale.................................. 3,530 --
-------- --------
Total current assets.............................. 320,014 229,734
Property, plant and equipment............................... 165,305 120,333
Less allowances for depreciation and amortization......... 47,842 34,573
-------- --------
Net property, plant and equipment................. 117,463 85,760
Goodwill, net of accumulated amortization of $11,590 in 1996
and $5,219 in 1995........................................ 236,047 99,813
Other intangibles, net of accumulated amortization of
$13,517 in 1996 and $7,870 in 1995........................ 12,947 18,385
Restricted cash............................................. 30,094 --
Prepaid pension costs....................................... 14,980 23,107
Deferred charges and other assets........................... 13,409 10,657
-------- --------
Total assets...................................... $744,954 $467,456
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 47,696 $ 22,981
Accrued liabilities....................................... 107,176 66,889
Current portion of long-term debt......................... 24,712 10,735
-------- --------
Total current liabilities......................... 179,584 100,605
Long-term debt, less current portion........................ 292,172 180,440
Deferred revenue............................................ 15,625 23,752
Other long-term liabilities................................. 34,656 25,694
Shareholders' equity:
Preferred stock, par value $.01 per share: 1,000,000
shares authorized; no shares issued or outstanding..... -- --
Common stock, par value $.01 per share: 53,000,000 shares
authorized; issued and outstanding: 24,754,303 net of
3,411 shares in treasury in 1996, 13,172,754 in 1995... 247 132
Class A common stock, par value $.01 per share: 1,000,000
shares authorized; 978,458 shares issued and
outstanding in 1995.................................... -- 10
Additional capital paid in................................ 125,839 76,606
Retained earnings......................................... 96,831 60,217
-------- --------
Total shareholders' equity........................ 222,917 136,965
-------- --------
Total liabilities and shareholders' equity.................. $744,954 $467,456
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 7
TRACOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL
PAR CAPITAL RETAINED
SHARES VALUE PAID IN EARNINGS TOTAL
---------- ----- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................. 10,611,965 $106 $ 49,254 $13,807 $ 63,167
Issuance of common stock for GDE
acquisition........................... 1,928,050 19 16,345 16,364
Exercise of stock options and Series A
Warrants.............................. 92,169 1 309 310
Purchase of common stock, at cost........ (975,000) (10) (7,786) (7,796)
Net income............................... 18,547 18,547
---------- ---- -------- ------- --------
Balance at December 31, 1994............... 11,657,184 116 58,122 32,354 90,592
Issuance of common stock, net of issuance
costs................................. 2,216,875 22 17,857 17,879
Exercise of stock options and Series A
Warrants, net of stock tendered as
payment for options exercised......... 277,153 4 627 631
Net income............................... 27,863 27,863
---------- ---- -------- ------- --------
Balance at December 31, 1995............... 14,151,212 142 76,606 60,217 136,965
Issuance of common stock, net of issuance
costs................................. 3,000,000 30 48,014 48,044
Exercise of stock options and Series A
Warrants, net of stock tendered as
payment for options exercised......... 308,114 2 798 800
Income tax effect related to stock
options and grants.................... 292 292
Issuance of common stock for Westmark
acquisition........................... 7,288,977 73 24 97
Issuance of common stock pursuant to
board of director stock plans......... 6,000 105 105
Net income............................... 36,614 36,614
---------- ---- -------- ------- --------
Balance at December 31, 1996............... 24,754,303 $247 $125,839 $96,831 $222,917
========== ==== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 8
TRACOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income............................ $ 36,614 $ 27,863 $ 18,547
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation of property, plant and
equipment........................ 18,319 13,524 12,236
Amortization of goodwill........... 6,371 3,666 1,204
Amortization of other
intangibles...................... 5,671 5,664 1,306
Decrease in prepaid pension
costs............................ 8,127 11,686 3,489
Decrease in debt issuance costs.... 3,237 2,054 2,577
Provision for deferred income
taxes............................ 7,778 2,796 2,067
Decrease in deferred revenue....... (8,127) (11,686) (3,489)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.................... (17,346) (4,085) 9,616
(Increase) decrease in
inventories and prepaids...... (3,390) 3,220 (771)
Increase (decrease) in accounts
payable....................... 1,650 6,869 (8,326)
Increase (decrease) in advance
payments...................... 6,195 (2,368) (4,788)
Due to Vitro's former parent..... -- -- (7,197)
Decrease in accrued expenses..... (21,770) (4,696) (639)
Increase in other................ (1,494) (545) (43)
--------- -------- --------
Net cash provided by operating
activities.................. 41,835 53,962 25,789
Investing activities:
Purchases of property, plant and
equipment.......................... (19,623) (13,676) (11,007)
Proceeds from sale of property, plant
and equipment...................... 14,610 2,382 897
Acquisition of businesses, net of cash
acquired........................... (176,948) (15,120) (61,048)
--------- -------- --------
Net cash used in investing
activities.................. (181,961) (26,414) (71,158)
Financing activities:
Payments of long-term debt............ (105,602) (10,732) (38,342)
Purchase of treasury stock............ -- -- (7,796)
Proceeds from stock offering, net of
stock issuance costs............... 48,044 17,879 --
Proceeds from issuance of long-term
debt............................... 180,000 -- 85,000
Payment of debt issuance costs........ (5,836) -- (3,229)
Exercise of stock options and
warrants........................... 800 631 310
--------- -------- --------
Net cash provided by financing
activities.................. 117,406 7,778 35,943
--------- -------- --------
Increase (decrease) in cash
and cash equivalents........ (22,720) 35,326 (9,426)
Cash and cash equivalents at beginning
of period............................. 59,478 24,152 33,578
--------- -------- --------
Cash and cash equivalents at end of
period................................ $ 36,758 $ 59,478 $ 24,152
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 9
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- BUSINESS AND ACQUISITIONS
BUSINESS
Tracor, Inc. and its subsidiaries (individually and collectively referred
to as Tracor or the Company) operate in one business segment, providing a broad
range of sophisticated electronic and information technology products, systems
and services to its customers in the U.S. Department of Defense (DOD) as well as
in nondefense U.S. government agencies, other governments and the commercial
marketplace. Tracor primarily markets and sells its own products, systems and
services. When marketing and selling to foreign customers, Tracor frequently
engages the assistance of in-country representatives, distributors or trading
companies.
Sales to agencies of the U.S. government totaled $926 million in 1996, $773
million in 1995 and $611 million in 1994. The U.S. government, through more than
700 contracts with approximately 100 separate government agencies, was the only
customer accounting for more than 10% of consolidated net sales. Sales to the
DOD were $845 million in 1996, $717 million in 1995 and $563 million in 1994.
Export sales, principally to Pacific Rim, European and Middle Eastern
customers, totaled $95 million in 1996, $81 million in 1995 and $59 million in
1994. Income before income taxes from foreign-based operations was not
significant.
ACQUISITIONS
Cordant Acquisition
On September 26, 1996, Tracor purchased all of the outstanding shares of
Cordant Holdings, Inc. (Cordant), an employee-owned information systems company.
Cordant focuses on the design, development and integration of information
systems for a variety of applications, including mail processing, records
management and CAD/GIS (computer-aided design/geographic information systems).
The purchase price of $65.7 million is subject to a contingent payment up to an
additional $10 million based upon the potential award of a large contract. The
acquisition was financed by the use of $34.2 million of cash on hand and the
issuance of two promissory notes totaling $31.5 million. One promissory note in
the amount of $5 million, subject to adjustments for indemnification claims, is
payable March 26, 1998. The other note in the amount of $26.5 million requires a
payment of approximately $1.8 million on April 1, 1997, and an additional
payment of $3.5 million on April 1, 1997, if the contingent payment discussed
above does not occur. The remaining balance of this note is payable upon the
resolution of a former Cordant minority shareholder's lawsuit. Both promissory
notes are supported by irrevocable standby letters of credit which are fully
collateralized by cash escrow deposits. Approximately $1.8 million of the
restricted cash and promissory notes is classified as current and presented with
other current assets and current portion of long-term debt, respectively, in the
balance sheet. The remainder of the restricted cash and promissory notes is
classified as long-term.
The acquisition has been accounted for using the purchase method, and,
accordingly, the purchase price including transaction expenses ($66 million),
and the liabilities assumed ($39 million) have been allocated to the assets
acquired ($44.9 million) based on a preliminary estimate of their respective
fair values at the date of acquisition. This preliminary estimate is subject to
change based on finalization of certain fair value determinations which are not
expected to have a material effect on the consolidated financial position or
results of operations of Tracor. The resulting excess of the purchase price over
the preliminary estimate of the fair value of the net assets acquired ($60.1
million) is being amortized over 25 years.
During the fourth quarter of 1996, Tracor obtained the necessary
information to complete its cost estimates related to the planned elimination of
certain duplicative corporate functions and excess leased facilities. Estimated
liabilities of approximately $1.9 million for employee severance and excess
facilities costs
F-7
<PAGE> 10
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
have been established and are included in the liabilities assumed of $39
million. As a result, goodwill increased $1.1 million, net of deferred taxes of
$747,000, over the $59 million reported at acquisition date.
The pro forma results for the effect of the Cordant acquisition are not
presented as such effect is not material to the financial condition or results
of operations of the Company.
AEL Acquisition
On February 22, 1996, Tracor purchased all of the outstanding common shares
of AEL Industries, Inc. (AEL). AEL 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 purchase price, including acquisition expenses, was approximately
$103.1 million. 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 for the
transaction and related expenses was obtained through an increase of the
Company's existing bank term credit facility and from cash on hand.
The acquisition has been accounted for using the purchase method, and,
accordingly, the purchase price ($103.1 million) and the liabilities assumed
($64 million) have been allocated to the assets acquired ($98.1 million) based
on their respective fair values at the date of acquisition. Several changes to
initial estimates are described below. The resulting excess of the purchase
price over the fair value of the net assets acquired ($69 million) is being
amortized over 30 years.
In conjunction with the acquisition of AEL, Tracor developed and is
executing a plan to exit certain non-strategic activities and product lines of
AEL, dispose of certain AEL properties which are excess to the combined company,
and to relocate certain AEL operations to other Tracor facilities. Tracor has
completed the sale of AEL's Instruments Services Division and two excess AEL
properties resulting in net proceeds of approximately $13 million. Based on the
completion of a market study initiated in conjunction with the acquisition,
Tracor also decided to exit AEL's Optical Communications Division product line.
The sale of this product line resulted in proceeds of $1 million. One other
facility remains to be sold at December 31, 1996. Finally, Tracor obtained the
necessary information to finalize its review of AEL's cost estimates to complete
certain contracts which were in loss positions at the date of acquisition.
The above changes to initial fair value estimates of assets and liabilities
of approximately $14.9 million, offset by a deferred tax asset increase of
approximately $6 million, have resulted in an increase to goodwill related to
the AEL acquisition of approximately $8.9 million. Such revisions are included
in the liabilities assumed of $64 million and assets acquired of $98.1 million.
As of December 31, 1996, the Company had substantially completed the
relocation and consolidation of certain operations previously performed at AEL
facilities into other Tracor facilities and the elimination of certain corporate
functions at AEL's headquarters. Estimated liabilities of approximately $6
million for employee severance, relocation costs, facility closing-related costs
and other miscellaneous liabilities were established at the date of acquisition.
Approximately $4.1 million of these costs have been incurred through December
31, 1996.
F-8
<PAGE> 11
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
The following unaudited net sales, net income and net income per share are
presented on a pro forma basis, assuming the acquisition of AEL had occurred on
January 1, 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
(UNAUDITED)
----------------------
1996 1995
---------- --------
<S> <C> <C>
Net sales................................................... $1,097,456 $996,839
Net income.................................................. 26,801 27,033
Net income per share fully diluted.......................... 1.07 1.19
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
actual results of operations that would have occurred had the acquisition of AEL
occurred on January 1, 1995, nor of future results.
Westmark Acquisition
On June 13, 1996, Tracor concluded the acquisition of substantially all the
assets of Westmark Systems, Inc. (Westmark), which primarily consisted of Tracor
stock and warrants and certain other real estate holdings. Westmark held all of
Tracor's Class A stock (978,458 shares), a Series B warrant to purchase
5,249,428 shares of Tracor common stock with an exercise price of $4.42 per
share, and a Series C warrant to purchase 5,455,000 shares of Tracor common
stock with an exercise price of $7.36 per share. Under the agreement, Tracor
exchanged 8,267,435 shares of common stock for the Westmark assets. Westmark
liquidated concurrently with the closing by distributing the Tracor shares to
its shareholders. The agreement provided for a distribution of the Tracor shares
through underwritten secondary offerings of a maximum of one-half of the shares
during the first two years after the closing. Accordingly, 3,567,272 shares were
sold in a public offering concluded on July 11, 1996. See Note I.
Other Acquisitions
During 1996 and 1995, Tracor completed several business acquisitions, none
of which were individually or collectively material to the financial condition
or results of operations of the Company. These acquisitions included, in 1996,
the AEGIS shipbuilding program support business from Litton Industries, Inc.,
the Systems Integration Division of Codar Technology, Inc., and Arial Data
Reduction Associates, Inc. and, in 1995, the chaff manufacturing business of
Lundy Technical Center (a division of TransTechnology Corporation), the Convair
Twin Engine Program from General Dynamics' Convair Division, and the
shaped-charge munitions business unit of The Titan Corporation. The aggregate
cash purchase price of these acquisitions, including expenses, was approximately
$25.8 million. The acquisitions have been accounted for using the purchase
method, and, accordingly, the purchase price and liabilities assumed ($5.6
million) have been allocated to the assets acquired ($11.2 million) based on
their respective fair values at the date of acquisition. The resulting excess of
the purchase price over the fair value of the net assets acquired ($20.2
million) is being amortized over 10 to 20 years.
GDE Acquisition
On November 17, 1994, Tracor purchased all of the outstanding common stock
of GDE Holdings, Inc. (GDE). GDE designs, develops, manufactures and supports
automatic test systems, imagery and information systems and mission planning
systems. The purchase price, including the effect of a post-closing amendment to
the acquisition that was finalized in March 1995, and related acquisition
expenses totaled $102 million. The purchase price was financed by the issuance
of approximately 1.9 million shares of Tracor's common stock (recorded at $8.50
per share), the issuance of approximately $10.9 million of Series A Notes (see
Note G),
F-9
<PAGE> 12
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
the borrowing of $55 million under the Company's amended and restated credit
agreement, and approximately $19.9 million of the Company's cash on hand.
The acquisition has been accounted for using the purchase method and,
accordingly, the purchase price and the liabilities assumed ($76 million) have
been allocated to the assets acquired ($104 million) based on their respective
fair values at the date of 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.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Tracor, Inc.
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts have been eliminated.
Cash Equivalents
All highly liquid investments, with a maturity of three months or less when
purchased, are considered to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions, in particular, estimates of anticipated contract costs and revenues
used in the earnings recognition process, which affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Long-term Contracts
Long-term contracts are accounted for under the percentage of completion
method, wherein revenue is recognized based on cumulative costs incurred and the
estimated cost to complete as such relates to total contract price. All costs
are expensed as incurred, and losses on contracts are estimated and recognized
when it becomes apparent a loss is to be incurred. The revenue impact of pension
costs is recognized as the pension costs are recognized for GAAP purposes. This
results in the deferral of revenue where allowable pension costs under
government accounting regulations exceed pension costs as prescribed by GAAP.
The entire amount of deferred revenue in the accompanying consolidated balance
sheets results from this accounting methodology.
The progress payment provisions of certain contracts permit Tracor to bill
for a percentage of costs incurred. The remainder of costs incurred and profit
are included in unbilled costs and fees and are billed at the completion of the
contract or upon delivery of the product. See Note C.
Inventories
Inventories, consisting principally of raw materials and purchased
components, are stated at the lower of cost (generally first-in, first-out
method) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, and depreciation is
calculated on both the straight-line and accelerated methods over the useful
lives of the related assets.
F-10
<PAGE> 13
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Goodwill, Other Intangibles and Deferred Charges and Other Assets
Goodwill, the excess cost over the fair value of net assets acquired, is
amortized using the straight-line method over 10 to 30 years. Other intangibles
are recorded at cost and amortized using the straight-line method over their
economic lives. Deferred debt issuance costs, included in deferred charges and
other assets, are capitalized and amortized to interest expense using the
interest method.
It is Tracor's policy to value goodwill and other intangible assets at the
lower of unamortized cost or fair value. Management reviews the valuation and
amortization of intangible assets on a periodic basis, taking into consideration
any events or circumstances which might result in diminished fair value. If this
review indicates goodwill will not be recoverable, the carrying value of the
goodwill will be reduced in accordance with the provisions of Financial
Accounting Standards Board (FASB) Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Research and Development Costs
Tracor-funded research and development costs are expensed as incurred. Such
costs were $11.1 million in 1996, $5.4 million in 1995 and $4.7 million in 1994.
Income Taxes
In accordance with FASB Statement No. 109, Accounting for Income Taxes,
deferred income taxes are provided for temporary differences between the basis
of assets and liabilities for financial reporting purposes and for income tax
return purposes.
Reclassifications
For comparative purposes, certain reclassifications have been made to
amounts previously reported.
NOTE C -- ACCOUNTS RECEIVABLE
The following table shows the components of accounts receivable (in
thousands), which include unbilled costs and fees under fixed-price and
cost-reimbursement type contracts. Billed accounts receivable are shown net of
allowances for doubtful accounts.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Billed:
U.S. government, including Foreign Military Sales (FMS)... $105,288 $ 72,338
Foreign................................................... 27,909 6,591
Domestic commercial....................................... 22,236 13,238
-------- --------
155,433 92,167
Unbilled costs and fees:
U.S. government, including FMS............................ 49,892 41,599
Foreign................................................... 6,345 5,266
Domestic commercial....................................... 11,229 2,625
-------- --------
67,466 49,490
-------- --------
$222,899 $141,657
======== ========
</TABLE>
F-11
<PAGE> 14
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Amounts included in unbilled costs and fees comprise contract amounts for
which billings have not been presented. The requirements for billing are those
commonly found in contracting situations, such as meeting contractual milestones
and fulfilling retainage provisions. Substantially all amounts not billed at
December 31, 1996, will be billed during 1997. It is also anticipated that
substantially all billed accounts receivable and unbilled costs and fees will be
collected within one year.
The following table summarizes the changes in the allowance for doubtful
accounts for 1994, 1995 and 1996 (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1994.................................. $ 78
Additions charged to costs and expenses................... 2
Additions due to GDE acquisition.......................... 804
Write-off of uncollectible accounts....................... (16)
------
Balance at December 31, 1994................................ 868
Additions charged to costs and expenses................... 285
Write-off of uncollectible accounts....................... (195)
Reduction in allowance.................................... (492)
------
Balance at December 31, 1995................................ 466
Additions charged to costs and expenses................... 223
Additions due to acquisitions............................. 1,508
Write-off of uncollectible accounts....................... (251)
------
Balance at December 31, 1996................................ $1,946
======
</TABLE>
Although Tracor has a concentration of credit risk with the U.S.
government, Tracor has not historically experienced significant collection
losses on U.S. government contracts. Also, Tracor's foreign receivables are not
concentrated within any one geographic region, nor are they subject to economic
conditions that would subject Tracor to unusual risk.
NOTE D -- INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials and purchased components...................... $ 8,996 $ 2,824
Work in process............................................. 2,859 1,651
Finished goods.............................................. 601 220
-------- --------
$ 12,456 $ 4,695
======== ========
</TABLE>
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land........................................................ $ 13,644 $ 8,942
Buildings................................................... 50,635 34,394
Equipment................................................... 94,658 71,179
Leasehold improvements...................................... 6,368 5,818
-------- --------
$165,305 $120,333
======== ========
</TABLE>
F-12
<PAGE> 15
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
NOTE F -- ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payroll and related items................................... $ 47,553 $ 44,493
Advance payments from customers............................. 9,519 3,324
Other....................................................... 50,104 19,072
-------- --------
$107,176 $ 66,889
======== ========
</TABLE>
NOTE G -- LONG-TERM DEBT
The components of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Revolving loan.............................................. $ -- $ --
Term loans.................................................. 163,205 74,550
Senior Subordinated Notes................................... 105,000 105,000
Series A Notes.............................................. 10,947 10,947
Promissory Notes payable to former Cordant shareholders (See
Note A)................................................... 31,500 --
Other....................................................... 6,232 678
-------- --------
316,884 191,175
Less current maturities..................................... 24,712 10,735
-------- --------
$292,172 $180,440
======== ========
</TABLE>
Interest paid totaled $25.9 million in 1996, $20.6 million in 1995 and
$13.8 million in 1994.
Amended and Restated Credit Agreement
Tracor's amended and restated credit agreement (Amended Credit Agreement)
consists of a $180 million term loan facility, a $60 million revolving loan
facility and a $50 million letters of credit facility. Substantially all assets
of Tracor and certain domestic, wholly-owned subsidiaries are pledged or
mortgaged under the Amended Credit Agreement, and all borrowings are guaranteed
by such subsidiaries.
The term loans are comprised of a $64 million A Term Loan, a $49.6 million
B Term Loan, and a $49.6 million C Term Loan. The A Term Loan facility is
evidenced by promissory notes maturing October 31, 1999, requiring quarterly
principal payments of approximately $5.3 million. The B Term Loan facility is
evidenced by promissory notes maturing October 31, 2000, requiring quarterly
payments of $133,333 through and including October 31, 1999, and quarterly
payments of $12 million from January 31, 2000, through October 31, 2000. The C
Term Loan facility is evidenced by promissory notes maturing April 30, 2001,
requiring quarterly payments of $131,578 through and including October 31, 2000,
and two payments of $23.8 million on January 31 and April 30, 2001. The
revolving loans facility is evidenced by promissory notes maturing December 31,
2000. The letters of credit facility provides for the issuance of letters of
credit with expiration dates generally 18 months or less from the date of
issuance (automatically renewable unless a default exists at the expiration
date) but in any event not later than December 31, 2000.
Certain mandatory prepayments may also be required from the net proceeds of
asset or equity sales and annual excess cash flow. Such mandatory repayments are
to be applied to equally and ratably prepay the A, B and C Term Loans based on
the relative principal amounts outstanding.
F-13
<PAGE> 16
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Term loans under the A Term Loan facility and the revolving loans bear
interest at Tracor's option at either the lender's base rate plus .75% or the
eurodollar rate plus 1.75% less a reduction ranging from .25% to 1.125% per
annum based on Tracor's leverage ratio, as defined. Loans under the B Term Loan
facility bear interest at Tracor's option at either the lender's base rate plus
1% or the eurodollar rate plus 2%. Loans under the C Term Loan facility bear
interest at Tracor's option at either the lender's base rate plus 1.25% or the
eurodollar rate plus 2.25%. Interest rates on the A, B and C Term Loans at
December 31, 1996, were 7.3%, 7.8% and 8.1% per annum, respectively. Interest on
base rate loans is payable quarterly, and interest on eurodollar loans is
payable at the end of the applicable interest period or every three months in
the case of interest periods in excess of three months. A commitment fee of .5%
per annum, less a reduction ranging from .125% to .25% per annum based on
Tracor's leverage ratio as defined, is charged on the unused revolving loans and
letters of credit facility and is payable quarterly in arrears. The commitment
fee at December 31, 1996, was .375% per annum. Each letter of credit bears an
issuance fee of .125% per annum plus a fee equal to .25% less than the interest
margin in effect for revolving loans maintained as eurodollar loans. The fee at
December 31, 1996, was 1.375%. At December 31, 1996, the Company had outstanding
letters of credit totaling $32.1 million relating to commitments for performance
on certain contracts with foreign customers and as collateral on certain
insurance policies.
The Amended Credit Agreement contains covenants which, among other things,
impose limitations and restrictions on the incurrence of additional
indebtedness, capital expenditures, future mergers and acquisitions, sales of
assets, payment of dividends and changes in control, as defined. In addition,
Tracor is required to satisfy certain financial covenants and tests relating to,
among other matters, interest coverage, working capital, leverage and net worth.
Senior Subordinated Notes
The acquisition of Vitro Corporation (Vitro) on August 23, 1993, was
financed by the issuance of $105 million aggregate principal amount of Senior
Subordinated Notes due August 15, 2001 (the Notes). The Notes bear interest at
an annual rate of 10 7/8%, payable semiannually on February 15 and August 15.
There is no sinking fund requirement.
The acquisition of GDE was financed in part by the issuance of
approximately $10.9 million (as adjusted by a post-closing amendment to the
acquisition that was finalized in March 1995) aggregate principal amount of
Series A Notes due August 15, 2001 (Series A Notes) in a private placement in
November 1994. The Series A Notes rank on the same level as, and are a part of
the same series of securities as, the Company's existing Notes discussed above.
The Series A Notes bear interest at an annual rate of 10 7/8%, payable
semiannually on February 15 and August 15. There is no sinking fund requirement.
The Notes and Series A Notes are redeemable, in whole or in part, at the
option of Tracor, on or after August 15, 1997, at the redemption prices of
104.661% in 1997, 103.107% in 1998, 101.554% in 1999 and 100% thereafter. In the
event of a change of control, as defined in the Indenture, each holder may
require Tracor to repurchase such holder's Notes or Series A Notes, as
applicable, at 101% plus accrued and unpaid interest. Tracor is also required to
offer to repurchase a specified portion of the Notes and Series A Notes in the
event of certain asset sales.
The Notes and Series A Notes are subordinated to all senior debt,
subordinated on an equal basis with any future senior subordinated indebtedness,
and senior to all other subordinated debt of Tracor. Substantially all of
Tracor's wholly-owned subsidiaries have guaranteed the Notes and Series A Notes
on a senior subordinated basis.
The indentures pertaining to the Notes and Series A Notes contain
restrictions on the incurrence of additional indebtedness, dividends on and
redemptions of capital stock, redemptions of certain subordinated
F-14
<PAGE> 17
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
obligations, the making of certain investments, transactions with affiliates,
sales of assets, and mergers or consolidations with or transfers of assets to
other persons.
Aggregate annual long-term debt maturities for each of the next five years
are as follows (in thousands):
<TABLE>
<S> <C>
1997.................................... $ 24,712
1998.................................... 27,692
1999.................................... 22,714
2000.................................... 48,839
2001.................................... 163,777
2002 and thereafter..................... 29,150
--------
Total................................... $316,884
========
</TABLE>
Fair Value
The fair value of Tracor's outstanding debt under the Amended Credit
Agreement approximates its carrying value. This assessment is based on the fact
that the debt has a variable interest rate. Based on the market prices for the
Notes, the fair values of Tracor's Notes and Series A Notes are $111 million and
$11.6 million, respectively, at December 31, 1996, and $108.4 million and $11.3
million, respectively, at December 31, 1995.
NOTE H -- RETIREMENT BENEFIT PLANS
Tracor provides retirement benefits through contributory and
noncontributory defined benefit and defined contribution plans.
Defined Benefit Pension Plan
Tracor's defined benefit pension plan (Pension Plan) covers most of its
employees. Retirement benefits are generally based on years of service and final
average compensation. Tracor's contributions are made in amounts sufficient to
satisfy funding requirements under the Employee Retirement Income Security Act
of 1974. Significant amendments include the merger of GDE's defined benefit plan
with the Pension Plan on December 31, 1994.
Assumptions used in accounting for the Pension Plan were:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Weighted-average discount rate:
January 1................................................ 7.25% 8.75% 7.50%
December 31.............................................. 7.75% 7.25% 8.75%
Rate of increase in compensation levels:
January 1................................................ 4.00% 5.00% 4.00%
December 31.............................................. 4.00% 4.00% 5.00%
Expected long-term rate of return on assets................ 9.50% 9.50% 9.50%
</TABLE>
F-15
<PAGE> 18
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Substantially all Pension Plan assets are invested in publicly traded
stocks and bonds. The funded status and the amount recognized in the
consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $296,648 $304,687
======== ========
Accumulated benefit obligation............................ $306,739 $315,351
======== ========
Projected benefit obligation................................ $353,421 $365,648
Pension Plan assets at fair value........................... 370,422 350,570
-------- --------
Pension Plan assets in excess of (less than) the projected
benefit obligation........................................ 17,001 (15,078)
Unrecognized prior service cost............................. 6,668 7,394
Unrecognized net loss (gain)................................ (8,689) 30,791
-------- --------
Net prepaid pension costs recognized........................ $ 14,980 $ 23,107
======== ========
</TABLE>
The components of pension expense are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost, benefits earned during the year...... $ 14,487 $ 12,458 $ 7,877
Interest cost on projected benefit obligation...... 25,149 25,891 13,221
Actual return on Pension Plan assets............... (42,961) (73,856) 7,200
Net amortization and deferral...................... 11,452 47,193 (24,367)
-------- -------- --------
$ 8,127 $ 11,686 $ 3,931
======== ======== ========
</TABLE>
Defined Contribution Retirement Plans
Tracor's contributions under its defined contribution plans, which together
cover substantially all employees, are generally based upon a percentage of an
eligible employee's covered compensation or employee contributions. Expenses
recorded under defined contribution plans were $10 million in 1996, $9.2 million
in 1995 and $7.2 million in 1994.
Effective December 1, 1996 the Company established the Tracor Deferred
Compensation Plan for eligible employees. The plan is a nonqualified deferred
compensation plan pursuant to which certain eligible employees of the Company
may elect to defer compensation. The plan is maintained primarily for the
purpose of providing deferred compensation for highly compensated employees,
within the meaning of Section 201(2); 301(3); and 401(a)(1) of the Employee
Retirement Income Security Act of 1974, as amended. The Company will match
contributions up to the extent of the allowable scheduled match under the
Defined Contribution Retirement Plan. Expenses under this plan were
approximately $88,000 in 1996.
Postretirement Health Care Plans
Tracor, principally through Vitro and GDE, provides postretirement health
care and life insurance benefits to certain retired employees who meet minimum
age and service requirements. The health care and life insurance plans are
contributory and contain other cost-sharing features such as deductibles and
coinsurance. Tracor's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management.
F-16
<PAGE> 19
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Upon Tracor's acquisition of Vitro, the postretirement health care plans
for Vitro employees were discontinued, leaving only the obligation that existed
at the acquisition date for eligible employees and retirees. Accordingly, the
cost of providing these benefits under the Tracor and Vitro plans is not
significant to the consolidated financial statements, and information regarding
actuarial methods and assumptions, health care cost assumptions, and components
of the obligation and annual expense is not provided. Other long-term
liabilities include $5 million at December 31, 1996, and $5.5 million at
December 31, 1995, for such benefits.
The defined benefit health care and life insurance plans sponsored by GDE
currently provide postretirement benefits; however, the salaried retiree medical
plans will terminate effective July 1, 2008. The current GDE retiree plans will
continue until that time with the premium capped at the rate in effect July 1,
1993, plus an escalation of 5% per year through 1997.
The following table (in thousands) presents the GDE plans' funded status
and the amounts recognized in the consolidated balance sheets:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $7,000 $ 8,149
Fully eligible active plan participants................... 840 1,596
Other active plan participants............................ 466 842
------ -------
8,306 10,587
Plan assets at fair value................................. -- --
------ -------
Accrued postretirement obligation, included in other
long-term liabilities..................................... $8,306 $10,587
====== =======
</TABLE>
Net periodic postretirement benefit cost for the GDE plans was
approximately $610,000 in 1996 and $961,000 in 1995.
For measurement of the GDE plans, 9% to 11% annual rates of increase,
depending on participant criteria, in the per capita cost of covered benefits
(i.e. health care cost trend rate) were assumed for 1996 and 1995. The rates
were assumed to decrease gradually to 6% for most participants by the year 2001
and remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing the
assumed health care trend rate by one percentage point would increase the
accumulated postretirement benefit obligation at December 31, 1996, by $130,000
and the net periodic postretirement benefit cost for 1996 by $67,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation for the GDE plans was 7.75% at December 31,
1996, and 7.25% at December 31, 1995.
NOTE I -- SHAREHOLDERS' EQUITY
Common Stock
Under certain conditions, as set forth in a registration rights agreement,
the initial holders of common stock may request Tracor to register its
securities with the Securities and Exchange Commission (SEC) for resale. This
registration right is generally not transferable to subsequent shareholders.
Tracor must bear the cost of any registration, except for underwriting
commissions, sellers' counsel fees and other selling expenses. Tracor may
include in any registration shares of common stock to be sold for its own
account, subject to certain limitations.
The acquisition of Westmark (see Note A), completed on June 13, 1996,
resulted in the issuance of 8,267,435 shares of Tracor common stock, the
retirement of the Company's Class A common stock (978,458
F-17
<PAGE> 20
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
shares) and two series of warrants to purchase a total of 10,704,428 shares of
the Company's common stock. Subsequent to the Westmark acquisition, Tracor
concluded a public offering on July 11, 1996, of 6,567,272 shares of common
stock at a price of $17.50 per share. Of the shares sold, the Company sold
3,000,000 shares and certain former shareholders of Westmark sold 3,567,272
shares. The net proceeds to the Company from the primary shares sold in the
offering totaled approximately $48 million.
On May 2, 1995, Tracor concluded a public offering of 4,600,000 shares of
common stock at a price of $11.50 per share. Of the 4,600,000 shares, Tracor
sold 1,600,000 shares and a selling stockholder sold 3,000,000 shares. Included
in shares sold by the stockholder were 616,875 shares obtained upon the exercise
of Series A Warrants. The net proceeds to Tracor from the exercise of Series A
Warrants and the primary shares sold in the offering totaled approximately $18
million.
During 1994, Tracor purchased from a major shareholder 975,000 shares of
its common stock for $7.8 million. These shares were classified as treasury
shares. In November 1995, Tracor's board of directors retired all 982,653 shares
of common stock held as treasury stock. The shares returned to the status of
authorized but unissued shares.
Common Stock Purchase Warrants
At December 31, 1996, there were outstanding 1,227,788 Series A warrants,
which entitle the holders to purchase shares of common stock at an exercise
price of $2.54. The warrants are exercisable at the option of the holder at any
time prior to December 27, 2001, and are not callable by Tracor. Under certain
conditions, as defined in the warrant agreement, the number of shares
purchasable and the exercise price may be adjusted. The holders may also request
Tracor to register the underlying securities with the SEC under substantially
the same terms described above for holders of common stock, except that the
registration rights are generally transferable to subsequent warrant holders.
Series A warrants exercised totaled 122,900 shares in 1996, 829,175 shares in
1995 and 46,472 shares in 1994.
Common Stock Option Plan
Tracor's stock option plans provide for the grant of restricted stock,
stock appreciation rights and both incentive and non-qualified options to
employees. The exercise price of each currently outstanding option is the fair
value of a share of Tracor's common stock on the date of grant. Up to 30% of
each option is exercisable one year after the grant, up to an additional 30% is
exercisable two years after the grant, and the remainder is exercisable three
years after the grant. The term of each option is 10 years from the date of
grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation (FAS 123), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
F-18
<PAGE> 21
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options granted subsequent
to December, 31, 1994 under the fair value method prescribed by FAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Risk-free interest rate................. 5.8% 6.3%
Dividend yield.......................... 0% 0%
Volatility factor of the expected market
price of Tracor's common stock........ .576 .576
Weighted-average expected life of the
options............................... 5 years 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, this option valuation model requires
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Pro forma stock-based compensation
expense............................... $ 2,021 $ 773
Pro forma net income.................... 34,593 27,090
Pro forma earnings per share:
Primary............................... 1.39 1.20
Fully diluted......................... 1.39 1.20
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
The effects of applying FAS 123 for pro forma disclosures are not likely to
be representative of the effects on reported net income for future years.
F-19
<PAGE> 22
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
A summary of changes in common stock options during 1994, 1995 and 1996 is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
SHARES PRICES PRICES
--------- --------------- --------
<S> <C> <C> <C>
Options outstanding, January 1, 1994........... 914,200 $ 1.75 - $ 8.13 $ 3.09
Granted...................................... 71,700 7.88 - 12.25 11.83
Exercised.................................... (48,500) 1.75 - 3.63 2.46
Surrendered.................................. (4,200) 3.13 3.13
--------- --------------- ------
Options outstanding, December 31, 1994......... 933,200 1.75 - 12.25 3.60
Granted...................................... 487,500 13.00 - 15.25 13.02
Exercised.................................... (69,703) 1.75 - 8.13 2.22
Surrendered.................................. -- -- --
--------- --------------- ------
Options outstanding, December 31, 1995......... 1,350,997 1.75 - 15.25 7.07
Granted...................................... 374,600 16.13 - 21.88 16.96
Exercised.................................... (188,625) 2.00 - 13.00 2.90
Surrendered.................................. (2,399) 8.13 8.13
--------- --------------- ------
Options outstanding, December 31, 1996......... 1,534,573 $ 1.75 - $21.88 $10.00
========= =============== ======
</TABLE>
Options outstanding at December 31, 1996 are comprised of the following:
<TABLE>
<CAPTION>
RANGE OF
EXERCISE
OPTIONS PRICES
--------- ---------------
<S> <C> <C>
548,773 $ 1.75 - $ 3.50
80,000 7.88 - 8.13
845,100 12.25 - 16.13
60,700 19.13 - 21.88
---------
1,534,573
=========
Options exercisable, December 31,
1996................................................... 798,043 $ 1.75 - $15.25
1995................................................... 653,400 1.75 - 12.25
1994................................................... 376,600 1.75 - 8.13
</TABLE>
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Weighted-average fair value of options granted during the
year...................................................... $9.39 $7.28
Weighted-average remaining contractual life of options at
December 31............................................... 7.5 years 7.8 years
</TABLE>
Common stock reserved at December 31, 1996, consists of the following:
<TABLE>
<S> <C> <C>
For exercise of outstanding warrants...................... 1,227,788
For exercise of stock options............................. 1,668,872
---------
2,896,660
=========
</TABLE>
F-20
<PAGE> 23
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
NOTE J -- INCOME TAXES
Income before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic.............................................. $64,990 $48,212 $31,111
Foreign............................................... 1,130 482 (66)
------- ------- -------
$66,120 $48,694 $31,045
======= ======= =======
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $17,442 $14,887 $ 8,708
State............................................... 4,269 3,308 1,723
Foreign............................................. 17 (160) --
------- ------- -------
21,728 18,035 10,431
Deferred:
Federal............................................. 6,995 2,309 1,978
State............................................... 528 487 218
Foreign............................................. 255 -- (129)
------- ------- -------
7,778 2,796 2,067
------- ------- -------
$29,506 $20,831 $12,498
======= ======= =======
</TABLE>
A reconciliation between income taxes computed on income before taxes at
the statutory federal rate (35% in 1996, 1995 and 1994) and the provision for
income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income taxes at the statutory federal rate............ $23,142 $17,043 $10,866
Goodwill.............................................. 2,115 1,240 553
State income taxes, net of federal tax benefits....... 3,118 2,467 1,262
Other................................................. 1,131 81 (183)
------- ------- -------
$29,506 $20,831 $12,498
======= ======= =======
</TABLE>
F-21
<PAGE> 24
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
A summary of the tax effects of temporary differences comprising deferred
income tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred income tax assets:
Contracts................................................. $13,383 $ 6,509
Postretirement medical obligation......................... 1,942 1,982
Accrued vacation/employee benefits........................ 8,834 8,332
Expense accruals not yet deductible....................... 4,612 820
Deferred compensation..................................... 6,894 3,426
Pension................................................... 6,891 9,243
Other..................................................... 2,242 783
------- -------
Total deferred tax assets......................... 44,798 31,095
Valuation allowance for deferred tax assets............... -- --
------- -------
Net deferred tax assets........................... 44,798 31,095
Deferred income tax liabilities:
Depreciation/amortization................................. 11,055 11,083
Pension................................................... 6,257 9,501
Other..................................................... 9,941 1,921
------- -------
Total deferred tax liabilities.................... 27,253 22,505
------- -------
Net deferred income taxes................................... $17,545 $ 8,590
======= =======
</TABLE>
Net deferred income taxes are reflected on the consolidated balance sheet
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Current deferred income taxes............................... $26,829 $15,916
Other long-term liabilities................................. (9,284) (7,326)
------- -------
Net deferred income taxes................................... $17,545 $ 8,590
======= =======
</TABLE>
Based on Tracor's taxable income in prior carryback years and forecast of
future income, management believes it is more likely than not that all net
deferred tax assets will be realized. The valuation allowance for capital losses
was eliminated in 1995 as a result of realized capital gains, and the related
tax benefit reduced the goodwill of GDE.
For tax purposes, the acquisitions of GDE, AEL and Cordant were accounted
for using their carryover tax basis, which resulted in the recording of
significant deferred income tax assets.
By a letter dated January 23, 1997, the Internal Revenue Service (IRS)
notified the Company of various proposed adjustments to the federal income tax
returns of GDE for its tax periods beginning November 20, 1992, and ending
November 17, 1994 (the date that the Company acquired GDE). The proposed
adjustments relate primarily to GDE's acquisition of its business from General
Dynamics in 1992. The Company plans to contest the proposed adjustments through
the IRS's administrative appeals process. While it is not possible to determine
the final adjustments resulting from this matter, management believes the
ultimate resolution will have no material adverse effect on the financial
position or results of operations of the Company.
Income taxes paid, net of refunds, totaled $17.4 million in 1996, $20
million in 1995 and $8.6 million in 1994.
F-22
<PAGE> 25
TRACOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
NOTE K -- LEASE COMMITMENTS
Tracor leases office space under various operating leases, which generally
contain renewal options and are subject to increases based on formulas such as
changes in the Consumer Price Index. Future minimum payments at December 31,
1996, for all noncancelable operating leases with initial terms of one year or
more are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................... 16,882
1998............................................... 13,878
1999............................................... 11,946
2000............................................... 10,082
2001............................................... 6,351
2002 and thereafter................................ 25,074
-------
$84,213
=======
</TABLE>
Rental expense for all operating leases was $16.6 million in 1996, $17.4
million in 1995 and $15.8 million in 1994.
NOTE L -- CONTINGENCIES
Tracor is involved in various lawsuits and is subject to certain
contingencies incidental to its business. While the ultimate results of these
matters cannot be predicted with certainty, management does not expect them to
have a material adverse effect on the consolidated financial position of Tracor.
NOTE M -- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Beginning in the second quarter of 1996, both primary and fully diluted net
income per share amounts are computed in accordance with the treasury stock
method using the weighted average common shares outstanding and equivalents
assuming the exercise of all outstanding warrants and options for common shares.
Prior to the second quarter of 1996, both primary and fully diluted net
income per share amounts were 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. For purposes of net income per share computations, net income is
adjusted for the pro forma reduction of interest expense, net of investment
income (where applicable) and income taxes, resulting from the assumed use of
warrant and option exercise proceeds to reduce outstanding debt.
The weighted average common and common equivalent shares used in the fully
diluted calculation were 25,353,000 in 1996; 24,168,000 in 1995; and 22,113,000
in 1994.
F-23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Approximately 86% 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 has
recently begun to stabilize. A major portion 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 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 is projected to comprise more than
one-third of the defense budget over the next decade. The electronic content of
the operations and maintenance segment, as well as the procurement portion of
the budget, is expected to experience a modest increase over this same time
frame. Tracor's ability to benefit from this upturn is enhanced by its
substantial position in the electronic warfare, mission planning, and imagery
markets.
Budget reductions have also driven the DOD and other U.S. government
agencies to pursue products and services which rapidly improve their operating
efficiency. This, in turn, has triggered a substantial increase in the demand
for state-of-the-art computer equipment and software systems and a major change
in the government's method for acquiring information technology, moving to large
government-wide acquisition contract vehicles. Following the acquisition of
Cordant, the Company formed Tracor Information Systems Company, by uniting
Cordant, Quality Systems, Inc. and the Software Center of Excellence. This
consolidation strengthens Tracor's ability to effectively address the rapidly
growing information technology market for both DOD and nondefense customers.
Information technology has been the fastest growing business area within Tracor.
The contraction of the defense budget in recent years and the resulting
excess capacity and increase in competition for contracts among defense
companies have resulted in a significant consolidation in the industry. Through
internal growth and several acquisitions, the Company has substantially
increased its revenue base. It has also 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. While acquisition price
expectations have increased, management believes the ongoing consolidation
within the defense industry will continue to present opportunities for
additional selected acquisitions at prices which meet the Company's objectives.
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 electronic and information technology products, systems, and
services for 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
The Company's results of operations were affected by major acquisitions
during 1996 and 1994. Each acquired company's results of operations are included
only from its respective date of acquisition. (See Note A to the Consolidated
Financial Statements.)
Year Ended December 31, 1996, Versus Year Ended December 31, 1995
On February 22, 1996, Tracor purchased all of the outstanding common stock
of AEL Industries, Inc. (AEL). AEL designs and manufactures sophisticated
countermeasures, simulation, and radar-warning
F-24
<PAGE> 27
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 acquisition was accounted for
using the purchase method, and, accordingly, the purchase price ($103.1 million)
and the liabilities assumed ($64 million) were allocated to the assets acquired
($98.1 million) based on their respective fair values on the date of
acquisition. The resulting excess of the purchase price over the fair value of
the net assets acquired ($69 million) is being amortized over 30 years.
Later in the year, on September 26, 1996, Tracor purchased all of the
outstanding shares of Cordant Holdings, Inc. (Cordant), an employee-owned
information systems company. Cordant focuses on the design, development, and
integration of information systems for a variety of applications, including mail
processing, records management, and CAD/GIS (computer-aided design/geographic
information systems). The purchase price of $65.7 million is subject to a
contingent payment of up to an additional $10 million based upon the potential
award of a large contract. The acquisition was financed by the use of $34.2
million cash on hand and the issuance of two promissory notes totaling $31.5
million. The promissory notes are supported by irrevocable standby letters of
credit, which are fully collateralized by cash escrow deposits. The acquisition
has been accounted for using the purchase method, and, accordingly, the purchase
price including transaction expenses ($66 million) and the liabilities assumed
($39 million) have been allocated to the assets acquired ($44.9 million) based
on a preliminary estimate of their respective fair values as of the date of
acquisition. This preliminary estimate is subject to change based on
finalization of certain fair value determinations which are not expected to have
a material effect on the consolidated financial position or results of
operations of Tracor. The resulting excess of the purchase price over the
preliminary estimate of the fair value of the net assets acquired ($60.1
million) is being amortized over 25 years.
Tracor experienced a 22% growth in sales compared to the prior year. AEL
and Cordant contributed 14% while Tracor companies excluding AEL and Cordant
contributed 8%. The sales increases occurred throughout the Company in the
following business areas and product lines: intelligence information systems,
imagery and mapping products, automatic test equipment, QF-4 drones, engineering
services, mine detection and neutralization systems, digital imagery
workstations, and chaff and flare expendables.
Selling, general, and administrative ("SG&A") expenses decreased as a
percentage of sales from 11.8% in 1995 to 11.4% in 1996. Amortization expense,
included in SG&A expenses, remained constant at approximately 1% of sales.
However, operating expenses, the major component of SG&A expenses, decreased
from 10.8% of sales in 1995 to 10.3% of sales in 1996 due to the increased
revenue base and reduced combined overhead costs.
An earnings before taxes increase of 35% was realized in 1996 over 1995.
AEL and Cordant contributed 18% with approximately 5% of the increase resulting
from a negotiated increase of $3.6 million in the price of a U.S. government
contract for work performed prior to 1996. The remaining 19% increase is
attributable to the internal sales growth noted above and improved profits on
those sales. Specifically, intelligence information systems, imagery and mapping
products, and mine detection and neutralization systems realized higher profits
during the year.
Fully diluted earnings per share were $1.46 in 1996, up from $1.23 in 1995.
A portion of the increase, $.08, is attributable to a $2.1 million gain,
resulting from a negotiated increase of $3.6 million in the price of a U.S.
government contract for work performed prior to 1996. The increase in weighted
average common and common equivalent shares from 24.2 million in 1995 to 25.4
million in 1996 resulted from the issuance of shares in a public offering
completed in July 1996.
Interest expense increased $7.7 million due primarily to an additional $108
million of senior term debt borrowed in conjunction with the AEL acquisition and
increased amortization expense of related loan costs. The increase in investment
interest income of $700,000 occurred due to higher cash balances during 1996
compared to the prior year.
Income taxes were incurred at statutory federal, state, and foreign rates.
The effective tax rate increased to 44.6% in 1996 compared to 42.7% in 1995, due
to additional nondeductible amortization expense of goodwill. The net deferred
income tax asset at December 31, 1996, is $17.5 million, due primarily to
F-25
<PAGE> 28
acquisitions. Based on the Company's taxable income in prior carryback years and
its forecast of future income, management believes, it is more likely than not,
all net deferred income tax assets will be realized. The realization of deferred
tax assets will be evaluated periodically.
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% in 1995 due to the acquisition of GDE, while sales
excluding GDE 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.
SG&A was 11.8% of sales in 1995, up from 11.3% of sales in 1994. While
total operating expenses included in SG&A remained constant at 10.8% of sales in
1995 and 1994, operating expenses, excluding the effect of acquisitions,
decreased as a percent of sales from 10.7% in 1994 to 10.0% in 1995.
Amortization expense, also included in SG&A, 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
taxable income in prior carryback years and its forecast of future income,
management believes, it is more likely than not, all net deferred income tax
assets will be realized. The realization of deferred tax assets will be
evaluated periodically.
FINANCIAL CONDITION AND LIQUIDITY
Working capital was $140.4 million at December 31, 1996, up from $129.1
million at December 31, 1995, and the ratio of current assets to current
liabilities was 1.8 at December 31, 1996, compared to 2.3 at December 31, 1995.
Cash provided by operating activities, compared to the prior year, was reduced
by costs associated with consolidating AEL facilities and exiting non-strategic
activities and product lines, including the disposal of excess properties, and
the relocation of certain operations to other Tracor facilities. Cash provided
by operating activities in 1995 also included a tax refund of $1.5 million
related to the preacquisition period of an acquired company. Normal capital
expenditures of $19.6 million and scheduled long-term debt payments of $19
million were incurred during the year. Proceeds of approximately $14 million
were received from the sale of two properties and two product lines obtained in
the acquisition of AEL. Long-term debt of $4 million associated with one of the
properties was retired with those proceeds. Proceeds from the amended
F-26
<PAGE> 29
credit agreement and cash on hand were used to finance the acquisition of AEL,
to retire approximately $10 million of debt assumed in the acquisition, and to
pay approximately $5 million of financing costs. Net proceeds of $48 million
from the sale of Tracor common stock were used to complete the acquisition of
Cordant. Three other business acquisitions with a total purchase price of $15.9
million were also completed during 1996 from cash on hand.
At December 31, 1996, Tracor had firm backlog of $1.0 billion, which
includes funded and unfunded contractual commitments. Approximately 76% of firm
backlog represents contracts with agencies of the U.S. government or its prime
contractors, and about 80% is expected to be realized as sales within one year.
In addition, the Company's backlog of unexercised contract options on U.S.
government contracts was $1.6 billion at year end.
The Company's operations typically do not require large capital
expenditures, and there were no significant capital commitments at December 31,
1996.
No borrowings were made from Tracor's $60 million revolving loans facility
during the year. At December 31, 1996, the Company had outstanding letters of
credit totaling approximately $32.1 million, leaving $17.9 million available
under its $50 million letters of credit facility. If the letters of credit
facility should become fully utilized, $30 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 foreign contracts and serve as collateral on certain insurance policies.
Management believes existing cash, continuing operations, and the amended
credit agreement will provide sufficient resources to allow the Company 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.
F-27
