PART I
Item 1. Business.
General.
Tracor, Inc. was incorporated in Delaware in 1991 and continues to do business
as a corporation. Tracor, Inc. and its subsidiaries ("Tracor" or the "Company")
provide sophisticated electronic and information technology products, systems,
and services to the Department of Defense ("DOD"), other U.S. government
agencies, foreign governments, and commercial customers. The Company's business
units operate in the U.S. and foreign defense electronics, information
technology, and systems engineering and integration markets. The Company's
products and services largely support high-priority DOD weapons, platforms, and
systems, enabling defense customers to enhance the operational performance and
readiness of existing systems and platforms, as well as extend their useful
lives and survivability. Since August 1993, Tracor has made 12 acquisitions as
part of its strategy to take advantage of a consolidating defense industry.
These acquisitions, combined with internal growth in 1996 and 1997, have enabled
the Company to grow in sales from $261.8 million in 1992 to $1,265.7 million in
1997 and in operating income from $11.1 million in 1992 to $101.9 million in
1997.
Industry Overview.
Approximately 74% of the products, systems, and services of Tracor are sold to
the DOD through direct contracts or through subcontracts with other U.S.
government contractors. In addition, the majority of foreign sales were in
defense electronics markets.
While the U.S. defense budget has decreased substantially over the past decade,
it is no longer declining and remains at more than $250 billion per year. Most
industry analysts indicate U.S. defense procurement account spending will rise
slowly as the year 2000 approaches.
A number of studies have indicated the need to transform the U.S. military into
a substantially different armed force than exists today. While the debate will
continue regarding the specific requirements for the future, there seems to be
general agreement that the future force will place greater emphasis on
information warfare driven by rapid advances in information and
information-related technologies. This includes automation and protected systems
architectures capable of rapidly disseminating information and integrating the
actions of widely dispersed and dissimilar units. Further, there is a need for
greater mobility, precision, speed, stealth, and strike distances with more
efficient logistics support. This transformation must be achieved while
effectively supporting near-term U.S. efforts.
The contraction of the defense budget and the resulting excess capacity and
increase in competition for contracts among defense companies have resulted in a
major 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.
While management believes the consolidation within the defense industry will
continue, the pursuit of acquisitions has become more challenging as seller
price expectations remain high following the premium prices paid by others in
earlier acquisitions.
The future defense budget and the industry consolidation cannot be predicted
with certainty; however, management believes the Company is well positioned to
continue to leverage its strengths and successes in its products, systems, and
services.
Company Strategy.
The Company's strategy in the evolving defense market consists of three key
elements: (1) protect and strengthen core businesses; (2) diversify to new
customers and markets; and (3) make strategic acquisitions of well-positioned
businesses which complement and strengthen the existing Tracor product areas.
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 the following 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 products, systems, 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, aircraft carriers, the Tomahawk and cruise missiles, and key
aircraft including the F-16, F/A-18E/F, F-117A, C-17, C-130, EA-6B, B-1B,
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,
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 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, 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 forces, 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. Tracor's products, systems, and services
also support the need for greater mobility, precision, speed, stealth, and
strike distances.
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.
Support Information Warfare: As the future military force places greater
emphasis on information warfare driven by rapid advances in information
and information-related technologies, management believes Tracor, with its
expertise in information technology, is well positioned to be a major
participant in supporting both near-term efforts and the long-term
transformation of the force.
Diversify to New Customers and 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 a 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, as well as to the U.S. Postal Service, the
Department of Justice, and the Administrative Office of the U.S. Courts.
In 1993 and 1995, the Company was awarded contracts from the Federal
Aviation Administration ("FAA") to perform systems 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 business was expanded in 1995
with the winning of a contract to provide test equipment for the new
Japanese F-2 fighter. International business accounted for 10% of total
1997 revenues.
New DOD Business: Tracor is constantly evaluating its technology to identify
areas of potential new business within the DOD. Several diversification
initiatives resulted in new programs in 1997, including contracts for
state-of-the-art, Tracor-developed camouflage systems for the U.S.
military and sophisticated imagery information technology products for the
National Imagery and Mapping Agency. Tracor also continued its work in
developing the next-generation mine detection and neutralization systems.
Commercial: The Company has developed a number of commercial applications of
its technology in areas as diverse as test systems for satellites to
aircraft structures. The Company has several contracts for applying a
range of sophisticated information systems capabilities to commercial and
state government customers, plus new contracts relating to major upgrades,
modifications, and manufacture of structures for commercial aircraft,
including electronics installation and systems integration.
Acquire Complementary Businesses. A key element in the Company's growth has
been the acquisitions of businesses which expand or enhance current lines of
products and services. During 1997, two relatively small, but strategic,
acquisitions were completed.
The acquisition of the Military Products Group of Calspan SRL Corporation
makes Tracor the leading producer of night vision goggle heads-up display
systems for the U.S. military on board various military helicopters and brings
other information display capabilities to the Company. The acquisition of the
Visual Information Technology ("VITec") division of Connectware, Inc. expands
Tracor's commercial mapping product line with image-processing software which
allows analysts to review, annotate, enhance, and output digital pictures from
a variety of sources.
Core Businesses.
The Company's core businesses are primarily in the U.S. and foreign defense
electronics, information technology, and systems engineering and integration
markets and largely support high-priority DOD weapons, platforms, and systems.
To obtain a better focus in the marketplace and more efficient operations,
Tracor realigned its businesses in 1997 into three major segments: Information
Systems, Aerospace, and Systems Technologies. This has resulted in more
efficient operations.
The major products and services of the segments are as follows:
Information Systems: Enterprise Systems
Mission Management
Imagery
Test and Space Systems
Aerospace: Electronic Warfare
Flight Systems
Systems Technologies: Shipboard Combat Systems Integration
Command, Control, and Communications Engineering
Range Systems and Support
See Note A to the Consolidated Financial Statements, incorporated herein by
reference, for sales and operating profits of the various products and services
of each segment as well as other financial information regarding the segments.
Information Systems. Through its information technology business segment,
Tracor Information Systems, Tracor offers various innovative information
technology products, services, and earth information solutions to government,
commercial, and international customers. The Company competes in all areas of
the rapidly growing information products market, providing enterprise systems,
mission management and imagery systems, and test and space systems.
Enterprise Systems: Tracor has a 29-year history of providing information
technology solutions to the federal and commercial marketplaces, including
a number of customers in the U.S. intelligence community. The Company
provides full-service software and network system solutions spanning
development, operations, support, and training, and applies leading-edge
technology to improve productivity in operational environments from data
collection and processing to analysis and dissemination.
Tracor also is helping a number of government and commercial customers
solve Year 2000 computer problems.
Other activities in this area include a contract with the Department of
Commerce and its Office of Domestic Operations to provide Lotus Notes and
Windows NT technical services in four U.S. cities. As a Lotus Authorized
Education Center and a Microsoft Authorized Technical Education Center,
Tracor offers full-service training solutions to key industry and
government clients.
The Company also focuses on the design, development, and integration of a
variety of information systems, employing commercially available hardware
and software applications which are sold by way of indefinite
delivery/indefinite quantity contracts. Applications include medical,
personnel, national intelligence, legal, mail processing, public access,
records management/workflow monitoring and control, and CAD/GIS
(computer-aided design/geographic information systems). Tracor products
and services in this area include the providing of commercial
off-the-shelf hardware and software to a wide range of DOD and other
government users, and other information technology products for various
members of the intelligence community. The hardware, software, and
peripherals can be ordered and purchased through Tracor's web-based
electronic ordering catalog.
Mission Management: Tracor's full-service mission planning products for the
U.S. Armed Forces aid military decision-makers, planners, and flight
crews in the employment of front-line tactical aircraft and the precision
targeting of their weapons systems. Several stealth aircraft and cruise
missiles, as well as the new family of high-altitude, high-endurance
unmanned aerial vehicles, Global Hawk and Dark Star, use these systems.
A growing portion of the Company's business is focused on the pursuit of
Sensor-to-Shooter programs. These programs transmit real-time intelligence
and targeting information to and from an aircraft for use in precision
targeting, mission planning, mission updates, and guided weapons support.
Program development includes actual test and evaluation trials, field
operations, and advanced warfighting experiments to ensure full
compatibility with joint operational and technological requirements for
the information-intensive battlefield of the 21st century.
Other 1997 mission management systems milestones include the first
operational deployment of the new Tracor-developed mission planning system
for Air Force F-117A fighters and the delivery of two systems to the Navy
for installation on aircraft carriers, fleet command ships, and amphibious
command ships. The first is an improved version Digital Imagery
Workstation Suite, which works together with Tracor's Precision Targeting
Workstation, to provide imagery-based mission planning for Navy tactical
aircraft and precision weapons, including the Tomahawk. (These
workstations also were delivered in 1997 for the first time to the United
Kingdom to support introduction of the Tomahawk into its inventory.) The
second is the Tactical Strike Coordination Manager designed to aid
commanders in the planning and coordination of strike missions.
Tracor's largest 1997 award in this area was a contract for the
development and production of the next-generation Air Vehicle Planning
System scheduled for deployment in 2002. Replacing an earlier Tracor
model, this system will plan and coordinate the missions of the entire
U.S. strategic bomber, tanker, and cruise missile force.
Imagery: Tracor supplies image-processing services to both government and
commercial customers worldwide. Products include softcopy mapping,
charting, and geodesy ("MC&G"); image-processing groundstations; and
interpretation and analysis centers. The Company has installed more than
1,000 MC&G workstations, and its software is employed in approximately 200
interpretation and analysis centers worldwide.
The Company made progress in 1997 in image processing and storage, winning
an important competitive contract awarded to build ruggedized imaging
ground stations for the U.S. Marine Corps, and a contract to provide
imagery product archives for the National Imagery and Mapping Agency's
Image Product Library program.
With the addition of VITec, Tracor has become an industry leader in the
development, manufacturing, and sale of commercial imagery exploitation
workstations and products. These include specialized image-processing
systems and software packages which permit image analysts and operators to
quickly input, roam, annotate, manipulate, and output images from
photographs, files, satellite images, maps, charts, and other digital
data. Aerial Data Reduction Associates, Inc., another Tracor subsidiary,
continues as a large supplier of mapping and geospatial products to
commercial consumers and state and local governments.
In a joint venture with Leica AG, Switzerland, Tracor has helped form a
new entity, LH Systems, LLC, to market the latest technology for map
compilation, engineering analysis, orthophoto production, digital terrain
modeling, and environmental management through a worldwide sales and
distribution network.
Test and Space Systems: For more than 30 years, Tracor has designed and
produced aircraft avionics test systems, while becoming the largest
supplier of these systems to the U.S. Air Force. In 1997, Tracor received
new orders for F-16 aircraft test systems, and the Company continues to
broaden its international presence with sales of systems for the Japanese
F-2 fighter program.
Recent emphasis has been placed on diversifying into other growing
markets, including satellites, telecommunications, and space launch
vehicles. In 1997, the Company increased its presence in the satellite
market with new orders placed by Motorola for Tracor test systems to be
used in the development of a global communications satellite system, as
well as several new contracts awarded by Hughes Space and Communications
for satellite test systems and engineering services. In the space
electronics market, Tracor made additional deliveries of space avionics
test systems, which are used in the Atlas and Titan launch vehicles, to
Lockheed Martin Astronautics.
Aerospace. Through its Tracor Aerospace segment, the Company is a developer
and manufacturer of electronic warfare systems, which protect platforms and
crew members of U.S. and friendly forces against enemy threats. Tracor won key
program recompetes during 1997 in core electronic warfare and flight systems
business areas. Tracor's work in these areas includes:
Electronic Warfare:
Countermeasures Dispenser Systems. The Company is well known for its
development and production of the AN/ALE-47 aircraft countermeasures
dispenser system, an advanced system capable of dispensing chaff, flares,
active radio frequency decoys, and other decoys from military aircraft.
Tracor has developed and manufactured several generations of these systems
during the past 30 years, with the newest being the AN/ALE-47, which has
been installed on more than 15 aircraft types for the U.S. Air Force, U.S.
Navy, and have been sold to more than 15 foreign customers.
Countermeasures Expendables. Tracor is a major developer and manufacturer
of chaff and flare decoys, which are ejected from countermeasures
dispenser systems to protect aircraft, ships, and personnel from
radar-guided or heat-seeking missiles. The Company won three flare
contracts in 1997, adding new flares to its product line, which includes
flares for Air Force F-15, A-10, C-17, C-5, and C-130 aircraft, as well as
U.S. Army AH-64, CH-47, and UH-60 helicopters.
Jammers. In 1997, Tracor completed development and began production of
Band 9/10 transmitters which improve the effectiveness of the AN/ALQ-99
jamming system aboard the Navy's EA-6B aircraft. These transmitters
provide increased frequency coverage and advanced capabilities against the
latest military threats. Tracor also began development of an advanced
technology Low Band Transmitter. In addition, the TACJAM-A system
manufactured by this segment provides the DOD with a common, modular,
multiplatform communication electronic attack capability into the 21st
century.
Radar Warning Systems. Tracor's systems seek and identify the spectrum of
threat frequencies and types of radar signals. The Company's integrated
front-end technology provides expanded frequency coverage, improved
direction finding accuracy, and dual polarization detection for radar
warning receivers and electronic warfare support systems, which detect,
identify, and locate hostile radar and communication transmitters.
Heads-Up Displays. The ANVIS Heads-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 flying. Tracor has become the leading producer of night
vision goggle heads-up display systems for the U.S. military, following
the win of a contract to upgrade an Air Force system and the acquisition
of Calspan SRL Corporation's Military Products Group. The system is being
installed in the Army UH-60A/L Blackhawk and the CH-47D Chinook; the
Marine Corps UH-1N Huey, CH-46E Sea Knight, KC-130T Hercules, and CH-53E
Sea King; and the 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.
Mine Neutralization and Detection Systems. The Company is developing an
Explosive Standoff Minefield Breacher ("ESMB") system prototype for the
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 land mines, clearing the way for rapid, safe passage.
The Company is also under contract to develop hand-held and vehicle-
mounted land mine detection systems which penetrate the ground with
electromagnetic energy to measure field anomalies, determining mine
presence and location. In addition, Tracor personnel have designed
products which work with standard ship navigation devices and use sonar to
identify the presence of mines at sea.
Camouflage. The Company won a contract from the Army for the
next-generation camouflage system which represents an extension of its
countermeasures technology. Tracor is the sole U.S. provider of this
advanced system, which not only conceals personnel and vehicles from
visual detection, but also from infrared sensors and radars. Following
acceptance of the initial test units, full production of the woodlands
Ultralightweight Camouflage Net System is scheduled to begin in 1998.
Tracor is also developing desert, arctic, and urban versions of these
systems. In addition, Tracor has applied this signature management
expertise to vehicles, and has several contracts with the DOD to reduce
the signature of ground combat and patrol vehicles.
Flight Systems:
Aerial Targets. The Company has been a major developer and producer of
full-scale and sub-scale drone aircraft for the DOD for more than
25 years. Tracor is the sole provider of the QF-4 full-scale drone for the
U.S. Armed Forces. The Company designs, manufactures, and modifies retired
military F-4 aircraft into full-scale drones for use as targets in weapons
system testing, evaluation, and personnel training. During 1997, the
Company completed flight testing and began production of the MQM-107E
sub-scale drone, which will be used by the Army, Air Force, and several
foreign customers, including the Royal Australian Navy.
Aircraft Structures. The Company performs major upgrades and modifications
and manufactures structures for military and commercial aircraft,
providing electronics installation and systems integration services. Under
a contract with Boeing, Tracor is joining the wing halves for the Boeing
717-200, a 21st century version of the popular and reliable DC-9 twinjet.
Tracor is working on a second contract to assemble more than 400 Y-Barrels
for the B-717-200. Attached to the wings, the Y-Barrel is part of the
fuselage and houses the main landing gear and fuel, hydraulic, and
electrical lines. In addition, the Company is applying its aircraft
modification expertise to the development of C-38A special mission
aircraft for the Air Force and Air National Guard. Slated for delivery in
1998, these aircraft will provide travelers with secure communications to
major command centers from anywhere in the world, and unrefueled
intercontinental range.
Flight Operations, Modifications, and Maintenance. Tracor performs a
variety of aircraft operations, modifications, and maintenance of both
military and civilian aircraft. Tracor has performed major avionics
upgrades to C-130 aircraft to include installations of forward-looking
infrared, satellite communication, and electronic flight instrumentation
systems. The Company also has designed and is currently providing hush
kits for the Learjet 20-series aircraft, enabling it to operate within
stringent Level III noise requirements, providing access to a wider range
of U.S. and international airports. Using its own aircraft, Tracor
provides flight testing and target towing services in support of weapons
systems evaluation and air-to-air combat training.
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.
Systems Technologies. The Company's third segment is Tracor Systems
Technologies which provides systems and software engineering and integration
services critical to the design, operation, testing, maintenance, and
upgrading of high-priority undersea, anti-air, and strike warfare combat
systems; communication systems; air traffic control and identification
systems; and strategic weapons systems.
Shipboard Combat Systems Integration:
Submarine Ballistic Missile Weapons Systems. Tracor has been the systems
integration contractor for the submarine fleet ballistic missile/strategic
weapons systems programs since the mid-1950s. The Company is the systems
integration contractor for the United States and United Kingdom TRIDENT II
system and ensures the major subsystems, including those for missile,
launcher, navigation, and fire control, to be fully integrated and tested
to perform as specified. Tracor also provides systems integration for the
POLARIS, POSEIDON, and TRIDENT missile systems.
U.S. Navy Surface Combatant and Ship Systems. Since World War II, Tracor
has performed systems engineering and integration for every guided missile
system installed on Navy ships, including the AEGIS weapon and combat
system. This automated, highly sophisticated air defense warfare system is
being installed on all new Navy cruisers and destroyers. Other shipboard
anti-air warfare guided missile systems include the Terrier New Threat
Upgrade, Tarter, AEGIS, NATO Seasparrow, and Tomahawk. The Company also
provides program management, ship integration, test and evaluation, and
configuration management support to the AEGIS program office. In addition,
Tracor provides systems engineering and integration for various ship
systems on board AEGIS destroyers, such as propulsion power plants and
electrical power generation plants.
Anti-Submarine Warfare Systems. Since 1977, Tracor has provided
engineering support for the AN/SQQ-89 surface ship and anti-submarine
warfare ("ASW") combat system project. The Company performs systems
engineering and integration for hull-mounted active/passive sonar systems,
helicopter-borne sonobuoys, towed array sensor systems, and underwater
fire control systems.
Tracor provides program management, acquisition, and integration support
to the submarine combat weapons system community. The Company also
provides submarine shock hardening, engineering, and logistics for the
Navy's new attack submarine program.
Command, Control, and Communications Engineering:
Communication Systems. Tracor provides radio communication systems and
associated engineering for the AEGIS guided missile destroyers. Since
1975, Tracor has delivered advanced communication systems for 52 AEGIS
cruisers and destroyers, and current contracts will continue through the
year 2002. In 1997, Tracor expanded its command, control, communication,
computers, and intelligence ("C4I") integration activities to include
turnkey program management and engineering support for the Navy's new
landing amphibious transport dock ship. The Company is also providing ship
design and integration engineering for the radio communication system to
be installed on the Navy's newest aircraft carrier. The Company also
provides lifetime support and in-service engineering of communication
systems, as well as C4I systems, aboard AEGIS and other combatants.
U.S. Navy Air Traffic Control and Landing Systems. Tracor provides
life-cycle support for the Navy's automatic carrier landing systems and
Marine Corps air traffic control and landing systems. These systems assist
naval and marine aviators in achieving safe landings aboard carriers,
shore stations, and expeditionary fields.
Identification Systems. Tracor provides life-cycle support to the Navy and
Coast Guard shipboard and shore-based identification systems and has
supported the development of the next-generation of identification
systems.
Special Forces Communications Systems. Tracor supports the communication
and electronics systems requirements of the DOD, Special Operations
Forces, and other government agencies for a host of mobile communication
systems, including those installed in special-purpose vehicles, boats,
planes, and suitcases.
Range Systems and Support: Tracor provides test range operations support to
various U.S. military installations. The Company provides operations
support and maintenance for the test range and technical facilities at
Eglin Air Force Base in Florida, Fort Huachuca in Arizona, and Holloman
Air Force Base in New Mexico, supporting the test and evaluation of
defense weapons systems, air armament, and munitions.
The Company performs operations support and maintenance on high-technology
equipment and has supplied logistics and engineering support for 146 radar
systems located on 27 test ranges worldwide. Tracor offers a full line of
test range instrumentation hardware systems, including radar and optical
tracking systems in fixed or mobile configurations to domestic and
international customers, and more than 70 company-developed precision
tracking radars have been installed worldwide.
Expansion and Diversification.
Tracor has been successful in translating its technologies and products to both
established and new military customers, non-DOD governmental agencies, the
foreign marketplace, and select commercial customers. Many of these successes
are discussed previously under "Company Strategy" and "Core Businesses" and
include a program to provide the Army's next-generation camouflage system.
Tracor also supplies engineering support to the FAA for the acquisition of major
air traffic control radar systems and for NASA's manned and unmanned space
flights.
In addition, 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 the development and production of
aircraft structures, a variety of mapping products for the earth information
market, and automatic test systems to support the telecommunications and
satellite markets, as previously discussed.
In a joint venture with Boeing, Farmland Industries, and Agrium Ltd., Tracor has
helped create RESOURCE21, a company which plans to operate a network of imaging
satellites at the turn of the century. With an initial focus on the growing
field of precision agriculture, RESOURCE21 will also extract sophisticated
information from multispectral imagery to facilitate resource management
decisions in agriculture, forestry, insurance, commodities, and environmental
industries worldwide. Tracor is scheduled to be responsible for the ground data
processing, image assessment, archiving, and production generation for this
commercial system. Tracor is expanding its aluminum-coated glass fiber ("chaff")
business beyond the military market into commercial and industrial applications.
A recent example is providing conductive additives to be used in the fabrication
of commercial antennas for direct broadcast satellite television and
uplink/downlink. Additionally, strategic alliances with several global
fiberglass manufacturers to develop new markets in EMI/RFI, static control, and
thermal applications are underway.Signal-processing expertise developed under
Navy sonar programs, combined with advanced database systems capabilities, led
to the development of a statewide regulatory and compliance system and
client/server-based order fulfillment system for Hewlett-Packard.Major
Customers.Tracor's sales 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. During
1997, Tracor performed under more than 770 contracts with approximately
100 customers within various U.S. government agencies. Sales to all such
agencies are subject to conditions unique to sales to the U.S.government.
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 Company or 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:
1997 1996 1995
---- ---- ----
(in Millions)
Customer-sponsored $161.2 $157.5 $132.3
Company-sponsored 10.1 11.1 5.4
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.
Approximately 84% of the Company's 1997 revenues resulted from contracts with
the U.S. government and its prime contractors. Systems 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 fixed-fee type
contracts provide for the payment of actual allowable costs, plus a fixed 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, 1997,
approximately 50% of the Company's revenues were derived from cost-reimbursement
type contracts, and approximately 50% of the Company's revenues were derived
from fixed-price 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 is 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 business with the U.S. government in the
future.
Sales to Foreign Customers.
For 1997, 1996, and 1995, approximately $130.4 million, $104.8 million, and
$87.0 million (representing 10% in each year) of the net sales of the Company
were attributable to sales and services provided to foreign customers. Foreign
sales were principally to Pacific Rim, European, and Middle Eastern customers
and to the Australian government. These customers are generally deemed to be
friendly to the government of the United States and to be relatively stable.
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, and social unrest). Although the loss of
all of the Company's foreign business could have a material adverse effect on
the Company's results of operations and financial condition, it is management's
opinion this risk is remote and the loss of any single contract with a foreign
government would not be material.
Employees.
As of December 31, 1997, the Company had approximately 10,740 employees. Of this
number, approximately 3,970 employees hold advanced or bachelor's degrees in a
number of scientific disciplines. Approximately 125 of the Company's employees
are located outside of the United States. Less than three percent of the
Company's U.S. employees are covered by collective bargaining agreements with
labor unions. The Company considers relations with its employees to be
excellent.
Backlog.
In each of its major lines of business, the Company has substantial firm backlog
and unexercised contract options which may be exercised by the customer. Firm
backlog represents the amount of revenue expected to be recognized for
contractually authorized performance of awarded firm contractual commitments.
Firm backlog may include amounts yet to be fully funded by the customer or
amounts for performance yet to be fully definitized. Unexercised contract
options represent the amount of revenue which would be recognized from the
performance of contract options that may be exercised by customers under
existing contracts and from task orders to be issued under indefinite quantity
contracts or basic ordering agreements. Amounts included in both firm backlog
and unexercised contract options are based on the contract's total awarded value
and the Company's estimates regarding the amount of the award that will
ultimately result in the recognition of revenue. These estimates are based on
the Company's experience with similar awards and similar customers. Estimates
are reviewed periodically and appropriate adjustments are made to the amounts
included in firm backlog and unexercised contract options. Historically, these
adjustments have not been significant.
The Company's firm backlog at December 31, 1997, was $1.3 billion, compared with
$1.0 billion as of December 31, 1996. The Company's unexercised contract options
as of December 31, 1997, were $1.9 billion, compared with $1.6 billion at
December 31, 1996. This total backlog of $3.2 billion at December 31, 1997, is
the highest in the Company's history and represents a 20% increase over the
total backlog at December 31, 1996. Management does not believe the Company's
firm backlog is seasonal in any material respect. Approximately 86% of firm
backlog as of December 31, 1997, is expected to be realized as sales within one
year. Approximately 84% of firm backlog as of December 31, 1997, was comprised
of contracts with agencies of the U.S. government or its prime contractors. See
"Major Customers" and "Government Contracts."
Sources and Availability of Raw Materials.
The Company's manufacturing operations require a wide variety of electronic and
mechanical components for which the Company has multiple commercial sources. The
Company's manufacturing operations also require raw materials which are
purchased in the open market and are normally available from a number of
suppliers. The Company has not experienced any significant delays in obtaining
timely deliveries of essential materials.
Compliance with Environmental Controls.
There have not been, and the Company does not anticipate, any materially adverse
effects upon the capital expenditures, earnings, or competitive position of the
Company resulting from compliance with federal, state, and local provisions
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment.
Patents.
There are a total of 118 Company owned-patents with 21 patent applications
pending. The Company does not believe existing patents and licenses are material
in the conduct of its business as a whole and believes research, development,
and engineering skills are more important. The U.S. government typically
receives royalty-free licenses on inventions arising from government contracts,
with each company retaining all commercial rights with respect to such
inventions. While patents are not material to the operation of the business,
proprietary information of the Company is adequately protected through the
requirement that employees execute confidentiality agreements as a condition of
employment.
Forward-Looking Statements.
Any statements contained herein which are forward-looking statements rather than
historical facts are subject to risks and uncertainties that could cause actual
results to differ from those stated or implied. These risks and uncertainties
include the competitive nature of the government contracting environment,
dependence on continued funding of government contracts, government contract
procurement and termination risks, restrictions imposed by terms of the
Company's indebtedness, the effect of changing political or economic conditions,
and other risks described in the Company's various SEC filings including the
Company's Form 8-K, dated July 21, 1997.
Item 2. Properties.
The Company's business activities are conducted in various leased and owned
properties generally located in proximity to its various U.S. government
customers. One hangar facility in East Alton, Illinois is currently under
contract for sale. All other facilities are considered suitable and adequate in
size for the Company's business activities.
The principal facilities of each business segment are listed below:
<TABLE>
<CAPTION>
Square
Location Footage Leased/Owned
---------------------------------------------- --------- ------------
<S> <C> <C>
Information Systems
San Diego, California (segment headquarters) 444,365 leased
Washington, D.C. area 178,021 leased
all others less than 20,000 sq. ft. each 78,151 leased
-------
700,537
Aerospace
Austin, Texas (segment and corporate
headquarters) 548,148 owned
Lansdale, Pennsylvania 372,403 owned
Mojave, California 309,376 leased/owned
East Alton, Illinois (under contract
for sale) 133,900 owned
Camden, Arkansas 122,644 leased
San Ramon, California 117,000 owned
Dayton, Ohio 76,650 leased
Lillington, North Carolina 75,000 leased
Jerusalem, Israel 48,000 owned
Palmdale, California 30,225 owned
Ft. Walton Beach, Florida 20,975 leased
all others less than 20,000 sq. ft. each 24,816 leased
---------
1,879,137
Systems Technologies
Washington, D.C. area (segment headquarters) 618,658 leased/owned
California, Maryland area 278,383 leased/owned
Ft. Walton Beach, Florida 122,240 owned
Oxnard, California 92,160 owned
Chesapeake, Virginia 84,721 leased
Silverdale, Washington area 72,929 leased
Bloomington, Indiana 48,260 leased
Groton, Connecticut 34,010 leased/owned
Dahlgren, Virginia 29,155 leased
San Diego, California 21,501 leased
all others less than 20,000 sq. ft. each 108,558 leased/owned
---------
1,510,575
---------
Total 4,090,249
=========
</TABLE>
Item 3. Legal Proceedings.
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 or results of operations
of Tracor.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Trading Market for Tracor Common Stock and Series A Warrants.
The Common Stock and Series A Warrants of the Company are listed on The Nasdaq
Stock Market(SM) 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 reported high and low
sales prices of the Common Stock and Series A Warrants on Nasdaq for the
applicable periods:
Common Stock Series A Warrants
--------------------- -------------------
1997
------------------------------------------------
High Low High Low
-------- --------- ------- -------
Fourth Quarter $31 3/8 $25 13/16 $29 1/4 $24
Third Quarter 31 23 7/8 28 21 1/2
Second Quarter 26 3/4 20 24 1/4 17 1/4
First Quarter 24 21 1/8 22 19
1996
------------------------------------------------
High Low High Low
-------- --------- ------- -------
Fourth Quarter $24 3/8 $19 3/4 $21 3/4 $17 3/8
Third Quarter 20 5/8 16 5/8 18 1/2 14 7/8
Second Quarter 21 1/8 17 1/8 18 1/2 14 5/8
First Quarter 17 7/16 14 15 11 1/2
As of February 17, 1998, the Company had approximately 8,924 holders of the
Common Stock, of which 304 were stockholders of record. The approximate number
of holders not of record was determined by requests made to registered clearing
agencies.
Dividend and Dividend Policy.
The Company has never paid a cash dividend on its Common Stock, although the
Company's predecessor paid dividends. The Company currently intends to retain
its earnings 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 Company's current credit facilities
impose certain limitations on the payment of dividends.
Issuance of Unregistered Securities.
On March 14, 1997, the Company sold $250 million of its 8 1/2% Senior
Subordinated Notes (the "Notes"). The sole underwriter was BT Securities
Corporation. The securities were sold to "Qualified Institutional Buyers" and
Institutional "Accredited Investors." The aggregate offering price was $250
million, and, with allowed discounts, the proceeds to the Company (less expenses
of the offering payable by the Company) after discounts were $244,005,000.00.
The Notes were sold pursuant to an exemption from registration provided by
Section 4 of the Securities Act. The Notes were subsequently exchanged for
registered securities of the Company pursuant to a Registration Statement (Form
S-4) filed with the Securities and Exchange Commission ("SEC") on April 18,
1997, Registration No. 333-24319, which is incorporated herein by reference.
Item 6. Selected Financial Data.
The Selected Financial Data with respect to Tracor and its subsidiaries are
contained on page 25 of the Annual Report to Shareholders for the year ended
December 31, 1997. The columns containing the data for the years 1993 through
1997 are incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Management's Discussion and Analysis of Financial Condition and Results of
Operation is contained on pages 22 through 24 of the Annual Report to
Shareholders for the year ended December 31, 1997, which is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and accompanying notes are included on
pages 26 through 40 of the Annual Report to Shareholders for the year ended
December 31, 1997, which is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Company.
Pursuant to the Delaware General Corporation Law, as implemented by Tracor's
Certificate of Incorporation and Bylaws, all corporate powers are exercised by
or under the direction of the Board of Directors. The Board of Directors has
created committees with responsibility for audits, compensation, and ethical
issues. Each director who is not an employee of Tracor serves on one or more
committees. Officers of the Company serve at the discretion of the Board of
Directors. The Board of Directors and executive officers of the Company consist
of the persons named in the table below. Additional information with respect to
those persons who serve as directors and executive officers is presented on page
43 of the Annual Report to Shareholders for the year ended December 31, 1997,
and pages 5 and 6 of the Proxy Statement, which are incorporated herein by
reference.
Name Age Position(s) with the Company
----------------------------------- --- ----------------------------
James B. Skaggs 60 Chairman of the Board and
President
Robert K. Floyd 62 Vice President and Chief
Financial Officer
Barry G. Campbell 56 Vice President; Chief
Executive Officer of Tracor
Systems Technologies, Inc.
K. Bruce Hamilton 56 Vice President; President of
Tracor Marine, Inc. and
Tracor Systems
Technologies, Inc.
David L. Lawrence 55 Vice President; President of
Tracor Flight Systems, Inc.
George R. Melton 51 Vice President; President of
Tracor Aerospace, Inc. and
Tracor Aerospace Electronic
Systems, Inc.
Dr. Terry A. Straeter 55 Vice President; President of
Cordant Federal Services
Corporation, GDE-Helava,
Inc., GDE Systems, Inc.,
GDE Systems Imaging, Inc.,
GDESI, Inc., Tracor
Enterprise Solutions, Inc.,
and Tracor Information
Systems Company
Woody Endsley 45 Vice President and Treasurer
Robert J. Fitch 49 Vice President - Government
Relations
Russell E. Painton 57 Vice President, General
Counsel, and Corporate
Secretary
John M. Rock, III 58 Vice President - Technology
and Information Systems
Roger W. Sadler 60 Vice President - Business
Development
Kathleen Thompson 50 Vice President - Human
Resources
William E. Conway, Jr. 48 Director
Dr. Julian Davidson 70 Director
Anthony Grillo 42 Director
Bob Marbut 62 Director
Elvis L. Mason 64 Director
Lt. Gen. Thomas P. Stafford (Ret.) 65 Director
Meetings of the Board of Directors.
During 1997, the Board of Directors met five times. Each director attended more
than 75% of the aggregate of (a) the total number of meetings held during 1997
and (b) the total number of meetings held by all committees of the Board of
Directors on which each served.
Item 11. Executive Compensation.
Information in response to this Item appears under the heading "Executive
Compensation" on pages 7 through 12 of the Proxy Statement, which is
incorporated herein by reference.
Item 12. Ownership of Management and Principal Stockholders.
Information in answer to this Item appears under the heading "Ownership of
Tracor, Inc. Common Stock" on pages 2 through 4 of the Proxy Statement, which is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Applicable information in answer to this Item appears on pages 5 through 16
under the heading "Election of Directors" in the Proxy Statement, which is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements. The following financial statements and
supplementary data of Tracor are presented in the Annual Report to
Shareholders for 1997, which is incorporated herein by reference.
Report of Independent Auditors.
Consolidated Income Statements.
Consolidated Balance Sheets.
Consolidated Statements of Shareholders' Equity.
Consolidated Statements of Cash Flows.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules. All schedules are omitted because the
required information is included elsewhere in the financial statements
or is otherwise inapplicable.
(a)(3) Exhibits.
3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to the Company's Registration Statement, No. 333-03330,
filed with the SEC,, on April 10, 1996).
3.2 Bylaws of the Company, as amended and restated (filed herewith).
4.1 Registration Rights Agreement, dated as of March 14, 1997, among
the Company, the Subsidiary Guarantors named therein, and
BT Securities Corporation (incorporated by reference to the Exhibit
4.1 to Amendment No. 2 to the Registrant's Registration Statement
on Form S-4, No. 333-24319, filed with the SEC on April 17, 1997).
4.2 Indenture, dated as of March 14, 1997, among the Company and U.S.
Trust Company of Texas, N.A. relating to the 8 1/2% Senior
Subordinated Notes Due 2007 (incorporated by reference to the
Exhibit 4.2 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-4, No. 333-24319, filed with the SEC on April
17, 1997).
4.3 Form of Exchange Notes (incorporated by reference to the Exhibit
4.3 to Amendment No. 2 to the Registrant's Registration Statement
on Form S-4, No. 333-24319, filed with the SEC on April 17, 1997).
4.4 Series A Indenture, dated as of November 17, 1994, among the
Company, each Subsidiary Guarantor, and U.S. Trust Company of
Texas, N.A., as Trustee, relating to the Series A Notes (the
"Series A Indenture") (previously filed with the SEC as an
exhibit to the Registrant's Registration Statement on Form S-1,
No. 33-89578, on February 17, 1995, and incorporated herein by
reference).
4.5 First Supplemental Indenture, dated as of April 11, 1995, to the
Series A Indenture (previously filed with the SEC as an exhibit
to the Registrant's Registration Statement on Form S-4/S-3,
No. 333-03330, on April 10, 1996, and incorporated herein by
reference).
4.6 Second Supplemental Indenture, dated as of February 2, 1996, to
the Series A Indenture (previously filed with the SEC as an
exhibit to the Registrant's Registration Statement on Form S-4/S-3,
No. 333-03330, on April 10, 1996, and incorporated herein by
reference.
4.7 Third Supplemental Indenture, dated September 26, 1996, to the
Series A Indenture (incorporated by reference to the Exhibit 4.7
to Amendment No. 2 to the Company's Registration Statement on Form
S-4, No. 333-24319, filed with the SEC on April 17, 1997).
4.8 Fourth Supplemental Indenture, dated March 14, 1997, to the Series
A Indenture (incorporated by reference to the Exhibit 4.8 to
Amendment No. 2 to the Company's Registration Statement on Form
S-4, No. 333-24319, filed with the SEC on April 17, 1997).
4.9 Specimen Series A Note (previously filed with the SEC as an
exhibit to the Registrant's Registration Statement on Form S-1
No. 33-89578) on February 17, 1995, and incorporated herein).
4.10 Credit Agreement among Tracor, the lending institutions party to
the Credit Agreement, Credit Lyonnais, The First National Bank of
Chicago, and Wells Fargo (Texas), National Association, as
Co-Agents and Bankers Trust Company, as Agent, dated as of March
14, 1997, incorporated by reference to the Exhibit 4.15 to
Amendment No. 2 to the Company's Registration Statement on Form
S-4, No. 333-24319, filed with the SEC on April 17, 1997).
4.11 Registration Statement on Form S-4 (previously filed with the SEC,
No. 333-24319, on April 18, 1997, and incorporated herein).
13.0 Annual Report to Shareholders for 1997 (filed herewith).
21.0 Subsidiaries of the Registrant (filed herewith).
23.0 Consent of the Independent Auditors (filed herewith).
27.1 Financial Data Schedule for Year Ended December 31, 1997 (filed
herewith).
27.2 Financial Data Schedule for Year Ended December 31, 1996 (filed
herewith).
27.3 Financial Data Schedule for Year Ended December 31, 1995 (filed
herewith).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Tracor, Inc.
Date: March 25, 1998
By:_/S/_________________________
James B. Skaggs
President and
Chief Executive Officer
Date: March 25, 1998
By:_/S/_________________________
Robert K. Floyd
Vice President,
Chief Financial Officer, and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 25, 1998
By:_/S/_________________________
William E. Conway, Jr.
Director
Date: March 25, 1998
By:_/S/_________________________
Julian Davidson
Director
Date: March 25, 1998
By:_/S/_________________________
Anthony Grillo
Director
Date: March 25, 1998
By:_/S/_________________________
Bob Marbut
Director
Date: March 25, 1998
By:_/S/_________________________
Elvis L. Mason
Director
Date: March 25, 1998
By:_/S/_________________________
James B. Skaggs
Director
Date: March 25, 1998
By:_/S/_________________________
Thomas P. Stafford
Director
BYLAWS OF
TRACOR, INC.
as amended December 17, 1997
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation shall be
at 1209 Orange Street, Wilmington, New Castle County, Delaware 19801 c/o The
Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders for all purposes may be
held at such time and place, either within or without the State of Delaware, as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
Section 2. Annual Meeting. An annual meeting of stockholders of the Corporation
shall be held each calendar year on such date and at such time as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting or in a duly executed waiver of notice of such meeting. At such
meeting, the stockholders shall elect directors and transact such other business
as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, the Certificate of
Incorporation or these Bylaws, may be called by the President, the Board of
Directors, or the holders of not less than twenty-five percent (25%) of all
shares entitled to vote at the meetings. Business transacted at all special
meetings shall be confined to the purposes stated in the notice of the meeting.
Section 4. Notice. Written or printed notice stating the place, date, and hour
of each meeting of the stockholders and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than ten (10) nor more than sixty (60) days before the date of the meeting,
either personally or by mail, by or at the direction of the President, the Board
of Directors, or stockholders calling the meeting, to each stockholder of record
entitled to vote at such meeting. If such notice is to be sent by mail, it shall
be directed to such stockholder at his address as it appears on the records of
the Corporation, unless he shall have filed with the Secretary of the
Corporation a written request that notices to him be mailed to some other
address, in which case it shall be directed to him at such other address. Notice
of any meeting of stockholders shall not be required to be given to any
stockholder who shall attend such meeting in person or by proxy and shall not,
at the beginning of such meeting, object to the transaction of any business
because the meeting is not lawfully called or convened, or who shall, either
before or after the meeting, submit a signed waiver of notice, in person or by
proxy.
Section 5. Voting List. At least ten (10) days before each meeting of
stockholders, the Secretary or other officer of the Corporation who has charge
of the Corporation's stock ledger, either directly or through another officer
appointed by him or through a transfer agent appointed by the Board of
Directors, shall prepare a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or a duly executed waiver of notice of such meeting or, if not so
specified, at the place where the meeting is to be held. Such list shall also be
produced and kept at the time and place of the meeting at all times during such
meeting and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares entitled
to vote on a matter, present in person or represented by proxy, shall constitute
a quorum at any meeting of stockholders, except as otherwise provided by
statute, the Certificate of Incorporation or these Bylaws. If a quorum shall not
be present at any meeting of stockholders, the stockholders entitled to vote
thereat who are present, in person or by proxy, or, if no stockholder entitled
to vote is present, any officer of the Corporation, may adjourn the meeting from
time to time until a quorum shall be present. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
At any adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the original meeting had a quorum
been present; provided that, if the adjournment is for more than thirty (30)
days or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting.
Section 7. Required Vote; Withdrawal Of Quorum. When a quorum is present at any
meeting, the vote of the holders of at least a majority of the outstanding
shares entitled to vote who are present, in person or by proxy, shall decide any
question brought before the meeting, unless the question is one on which, by
express provision of statute, the Certificate of Incorporation or these Bylaws,
a different vote is required, in which case such express provision shall govern
and control the decision of the question. The stockholders present at a duly
constituted meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
Section 8. Method of Voting; Proxies.
(a) Each outstanding share, regardless of class, shall be entitled to one
vote on each matter submitted to a vote at a meeting of stockholders,
except to the extent that the voting rights of the shares of any class or
classes are limited, denied, increased or decreased by the Certificate of
Incorporation.
(b) Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three (3) years from
its date, unless the proxy provides for a longer period. Each proxy shall
be filed with the Secretary of the Corporation prior to or at the time of
the meeting.
(c) Without limiting the manner in which a stockholder may authorize another
person or persons to act for him as proxy pursuant to subsection (b) of
this Section, the following shall constitute a valid means by which a
stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing another person or
persons to act for him as proxy. Execution may be accomplished by the
stockholder or by an authorized officer, director, employee or agent
of the stockholder signing such writing or causing such stockholder's
signature to be affixed to such writing by any reasonable means
including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or persons to act for him
as proxy by transmitting or authorizing the transmission of a
telegram, cablegram, or other means of electronic transmission to the
person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized
by the person who will be the holder of the proxy to receive such
transmission, provided that any such telegram, cablegram or other
means of electronic transmission must either set forth or be submitted
with information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the
stockholder. If it is determined that such telegrams, cablegrams or
other electronic transmissions are valid, the inspectors or, if there
are no inspectors, such other persons making that determination shall
specify the information upon which they relied.
(d) Any copy, facsimile telecommunication or other reliable reproduction of
the writing or transmission created pursuant to subsection (c) of this
Section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction
of the entire original writing or transmission.
(e) A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
Section 9. Record Date.
(a) In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors, and which record date shall not
be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote
at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, or, if notice is waived,
at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors
may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted
by the Board of Directors. If no record date has been fixed by the Board
of Directors, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is required by statute or these Bylaws,
shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the Corporation
by delivery to its registered office in Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Such
delivery shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by
statute or these Bylaws, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall
be at the close of business on the day on which the Board of Directors
adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing
the record date is adopted, and which record date shall be not more than
sixty (60) days prior to such payment, exercise, or other action. If no
record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
Section 10. Inspectors of Elections. The Board of Directors may, in advance of
any meeting of stockholders, appoint one or more inspectors to act at such
meeting or any adjournment thereof. If any of the inspectors so appointed shall
fail to appear or act, the chairman of the meeting shall, or if inspectors shall
not have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares of capital stock of the
Corporation outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, and the validity and
effect of proxies and shall receive votes, ballots, or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots, or consents, determine the results,
and do such acts as are proper to conduct the election or vote with fairness to
all stockholders. On request of the chairman of the meeting, the inspectors
shall make a report in writing of any challenge, request, or matter determined
by them and shall execute a certificate of any fact found by them. No director
or candidate for the office of director shall act as an inspector of an election
of directors. Inspectors need not be stockholders.
ARTICLE III
DIRECTORS
Section 1. Management. The business and affairs of the Corporation shall be
managed by its Board of Directors, who may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute, the
Certificate of Incorporation or these Bylaws directed or required to be
exercised or done by the stockholders. The Board of Directors shall keep regular
minutes of its proceedings.
Section 2. Number; Election.
(a) The Board of Directors shall consist of one (1) or more directors who need
not be stockholders or residents of the State of Delaware. The number of
directors which shall constitute the whole Board of Directors may be
increased or reduced as provided in Section 3. immediately following. A
written ballot will not be required for the election of directors.
(b) The Board of Directors shall be divided into three classes, each class to
consist as nearly as possible of one-third of the directors. The term of
office of one class of directors shall expire each year. The initial term
of office of the Class I directors shall expire at the 1997 annual meeting
of stockholders. The initial term of office of the Class II directors
shall expire at the 1998 annual meeting of stockholders. The initial term
of office of the Class III directors shall expire at the 1999 annual
meeting of stockholders. Commencing with the 1997 annual meeting of
stockholders, the directors of the class elected at each annual meeting of
stockholders shall hold office for a term of three years. The directors
for the class of directors whose term is expiring at such annual meeting
shall be elected at the annual meeting of the stockholders, except as
hereinafter provided, and each director elected shall hold office until
his successor is elected and qualified or until his earlier resignation or
removal.
(c) Effective upon the issuance of shares of common stock of the Corporation
pursuant to the terms of that certain Acquisition Agreement, dated as of
March 9, 1996, as amended, by and among the Corporation and Westmark
Systems, Inc. (the "Acquisition Agreement"), the Board of Directors shall
be automatically increased by one director, who shall be a Class III
director. Pursuant to the terms of the Acquisition Agreement, the Board of
Directors shall appoint Elvis Mason to the additional directorship. Such
directorship shall automatically terminate at the 1999 meeting of
stockholders, and the number of directors shall be automatically decreased
by one.
Section 3. Change in Number. The number of directors may be increased or
decreased from time to time by resolution of the Board of Directors, but no
decrease shall have the effect of shortening the term of any incumbent director.
Section 4. Removal. Any director may be removed in accordance with Delaware law
at any annual or special meeting of stockholders, only by the affirmative vote
of the holders of a majority of the shares represented in person or by proxy at
such meeting and entitled to vote for the election of such director, if notice
of the intention to act upon such matters shall have been given in the notice
calling such meeting.
Section 5. Vacancies and Newly Created Directorships. Vacancies and newly-
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. Each director so chosen
shall hold office until the first annual meeting of stockholders held after his
election at which the term of office of his class expires and until his
successor is elected and qualified or until his earlier resignation or removal.
If at any time there are no directors in office, an election of directors may
be held in the manner provided by statute. Except as otherwise provided in these
Bylaws, when one or more directors shall resign from the Board of Directors,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have the power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in these Bylaws with respect to the filling of other
vacancies.
Section 6. Election of Directors; Cumulative Voting Prohibited. At every
election of directors, each stockholder shall have the right to vote in person
or by proxy the number of voting shares owned by him for as many persons as
there are directors to be elected and for whose election he has a right to vote.
Cumulative voting shall be prohibited.
Section 7. Place of Meetings. The directors of the Corporation may hold their
meetings, both regular and special, either within or without the State of
Delaware.
Section 8. First Meetings. The first meeting of each newly elected Board shall
be held without further notice immediately following the annual meeting of
stockholders, and at the same place, unless by unanimous consent of the
directors then elected and serving, such time or place shall be changed.
Section 9. Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place as shall from time to time be
determined by the Board of Directors.
Section 10. Special Meetings. Special meetings of the Board of Directors may be
called by the President on twenty-four (24) hours notice to each director, if by
telecopy, electronic facsimile or hand delivery, or on three (3) days' notice if
by mail or by telegram. Special meetings may be called in like manner and on
like notice on the written request of any one of the directors. Except as may be
otherwise expressly provided by statute, the Certificate of Incorporation or
these Bylaws, neither the business to be transacted at, nor the purpose of, any
special meeting need be specified in a notice or waiver of notice.
Section 11. Quorum. At all meetings of the Board of Directors, the presence of a
majority of the directors shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the vote of a majority of the
directors present at any meeting at which a quorum is present shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute, or the Certificate of Incorporation or these Bylaws. If a quorum shall
not be present at any meeting of directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 12. Action Without Meeting; Telephone Meetings. Any action required or
permitted to be taken at a meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if a consent in writing, setting forth
the action so taken, is signed by all the members of the Board of Directors or
committee, as the case may be. Such consent shall have the same force and effect
as a unanimous vote at a meeting. Subject to applicable notice provisions and
unless otherwise restricted by the Certificate of Incorporation, members of the
Board of Directors, or any committee designated by the Board of Directors, may
participate in and hold a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such meeting shall constitute
presence in person at such meeting, except where a person's participation is for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
Section 13. Chairman of the Board. The Board of Directors may elect a Chairman
of the Board to preside at their meetings and to perform such other duties as
the Board of Directors may from time to time assign to him.
Section 14. Compensation. Directors, as such, shall not receive any stated
salary for their services, but, by resolution of the Board of Directors, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board of Directors; provided, that nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
ARTICLE IV
COMMITTEES
Section 1. Designation. The Board of Directors may, by resolution passed by a
majority of the entire Board of Directors, designate one or more committees.
Section 2. Number; Qualification; Term. Each committee shall consist of one or
more directors appointed by resolution adopted by a majority of the entire Board
of Directors. The number of committee members may be increased or decreased from
time to time by resolution adopted by a majority of the entire Board of
Directors. Each committee member shall serve as such until the earliest of (i)
the expiration of his term as director, (ii) his resignation as a committee
member or as a director, or (iii) his removal as a committee member or as a
director.
Section 3. Authority. Each committee, to the extent expressly provided in the
resolution of the Board of Directors establishing such committee, shall have and
may exercise all of the authority of the Board of Directors in the management
of the business and affairs of the Corporation except to the extent expressly
restricted by statute, the Certificate of Incorporation or these Bylaws.
Section 4. Committee Changes; Removal. The Board of Directors shall have the
power at any time to fill vacancies in, to change the membership of, and to
discharge any committee. The Board of Directors may remove any committee member,
at any time, with or without cause.
Section 5. Alternate Members of Committees. The Board of Directors may designate
one or more directors as alternate members of any committee. Any such alternate
member may replace any absent or disqualified member at any meeting of the
committee.
Section 6. Regular Meetings. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
Section 7. Special Meetings. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee member
at least (i) twenty-four (24) hours before such special meeting if notice is
given by telecopy, electronic facsimile or hand delivery or (ii) at least three
days before such special meeting if notice is given by mail or by telegram.
Neither the business to be transacted at, nor the purpose of, any special
meeting of any committee need be specified in the notice or waiver of notice of
any special meeting.
Section 8. Quorum; Majority Vote. At meetings of any committee, a majority of
the number of members designated by the Board of Directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the Certificate of Incorporation or
these Bylaws.
Section 9. Minutes. Each committee shall cause minutes of its proceedings to be
prepared and shall report the same to the Board of Directors upon the request of
the Board of Directors. The minutes of the proceedings of each committee shall
be delivered to the Secretary of the Corporation for placement in the minute
books of the Corporation.
Section 10. Compensation. Committee members may, by resolution of the Board of
Directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings.
Section 11. Responsibility. The designation of any committee and the delegation
of authority to it shall not operate to relieve the Board of Directors or any
director of any responsibility imposed upon it or such director by law.
ARTICLE V
NOTICES
Section 1. Method. Whenever by statute, the Certificate of Incorporation, or
these Bylaws, notice is required to be given to any committee member, director,
or stockholder and no provision is made as to how such notice shall be given,
personal notice shall not be required, and any such notice may be given (a) in
writing, by mail, postage prepaid, addressed to such committee member, director,
or stockholder at his address as it appears on the books or (in the case of a
stockholder) the stock transfer records of the Corporation, or (b) by any other
method permitted by law (including but not limited to overnight courier service,
telegram, telex, or telefax). Any notice required or permitted to be given by
mail shall be deemed to be given when deposited in the United States mail as
aforesaid. Any notice required or permitted to be given by overnight courier
service shall be deemed to be given at the time delivered to such service with
all charges prepaid and addressed as aforesaid. Any notice required or permitted
to be given by telegram, telex, or telefax shall be deemed to be delivered and
given at the time transmitted with all charges prepaid and addressed as
aforesaid.
Section 2. Waiver. Whenever any notice is required to be given to any
stockholder, director, or committee member of the Corporation by statute, the
Certificate of Incorporation or these Bylaws, a written waiver thereof, signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be equivalent to notice. Attendance of a stockholder,
director, or committee member at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends for the express purpose of
objecting at the beginning of the meeting to the transaction of any business on
the ground that the meeting is not lawfully called or convened.
Section 3. Exception to Notice Requirement. The giving of any notice required
under any provision of the General Corporation Law of Delaware, the Certificate
of Incorporation or these Bylaws shall not be required to be given to any
stockholder to whom (i) notice of two consecutive annual meetings, and all
notices of meetings or of the taking of action by written consent without a
meeting to such stockholder during the period between such two consecutive
annual meetings, or (ii) all, and at least two, payments (if sent by first class
mail) of dividends or interest on securities during a twelve-month period, have
been mailed addressed to such person at his address as shown on the records of
the Corporation and have been returned undeliverable. If any such stockholder
shall deliver to the Corporation a written notice setting forth his then current
address, the requirement that notice be given to such stockholder shall be
reinstated.
ARTICLE VI
OFFICERS
Section 1. Officers. The officers of the Corporation shall be elected by the
directors and shall be a President, a Vice President, a Secretary, and a
Treasurer. The Board of Directors may also choose a Chairman of the Board,
additional Vice Presidents and one or more Assistant Secretaries and Assistant
Treasurers. Any two or more offices may be held by the same person, except that
no person shall be both the President and the Secretary.
Section 2. Election. The Board of Directors at its first meeting after each
annual meeting of stockholders shall elect the officers of the Corporation, none
of whom need be a member of the Board, a stockholder or a resident of the State
of Delaware. The Board of Directors may appoint such other officers and agents
as it shall deem necessary, who shall be appointed for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors.
Section 3. Compensation. The compensation of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
Section 4. Removal and Vacancies. Each officer of the Corporation shall hold
office until his successor is elected and qualified or until his earlier
resignation or removal. Any officer or agent elected or appointed by the Board
of Directors may be removed either for or without cause by a majority of the
directors represented at a meeting of the Board of Directors at which a quorum
is represented, whenever in the judgment of the Board of Directors the best
interests of the Corporation will be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. If
the office of any officer becomes vacant for any reason, the vacancy may be
filled by the Board of Directors.
Section 5. President. The President shall be the chief executive officer of the
Corporation. He shall preside at all meetings of the stockholders and the Board
of Directors unless the Board of Directors shall elect a Chairman of the Board,
in which event the President shall preside at Board meetings in the absence of
the Chairman of the Board. The President shall have general and active
management of the business and affairs of the Corporation, shall see that all
orders and resolutions of the Board are carried into effect, and shall perform
such other duties as the Board of Directors shall prescribe.
Section 6. Vice Presidents. In the absence of the President or in the event of
his inability or refusal to act, the Vice President (or in the event there is
more than one Vice President, the vice presidents in the order designated by the
Board, or in the absence of any designation, then in the order of their election
or appointment) shall perform the duties of the President, and when so acting
shall have all the powers of and be subject to all of the restrictions upon the
President. Each Vice President shall have only such powers and perform only such
duties as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate to him.
Section 7. Secretary. The Secretary shall attend all sessions of the Board of
Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for any committee when required. Except as otherwise
provided herein, the Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision he shall be. He shall keep in safe custody
the seal of the Corporation and, when authorized by the Board of Directors,
affix the same to any instrument requiring it, and, when so affixed, it shall be
attested by his signature or by the signature of the Treasurer or an Assistant
Secretary.
Section 8. Assistant Secretaries. Each Assistant Secretary shall have only such
powers and perform only such duties as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.
Section 9. Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements of the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the President and directors, at the
regular meetings of the Board of Directors, or whenever they may require it, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation, and shall perform such other duties as the Board of Directors
may prescribe. If required by the Board of Directors, he shall give the
Corporation a bond in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of his office and for the restoration to the Corporation, in case
of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money, and other property of whatever kind in his possession
or under his control belonging to the Corporation.
Section 10. Assistant Treasurers. Each Assistant Treasurer shall have only such
powers and perform only such duties as the Board of Directors may from time to
time prescribe.
ARTICLE VII
CERTIFICATES REPRESENTING SHARES
Section 1. Certificates. The shares of the Corporation shall be represented by
certificates in such form as shall be determined by the Board of Directors. Such
certificates shall be consecutively numbered and shall be entered in the books
of the Corporation as they are issued. Each certificate shall state on the face
thereof the holder's name, the number and class of shares, and the par value of
such shares or a statement that such shares are without par value. Each
certificate shall be signed by the President or a Vice President and by the
Secretary or an Assistant Secretary and may be sealed with the seal of the
Corporation or a facsimile thereof. Any or all of the signatures on a
certificate may be facsimile.
Section 2. Legends. The Board of Directors shall have the power and authority to
provide that certificates representing shares of stock shall bear such legends
as the Board of Directors shall authorize, including, without limitation, such
legends as the Board of Directors deems appropriate to assure that the
Corporation does not become liable for violations of federal or state securities
laws or other applicable law.
Section 3. Lost Certificates. The Corporation may issue a new certificate
representing shares in place of any certificate theretofore issued by the
Corporation, alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen or destroyed. The Board of Directors, in its discretion and as a
condition precedent to the issuance thereof, may require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as it shall specify and/or to give the Corporation a bond in
such form, in such sum, and with such surety or sureties as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfer of Shares. Shares of stock shall be transferable only on the
books of the Corporation by the holder thereof in person or by his duly
authorized attorney. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation or the transfer agent of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 5. Registered Stockholders. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof for any and all purposes, and, accordingly, shall not be bound to
recognize any equitable or other claim or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. The directors, subject to any restrictions contained in
the Certificate of Incorporation, may declare dividends upon the shares of the
Corporation's capital stock. Dividends may be paid in cash, in property, or in
shares of the Corporation, subject to the provisions of the General Corporation
Law of Delaware and the Certificate of Incorporation.
Section 2. Reserves. By resolution of the Board of Directors, the directors may
set apart out of any of the funds of the Corporation such reserve or reserves as
the directors from time to time, in their discretion, think proper to provide
for contingencies, or to equalize dividends, or to repair or maintain any
property of the Corporation, or for such other purposes as the directors shall
think beneficial to the Corporation, and the directors may modify or abolish any
such reserve in the manner in which it was created.
Section 3. Checks. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
Section 5. Seal. The corporate seal shall have inscribed thereon the name of the
Corporation. Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 6. Indemnification.
(a) The Corporation shall indemnify its directors, officers, employees, and
agents to the fullest extent permitted by the General Corporation Law of
Delaware and the Certificate of Incorporation.
(b) Except as hereafter provided, when any claim or lawsuit is brought against
any director, officer, employee, or agent of the Corporation in his/her
representative capacity (hereinafter "Indemnitee"), for actions taken by
him/her on behalf of the Corporation, the Corporation shall advance to, or
on behalf of, the Indemnitee, all costs of defending such action,
including, but not limited to, attorneys fees, filing fees, all costs of
pre-trial discovery, and travel expenses (both for counsel, the
defendant(s) and witnesses) (all of which are hereinafter referred to as
"Costs of Defense").
(c) Prior to the advancement of any of Costs of Defense the Indemnitee must
undertake in writing, that if he/she is unsuccessful in defending the
cause of action, and is found not to be entitled to indemnification and/or
is otherwise held to be personally liable for the costs of suit, the
Indemnitee will reimburse the corporation for all such costs so advanced.
(d) Furthermore, if the allegations of the suit are that the Indemnitee has
engaged in gross negligence, malfeasance, or intentional misconduct, then
the Corporation shall not advance any Costs of Defense unless and until a
majority of disinterested directors have considered the matter and voted
to advance such costs. In making the decision whether or not to advance
the costs the disinterested directors shall consider the relative merits
of the claim, the likelihood of the plaintiff prevailing in the case, the
total estimated Costs of Defense and the ability of the Indemnitee to
reimburse the costs to the Corporation if the Indemnitee is not found to
be entitled to indemnification by the Corporation.
Section 7. Transactions with Directors and Officers. No contract or other
transaction between the Corporation and any other corporation and no other act
of the Corporation shall, in the absence of fraud, be invalidated or in any way
affected by the fact that any of the directors of the Corporation are
pecuniarily or otherwise interested in such contract, transaction or other act,
or are directors or officers of such other corporation. Any director of the
Corporation, individually, or any firm or corporation of which any such director
may be a member, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation; provided,
however, that the fact that the director, individually, or the firm or
corporation is so interested shall be disclosed or shall have been known to the
Board of Directors or a majority of such members thereof as shall be present at
any annual meeting or at any special meeting, called for that purpose, of the
Board of Directors at which action upon any contract or transaction shall be
taken. Any director of the Corporation who is so interested may be counted in
determining the existence of a quorum at any such annual or special meeting of
the Board of Directors which authorizes such contract or transaction, and may
vote thereat to authorize such contract or transaction with like force and
effect as if he were not such director or officer of such other corporation or
not so interested. Every director of the Corporation is hereby relieved from any
disability which might otherwise prevent him from carrying out transactions with
or contracting with the Corporation for the benefit of himself or any firm,
corporation, trust or organization in which or with which he may be in anywise
interested or connected.
Section 8. Amendments. These Bylaws may be altered, amended, or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors at any
regular meeting of the stockholders or the Board of Directors, at any special
meeting of the stockholders or the Board of Directors if notice of such
alteration, amendment, repeal, or adoption of new bylaws be contained in the
notice of such special meeting, or by written consent of the Board of Directors
or the stockholders without a meeting; provided, however, that no amendment to
this Article VIII, Section 8, or to paragraphs (b) or (c) of Article III,
Section 2 of these Bylaws shall be effective without the affirmative vote of
holders representing 80% of the outstanding Common Stock.
Section 9. Table of Contents; Headings. The Table of Contents and headings used
in these Bylaws have been inserted for convenience only and do not constitute
matters to be construed in interpretation.
CERTIFICATE BY SECRETARY
The undersigned, being the secretary of the Corporation, hereby certifies that
the foregoing Amended and Restated Bylaws were duly adopted by the Directors of
the Corporation effective on December 17, 1997.
IN WITNESS WHEREOF, I have signed this certification as of the 18th day of
December, 1997.
/s/ Russell E. Painton
Russell E. Painton, Secretary
[OUTSIDE FRONT COVER]
TRACOR
ANNUAL REPORT
1997
[INSIDE FRONT COVER]
Profile
On land, at sea, and in space, Tracor, Inc. provides leading-edge technology to
government and commercial customers worldwide in the areas of information
systems, aerospace, and systems engineering. Tracor is one of America's fastest
growing defense companies and employs more than 10,700 people at approximately
150 locations.
<PAGE>
<TABLE>
Stock Performance
[GRAPH APPEARS HERE]
<CAPTION>
Value of $100 investment made December 31, 1992, including dividends
Measurement DJ Defense & Nasdaq Tracor
Period Aerospace Stock Market Inc.
<S> <C> <C> <C>
4th Quarter '92 100.00 100.00 100.00
1st Quarter '93 102.62 101.88 78.13
2nd Quarter '93 111.87 103.83 153.13
3rd Quarter '93 117.49 112.58 167.19
4th Quarter '93 129.22 114.80 225.00
1st Quarter '94 133.68 109.97 196.88
2nd Quarter '94 135.35 104.83 187.50
3rd Quarter '94 138.34 113.51 203.13
4th Quarter '94 145.32 112.21 303.13
1st Quarter '95 167.74 122.33 287.50
2nd Quarter '95 200.64 139.93 340.63
3rd Quarter '95 220.63 156.79 412.50
4th Quarter '95 252.71 158.70 362.50
1st Quarter '96 270.94 166.10 435.94
2nd Quarter '96 284.70 179.66 431.25
3rd Quarter '96 307.91 186.05 515.63
4th Quarter '96 335.83 195.19 531.25
1st Quarter '97 314.75 184.61 581.25
2nd Quarter '97 356.30 218.45 628.13
3rd Quarter '97 384.94 255.40 768.75
4th Quarter '97 353.18 239.53 759.38
</TABLE>
Contents
2 Financial Highlights and Sales by Market
3 Message to Shareholders and Employees
8 Segments at a Glance
9 Business Review
10 Tracor Information Systems
14 Tracor Aerospace
18 Tracor Systems Technologies
22 Management's Discussion and Analysis
25 Financial Report
42 Principal Locations
43 Board of Directors and Management Team
45 Shareholder Information
<PAGE> 2
<TABLE>
Financial Highlights
<CAPTION>
(dollars in thousands, except per share amounts)
1992 1993(1) 1994(1) 1995 1996(2) 1997
-------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $261,835 $407,495 $694,037 $886,920 $1,082,505 $1,265,686
Earnings before
interest, income
taxes, and
extraordinary item $11,126 $23,754 $47,816 $68,190 $92,590 $101,906
Income before
extraordinary item $4,530 $9,277 $18,547 $27,863 $36,614 $44,391
Income per common share
before extraordinary
item - assuming
dilution (3) $0.44 $0.72 $1.15 $1.29 $1.47 $1.65
Customer-funded research
and development $59,555 $71,759 $104,872 $132,347 $157,524 $161,186
Company-funded research
and development $2,859 $3,538 $4,672 $5,404 $11,110 $10,102
Bookings (new orders) $276,436 $321,113 $659,575 $1,006,980 $1,075,826 $1,505,788
Capital expenditures $7,360 $8,435 $11,007 $13,676 $19,623 $22,160
Firm backlog (funded
and unfunded) $301,502 $590,366 $806,228 $923,978 $1,030,472 $1,272,091
Unfunded contract
options $450,635 $1,120,268 $1,015,795 $948,854 $1,614,640 $1,901,076
Total assets $139,771 $305,733 $444,086 $467,456 $744,954 $717,609
Working capital $45,977 $87,140 $95,392 $129,129 $140,430 $163,352
Shareholders' equity $52,345 $63,167 $90,592 $136,965 $222,917 $259,215
Shares outstanding
(in thousands) 10,000 10,612 11,657 14,151 24,754 25,149
Current ratio 2.4 2.0 2.0 2.3 1.8 2.1
Long-term debt to
equity ratio 0.93 2.15 2.15 1.32 1.31(4)
1.04(4)
Book value per
outstanding share $5.23 $5.95 $7.77 $9.68 $9.01 $10.31
Employees 3,400 8,900 9,700 9,400 10,450 10,740
Common stock shareholders
(estimated) 1,000 1,500 4,000 5,000 5,750 8,920
<FN>
(1) Reflects the acquisitions of Vitro Corporation on August 25, 1993, and GDE
Holdings, Inc. on November 17, 1994.
(2) Reflects the acquisitions of AEL Industries, Inc. on February 22, 1996,
and Cordant Holdings, Inc. on September 26, 1996.
(3) Amounts have been restated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. See notes to the
Consolidated Financial Statements.
(4) Includes $31.5 million in 1996 and $26.3 million in 1997 of fully cash
collateralized promissory notes payable issued in conjunction with the
acquisition of Cordant. Excluding the promissory notes payable, the ratio
is 1.18 in 1996 and .96 in 1997.
</TABLE>
<TABLE>
Sales by Market
[GRAPH APPEARS HERE]
<CAPTION>
(dollars in thousands)
1996 1997
_________________________ _________________________
Total % of % of Total % of % of
Sales DOD Total Sales DOD Total
__________ ____ _____ __________ ____ _____ ___________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic
U.S. Government Defense
$ 457,002 54% $ 494,960 53% Navy
216,861 26% 250,285 27% Air Force
83,638 10% 94,489 10% Army
87,087 10% 91,865 10% Other
___________________________________________________________________________________________
844,588 78% 931,599 74% Total U.S. Government Defense
___________________________________________________________________________________________
81,373 8% 121,396 10% U.S. Government Nondefense
___________________________________________________________________________________________
925,961 86% 1,052,995 84% Total U.S. Government
8,514 1% 17,754 1% State/Local Government
43,253 3% 64,528 5% Commercial
___________________________________________________________________________________________
977,728 90% 1,135,277 90% Total Domestic
104,777 10% 130,409 10% Foreign
___________________________________________________________________________________________
$1,082,505 100% $1,265,686 100% Total Sales
</TABLE>
<PAGE> 3
[PHOTO OF JAMES B. SKAGGS, PRESIDENT, APPEARS ALONG ENTIRE RIGHT SIDE OF PAGE]
Message to Shareholders and Employees
Your company continued to achieve outstanding performance, growth, and
shareholder value during 1997. We are proud to report record-high sales,
bookings, backlog, and earnings before an extraordinary item. Tracor's stock
price increased 43 percent during the year, giving us the best stock price
performance of any major company in the aerospace and defense industry. Internal
growth remained strong at 7 percent, and we made good progress in continuing the
company's diversification trends. Our non-U.S. Department of Defense (DOD) sales
reached 26 percent of the total, driven by impressive increases of 55 percent in
sales to other government customers and 49 percent in commercial markets. Sales
to foreign customers also grew, remaining at 10 percent of total sales.
Our accomplishments were noted in the January 1998 issue of Forbes magazine,
which listed Tracor as the best performer in sales and earnings per share growth
in the aerospace and defense industry over the past five years. This growth in
the midst of a consolidating defense industry propelled Tracor to become the
14th largest defense company in the United States.
In 1997, we won our largest total contract, including options - $342 million
for eight years - to continue providing technical support for the Eglin Air
Force Base Test Range. We also won our largest firm contract - a $200 million
classified contract in our Information Systems segment. These wins contributed
to record-high bookings during the year, which were 40-percent higher than in
1996, and to impressive backlog figures of $1.3 billion in firm orders, a
23-percent increase over last year, and, including options, a total of
$3.2 billion, a 20-percent increase. This backlog provides us confidence in our
ability to continue our solid internal growth.
Financial Results
Sales for 1997 reached an all-time high of $1,265.7 million, a 17-percent
increase over 1996 sales. Income before the extraordinary item was $44.4
million, a 29-percent increase over 1996, excluding the effect of a nonrecurring
gain in 1996. Income per share before the extraordinary item was $1.65 (assuming
dilution), a 19-percent increase over 1996 before the nonrecurring gain. The
extraordinary item, occurring in the first and third quarters, related to
the company's decision in 1997 to reduce our interest expense. The company
entered into a new bank agreement, issued new 8 1/2% Senior Subordinated Notes
due 2007, and redeemed the outstanding 10 7/8% Senior Subordinated Notes due
2001. These transactions resulted in substantially lower interest expense. The
extraordinary item, relating to the debt refinancing, reduced 1997 net income to
$34.2 million, or $1.27 per share (assuming dilution). In addition to reducing
interest cost, the company also succeeded in lowering its effective tax rate.
Defense Environment
Sales of products, systems, and services to DOD customers rose 10 percent in
1997 over 1996 and represented approximately 74 percent of Tracor's total sales.
While the defense budget has decreased dramatically over the past decade, it
is no longer declining and remains at more than $250 billion per year. Most
industry analysts indicate U.S. defense procurement account spending will rise
slowly as the year 2000 approaches, and we believe Tracor is well positioned to
benefit from this upturn. In any event, we believe the defense budget will
remain stable and reasonably predictable, especially when compared with many
other industries.
A number of studies have indicated the need to transform the U.S. military
into a substantially different armed force than exists today. While the debate
will continue regarding the specific requirements for the future, there seems to
be general agreement that the future force will place greater emphasis on
information warfare driven by rapid advances in information and information-
related technologies. This includes automation and protected systems
architectures capable of rapidly disseminating information and integrating the
actions of widely dispersed and dissimilar units. Further, there is a need for
greater mobility, precision, speed, stealth, and strike distances with more
efficient logistics support. This transformation must be achieved while
effectively supporting near-term U.S. efforts.
Tracor is well positioned with core competencies in leading-edge technologies
and an extensive understanding of military operations to be a major participant
in supporting both near-term efforts and the future transformation of our
military forces for the 21st century.
Operating in a dynamic industry and customer environment, Tracor has
maintained a disciplined focus on its successful strategies: protect and
strengthen core businesses, diversify to new customers and markets, and acquire
companies which complement and enhance our capabilities. These strategies,
coupled with our dedication to improving our operating efficiency each year,
have produced a high-performance level with extraordinary growth and continued
diversification.
To better achieve our objectives, we realigned our businesses during the year
into three major segments - Information Systems, Aerospace, and Systems
Technologies. This has resulted in a better focus in the marketplace and more
efficient operations, thus reducing operating expenses from 10.3 percent of
sales in 1996 to 9.3 percent of sales in 1997.
We will continue to examine these strategies in view of the projected
environment with the ever-present objective of producing superior shareholder
returns.
Protect and Strengthen Core Businesses
Tracor holds leadership positions - number one or two - in most of its core
defense business areas. These top positions are maintained by outstanding
performance and the application of technology innovation to products, systems,
and services providing the best value to our customers, the largest being the
DOD.
The company was somewhat insulated from previous cutbacks in the defense
budget because of the nature of our work supporting critical, high-priority
programs, many of which are funded by the more stable Operations and Maintenance
segment of the defense budget. The replacement of many of our nation's defense
systems will be extended well beyond the time originally contemplated. Tracor
will continue to play an important role in current key programs which are
dedicated to upgrading systems capabilities to improve their effectiveness and
extend their useful lives.
During the year, we performed well in all of our segments, with an impressive
record of winning follow-on, recompeted contracts, as well as important new
ones.
In recognition of Tracor's commitment to high-performance standards, we
continued to receive numerous letters of commendation and awards from our
customers, as well as high award fees.
Three of Tracor's business units have now earned the Software Engineering
Institute (SEI) Level 3 rating for implementing world-class software development
processes. The rating places these three units in the elite top 16 percent of
all software organizations in the SEI's database. In addition, many of our
operations have achieved varying levels of ISO certification, enabling us to
reduce costs associated with the requirements of military specifications and to
comply with the requirements of many foreign customers.
Diversify to New Customers and Markets
Tracor's diversifications are a major component of internal growth. We have
been successful in identifying new, high-priority market areas which are
undergoing substantial transformation and in applying innovative technologies
and processes to provide more effective solutions. These programs offer
opportunities for leadership in other strong, long-term niche markets.
Several diversification initiatives resulted in new programs in 1997,
including contracts for state-of-the-art, Tracor-developed camouflage systems
for the U.S. military and sophisticated imagery information technology products
for the National Imagery and Mapping Agency. Tracor also continued its work as a
key participant in developing the next-generation mine detection and
neutralization systems.
Expansion of work in new areas continued during the year, resulting in the
49-percent increase in sales to commercial customers. For example, Tracor's
participation in the Boeing 717-200 aircraft program expanded in 1997 with a
contract to manufacture the Y-Barrel assembly for this new-generation 100-seat
airplane designed to meet more stringent noise and emission requirements and
lower operating costs for the airlines.
In addition to these business expansions and diversifications, we are
developing new products with promising growth potential. In response to the
projected requirements for the 21st century battlefield, Tracor is developing
several expendable sensor products to support the military's real-time data
acquisition requirements. Products include sensors to measure weather conditions
and to determine the presence and type of chemical warfare agents in the air.
Early in 1998, the company won a program to develop the next-generation chemical
warfare agent detector for use by the U.S. armed forces. The detector will
identify the presence of hazardous airborne chemical warfare agents and alert
soldiers to take preventive action.
Acquire Complementary Businesses
A key element in our growth has been the acquisition of businesses which
expand or enhance our current lines of products and services. During 1997, we
completed two such purchases. While both acquisitions were relatively small,
they added valuable new capabilities, which complement and strengthen existing
Tracor product areas.
The acquisition of the Military Products Group of Calspan SRL Corporation
makes Tracor the number one producer of heads-up display systems used with night
vision equipment on board various military helicopters and brings other
information display capabilities to the company. The addition of the Visual
Information Technology (VITec) division of Connectware, Inc. expands Tracor's
commercial mapping product line with image-processing software which allows
analysts to review, annotate, enhance, and output digital pictures from a
variety of sources.
The pursuit of acquisitions which meet both our operational and financial
criteria has become more challenging as seller price expectations have remained
high following the premium prices paid by others in earlier major acquisitions.
Nonetheless, we believe the defense industry consolidation will continue as will
our search for acquisition opportunities, which will add value to Tracor's
shareholders.
Our well-crafted and tested plan for growth has led to yet another strong
year. One of the keys to Tracor's success has been its size - large enough to
enjoy cost efficiencies and compete effectively with the industry behemoths, but
small and nimble enough to respond to the dynamic environment.
Tracor's excellent position will continue to be enhanced by its talented and
committed employees, backed by a growing shareholder base.
Together, we have succeeded in setting records to preserve and enhance
shareholder value. We continue to be dedicated to the vision focused on being
the employer, supplier, and investment of choice.
Very truly yours,
/s/James B. Skaggs
James B. Skaggs
Chairman and President
February 25, 1998
[MARGIN NOTES APPEAR WITHIN THE PREVIOUS TEXT]
Most industry analysts indicate U.S. defense procurement account spending will
rise slowly as the year 2000 approaches, and we believe Tracor is well
positioned to benefit from this upturn.
Tracor holds leadership positions - number one or two - in most of its core
defense business areas.
We have been successful in identifying new, high-priority, market areas which
are undergoing substantial transformation and in applying innovative
technologies and processes to provide more effective solutions.
Together, we have succeeded in setting records to preserve and enhance
shareholder value.
[BAR GRAPHS ALSO APPEAR WITHIN THE PRECEDING TEXT]
Net Sales (in thousands)
1997 -- $1,265,686
1996 -- $1,082,505
1995 -- $886,920
1994 -- $694,037
1993 -- $407,495
1992 -- $261,835
Operating Income (in thousands)
1997 -- $101,906
1996 -- $92,590
1995 -- $68,190
1994 -- $47,816
1993 -- $23,754
1992 -- $11,126
Income Before Extraordinary Item (in thousands)
1997 -- $44,391
1996 -- $36,614
1995 -- $27,863
1994 -- $18,547
1993 -- $9,277
1992 -- $4,530
Income Per Common Share Before Extraordinary Item (assuming dilution)
1997 -- $1.65
1996 -- $1.47
1995 -- $1.29
1994 -- $1.15
1993 -- $0.72
1992 -- $0.44
Total Backlog (in thousands)
[shaded to show Firm Backlog and to show Unexercised Options, as listed on the
Financial Highlights table on page 2 above]
1997 -- $3,173,167
1996 -- $2,645,112
1995 -- $1,872,832
1994 -- $1,822,023
1993 -- $1,710,634
1992 -- $752,137
Bookings (in thousands)
1997 -- $1,505,788
1996 -- $1,075,826
1995 -- $1,006,980
1994 -- $659,575
1993 -- $321,113
1992 -- $276,436
Shareholders' Equity (in thousands)
1997 -- $259,215
1996 -- $222,917
1995 -- $136,965
1994 -- $90,592
1993 -- $63,167
1992 -- $52,345
Return on Average Shareholders' Equity
1997 -- 18% *
1996 -- 20%
1995 -- 25%
1994 -- 24%
1993 -- 16%
1992 -- 10%
* Calculation excludes the effect of the extraordinary item.
<PAGE> 8
Segments at a Glance
Tracor Information Systems Number of employees: 2,870
Program Areas
Softcopy imagery exploitation, processing, and archiving systems
Digital photogrammetric workstations
Commercial imagery and mapping products and services
Automated mission planning systems
Mission rehearsal and training systems
Targeting systems for precision weapons
Test equipment for avionics and munitions
Test equipment for satellite and telecommunications systems
Avionics for space launch vehicles
Buried object detection systems
Optical/digital-based records management systems
Commercial information systems acquisition, integration, and deployment
Web-based, workflow-enabled client/server solutions
Software validation and testing, including Year 2000 solutions
Network design, operations, security, administration, and customer support
Training and computer-based training
Broadband integrated services/video teleconferencing
(in thousands)
1997 1996 1995
________ ________ ________
Net sales $469,653 $351,785 $274,461
Operating profit $42,932 $32,538 $22,752
[GRAPH APPEARS HERE]
Enterprise systems: 38%
Mission management: 26%
Imagery: 18%
Test and space systems: 18%
Tracor Aerospace Number of employees: 2,150
Program Areas
Countermeasures dispenser systems
Chaff and flare expendables
Communications countermeasures
Radar warning receivers
Night vision heads-up displays and beacons
Aerial targets
Commercial aircraft hush kits
Aircraft structures and modification
Aircraft operations, maintenance, and certification
Underwater acoustic signal processing
Airport noise monitoring systems
Mine countermeasures
Camouflage and signature management systems
Electronic shelter integration
Decision support systems
Chemical detection systems
Laser-warning systems
(in thousands)
1997 1996 1995
________ ________ ________
Net sales $328,067 $259,955 $153,180
Operating profit $30,600 $35,197 $18,691
[GRAPH APPEARS HERE]
Electronic warfare: 69%
Flight systems: 31%
Tracor Systems Technologies Number of employees: 5,640
Program Areas
Naval surface combatant systems
Missile weapon systems
Strategic undersea systems
Air defense systems
Fleet battle management systems
Submarine fire control systems
Radio communication systems
Test range operation management and instrumentation
Radar and optical tracking systems
Air traffic control and landing systems
Identification detection systems
Electronic shelter integration
Logistics engineering
Signals intelligence and electronic warfare systems
FAA radar systems
Space and terrestrial communications systems
Physical security systems
(in thousands)
1997 1996 1995
________ ________ ________
Net sales $467,966 $470,765 $459,279
Operating profit $28,374 $24,447 $26,747
[GRAPH APPEARS HERE]
Shipboard combat systems integration: 53%
Command, control, and communications engineering: 28%
Range systems and support: 19%
<PAGE> 9
Tracor Postured for More Growth
Achieving strong growth in a consolidating defense environment places Tracor
among the best in the industry and has elevated the company to its current
position as the 14th largest defense company in the nation.
This sales growth stems from both acquisitions and internal initiatives.
Earnings growth outpaced sales growth and reflected our success in implementing
more efficient methods for running our business.
While the U.S. defense budget is not increasing in real dollars, opportunities
for Tracor remain strong.
Our blueprint for growth, which has already guided us through several years of
extraordinary results, starts with three main strategies: to expand and protect
our important work for the U.S. Department of Defense; to diversify our
offerings into new government, commercial, and foreign areas; and to acquire
businesses which enhance our existing products and programs or which bring
important new complementary capabilities to the company. Our success has
resulted in Tracor's becoming the fastest growing major defense contractor in
the United States, providing high-quality products, systems, and services to its
customers.
In order to better focus our resources in the marketplace and improve
operational efficiencies, Tracor realigned its businesses in 1997 into
three major segments and is now managing and reporting financial results by
these areas. The most rapidly growing area is Information Systems; next is
Aerospace; and the third segment, Systems Technologies, while experiencing a
lesser growth trend, remains steady and consistent.
Regrouping ourselves has laid the groundwork for improved results and optimizes
our position for continued growth.
[GRAPH APPEARS HERE]
Systems Technologies: 37%
Information Systems: 37%
Aerospace: 26%
<PAGE> 10
Tracor Information Systems
Tracor's goal is to remain on the forefront of the rapidly unfolding information
age, supplying innovative information technology and earth information solutions
to meet the demanding needs of government, commercial, and international
customers.
[THREE PHOTOS APPEAR HERE]
1. Tracor-developed digital mapping software has evolved from military
applications to the commercial industry and is now used in more than 50
countries.
2. Tracor's full-service mission planning products aid the military
with precision targeting of tactical and strategic aircraft and weapon
systems.
3. As the largest supplier of automatic test equipment to the U.S. Air Force,
Tracor is also providing these mobile systems to Japan for the F-2 fighter
program.
Tracor Information Systems provides enterprise-wide solutions to satisfy an
increasing demand for state-of-the-art information systems in target markets.
Backed by years of experience in working closely with a variety of customers,
Tracor has mastered the ability to pinpoint needs quickly and develop superior
solutions. Further, this expertise has allowed the company to leverage its
military capabilities into commercial applications.
Tracor's vision includes becoming a preeminent worldwide supplier of earth
information products. The company's core competencies extend to all areas of
this rapidly growing market from hardware systems to software tools, including
data extraction and product generation. For key military applications, Tracor's
mission management systems enable warfighters to precisely locate their targets,
as well as determine an optimal route that minimizes risk of detection. In the
commercial arena, Tracor is providing end-to-end multispectral solutions for
customers engaged in precision farming, tax collection, city mapping, and other
activities.
Tracor's full-service mission management products for the U.S. Armed Forces
aid military decision-makers, planners, and flight crews with the employment of
front-line tactical and strategic aircraft and the precision targeting of their
weapon systems. The F-117A stealth fighter; B-2 stealth bomber; all long-range
cruise missiles (Tomahawk Missile, Air Launch Cruise Missile, and Advanced
Cruise Missile); and the new family of high-altitude, high-endurance unmanned
aerial vehicles, the Global Hawk and Dark Star, all depend on these Tracor
systems.
Focusing development efforts on Sensor-to-Shooter programs is a high priority
for Tracor. These programs are designed to funnel real-time intelligence and
targeting information to and from an aircraft. They emphasize the exploitation
of national, theater, and tactical intelligence for real-time use in precision
targeting, mission planning, mission updates, and guided weapons support.
Performing Sensor-to-Shooter development as an adjunct to actual test and
evaluation trials, field operations, and advanced warfighting experiments
ensures full compatibility with joint operational and technological requirements
for the battlefield of the next century.
A notable 1997 milestone for Tracor was the first operational deployment of
the new Tracor-developed mission planning system for U.S. Air Force F-117A
fighters.
Also during the year, Tracor delivered two state-of-the-art mission
management products to the U.S. Navy for installation on aircraft carriers,
fleet command ships, and amphibious command ships. The first is an improved
version of the Digital Imagery Workstation Suite, which, together with Tracor's
Precision Targeting Workstation, provides imagery-based mission planning for the
Tomahawk and all Navy precision weapons and tactical aircraft. These systems
also were delivered for the first time to the United Kingdom to support the
introduction of the Tomahawk into its inventory. The second was the Tactical
Strike Coordination Manager, a decision support tool which aids commanders in
the planning and coordination of strike missions.
Tracor's largest 1997 award in mission management was a U.S. Strategic
Command contract for the development and production of the next-generation Air
Vehicle Planning System. Scheduled for deployment in 2002, this system will
replace Tracor's previous product and be used to plan and coordinate the
missions of the entire U.S. strategic bomber, tanker, and cruise missile force.
As an industry leader in the development and integration of imagery and
information systems, the company continues to satisfy challenging customer
requirements for automated image processing. Products include softcopy mapping,
charting, and geodesy (MC&G); image-processing groundstations; and
interpretation and analysis centers. Tracor has installed more than 1,000 MC&G
workstations, and its software is employed in some 200 interpretation and
analysis centers worldwide.
Competitive wins in 1997 solidified Tracor's position as a key contractor for
image processing and storage. For instance, two Tracor units became key team
members on the first award to build ruggedized imaging ground stations for the
U.S. Marine Corps. As a result of other major wins, Tracor will provide imagery
product archives in support of tactical users for the National Imagery and
Mapping Agency's Image Product Library program.
Tracor is also expanding its commercial array of earth information products.
Under a joint venture with Leica AG, Switzerland, a new entity, LH Systems, LLC,
was formed to market the latest technology for map compilation, engineering
analysis, orthophoto production, digital terrain modeling, and environmental
management through a worldwide sales and distribution network.
The 1997 acquisition of Visual Information Technology also expands Tracor's
commercial product line with image-processing software which allows analysts to
review, annotate, enhance, and output digital pictures from a variety of
sources. Another subsidiary, ADR, Inc., continues as one of the largest
suppliers of mapping and geospatial products to commercial consumers and state
and local governments.
Additionally, Tracor has leveraged its core competencies into a growing new
market of commercial satellite remote sensing systems. In a joint venture with
Boeing, Farmland Industries, and Agrium Ltd., Tracor has helped create
RESOURCE21, a remote sensing-based information company which plans to operate a
network of imaging satellites at the turn of the century. With an initial focus
on the burgeoning field of precision agriculture, RESOURCE21 will also extract
sophisticated information from multispectral imagery to facilitate resource
management decisions in agriculture, forestry, insurance, commodities, and
environmental industries worldwide.
Tracor has excelled in the design and production of aircraft avionics test
systems for more than three decades and is the largest supplier of these systems
to the Air Force. In 1997, Tracor received substantial new orders for F-16
aircraft test systems and continues to broaden its international reach with
sales of systems for the Japanese F-2 fighter program. Recent emphasis has been
placed on diversifying into other growing markets, including satellites,
telecommunications, and space launch vehicles.
The company gained solid footholds in the accelerating commercial and
telecommunications satellite support markets in 1997. Motorola placed new orders
for Tracor test systems used in the development of its global communications
satellite system. One of the largest satellite manufacturers, Hughes Space and
Communications, awarded Tracor several contracts for satellite test systems and
engineering services. During the year, Tracor continued to build its long-term
relationship with Lockheed Martin Astronautics, supplying additional space
avionics test systems for the Atlas and Titan launch vehicles.
In other business areas, Tracor constructs and operates leading-edge network
systems, which improve productivity in data collection, processing, and
dissemination. New contracts have continued to expand and diversify the
company's presence in the intelligence community, as well as other federal and
commercial marketplaces.
Tracor is helping a number of customers resolve their looming Year 2000
computer problems. Using methods which adhere to the software capability
maturity model, Tracor estimates it will perform an independent verification and
validation of a variety of systems with up to 60 million lines of code.
Building upon a 29-year history of providing information technology solutions
to the federal and commercial marketplaces, Tracor is continuing its work in the
design, development, and integration of commercially available hardware and
software products through various contracts. Some of these include providing
commercial off-the-shelf products to a wide range of Department of Defense and
other government users; hardware, software, and peripherals which can be ordered
and purchased through Tracor's web-based electronic ordering catalog; and other
information technology products for various members of the intelligence
community.
[TWO PHOTOS APPEAR WITHIN THE PRECEDING TEXT]
1. Using structured software development and test methods, Tracor is solving the
Year 2000 problem for clients with systems ranging from 60,000 to 60 million
lines of software code.
2. Digital mapping and geographic information system services provided by Tracor
are key to a variety of sophisticated commercial and defense applications.
<PAGE> 14
Tracor Aerospace
Tracor enjoys leadership positions in all of its core aerospace product areas
and is continuously expanding the technology envelope to retain and enhance
these positions. Additional growth is achieved by the company's success in
identifying new complementary products.
[THREE PHOTOS APPEAR HERE]
1. Tapping its expertise in signature management, Tracor has diversified into a
new area with the win of a major contract for advanced woodlands camouflage
net systems.
2. The Tracor-developed Band 9/10 transmitter, now being produced, provides
expanded capabilities for the U.S. Navy's EA-6B aircraft against the latest
military threats.
3. Thriving in the commercial marketplace, Tracor is a key aircraft structures
supplier for the new Boeing 717-200 100-seat twinjet.
As a leading supplier to the U.S. and international armed forces for more
than three decades, Tracor Aerospace has earned the position as a trusted
developer and manufacturer of defense systems which protect platforms and crew
members of U.S. and friendly forces against enemy threats. Through continued
performance excellence over the past several years on existing contracts, Tracor
has won key program recompetes during 1997 in core electronic warfare and flight
systems business areas and continues to leverage its preferred supplier
reputation to diversify into new markets.
Tracor's core business areas span the full spectrum of products and services
required by its customers as they prepare to engage threats to the free world in
the 21st century.
As a world leader in the countermeasures marketplace, Tracor is best known
for its development and production of the AN/ALE-47 countermeasures dispenser
system, the most advanced system capable of deploying chaff, flares, active
radio frequency decoys, and other decoys from military aircraft. The ALE-47 has
been installed in more than 15 aircraft types for the U.S. Air Force, U.S. Navy,
and more than 15 international customers.
With the win of three flare contracts in 1997, Tracor has also maintained its
position as one of the world's top developers and producers of expendable
decoys. Under these contracts, Tracor has added new flares to its product line,
which includes flares for Air Force F-15, A-10, C-17, C-5, and C-130 aircraft,
as well as U.S. Army AH-64, CH-47, and UH-60 helicopters. These flares are
deployed by the ALE-47 and other dispenser systems to protect aircraft from
heat-seeking missiles. Also, Tracor continues to be the world's largest supplier
of chaff expendables, which decoy radar-guided missiles.
Active countermeasures, which jam enemy communication and radar systems, are
another focus for Tracor in the electronic warfare market. During 1997, Tracor
completed development and began production of Band 9/10 transmitters, which
improve the effectiveness of the AN/ALQ-99 jamming system aboard the Navy's
EA-6B aircraft. These transmitters provide increased frequency coverage and
enhanced capabilities against the latest military threats. Continuing its
leadership in jamming systems, Tracor won the contract to develop an advanced
technology Low Band Transmitter, also targeted to fly on the EA-6B. Other
electronic attack subsystems are currently in development for the Army, allowing
them to jam modern ground-based communications systems.
Tracor also produces antennas and receivers for several key U.S. threat
warning and jamming systems, which provide an electronic shield for most of the
U.S. military's tactical aircraft, from sophisticated helicopters to the most
advanced fighters. These systems are currently being developed for application
on the Army's AH-64 Apache helicopter, the multi-service V-22 Osprey, and the
Navy's F/A-18E/F Super Hornet fighter.
Another product designed to improve effectiveness and keep air crews safe
during operation of their aircraft is the AN/AVS-7 Heads-up Display System, a
flight display used with night vision equipment on board military helicopters.
With the win of a contract to upgrade an Air Force system and the acquisition of
a related business group, Tracor has become the number one producer of heads-up
display systems for night vision equipment for the U.S. military.
Building on more than 15 years of experience in aircraft structures for
military applications, Tracor has established itself as an emerging supplier in
this area for commercial customers. Tracor first was chosen to join the wing
halves for the B-717-200, which is currently being developed by Boeing and is a
21st century version of the popular and reliable DC-9 twinjet. The outstanding
record of achievement on this program led to the award of another contract to
assemble the Y-Barrel for the B-717-200. Attached to the wings, the Y-Barrel is
part of the fuselage and houses the main landing gear and fuel, hydraulic, and
electrical lines. As a next-generation, 100-passenger airplane, the B-717-200 is
designed to meet more stringent noise and emission requirements and to lower
operating costs for the airlines. Forecasts show the need for at least 2,000
airplanes of this type over the next 20 years.
Backed by more than a quarter century of expertise in the development and
production of unmanned full-scale and sub-scale aerial targets, Tracor products
play an important role in weapon systems testing. As the leading supplier of
full-scale target drones, Tracor was awarded the third production lot in 1997 to
produce the next 24 QF-4 drones. Converted from F-4 aircraft, these aerial
targets are used by the U.S. Armed Forces for technology development and weapons
system testing and evaluation. Also a major producer of sub-scale drones, Tracor
completed flight testing and began production of the MQM-107E. This aerial
target will be used by the Army, Air Force, and foreign customers, including the
Royal Australian Navy.
One of the year's most notable awards was a contract from the Army for the
next-generation camouflage system, which brought to fruition Tracor's decade of
research and development in concealment technology. Tracor is the sole U.S.
provider of this advanced system, which not only conceals personnel and vehicles
from visual detection, but also from infrared sensors and radars. Following
acceptance of the initial test units, full production of the woodlands
Ultralightweight Camouflage Net System will begin in 1998. The company is also
developing desert, arctic, and urban versions of these systems.
The prevalence and danger of landmines, both from newly laid mines and those
left undisturbed from previous conflicts, have become important concerns for
today's soldiers and civilians. The company is currently developing a minefield
breaching system, which features a Tracor-designed, rocket-deployed net with
specially designed munitions. These munitions penetrate the ground to detonate
buried mines, clearing the way for rapid, safe passage for vehicles and
personnel. Complementary to this work are the mine detection programs underway
in the Tracor Information Systems segment, which include hand-held and vehicle-
mounted mine detection systems.
Tracor also won a contract from the Air Force to produce the Tower Restoral
Vehicle, which provides mobile air traffic control tower services at temporary
bases, alternative landing areas, or air bases where permanent facilities have
been disabled. This rapidly deployed system allows air traffic control operators
to assist three aircraft simultaneously.
Tracor is applying its aircraft modification expertise to the development of
C-38A special mission aircraft for the U.S. Air Force and Air National Guard.
Slated for delivery in 1998, these aircraft will provide travelers with secure
communications to major command centers from anywhere in the world.
The company also has more than a decade of experience in the design,
development, and Federal Aviation Administration certification of hush kits,
which reduce aircraft noise during takeoff and landing. Tracor's newest hush
kits enable the Learjet 20 series aircraft to operate within stringent Level III
noise requirements, providing access to a wider range of U.S. and international
airports.
Responding to the growing worldwide interest in information relating to the
21st century digital battlefield, Tracor is developing sensor products which
draw upon the company's dispenser system technology. The sensors are designed to
be deployed from existing dispenser systems aboard aircraft or from ground
systems and report data back to a central collection and analysis location. From
different altitudes, the sensors can measure meteorological conditions, detect
the presence of people or vehicles, and discern the type and concentration of
any chemical agents in the air.
[TWO PHOTOS APPEAR HERE]
1. Expanding to the international arena, Tracor is producing sub-scale aerial
targets used for weapons testing, evaluation, and training for the Royal
Australian Navy.
2. Offering new solutions for mine neutralization, Tracor's expertise in mine
countermeasures provides safe passage for the U.S. military in combat and
hazardous environments.
<PAGE> 18
Tracor Systems Technologies
Tracor continues a long tradition of playing a key role in almost all U.S. Navy
high-priority ship and submarine programs and has expanded its engineering
expertise to important U.S. Army, Naval air, Federal Aviation Administration,
and NASA programs.
[THREE PHOTOS APPEAR HERE]
1. For more than 25 years, Tracor has performed systems engineering and
integration for combat and communication systems on board AEGIS cruisers and
destroyers, the Navy's most advanced surface combatants.
2. Tracor develops highly specialized state-of-the-art communication systems for
installation on aircraft, boats, and vehicles for special operations forces.
3. Tracor has more than a half century of systems engineering and integration
experience with ballistic missile systems aboard Navy submarines.
As one of the U.S. Navy's largest engineering support contractors, Tracor
Systems Technologies is continuing its legacy of providing systems and software
engineering and integration for high-priority programs.
Coupling its technical expertise with proven management disciplines, the
company supplies its customers with key engineering capabilities critical to the
design, operation, testing, maintenance, and upgrading of major U.S. systems.
Tracor focuses this life-cycle support work on communication systems; undersea,
anti-air, and strike warfare combat systems; air traffic control and
identification systems; strategic weapon systems; transportation systems; and
space systems. Other key company competencies lie in the areas of ship system
design and engineering, test range operations, and special operations.
As disarmament agreements reduce the number of ground-based intercontinental
ballistic missiles, Tracor continues to play a key role in the Navy's submarine
fleet ballistic missile/strategic weapon systems programs. The United States and
United Kingdom depend on submarine ballistic missile systems to serve as their
strategic deterrent, and Tracor has helped maintain a high state of operational
readiness since the mid-1950s by providing systems integration for the POLARIS,
POSEIDON, and TRIDENT missile systems.
Since World War II, Tracor has performed systems engineering for every guided
missile system installed on Navy ships. For more than 25 years, Tracor has
supported the AEGIS weapon and combat system, an automated, highly sophisticated
air defense warfare system being installed on all new Navy cruisers and
destroyers.
In 1997, the company was awarded a contract to continue providing program
management, ship integration, test and evaluation, and configuration management
support to the AEGIS program office. In addition, Tracor won a contract to
provide radio communication systems and associated engineering for the AEGIS
guided missile destroyers. Since 1975, Tracor has delivered advanced
communication systems for 52 cruisers and destroyers, and current contracts will
continue these efforts through the year 2002. Tracor expanded its command,
control, communication, computers, and intelligence (C4I) integration support to
include turnkey program management and engineering for the Navy's new landing
amphibious transport dock ship. The company is also providing ship design and
integration engineering for the radio communication system to be installed on
the Navy's newest aircraft carrier. The company won an additional contract to
provide lifetime support and in-service engineering of communication systems, as
well as C4I systems, aboard AEGIS and other combatants.
Tracor also provides the U.S. Army with comprehensive systems and software
engineering, systems integration, and C4I support under contracts with both the
Communication and Electronics Command and the Aviation and Missile Command.
In 1997, Tracor won a contract to provide quality engineering services in
support of various technical programs for the Navy, including those for
launchers and missiles, surface fire support, and theater air defense.
The company continues to contribute to major Navy initiatives by providing
testing support for the STANDARD Missile II, which is designed to protect U.S.
forces afloat and ashore by intercepting enemy ballistic missiles in the upper
atmosphere.
Continuing its work for the Navy's undersea vehicle programs for more than 20
years, Tracor was awarded a contract for engineering and technical services
required to operate and maintain the Torpedo Test Facility Complex in Rhode
Island. Here, the company provides design, development, test article buildup,
and subsystem/ system testing, as well as performance testing for thermal and
electric engines used in undersea weapons and special-purpose vehicles.
Since 1977, Tracor has provided engineering for the AN/SQQ-89 surface ship
anti-submarine warfare (ASW) combat system project which today equips Navy ships
with the most sophisticated ASW capability in the world. The company's role
involves performing systems engineering and integration for hull-mounted
active/passive sonar systems, helicopter-borne sonobuoys, towed array sensor
systems, and underwater fire control systems.
Tracor provides essential program management, acquisition, and integration
engineering for the submarine combat weapon system community. Building on this
capability in 1997, Tracor won a subcontract to provide submarine shock
hardening, engineering, and logistics support for the Navy's new attack
submarine program. Designed to ensure continued battle space dominance into the
21st century, the submarine will meet the new challenge of littoral, or
near-shore, warfare.
Tracor's extensive capabilities in hardware, software, and systems
engineering were instrumental in winning work for two nondefense government
customers: the Federal Aviation Administration (FAA) and NASA. Tracor supplies
systems engineering support to the FAA radar surveillance directorate for the
acquisition of major air traffic control radar systems. In addition, Tracor is
the prime contractor supporting the NASA headquarters Office of Safety and
Mission Assurance in its responsibilities, which include space program safety,
mission assurance, risk management, and risk assessment.
Tracor continues its legacy of meeting the communication and electronics
systems requirements of the U.S. Department of Defense, special operations
forces, and other government agencies for a host of mobile communication systems
including those installed in special-purpose vehicles, boats, planes, and
suitcases.
The company expanded its role in these areas with the win of a Navy contract
for advanced communication-electronics systems. The government also exercised
options on several contracts for the production of highly specialized mobile
communication and intelligence processing systems.
For 40 years, Tracor has provided test range operations support to various
U.S. military installations. In 1997, the company was awarded its largest total
contract to provide operations and maintenance of test range and technical
facilities at Eglin Air Force Base in Florida, supporting the test and
evaluation of defense weapons systems, air armament, and munitions.
The company has a long history of performing operations and maintenance on
high-technology equipment and has supplied logistics and engineering support for
146 radar systems located on 27 test ranges worldwide. Tracor offers a full line
of test range instrumentation systems, including radar and optical tracking
systems in fixed or mobile configurations. For more than 20 years, Tracor has
provided these products to domestic and foreign customers, and more than
70 company-developed precision tracking radars have been installed around the
world.
[TWO PHOTOS APPEAR HERE]
1. Under the company's single largest total contract, Tracor will continue
providing operations and maintenance of Air Force test ranges and technical
facilities at Eglin Air Force Base.
2. Tracor supplies engineering services to the Federal Aviation Administration
for radars used to operate air traffic control systems.
<PAGE> 22
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Business Environment
Approximately 74% of the products, systems, and services of Tracor, Inc. and its
subsidiaries (Tracor or the Company) are sold to the U.S. Department of Defense
(DOD) through direct contracts or through subcontracts with other U.S.
government contractors. In addition, the majority of foreign sales were in
defense electronics markets.
While the U.S. defense budget has decreased substantially over the past
decade, it is no longer declining and remains at more than $250 billion per
year. Most industry analysts indicate U.S. defense procurement account spending
will rise slowly as the year 2000 approaches. The total budget remains stable
and reasonably predictable.
A number of studies have indicated the need to transform the U.S. military
into a substantially different armed force than exists today. While the debate
will continue regarding the specific requirements for the future, there seems to
be general agreement that the future force will place greater emphasis on
information warfare driven by rapid advances in information and information-
related technologies. This includes automation and protected systems
architectures capable of rapidly disseminating information and integrating the
actions of widely dispersed and dissimilar units. Further, there is a need for
greater mobility, precision, speed, stealth, and strike distances with more
efficient logistics support. This transformation must be achieved while
effectively supporting near-term U.S. efforts.
Management believes Tracor is well positioned with core competencies in
leading-edge technologies and an extensive understanding of military operations
to be a major participant in supporting both near-term efforts and the future
transformation of our military forces.
The contraction of the defense budget and the resulting excess capacity and
increase in competition for contracts among defense companies have resulted in a
major 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, along with the
Company's realignment of its businesses into three major segments, have enhanced
Tracor's cost competitiveness in bidding on new contracts and recompetes of
existing contracts.
While management believes the consolidation within the defense industry will
continue, the pursuit of acquisitions has become more challenging as seller
price expectations remain high following the premium prices paid by others in
earlier acquisitions.
The future defense budget and the industry consolidation cannot be predicted
with certainty; however, management believes Tracor is well positioned to
continue to leverage its strengths and successes in its products, systems, and
services.
Results of Operations
The Company's results of operations have been impacted by several business
acquisitions in 1997, 1996, and 1995. Each acquired business's results of
operations are included only from its respective date of acquisition. (See Note
B to the Consolidated Financial Statements for a discussion of the
acquisitions.)
Year Ended December 31, 1997, Versus Year Ended December 31, 1996
1997 1996
--------------------------------------------------------
(in thousands)
Net sales:
Information Systems $ 469,653 $ 351,785
Aerospace 328,067 259,955
Systems Technologies 467,966 470,765
--------------------------------------------------------
Consolidated net sales $1,265,686 $1,082,505
========================================================
Earnings before interest,
income taxes, and
extraordinary item:
Information Systems $ 42,932 $32,538
Aerospace 30,600 35,197
Systems Technologies 28,374 24,447
--------------------------------------------------------
101,906 92,182
Other -- 408
--------------------------------------------------------
Consolidated earnings before
interest, income taxes, and
extraordinary item $101,906 $92,590
========================================================
Sales for 1997 increased 17% over 1996 sales. Internal growth represented 7%
of the increase, and 10% of the sales growth was attributable to acquired
businesses. Sales for 1997 grew in both the Information Systems segment (33%)
and the Aerospace segment (26%), while the Systems Technologies segment was down
slightly. Earnings before interest, income taxes, and extraordinary item
increased 14% over the prior year, excluding the effect of a $3.6 million
nonrecurring gain recognized by the Aerospace segment in 1996 attributable to a
negotiated increase to the price of a U.S. government contract for work
performed prior to 1996.
Information Systems segment sales increased 25% reflecting the results of
acquired businesses, while internal growth contributed an 8% increase. Internal
growth was experienced primarily in test and space systems programs, including
automatic test equipment for Japan's F-2 aircraft and in enterprise information
systems programs for customers in the intelligence community. Segment earnings
increased due to these sales increases and improved profit margins on test and
space systems programs and mission management products.
Aerospace segment sales increased 19% from internal growth and 7% due to
acquired businesses. Internal growth reflected increased sales in electronic
warfare programs for heads-up displays and countermeasures, and flight systems
programs for sub-scale aerial targets produced for the Australian government,
C-38A aircraft for the U.S. government, and assembly of airframe structures for
Boeing 717-200 aircraft. Segment earnings, excluding the nonrecurring gain in
1996, decreased approximately 3% in 1997 and decreased as a percentage of sales.
These reductions were due primarily to lower profit margins on certain
electronic warfare production contracts and increased costs on certain flight
systems development contracts. Delays in the award of several key production
contracts also had an adverse effect on profit margins. Contract awards delayed
until late in 1997 included: a $60 million contract, including options, for the
Band 9/10 radar jamming transmitters for the U.S. Navy's EA-6B aircraft; a $12.4
million production order for AN/ALE-47 countermeasures dispenser systems; and, a
$13.3 million production order for QF-4 aerial targets. In addition, production
of MQM-107E sub-scale aerial targets for the U.S. government was delayed due to
program modifications and is expected to begin in the second quarter of 1998.
Systems Technologies segment sales decreased slightly in 1997, while the
long-term trend has shown modest growth. Increases in command, control, and
communications engineering contract revenues were offset by lower revenues from
shipboard combat systems integration contracts and range systems and support
contracts. Segment earnings increased due to the timing of award fees and
profits on certain completed contracts.
Selling, general, and administrative (SG&A) expenses were 10.4% of sales in
1997, down from 11.4% of sales in 1996. Operating expenses, the major component
of SG&A expenses, decreased from 10.3% of sales in 1996 to 9.3% of sales in
1997, due to the increased revenue base, operating efficiencies resulting from
the integration of acquired businesses, and cost savings realized through the
realignment of Tracor's businesses into three operating segments.
Interest expense decreased from $30.2 million in 1996 to $25.9 million in
1997 primarily as the result of the debt refinancing completed in the first
quarter of 1997. (See Financial Condition and Liquidity for a discussion of the
debt refinancing.) Available cash balances were also used to reduce revolving
debt shortly after the refinancing was completed which resulted in lower
investment interest income for the balance of 1997 compared to the prior year.
Income taxes were incurred at statutory federal, state, and foreign rates.
The effective tax rate decreased from 44.6% in 1996 to 42.1% in 1997. This
decrease was composed of a reduction of approximately 3.5% primarily as a result
of favorable settlements with taxing authorities and tax savings realized upon
export sales, and an increase of approximately 1% due to additional
nondeductible amortization expense of goodwill related to acquisitions completed
in 1996. At December 31, 1997, Tracor had a net deferred income tax asset of
$13.8 million. 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.
The debt refinancing completed by the Company in 1997, resulted in an
extraordinary loss of $10.1 million, net of an income tax benefit of $7.1
million, consisting of a $7.6 million premium to retire the existing notes and a
$9.6 million write-off of unamortized debt issuance costs. Before the
extraordinary loss in 1997 and a nonrecurring gain of $.08 in 1996, diluted
income per share of $1.65 in 1997 was up 19% over 1996. Diluted net income per
share in 1996 included $.08 attributable to a $2.1 million nonrecurring gain
resulting from a negotiated increase of $3.6 million to the price of a U.S.
government contract for work performed prior to 1996. The weighted average
common shares and dilutive securities increased from 25 million in 1996 to 26.9
million in 1997, due primarily to the issuance of shares in a public offering
completed in July 1996.
Year Ended December 31, 1997, Versus Year Ended December 31, 1996
1997 1996
--------------------------------------------------------
(in thousands)
Net sales:
Information Systems $ 351,785 $274,461
Aerospace 259,955 153,180
Systems Technologies 470,765 459,279
--------------------------------------------------------
Consolidated net sales $1,082,505 $886,920
========================================================
Earnings before interest and
income taxes:
Information Systems $32,538 $22,752
Aerospace 35,197 18,691
Systems Technologies 24,447 26,747
--------------------------------------------------------
92,182 68,190
Other 408 --
--------------------------------------------------------
Consolidated earnings before
interest and income taxes $92,590 $68,190
========================================================
Tracor experienced a 22% growth in sales compared to the prior year, with
acquired companies contributing 14% and internal growth contributing 8% of the
increase. The most substantial sales growth was in the Aerospace segment (70%),
followed by the Information Systems segment (28%), and the Systems Technologies
segment (2%). Earnings before interest and income taxes increased 31% over the
prior year, excluding the effect of a $3.6 million nonrecurring gain recognized
by the Aerospace segment in 1996 attributable to a negotiated increase to the
price of a U.S. government contract for work performed prior to 1996. Earnings
on internal sales growth contributed 19% of the 1996 earnings growth while
acquired businesses accounted for 12% of the growth.
The Information Systems segment had internal sales growth of 15% over the
prior year. Increased sales occurred in each of the segment's major products and
services. Acquired businesses represented 13% of the segment's sales growth. The
internal growth in sales and improved profit margins on deliveries of mission
management and imagery products resulted in substantial earnings growth for the
segment.
Aerospace segment sales increased 56% in 1996 due to the acquisition of AEL
Industries, Inc. (AEL) in February 1996. Internal sales growth of 14% was
realized in both electronic warfare and flight systems product areas. These
increased sales also resulted in increased earnings, exclusive of the effects of
the acquisition.
Systems Technologies segment sales increased in 1996 in each of its products
and services; however, a change in the contract mix from 1995 to 1996 resulted
in decreased earnings.
SG&A expenses decreased as a percentage of sales from 11.8% in 1995 to 11.4%
in 1996. 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.
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, was $17.5 million, due primarily to
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.
Diluted net income per share was $1.47 in 1996, up 14% from $1.29 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 shares and dilutive securities from 21.5 million in 1995 to 25 million in
1996 resulted from the issuance of shares in a public offering completed in July
1996.
Financial Condition and Liquidity
Working capital was $163.4 million at December 31, 1997, up from $140.4
million at December 31, 1996, and the ratio of current assets to current
liabilities was 2.1 compared to 1.8. Working capital and the current ratio
increased primarily due to a decrease in accounts payable and accrued
liabilities and a reduction in the current portion of long-term debt as the
result of the debt refinancing in March 1997. Cash generated from operations
increased only slightly over the prior year due in large part to an increase in
accounts receivable which include unbilled contract costs and fees. This
increase was due to the timing of billings and collections related to several
production contracts.
Investing activities of $15.7 million for the year included the business
acquisitions of the Visual Information Technology division of Connectware, Inc.
and the Military Products Group of Calspan SRL Corporation, and investments in
two joint ventures. Normal capital expenditures totaling $22.2 million were
incurred during the year. The Company's operations typically do not require
large capital expenditures, and there were no substantial capital commitments at
December 31, 1997.
On March 14, 1997, Tracor completed the sale of $250 million of 8 1/2% Senior
Subordinated Notes (Notes) and entered into a new $200 million bank credit
facility (New Bank Credit Facility). The sale of the Notes resulted in proceeds
of $249 million, and $42 million was borrowed under the New Bank Credit Facility
at the time of the refinancing. These proceeds were used to retire the Company's
existing 10 7/8% Senior Subordinated Notes (Old Notes) plus accrued interest
($117.2 million), retire the existing bank credit facility plus accrued interest
($160.3 million), pay a premium to retire the Old Notes ($7.6 million), and pay
debt issuance costs ($6.8 million). The Company repaid the $42 million borrowed
under the New Bank Credit Facility prior to the end of the first quarter. There
were no revolving borrowings outstanding at December 31, 1997.
At December 31, 1997, Tracor had outstanding letters of credit totaling $38.4
million. Existing letters of credit secure performance commitments on certain
contracts with foreign customers and serve as collateral on certain insurance
policies.
The Company had firm backlog of $1.3 billion, which included funded and
unfunded contractual commitments at December 31, 1997. Approximately 84% of firm
backlog represents contracts with agencies of the U.S. government or its prime
contractors, and about 86% is expected to be realized as sales within one year.
In addition, Tracor's backlog of unexercised contract options, primarily on U.S.
government contracts, was $1.9 billion at year end.
Management believes cash from operations and amounts available under the $200
million New Bank Credit Facility will provide the necessary resources to allow
the Company to meet its obligations, fund capital equipment requirements, and
pursue its business strategy. In addition, the long-term debt refinancing
completed during the year has provided Tracor with the financial flexibility to
pursue further acquisitions in the ongoing U.S. defense industry consolidation.
Year 2000
Over the past several years, Tracor management has assessed its current major
computer-based information systems, including hardware and software, in each of
its major operations. Tracor's current systems and vendor products were matched
against the Company's information systems requirements. Such requirements
included whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Tracor made product selections and is
in various stages of implementation with all critical systems scheduled to be in
place by December 31, 1998. Tracor's selections are designed not only to solve
the Year 2000 issue, but also to improve operations with new or upgraded
applications. Management believes these upgrades to existing software and
conversions to new software will preclude Year 2000-related problems for its
computer systems. The cost of the upgrades and conversions have not had and are
not expected to have a material effect upon the results of operations or the
financial condition of the Company. However, if such upgrades and conversions
are not made, or are not completed timely, the Year 2000 issue could have a
material impact on operations.
The Company is in discussions with its vendors in order to determine the
extent to which Tracor's interface systems are vulnerable to those vendors'
failure to remediate their own Year 2000 issues. Although Tracor has received
confirmations of each vendor's plans to address Year 2000 issues, there is no
guarantee the vendor's systems with which the Company's systems interface will
be converted timely and will not have an adverse effect on the Company's
systems. However, Tracor is tracking this issue closely in order to be able to
respond to any potential problems in this area at the earliest possible time.
Management has determined Tracor should have no material exposure to
contingencies related to the Year 2000 issue for the products and services it
has sold.
<PAGE> 25
<TABLE>
<CAPTION>
Selected Financial Data
Years Ended December 31 (in thousands, except per share amounts)
1997 1996(1) 1995 1994(1) 1993(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $1,265,686 $1,082,505 $886,920 $694,037 $407,495
Cost of sales 1,031,627 866,234 713,802 568,020 333,852
Selling, administrative,
and general expenses 132,153 123,681 104,928 78,201 49,889
- -------------------------------------------------------------------------------------------------
Earnings before interest,
income taxes,
and extraordinary item 101,906 92,590 68,190 47,816 23,754
Interest expense, net 25,237 26,470 19,496 16,771 8,277
- -------------------------------------------------------------------------------------------------
Income before income taxes
and extraordinary item 76,669 66,120 48,694 31,045 15,477
Income taxes 32,278 29,506 20,831 12,498 6,200
- -------------------------------------------------------------------------------------------------
Income before extraordinary
item 44,391 36,614 27,863 18,547 9,277
Extraordinary loss from early
extinguishment of debt,
net of income tax benefit
of $7,057 10,146 -- -- -- --
- -------------------------------------------------------------------------------------------------
Net income $ 34,245 $ 36,614 $ 27,863 $ 18,547 $ 9,277
=================================================================================================
Share Data:
Earnings per common share
- basic (2):
Income before
extraordinary item $1.78 $1.86 $2.11 $1.79 $.92
Extraordinary loss (.41) -- -- -- --
- -------------------------------------------------------------------------------------------------
Net income per common
share - basic $1.37 $1.86 $2.11 $1.79 $.92
=================================================================================================
Earnings per common share -
assuming dilution (2):
Income before
extraordinary item $1.65 $1.47 $1.29 $1.15 $.72
Extraordinary loss (.38) -- -- -- --
- -------------------------------------------------------------------------------------------------
Net income per common
share - assuming
dilution $1.27 $1.47 $1.29 $1.15 $.72
=================================================================================================
Weighted average common
shares adjusted for
potential dilution (2) 26,890 24,969 21,537 16,086 12,932
Operating and Other Data:
Capital expenditures $ 22,160 $ 19,623 $ 13,676 $ 11,007 $ 8,435
Depreciation and amortization 32,857 30,361 22,854 14,746 9,614
Firm backlog 1,272,091 1,030,472 923,978 806,228 590,366
Balance Sheet Data
(at end of period):
Working capital $163,352 $140,430 $129,129 $95,392 $87,140
Total assets 717,609 744,954 467,456 444,086 305,733
Long-term debt 280,967(3) 316,884(3) 191,175 205,738 144,302
Shareholders' equity 259,215 222,917 136,965 90,592 63,167
<FN>
(1) Reflects the acquisitions of Cordant Holdings, Inc. on September 26, 1996;
AEL Industries, Inc. on February 22, 1996; GDE Holdings, Inc. on November
17, 1994; and Vitro Corporation on August 25, 1993.
(2) Amounts have been restated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. See notes to the
Consolidated Financial Statements.
(3) Includes $26.3 million in 1997 and $31.5 million in 1996 of fully cash
collateralized promissory notes payable issued in conjunction with the
acquisition of Cordant.
</TABLE>
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
January 30, 1998
<TABLE>
<CAPTION>
Consolidated Income Statements
Years Ended December 31, 1997, 1996, and 1995 (in thousands, except per share
amounts)
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,265,686 $1,082,505 $886,920
Cost of sales 1,031,627 866,234 713,802
- --------------------------------------------------------------------------------
Gross profit 234,059 216,271 173,118
Selling, administrative, and
general expenses 132,153 123,681 104,928
- --------------------------------------------------------------------------------
Earnings before interest, income
taxes, and extraordinary item 101,906 92,590 68,190
Interest expense 25,862 30,156 22,440
Interest income 625 3,686 2,944
- --------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 76,669 66,120 48,694
Income taxes 32,278 29,506 20,831
- --------------------------------------------------------------------------------
Income before extraordinary item 44,391 36,614 27,863
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit of $7,057 10,146 -- --
- --------------------------------------------------------------------------------
Net income $ 34,245 $ 36,614 $ 27,863
================================================================================
Earnings per common share - basic:
Income before extraordinary item $1.78 $1.86 $2.11
Extraordinary loss (.41) -- --
- --------------------------------------------------------------------------------
Net income per common share - basic $1.37 $1.86 $2.11
================================================================================
Earnings per common share - assuming
dilution:
Income before extraordinary item $1.65 $1.47 $1.29
Extraordinary loss (.38) -- --
- --------------------------------------------------------------------------------
Net income per common share -
assuming dilution $1.27 $1.47 $1.29
================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 and 1996 (in thousands, except share amounts)
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 168 $ 36,758
Accounts receivable 267,352 222,899
Inventories 15,227 12,456
Prepaid expenses and other 15,111 17,542
Deferred income taxes 15,594 26,829
Net assets held for sale 3,530 3,530
- --------------------------------------------------------------------------------
Total current assets 316,982 320,014
Property, plant, and equipment 176,691 165,305
Less allowances for depreciation and amortization 56,001 47,842
- --------------------------------------------------------------------------------
Net property, plant, and equipment 120,690 117,463
Goodwill, net of accumulated amortization of
$20,801 in 1997 and $11,590 in 1996 227,815 236,047
Other intangibles, net of accumulated amortization of
$18,351 in 1997 and $13,517 in 1996 8,180 12,947
Restricted cash 22,950 30,094
Prepaid pension costs 7,237 14,980
Deferred charges and other assets 13,755 13,409
- --------------------------------------------------------------------------------
Total assets $717,609 $744,954
================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 39,073 $ 47,696
Accrued liabilities 103,933 107,176
Current portion of long-term debt 10,624 24,712
- --------------------------------------------------------------------------------
Total current liabilities 153,630 179,584
Long-term debt, less current portion 270,343 292,172
Deferred revenue 7,882 15,625
Other long-term liabilities 26,539 34,656
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;
shares issued and outstanding:
25,148,949 net of 18,169 shares in treasury in 1997
and 24,754,303 net of 3,411 shares in treasury in 1996 251 247
Additional capital paid in 127,888 125,839
Retained earnings 131,076 96,831
- --------------------------------------------------------------------------------
Total shareholders' equity 259,215 222,917
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $717,609 $744,954
================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996, and 1995 (in thousands, except share amounts)
Common Stock Additional
Par Capital Retained
Shares Value Paid In Earnings Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 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 directors stock plan 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
Exercise of stock options and
Series A Warrants, net of stock
tendered as payment for options
exercised 388,646 4 1,824 1,828
Income tax effect related to stock
options and grants 59 59
Issuance of common stock pursuant to
board of directors stock plan 6,000 166 166
Net income 34,245 34,245
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 25,148,949 $251 $127,888 $131,076 $259,215
=================================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995 (in thousands)
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 34,245 $ 36,614 $ 27,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss from early extinguishment
of debt, net of income tax benefit 10,146 -- --
Depreciation of property, plant, and equipment 18,812 18,319 13,524
Amortization of goodwill 9,211 6,371 3,666
Amortization of other intangibles 4,834 5,671 5,664
Decrease in prepaid pension costs 7,743 8,127 11,686
Decrease in debt issuance costs 1,343 3,237 2,054
Provision for deferred income taxes 4,648 7,778 2,796
Decrease in deferred revenue (7,743) (8,127) (11,686)
Changes in operating assets and liabilities:
Increase in accounts receivable (41,193) (17,346) (4,085)
(Increase) decrease in inventories and prepaids 4,326 (3,390) 3,220
Increase (decrease) in accounts payable (8,623) 1,650 6,869
Increase (decrease) in advance payments (956) 6,195 (2,368)
Increase (decrease) in accrued expenses 625 (21,770) (4,696)
Other 7,144 (1,494) (545)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,562 41,835 53,962
Investing activities:
Purchases of property, plant, and equipment (22,160) (19,623) (13,676)
Proceeds from sale of property, plant, and equipment 128 14,610 2,382
Acquisition of businesses, net of cash acquired,
and investments in joint ventures (15,745) (176,948) (15,120)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (37,777) (181,961) (26,414)
Financing activities:
Payments of long-term debt (414,522) (105,602) (10,732)
Proceeds from stock offering, net of stock issuance costs -- 48,044 17,879
Proceeds from issuance of long-term debt 383,805 180,000 --
Payment of debt issuance costs (6,840) (5,836) --
Payment of premium to retire long-term debt (7,646) -- --
Exercise of stock options and warrants 1,828 800 631
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (43,375) 117,406 7,778
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (36,590) (22,720) 35,326
Cash and cash equivalents at beginning of period 36,758 59,478 24,152
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 168 $ 36,758 $ 59,478
=================================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements December 31, 1997
Note A - Business Segments
Tracor, Inc. and its subsidiaries (individually and collectively referred to
as Tracor or the Company) provide various products, systems, and services to
their customers in the U.S. Department of Defense (DOD), as well as in
nondefense U.S. government agencies, other governments, and the commercial
marketplace. The Company is organized and reports the results of its operations
in three business segments (Information Systems, Aerospace, and Systems
Technologies) based on the products, systems, and services provided to the
marketplace and customers served by each segment. The Company evaluates
performance and allocates resources based on profit or loss from operations
before interest, income taxes, and extraordinary item. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies. (See Note C.) Intersegment sales are recorded at cost plus
applicable profit and are eliminated upon consolidation.
Effective December 31, 1997, Tracor adopted the Financial Accounting
Standards Board (FASB) Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information (FAS 131). FAS 131 established standards for
the way public business enterprises report information about operating segments
in annual financial statements. FAS 131 also established standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of FAS 131 did not affect the Company's results of operations or
financial position. Financial information for Tracor's business segments is as
follows (in thousands):
<TABLE>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Information Systems $ 472,853 $ 352,107 $274,670
Aerospace 330,573 260,134 153,329
Systems Technologies 472,684 477,145 464,870
- --------------------------------------------------------------------------------
1,276,110 1,089,386 892,869
Intersegment sales:
Information Systems 3,200 322 209
Aerospace 2,506 179 149
Systems Technologies 4,718 6,380 5,591
- --------------------------------------------------------------------------------
10,424 6,881 5,949
Net sales:
Information Systems 469,653 351,785 274,461
Aerospace 328,067 259,955 153,180
Systems Technologies 467,966 470,765 459,279
- --------------------------------------------------------------------------------
Consolidated net sales $1,265,686 $1,082,505 $886,920
================================================================================
Earnings before interest, income taxes,
and extraordinary item:
Information Systems $ 42,932 $32,538 $22,752
Aerospace 30,600 35,197 18,691
Systems Technologies 28,374 24,447 26,747
- --------------------------------------------------------------------------------
101,906 92,182 68,190
Other -- 408 --
- --------------------------------------------------------------------------------
Consolidated earnings before interest,
income taxes, and extraordinary
item 101,906 92,590 68,190
Interest expense, net of interest income 25,237 26,470 19,496
- --------------------------------------------------------------------------------
Consolidated income before income taxes
and extraordinary item $ 76,669 $66,120 $48,694
================================================================================
Depreciation and amortization expense:
Information Systems $13,540 $10,369 $ 9,374
Aerospace 11,679 10,976 5,006
Systems Technologies 7,545 8,918 8,379
- --------------------------------------------------------------------------------
32,764 30,263 22,759
Other 93 98 95
- --------------------------------------------------------------------------------
Consolidated depreciation and amortization
expense $32,857 $30,361 $22,854
================================================================================
Capital expenditures:
Information Systems $ 4,446 $ 2,435 $ 1,242
Aerospace 14,259 12,133 7,288
Systems Technologies 3,202 4,991 5,039
- --------------------------------------------------------------------------------
21,907 19,559 13,569
Other 253 64 107
- --------------------------------------------------------------------------------
Consolidated capital expenditures $22,160 $19,623 $13,676
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Assets attributable to each operating segment are as follows (in thousands):
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Assets:
Information Systems $269,200 $265,919
Aerospace 285,491 243,134
Systems Technologies 121,319 135,870
- ------------------------------------------------------------
676,010 644,923
Corporate assets:
Cash 4,552 45,372
Other current assets 1,869 11,665
Property, plant, and equipment 969 814
Restricted cash (see Note B) 27,950 31,844
Deferred charges and other assets 6,259 10,336
- ------------------------------------------------------------
Consolidated assets $717,609 $744,954
============================================================
</TABLE>
<TABLE>
<CAPTION>
Segment sales derived from various products, systems, and services are as
follows (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Information Systems:
Enterprise systems $ 180,442 $ 101,197 $ 49,852
Mission management 121,211 109,503 86,609
Imagery 84,900 73,485 57,900
Test and space systems 83,100 67,600 80,100
- --------------------------------------------------------------------------------
469,653 351,785 274,461
Aerospace:
Electronic warfare 226,740 204,536 114,741
Flight systems 101,327 55,419 38,439
- --------------------------------------------------------------------------------
328,067 259,955 153,180
Systems Technologies:
Shipboard combat systems integration 250,056 266,376 262,718
Command, control, and communications
engineering 130,598 111,532 109,224
Range systems and support 87,312 92,857 87,337
- --------------------------------------------------------------------------------
467,966 470,765 459,279
- --------------------------------------------------------------------------------
Consolidated net sales $1,265,686 $1,082,505 $886,920
================================================================================
</TABLE>
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 by geographic area, as determined by the location of the customer, are as
follows (in thousands):
1997 1996 1995
- ------------------------------------------------------------------
Sales by geographic area:
United States $1,135,277 $ 977,728 $799,948
Foreign countries 130,409 104,777 86,972
- ------------------------------------------------------------------
Consolidated net sales $1,265,686 $1,082,505 $886,920
==================================================================
Foreign sales were principally to Pacific Rim, European, and Middle Eastern
customers and to the Australian government. Company assets located outside the
United States and income before income taxes from foreign-based operations were
not material for any of the years presented.
Sales to U.S. government agencies totaled $1 billion in 1997, $926 million in
1996, and $773 million in 1995. The U.S. government, through more than 770
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 $932 million in 1997, $845 million in 1996, and $717 million in 1995.
Note B - 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, now known as Tracor Enterprise Solutions,
Inc., 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, $65.7 million, 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
was reduced by payments totaling approximately $5.3 million on April 1, 1997.
The remaining balance of this note, $21.2 million, 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 $5 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 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 ($60.1 million) is being amortized over 25 years.
Tracor recorded estimated liabilities of $2.9 million relating to the planned
elimination of certain duplicative corporate functions and the consolidation of
operating facilities. As of December 31, 1997, approximately $1.8 million of
costs has been incurred for employee severance and excess facility costs. The
remainder of these costs are expected to be incurred before December 31, 1998.
AEL Acquisition - On February 22, 1996, Tracor purchased all of the outstanding
common shares of AEL Industries, Inc. (AEL). AEL, now known as Tracor Aerospace
Electronic Systems, Inc., is a leading supplier of electronic defense systems
and subsystems. The company designs and manufactures sophisticated
countermeasures, simulation, and radar warning receiver systems, and provides
state-of-the-art antenna, microwave, and integrated circuit components.
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. 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, Tracor developed and executed 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. During 1996, Tracor completed
the sale of two excess properties and two product lines obtained in the
acquisition resulting in net proceeds of approximately $14.4 million. At
December 31, 1997, another facility was under contract to be sold with closing
expected to occur in the second quarter of 1998.
As of December 31, 1997, the Company had 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.
Substantially all of these costs were incurred as of December 31, 1997.
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 J.)
Other Acquisitions - During 1997, 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 1997, the Visual Information Technology (VITec)
division of Connectware, Inc. and the Military Products Group of Calspan SRL
Corporation; in 1996, the AEGIS shipbuilding program support business from
Litton Industries, Inc., the Systems Integration Division of Codar Technology,
Inc., and Aerial 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 shape-charged munitions business unit of The Titan
Corporation. The aggregate cash purchase price of these acquisitions, including
expenses, was approximately $38.3 million. The acquisitions have been accounted
for using the purchase method, and, accordingly, the purchase price and
liabilities assumed ($9 million) have been allocated to the assets acquired
($18.8 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 ($28.5 million) is being amortized over 10 to 30 years.
Note C - 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, management estimates anticipated
contract costs and revenues used in the earnings recognition process, which
affect the amounts reported in the Company's 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 D.)
Inventories - Inventories, consisting primarily 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.
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 accordingly.
Research and Development Costs - Company-funded research and development
costs are expensed as incurred. Such costs were $10.1 million in 1997,
$11.1 million in 1996, and $5.4 million in 1995.
Income Taxes - In accordance with FASB Statement No. 109, Accounting for
Income Taxes, deferred income taxes are provided for the 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 D - Accounts Receivable
The following table shows the components of accounts receivable (in
thousands), which include unbilled costs and fees under both fixed-price and
cost-reimbursement type contracts. Billed accounts receivable are shown net of
allowances for doubtful accounts.
1997 1996
- ----------------------------------------------------------
Billed:
U.S. government, including
Foreign Military Sales (FMS) $105,371 $105,288
Foreign 21,609 27,909
Domestic commercial 24,356 22,236
- ----------------------------------------------------------
151,336 155,433
Unbilled costs and fees:
U.S. government, including FMS 73,697 49,892
Foreign 17,164 6,345
Domestic commercial 25,155 11,229
- ----------------------------------------------------------
116,016 67,466
- ----------------------------------------------------------
$267,352 $222,899
==========================================================
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, 1997, will be billed during 1998. 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 1995, 1996, and 1997 (in thousands):
Balance at January 1, 1995 $ 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
Additions charged to costs and expenses 266
Additions due to acquisitions 25
Write-off of uncollectible accounts (343)
Reduction in allowance (1,406)
- --------------------------------------------------
Balance at December 31, 1997 $ 488
==================================================
Although it has a concentration of credit risk with the U.S. government,
Tracor has not historically experienced substantial 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 E - Inventories
The components of inventories are as follows (in thousands):
1997 1996
- --------------------------------------------------------------
Raw materials and purchased components $10,550 $ 8,996
Work in process 3,915 2,859
Finished goods 762 601
- --------------------------------------------------------------
$15,227 $12,456
==============================================================
Note F - Property, Plant, and Equipment
The components of property, plant, and equipment are as follows (in thousands):
1997 1996
- ----------------------------------------------
Land $ 13,644 $ 13,644
Buildings 54,010 50,635
Equipment 102,454 94,658
Leasehold improvements 6,583 6,368
- ----------------------------------------------
$176,691 $165,305
==============================================
Note G - Accrued Liabilities
The components of accrued liabilities are as follows (in thousands):
1997 1996
- -------------------------------------------------------
Payroll and related items $ 52,527 $ 47,553
Advance payments from customers 8,563 9,519
Interest 9,147 5,617
Other 33,696 44,487
- -------------------------------------------------------
$103,933 $107,176
=======================================================
Note H - Long-term Debt
The components of long-term debt are as follows (in thousands):
1997 1996
- ------------------------------------------------------
Revolving loan $ -- $ --
Term loans -- 163,205
Senior subordinated notes 249,055 115,947
Promissory notes payable to
former Cordant shareholders
(see Note B) 26,250 31,500
Other 5,662 6,232
- ------------------------------------------------------
280,967 316,884
Less current maturities 10,624 24,712
- ------------------------------------------------------
$270,343 $292,172
======================================================
Interest paid totaled $21.1 million in 1997, $25.9 million in 1996, and $20.6
million in 1995.
Senior Subordinated Notes - On February 14, 1997, Tracor commenced a tender
offer to purchase for cash up to the entire $115,947,000 outstanding principal
amount of its 10 7/8% Senior Subordinated Notes due 2001 (Old Notes) and a
related solicitation of consents to modify certain other terms of the indentures
under which the Old Notes were issued. On February 17, 1997, the Company also
commenced a private placement offering (Offering) of $250 million aggregate
principal amount of 8 1/2% Senior Subordinated Notes due 2007 (New Notes). The
Offering was conditioned upon receipt of consents and tenders representing at
least a majority in aggregate principal amount of Old Notes outstanding. On
March 14, 1997, Tracor consummated the tender offer and purchased for cash
$112,891,000 of Old Notes. On July 14, 1997, Tracor issued a notice of
redemption for the remaining $3,056,000 of Old Notes and redeemed such notes on
August 15, 1997. The purchase of the Old Notes in the first quarter and
redemption of the remaining Old Notes in the third quarter resulted in an
extraordinary loss for the year of approximately $10.1 million, net of an income
tax benefit of $7.1 million, consisting of a $7.6 million premium to retire the
Old Notes and a $9.6 million write-off of unamortized debt issuance costs. The
New Notes were issued subject to a registration rights agreement, pursuant to
which Tracor filed a registration statement on April 1, 1997, and exchanged the
New Notes for identical registered 8 1/2% Senior Subordinated Notes due 2007
(Notes) of the Company.
Interest on the Notes is payable semiannually on September 1 and March 1. The
Notes are redeemable in whole or in part at the option of the Company on or
after March 1, 2002, at the redemption prices of 104.250% in 2002, 102.833% in
2003, 101.417% in 2004, and 100% thereafter. In addition, prior to March 1,
2000, the Company, at its option, may redeem up to 35% of the aggregate
principal amount of the Notes with the net cash proceeds of one or more public
equity offerings at the redemption price of 108.5%. In the event of a change of
control, as defined in the indenture, each holder may require Tracor to
repurchase such holder's Notes at 101% plus accrued and unpaid interest. Tracor
is also required to offer to repurchase a specified portion of the Notes in the
event of certain asset sales.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future senior indebtedness
of the Company. Substantially all of Tracor's wholly owned subsidiaries have
guaranteed the Notes on a senior subordinated basis.
Bank Credit Facility - Upon completion of the Offering, the Company also
refinanced its outstanding indebtedness under its existing bank agreement and
entered into a new bank credit facility (New Bank Credit Facility) providing for
a five-year revolving credit facility in the initial principal amount of
$200 million.
The New Bank Credit Facility is subject to commitment reductions of
$25 million on February 28, 2000, and $50 million on February 28, 2001.
Revolving borrowings may remain outstanding until the final maturity date of the
facility except for the possibility of repayments being required by certain
mandatory prepayment events. All of Tracor's stock in certain of its domestic,
wholly owned subsidiaries is pledged under the New Bank Credit Facility, and all
borrowings are guaranteed by such subsidiaries.
The New Bank Credit Facility bears interest at Tracor's option either at the
lender's base rate plus up to .75% or the eurodollar rate plus .625% to 1.75% in
each case based on certain financial ratios, as defined. 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 ranging from .25%
to .375% per annum is charged on unused revolving loans and is payable quarterly
in arrears. The commitment fee at December 31, 1997, was .25%. Each letter of
credit bears an issuance fee of .125% per annum plus a fee equal to .25% less
the interest margin in effect for revolving loans maintained as eurodollar
loans. The total letters of credit fee at December 31, 1997, was .875%. The
Company had outstanding letters of credit at December 31, 1997, totaling $38.4
million relating to commitments for performance on certain contracts with
foreign customers and as collateral on certain insurance policies. There were no
revolving borrowings outstanding at December 31, 1997.
Long-term Debt Covenants - The New Bank Credit Facility and Notes contain
covenants which, among other things, impose limitations and restrictions on the
incurrence of additional indebtedness, capital expenditures, future mergers and
acquisitions, sales of assets, and payment of dividends. In addition, Tracor is
required to satisfy certain financial covenants relating to, among other
matters, interest coverage, working capital, leverage, and net worth.
Long-term Debt Maturities - Aggregate annual long-term debt maturities for
each of the next five years are as follows (in thousands):
1998 $ 10,624
1999 36
2000 2
2001 --
2002 --
2003 and thereafter 270,305
--------
Total $280,967
========
Fair Value - Based on the market prices for the Notes, the fair value of
Tracor's Notes is $258.8 million at December 31, 1997.
Note I - Retirement Benefit Plans
Tracor provides employee 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 (ERISA).
Assumptions used in accounting for the Pension Plan were:
1997 1996 1995
- ---------------------------------------------------------
Weighted average discount rate:
January 1 7.75% 7.25% 8.75%
December 31 7.25% 7.75% 7.25%
Rate of increase in
compensation levels:
January 1 4.00% 4.00% 5.00%
December 31 4.00% 4.00% 4.00%
Expected long-term rate
of return on assets 9.50% 9.50% 9.50%
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):
1997 1996
- ------------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested benefit obligation $335,558 $296,648
============================================================
Accumulated benefit obligation $346,793 $306,739
============================================================
Projected benefit obligation $399,271 $353,421
Pension Plan assets at fair value 410,418 370,422
- ------------------------------------------------------------
Pension Plan assets in excess of
the projected benefit obligation 11,147 17,001
Unrecognized prior service cost 5,941 6,668
Unrecognized net gain (9,851) (8,689)
- ------------------------------------------------------------
Net prepaid pension costs recognized $ 7,237 $ 14,980
============================================================
The components of pension expense are as follows (in thousands):
1997 1996 1995
- ---------------------------------------------------------------
Service cost, benefits earned
during the year $13,810 $14,487 $12,458
Interest cost on projected
benefit obligation 27,192 25,149 25,891
Actual return on Pension
Plan assets (67,664) (42,961) (73,856)
Net amortization and deferral 34,405 11,452 47,193
- ---------------------------------------------------------------
$ 7,743 $ 8,127 $11,686
===============================================================
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 $12.5 million in 1997, $10 million in 1996, and $9.2
million in 1995.
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 Company will match contributions up to the
extent of the allowable scheduled company contributions under the defined
contribution retirement plans. Expenses under the Tracor Deferred Compensation
Plan were approximately $225,000 in 1997 and $88,000 in 1996.
Postretirement Health Care Plans - The Company 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.
The postretirement health care plans for certain employees within the Systems
Technologies and Aerospace segments were discontinued in 1993, leaving only the
obligation that existed at that date for eligible employees and retirees.
Accordingly, the cost of providing these benefits is not material 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
$4 million at December 31, 1997, and $5 million at December 31, 1996, for such
benefits.
Postretirement health care and life insurance benefits are currently provided
for certain employees of the Information Systems segment; however, the salaried
retiree medical plans will terminate effective July 1, 2008. The current 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 Information Systems plans'
funded status:
1997 1996
- -----------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $5,698 $7,000
Fully eligible active plan participants 831 840
Other active plan participants 345 466
- -----------------------------------------------------------------
6,874 8,306
Plan assets at fair value -- --
- -----------------------------------------------------------------
Net accumulated postretirement obligation $6,874 $8,306
=================================================================
The accrued postretirement obligation, including an unrecognized net gain,
recorded in other long-term liabilities was approximately $10.3 million at
December 31, 1997 and 1996. Net periodic postretirement benefit cost for the
Information Systems plans was approximately $332,000 in 1997, $610,000 in 1996,
and $961,000 in 1995.
For measurement of the plans, 7% to 9% 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 1997 and 1996. 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
substantial 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, 1997 and 1996, by $100,000 and
$130,000, respectively. The net periodic postretirement benefit cost for 1997
and 1996 would increase by $221,000 and $67,000, respectively.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation for the Information Systems plans was 7.25% at
December 31, 1997, and 7.75% at December 31, 1996.
Note J - Shareholders' Equity
Common Stock - The acquisition of Westmark (see Note B), completed on June 13,
1996, resulted in the issuance of 8,267,435 shares of Tracor common stock, as
well as the retirement of the Company's Class A common stock (978,458 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.
Common Stock Purchase Warrants - At December 31, 1997, there were outstanding
979,295 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. Theholders may also request Tracor to register the underlying
securities with the SEC and such registration rights are generally transferable
to subsequent warrant holders. Series A Warrants exercised totaled 248,493
shares in 1997, 122,900 shares in 1996, and 829,175 shares in 1995.
Preferred Share Purchase Rights - On February 17, 1997, the board of
directors declared a dividend of one Preferred Share Purchase Right (Right) on
each outstanding share of the Company's common stock. Under certain conditions,
the holder of Rights may purchase one one-hundredth of a share of a new series
of junior participating preferred stock at an exercise price of $100. The Rights
expire February 17, 2007.
The Rights become exercisable only if a person or group acquires 20% or more
of Tracor's common stock or upon the announcement of an intention to make a
tender offer or exchange offer, the consummation of which would result in
ownership by a person or group of 20% or more of the common stock. Following the
acquisition by a person or group of beneficial ownership of 20% or more of the
Company's common stock and prior to an acquisition of 50% or more of the common
stock, the board of directors may exchange the Rights (other than Rights owned
by such person or group), in whole or in part, at an exchange ratio of one share
of common stock (or one one-hundredth of a share of the new series of junior
participating preferred stock) per Right. These Rights may cause substantial
ownership dilution to a person or group who attempts to acquire Tracor without
the approval of the Company's board of directors.
In the event Tracor is acquired in a merger or other business combination
transaction after a person or group has acquired 20% or more of the Company's
outstanding stock, each Right will entitle its holder to purchase, at the
Right's then-current exercise price, a number of the acquiring company's shares
having a market value of twice such price. In addition, if a person or group
acquires 20% or more of Tracor's outstanding common stock, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current exercise price, a number of Tracor's
common shares having a market value of twice such price.
The Rights may be redeemed by the Company at a price of $.01 per Right at any
time prior to the acquisition by person or group of beneficial ownership of 20%
or more of Tracor's common stock at the option of the board of directors. The
board is also authorized to reduce the 20% threshold referred to above to not
less than 10%.
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 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.
Pro forma information regarding net income and earnings per share is required
by FAS 123, which also requires the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method prescribed by FAS 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
1997 1996 1995
- ------------------------------------------------------------
Risk-free interest rate 6.1% 5.8% 6.3%
Dividend yield 0% 0% 0%
Volatility factor of the
expected market price of
Tracor's common stock .542 .576 .576
Weighted average expected
life of the options 5 years 5 years 5 years
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 substantially
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 expensed over the options' vesting periods. The Company's pro forma
information follows (in thousands, except per share amounts):
1997 1996 1995
- ---------------------------------------------------------------------
Pro forma stock-based
compensation expense $ 3,375 $ 2,021 $ 773
Pro forma net income 30,870 34,593 27,090
Pro forma earnings per
common share - basic:
Income before extraordinary item $1.65 $1.75 $2.05
Extraordinary loss (.41) -- --
- ---------------------------------------------------------------------
Net income per common share -
basic $1.24 $1.75 $2.05
=====================================================================
Pro forma earnings per
common share - assuming dilution:
Income before extraordinary item $1.54 $1.40 $1.27
Extraordinary loss (.38) -- --
- ---------------------------------------------------------------------
Net income per common share -
assuming dilution $1.16 $1.40 $1.27
=====================================================================
Because FAS 123 is applicable only to options granted after December 31,
1994, the year ended December 31, 1997, is the only period presented which
reflects the full pro forma effect of the standard. 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.
A summary of changes in common stock options during 1995, 1996, and 1997 is
as follows:
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
- -----------------------------------------------------------------
Options outstanding,
January 1, 1995 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 (5,399) 8.13 - 13.00 10.84
- -----------------------------------------------------------------
Options outstanding,
December 31, 1996 1,531,573 1.75 - 21.88 10.00
Granted 478,150 21.25 - 22.38 22.35
Exercised (154,911) 2.00 - 22.38 10.71
Surrendered (31,110) 13.00 - 22.38 19.25
- -----------------------------------------------------------------
Options outstanding,
December 31, 1997 1,823,702 $ 1.75 - $22.38 $13.01
=================================================================
Options outstanding at December 31, 1997, are comprised of the following:
Weighted
Average
Average Remaining
Range of Exercise Contractual
Options Exercise Prices Price Life
- ------------------------------------------------------
504,322 $ 1.75 - $ 3.50 $ 2.66 4.7 years
60,000 7.88 - 8.13 8.12 5.9 years
753,700 12.25 - 16.13 14.14 7.6 years
505,680 19.13 - 22.38 22.23 9.1 years
- ------------------------------------------------------
1,823,702 $ 1.75 - $22.38 $13.01 7.2 years
======================================================
Options exercisable, December 31,
1997 959,109 $1.75 - $21.88
1996 797,143 1.75 - 15.25
1995 653,400 1.75 - 12.25
1997 1996 1995
- -----------------------------------------------------------------------
Weighted average fair value of
options granted during the year $11.97 $9.39 $7.28
Weighted average remaining
contractual life of options at
December 31 7.2 years 7.5 years 7.8 years
Common stock reserved at December 31, 1997, consists of the following:
For exercise of outstanding warrants 979,295
For exercise of stock options 2,507,961
- ------------------------------------------------
3,487,256
Note K - Income Taxes
Income before income taxes and extraordinary item consists of the following
(in thousands):
1997 1996 1995
- ----------------------------------------------------------
Domestic $73,495 $64,990 $48,212
Foreign 3,174 1,130 482
- ----------------------------------------------------------
$76,669 $66,120 $48,694
==========================================================
The provision for income taxes from continuing operations consists of the
following (in thousands):
1997 1996 1995
- ----------------------------------------------------------
Current:
Federal $22,229 $17,442 $14,887
State 4,516 4,269 3,308
Foreign 885 17 (160)
- ----------------------------------------------------------
27,630 21,728 18,035
Deferred:
Federal 4,227 6,995 2,309
State 631 528 487
Foreign (210) 255 --
- ----------------------------------------------------------
4,648 7,778 2,796
- ----------------------------------------------------------
$32,278 $29,506 $20,831
==========================================================
A reconciliation between income taxes computed on income before income taxes
and extraordinary item at the statutory federal rate, 35%, and the provision for
income taxes is as follows (in thousands):
1997 1996 1995
- ----------------------------------------------------------
Income taxes at the
statutory federal rate $26,834 $23,142 $17,043
Goodwill 2,888 2,115 1,240
State income taxes,
net of federal tax
benefits 3,346 3,118 2,467
Other (790) 1,131 81
- ----------------------------------------------------------
$32,278 $29,506 $20,831
==========================================================
A summary of the tax effects of temporary differences comprising deferred
income tax assets and liabilities is as follows (in thousands):
1997 1996
- -------------------------------------------------------------
Deferred income tax assets:
Contracts $ 2,930 $13,383
Postretirement medical obligation 3,447 1,942
Accrued vacation/employee benefits 9,032 8,834
Expense accruals not yet deductible 2,740 4,612
Deferred compensation 11,058 6,894
Pension 3,163 6,891
Other 2,562 2,242
- -------------------------------------------------------------
Total deferred tax assets 34,932 44,798
Deferred income tax liabilities:
Depreciation/amortization 6,700 11,055
Pension 3,160 6,257
Other 11,266 9,941
- -------------------------------------------------------------
Total deferred tax liabilities 21,126 27,253
- -------------------------------------------------------------
Net deferred income taxes $13,806 $17,545
=============================================================
Net deferred income taxes are reflected on the consolidated balance sheet as
follows (in thousands):
1997 1996
- --------------------------------------------------
Current deferred income taxes $15,594 $26,829
Other long-term liabilities (1,788) (9,284)
- --------------------------------------------------
Net deferred income taxes $13,806 $17,545
==================================================
Based on Tracor's taxable income in prior carryback years and forecast of
future income, management believes, it is more likely than not, all net deferred
tax assets will be realized. The Company settled the Internal Revenue Service
(IRS) examination of the federal income tax returns of GDE Systems, Inc. (GDE)
for its tax periods beginning November 20, 1992, and ending November 17, 1994
(the date the Company acquired GDE). The final adjustments resulted in a
reduction of GDE's goodwill by $1.7 million. Also in 1997, the IRS completed its
examination of the Company's federal income tax returns for 1994 and 1995. The
final adjustments resulted in a reduction in goodwill of $5.4 million. A benefit
will be realized in earnings through reduced future goodwill amortization
expense as a result of these adjustments.
Income taxes paid, net of refunds, totaled $13.1 million in 1997, $17.4
million in 1996, and $20 million in 1995.
Note L - 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,
1997, for all noncancelable operating leases with initial terms of one year or
more are as follows (in thousands):
1998 $17,795
1999 14,733
2000 12,274
2001 8,247
2002 5,671
2003 and thereafter 16,441
----------------------------
$75,161
============================
Rental expense for all operating leases was $19.9 million in 1997,
$16.6 million in 1996, and $17.4 million in 1995.
Note M - 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 N - Earnings Per Share
In February 1997, the FASB issued Statement No. 128, Earnings Per Share (FAS
128), changing the method used to compute earnings per share. The Company has
adopted the provisions of FAS 128 as of December 31, 1997, and has restated
earnings per share for all prior periods presented. Under the new requirements,
the Company has presented basic earnings per share, the calculation of which
excludes the dilutive effect of warrants, options, and convertible securities,
and diluted earnings per share, which is similar to the previously reported
fully diluted earnings per share.
The following table (in thousands) reconciles the weighted average common
shares used to calculate basic earnings per share and the adjusted weighted
average common shares and assumed conversions of warrants and stock options used
to calculate diluted earnings per share.
1997 1996 1995
- ---------------------------------------------------------------
Weighted average common shares 24,907 19,720 13,188
Effect of dilutive securities:
Series A Warrants 950 835 713
Stock options 1,033 4,414 7,636
- ---------------------------------------------------------------
Weighted average common shares
and assumed conversions 26,890 24,969 21,537
===============================================================
<PAGE>
<TABLE>
<CAPTION>
Common Stock Data
1993 1994 1995 1996 1997
------------- --------------- --------------- ---------------- --------------
High Low High Low High Low High Low High Low
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $4 1/8 $2 3/4 $10 1/8 $7 7/8 $14 $10 $17 7/16 $14 $24 $21 1/8
Second Quarter 6 1/8 2 7/8 8 1/2 6 15/16 14 1/4 11 3/8 21 1/8 17 1/8 26 3/4 20
Third Quarter 6 7/8 5 3/4 8 3/4 7 1/8 18 1/8 13 5/8 20 5/8 16 5/8 31 23 7/8
Fourth Quarter 9 1/4 6 7/8 12 5/8 7 1/2 16 7/8 14 1/2 24 3/8 19 3/4 31 3/8 25
13/16
<FN>
Listed on The Nasdaq Stock Market(SM) - TTRR
</TABLE>
<TABLE>
<CAPTION>
Summary of Quarterly Results
Unaudited (in thousands, except per share amounts)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $297,464 $312,667 $320,791 $334,764 $1,265,686
Income before extraordinary item $10,264 $10,511 $11,350 $12,266 $44,391
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit 9,985 -- 161 -- 10,146
- -------------------------------------------------------------------------------------------------
Net income $ 279 $10,511 $11,189 $12,266 $34,245
=================================================================================================
Earnings per common share -
basic (1):
Income before extraordinary item $.41 $.42 $.46 $.49 $1.78
Extraordinary loss (.40) -- (.01) -- (.41)
- -------------------------------------------------------------------------------------------------
Net income per common share -
basic $.01 $.42 $.45 $.49 $1.37
=================================================================================================
Earnings per common share -
assuming dilution (1):
Income before extraordinary item $.38 $.39 $.42 $.46 $1.65
Extraordinary loss (.37) -- (.01) -- (.38)
- -------------------------------------------------------------------------------------------------
Net income per common share -
assuming dilution $.01 $.39 $.41 $.46 $1.27
=================================================================================================
1996(2)
Net sales $229,047 $267,372 $255,994 $330,092 $1,082,505
Net income $7,661 $7,997 $11,306 $9,650 $36,614
Net income per common share -
basic (1) $.54 $.51 $.46(3) $.39 $1.86(3)
Net income per common share -
assuming dilution (1) $.34 $.34 $.43(3) $.36 $1.47(3)
<FN>
(1) Amounts have been restated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. See notes to the
Consolidated Financial Statements.
(2) Reflects the acquisitions of AEL Industries, Inc. on February 22, 1996,
and Cordant Holdings, Inc. on September 26, 1996.
(3) Includes a $2.1 million gain, net of tax, ($.08 per share) due to a
negotiated increase in the price of a U.S. government contract for work
performed prior to 1996.
</TABLE>
<PAGE> 42
Tracor Principal Locations
[A MAP OF THE UNITED STATES IS SHOWN]
TRACOR, INC.
6500 Tracor Lane
Austin, TX 78725-2000
512 926-2800
512 929-2262 Fax
800 519-TTRR (8877)
www.tracor.com
Washington Office
1215 Jefferson Davis Highway, Suite 1109
Arlington, VA 22202-4302
703 418-3530
703 415-1459 Fax
TRACOR INFORMATION SYSTEMS
P.O. Box 509009
San Diego, CA 92150-9009
GDE Systems, Inc.
San Diego, CA
619 675-2600
619 675-1999 Fax
www.gdesystems.com
Imagery and Information Systems Division
P.O. Box 509008
San Diego, CA 92150-9008
619 592-5553
619 592-1019 Fax
Mission Management Systems Division
P.O. Box 509008
San Diego, CA 92150-9008
619 592-1689
619 592-1628 Fax
Products Division
P.O. Box 509008
San Diego, CA 92150-9008
619 592-5200
619 592-5309 Fax
ADR, Inc.
9285 Commerce Highway
Pennsauken, NJ 08110
609 663-7200
800 257-7960
609 486-7778 Fax
www.adrinc.com
Test and Space Systems Division
San Diego, CA
619 675-5806
619 675-5885 Fax
Quality Systems, Inc.
8201 Greensboro Drive, Suite 1200
McLean, VA 22102
703 847-5820
703 847-5887 Fax
www.qsi.com
Tracor Integrated Solutions
1601 Research Boulevard
Rockville, MD 20850-3173
301 838-6800
301 838-6805 Fax
Tracor Enterprise Solutions, Inc.
11400 Commerce Park Drive
Reston, VA 20191
703 758-7000
703 758-7047 Fax
www.tracor-es.com
TRACOR AEROSPACE
6500 Tracor Lane
Austin, TX 78725-2070
Tracor Aerospace, Inc.
Austin, TX
512 926-2800
512 929-2380 Fax
Analysis and Applied Research Division
Austin, TX
512 929-2053
512 929-4089 Fax
www.aard.tracor.com
Countermeasures and Combat Systems Division
Austin, TX
512 929-2200
512 929-2891 Fax
Defense Systems Division
Austin, TX
512 929-2779
512 929-2320 Fax
Tracor Aerospace Electronic Systems, Inc.
305 Richardson Road
Lansdale, PA 19446-1485
215 996-2000
215 996-2088 Fax
www.aes.tracor.com
Tracor Flight Systems, Inc.
1434 Flight Line, Bldg. 58B
Mojave, CA 93501-1665
805 824-4601
805 824-2257 Fax
TRACOR SYSTEMS TECHNOLOGIES
1601 Research Boulevard
Rockville, MD 20850-3173
Tracor Systems Technologies, Inc.
Rockville, MD
301 738-4000
301 738-4643 Fax
www.tst.tracor.com
Army Systems Division
Monmouth Park Corporate Center
185 Route 36, Building B
West Long Branch, NJ 07764-1304
732 726-2600
732 726-2610 Fax
Electronic Systems Division
23481 Cottonwood Parkway
California, MD 20619-9517
301 862-9300
301 862-9330 Fax
www.eaglenet.com/tracor
FAA Division
Rockville, MD
301 838-6400
301 838-6465 Fax
Surface Warfare Division
5001 N. State Road 37 (Bus.)
Bloomington, IN 47404-1626
812 333-6291
812 333-1415 Fax
Surface Weapons Systems Division
16541 Commerce Drive
King George, VA 22485
540 663-9800
540 663-6382 Fax
Systems Design Division
Rockville, MD
301 231-3370
301 231-2562 Fax
Systems Engineering Division
Heitman Office Building, Suite 1012
2351 S. Jefferson Davis Highway
Arlington, VA 22202
703 418-8003
703 418-8275 Fax
Systems Integration Division
Rockville, MD
301 231-1900
301 231-3150 Fax
Technical Services Division
10300 Silverdale Way, NW
Silverdale, WA 98383-1072
360 692-7800
360 692-2108 Fax
Tracor Services Corporation
Industrial Parkway
557 Mary Esther Cut-off
Fort Walton Beach, FL 32548-4090
850 244-7711
850 244-7760 Fax
www.tracorservices.com
<PAGE>
Board of Directors
James B. Skaggs, 60
Chairman of the Board, Tracor, Inc.
Austin, TX
Director since 1990
William E. Conway, Jr., 48
Managing Director, The Carlyle Group
Washington, D.C.
Director since 1995 (1)
Dr. Julian Davidson, 70
President and Chief Executive Officer, Davidson Enterprises, LLC
Huntsville, AL
Director since 1991 (2)
Anthony Grillo, 42
Senior Managing Director, The Blackstone Group, L.P.
New York, NY
Director since 1991 (1)
Bob Marbut, 62
Chairman and Co-Chief Executive Officer, Hearst-Argyle Television, Inc.
New York, NY/San Antonio, TX
Director since 1991 (2)
Elvis L. Mason, 64
Managing Partner, Mason Best Company, L.P.
Dallas, TX
Director since 1991 (2)
Retired U.S. Air Force Lt. Gen. Thomas P. Stafford, 67
Former Astronaut
Co-Founder, Stafford, Burke and Hecker, Inc.
Alexandria, VA
Director since 1994 (1)
(1) Audit/Ethics Committee
(2) Compensation/Stock Option Committee
Management Team
James B. Skaggs, 60
President
Chief Executive Officer
8 years of service
Robert K. Floyd, 62
Vice President, Finance
Chief Financial Officer
8 years of service
Barry G. Campbell, 56
Vice President
Chief Executive Officer, Tracor Systems Technologies
28 years of service
Woody Endsley, 45
Vice President
Treasurer
21 years of service
Robert J. Fitch, 49
Vice President, Government Relations
5 years of service
K. Bruce Hamilton, 56
Vice President
President, Tracor Systems Technologies
32 years of service
George R. Melton, 51
Vice President
President and Chief Executive Officer, Tracor Aerospace
8 years of service
Russell E. Painton, 57
Vice President
General Counsel
Corporate Secretary
32 years of service
John M. Rock, 58
Vice President,Technology and Information Systems
7 years of service
Roger W. Sadler, 61
Vice President, Business Development
7 years of service
Dr. Terry A. Straeter, 55
Vice President
President and Chief Executive Officer, Tracor Information Systems
19 years of service
Kathleen Thompson, 50
Vice President, Human Resources
26 years of service
<PAGE>
Mission
At Tracor, we believe mutual dedication to excellence in performing every task
we undertake, large or small, is the key to our future. We accomplish excellence
and enhance shareholder value by carrying out our responsibilities to:
achieve profitable growth consistent with the best in our industry;
provide high-quality, innovative technological products, systems, and
services which give the best value to our customers;
ensure the highest standards of integrity in all activities;
create a safe, pleasant, and motivating work environment providing both job
fulfillment and career growth opportunities for employees; and
support the communities in which we have operations to develop a better
environment for all citizens to enjoy.
Growth at Tracor is through excellence.
Acknowledgments
Design and printing: Tracor Publications, Austin, Texas
Principal photography: Jim Lincoln Photography, Austin, Texas
Other photography credits: Iridium LLC, Frank Morgan Photography, Motorola,
Inc., NASA,
Shin Watanabe/PHOTONICA, and Kent Schnoeker Photography
Thanks to the following individuals who were photographed to illustrate our
business areas:
Cynthia L. Alaniz, Staff Accountant, Tracor Aerospace - page 12
Gilbert Atencio, Structural Mechanic, Tracor Flight Systems - page 15
Allan Blades, Photogrammetric Technician, ADR - page 13
Eric Bonner, Photogrammetric Technician, ADR - page 13
David K. Braig, Photogrammetric Technician, ADR - page 13
Julie Brophy, Data Analyst, Tracor Flight Systems - page 15
James F. Brown, Photogrammetric Technician, ADR - page 13
La Verne Deyne, Production Operator, Tracor Aerospace Electronic Systems - page
15
Lisa Dorn, Data Manager, GDE Systems - page 10
Deb Finney, Production Operator, Tracor Aerospace Electronic Systems - page 15
Rusty Greer, Systems Analyst, Tracor Systems Technologies - page 18
John Gullatt, Principal Scientist, Tracor Aerospace - page 12
Shelley Helyer, Human Resources Representative, Tracor Aerospace - page 12
Peggy Hess, Production Operator, Tracor Aerospace Electronic Systems - page 15
Marsha Holland, Department Head, Simulation and Signature Department, Tracor
Services - page 20
Rick Jorgenson, Painter, Tracor Flight Systems - page 16
Mike Krueger, Structural Mechanic, Tracor Flight Systems - page 15
Michael Lauth, Photogrammetric Technician, ADR - page 13
David Lown, Production Supervisor, Tracor Flight Systems - page 15
Carroll L. Marcus, Jr., Director, Accounting, Tracor Aerospace - page 12
Larry Martin, Structural Mechanic, Tracor Flight Systems - page 15
Tanya L. Mayes, Staff Sergeant, Texas Army National Guard, Camp Mabry - page 14
Celsa Medellin, Electronic Assembler Specialist, GDE Systems - page 11
Samuel A. Mirsky, Electrical Engineer, Tracor Services - page 20
Eric Mueller, Electronics Development Technician, GDE Systems - page 11
Tim L. Murphy, Painter, Tracor Flight Systems - page 16
Ivette Nelson, Structural Mechanic, Tracor Flight Systems - page 15
Barb Nice, Production Operator, Tracor Aerospace Electronic Systems - page 15
Connie Polakoff, Structural Mechanic, Tracor Flight Systems - page 15
Javier Ramirez, Staff Sergeant, Texas Army National Guard, Camp Mabry - page 14
Gabe Sulyok, Supervisor, Electronic Assembly, Tracor Aerospace Electronic
Systems - page 15
Paul Theriault, Structural Mechanic, Tracor Flight Systems - page 15
Dennis Werner, Technician, Tracor Aerospace Electronic Systems - page 15
Tracor is an equal opportunity employer and seeks to attract and retain the best
qualified people without regard to race, color, religion, sex, age, national
origin, disability, or veteran status.
<PAGE> 45
Shareholder Information
Stock Listing
Tracor, Inc. common stock typically is bought or sold through a brokerage
institution. At year end, 23 firms were making a market for the stock, which is
listed in the Nasdaq National Market under the trading symbol TTRR. Tracor
Series A Warrants trade in the Nasdaq National Market under the symbol TTRRW.
Company Information
To keep you informed of your company's progress, shareholders periodically are
provided with updated information through quarterly news releases, as well as
semiannual and annual reports.
For additional information, contact:
Marian Kelley,
Corporate Director,
Public Relations
512 929-2271
800 519-TTRR (8877)
512 929-2262 Fax
[email protected]
Corporate address:
Tracor, Inc.
6500 Tracor Lane
Austin, TX 78725-2006
www.tracor.com
Transfer Agent
For stock transfers, name changes, address changes, or other inquiries, contact
our transfer agent:
Harris Trust and Savings Bank
700 Louisiana Street, Suite 3350
Houston, TX 77002-2729
800 926-1269
713 223-0674 Fax
Form 10-K
Copies of Tracor's Form 10-K filed each year with the Securities and Exchange
Commission are available online at www.tracor.com or, without charge, upon
request from:
W. Michael Murray
Assistant Corporate Secretary
Tracor, Inc.
6500 Tracor Lane
Austin, TX 78725-2000
512 929-2288
[email protected]
Exhibits to this report are also available online, or printed copies may be
obtained at a reasonable cost.
Annual Meeting
The annual meeting of shareholders will be held at 10 a.m., Tuesday, April 21,
1998, at Tracor corporate headquarters in Austin, Texas. A notice of the
meeting, along with a form of proxy and a proxy statement, will be mailed to
shareholders on or about March 26, 1998.
Any statements contained in this report which are forward-looking statements
rather than historical facts are subject to risks and uncertainties that could
cause actual results to differ materially from those stated or implied. These
risks and uncertainties include the competitive nature of the government
contracting environment, dependence on continued funding of government
contracts, government contract procurement and termination risks, restrictions
imposed by terms of the company's indebtedness, the effect of changing political
or economic conditions, and other risks described in the company's various
Securities and Exchange Commission filings, including the company's Form 8-K,
dated July 21, 1997.
<PAGE>
Tracor, Inc.
6500 Tracor Lane
Austin, TX 78725-2000
512 926-2800
www.tracor.com
Subsidiaries of the Registrant
Tracor, Inc.
GDE Systems, Inc.
Aerial Data Reduction Associates, Inc.
GDE-Helava, Inc.
GDE Systems Imaging, Inc.
GDESI, Inc.
Rokar International, Ltd.
Tracor Aerospace, Inc.
Tracor Aerospace Electronic Systems, Inc.
Tracor Australia PTY Limited
Tracor Flight Systems, Inc.
Tracor FSC, Inc.
Tracor Holdings, Inc.
Tracor Information Systems Company
Tracor Enterprise Solutions, Inc.
Tracor Marine, Inc.
Tracor Services Corporation
Tracor Technical Services, Inc.
Tracor Systems Technologies, Inc.
Quality Systems, Inc.
Vitro Systems International Corporation
Vitro Sciences International, Inc.
Westmark Services Company, Inc.
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Tracor, Inc. of our report dated January 30, 1998, included in the 1997
Annual Report to Shareholders of Tracor, Inc.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8s No. 33-55624, No. 33-93186, No. 33-96474, No. 333-17409,
No. 333-27061, and No. 333-30363) pertaining to various benefit plans sponsored
by Tracor, Inc. and in the Registration Statement (Form S-3 No. 333-05491) of
Tracor, Inc. of our report dated January 30, 1998, with respect to the
consolidated financial statements of Tracor, Inc. incorporated by reference in
this Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Austin, Texas
March 23, 1998
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</TABLE>
