AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 2001
REGISTRATION NO. 333-58402
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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L-3 COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
3812, 3663, 3679
(Primary Standard Industrial Classification Code Number)
13-3937434
(I.R.S. Employer
Identification No.)
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
CHRISTOPHER C. CAMBRIA, ESQ.
L-3 COMMUNICATIONS HOLDINGS, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 697-1111
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------
Copies to:
VINCENT PAGANO, JR., ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3909
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement number for the same offering. [ ]
---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 11, 2001
PROSPECTUS
297,229 SHARES
[L-3 COMMUNICATIONS LOGO OMITTED]
L-3 COMMUNICATIONS HOLDINGS, INC.
COMMON STOCK
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All of the common stock offered hereby may be sold from time to time by and for
the account of the selling stockholders named in this prospectus.
The methods of sale of our common stock offered in this prospectus are
described under the heading "Plan of Distribution." We will receive none of the
proceeds from such sales. We will pay all expenses incurred in connection with
the offering described in this prospectus except for the underwriting and
brokerage expenses, fees, discounts and commissions, which will all be paid by
the selling stockholders.
INVESTING IN THE SHARES INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
Our common stock is listed on the New York Stock Exchange under the symbol
"LLL". On April 10, 2001, the last reported sale price of the shares was $86.65
per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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, 2001.
TABLE OF CONTENTS
Forward-Looking Statements .............. i
Available Information ................... ii
Prospectus Summary ...................... 1
Risk Factors ............................ 7
Use of Proceeds ......................... 14
Price Range of Common Stock ............. 14
Dividend Policy ......................... 14
Capitalization .......................... 15
Selected Financial Data ................. 16
Management's Discussion and Analysis
of Results of Operations and
Financial Condition .................. 18
Business ................................ 29
Management .............................. 49
Certain Relationships and Related
Transactions ......................... 58
Security Ownership of Certain
Beneficial Owners and Management ..... 60
Selling Stockholders .................... 62
Description of Capital Stock ............ 63
Certain United States Federal Income
Tax Consequences for Non-United
States Holders ....................... 66
Plan of Distribution .................... 68
Legal Matters ........................... 68
Experts ................................. 68
Index to Financial Statements ........... F-1
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FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, the likelihood of our success in
developing and expanding our business and the realization of sales from backlog
include forward-looking statements within the meaning of section 27A of the
Securities Act of 1933, referred to herein as the Securities Act, and Section
21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures and other projections, they are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Our forward-looking statements will also be influenced by factors such as:
o our dependence on the defense industry and the business risks peculiar
to that industry, including changing priorities or reductions in the
U.S. Government defense budget;
o our reliance on contracts with a limited number of agencies of, or
contractors to, the U.S. Government and the possibility of termination
of government contracts by unilateral government action or for failure
to perform;
o our ability to obtain future government contracts on a timely basis;
o the availability of government funding and customer requirements;
o our significant amount of debt and the restrictions contained in our
debt agreements;
o collective bargaining agreements and labor disputes;
o economic conditions, competitive environment, international business
and political conditions, timing of international awards and
contracts;
o our extensive use of fixed price contracts as compared to cost plus
contracts;
o our ability to identify future acquisition candidates or to integrate
acquired operations;
o the rapid change of technology in the communications equipment
industry;
o the high level of competition in the communications equipment
industry;
o our introduction of new products into commercial markets or our
investments in commercial products or companies; and
o pension, environmental or legal matters or proceedings and various
other market, competition and industry factors, many of which are
beyond our control.
i
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and the actual results or developments may
differ materially from the expectations expressed in the forward-looking
statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-K, Form 10-Q and Form 8-K reports to the SEC. Also note that we provide
a cautionary discussion of risk and uncertainties under the caption "Risk
Factors" in this prospectus. These are factors that we think could cause our
actual results to differ materially from expected results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
AVAILABLE INFORMATION
We have filed with the SEC on Form S-1 under the Securities Act a
Registration Statement, referred to herein, together with all amendments,
exhibits, schedules and supplements thereto, as the Registration Statement, with
respect to the shares of common stock offered by this prospectus. This
prospectus, which is a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement. For further
information about us and our common stock, you should refer to the Registration
Statement. This prospectus summarizes material provisions of contracts and other
documents to which we refer you. Since this prospectus may not contain all of
the information that you may find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
Registration Statement.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, referred to herein as the Exchange Act, and, in
accordance therewith, file reports and other information with the Securities
and Exchange Commission, referred to herein as the SEC. Such reports and other
information can be inspected and copied at the Public Reference Section of the
SEC located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549 and at regional public reference facilities maintained by the SEC
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the SEC at prescribed rates. Such material may also be accessed
electronically by means of the SEC's home page on the Internet
(http://www.sec.gov).
Our common stock is quoted on the New York Stock Exchange under the symbol
"LLL." You may inspect reports and other information concerning us at the
offices of the New York Stock Exchange at 11 Wall Street, New York, New York
10005.
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF
ANY SALE OF COMMON STOCK.
ii
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus and does not contain all of the information you need to consider in
making your investment decision. You should read this entire prospectus
carefully.
For convenience in this prospectus, "L-3 Holdings" refers to L-3
Communications Holdings, Inc. and "L-3 Communications" refers to L-3
Communications Corporation, a wholly-owned operating subsidiary of L-3
Holdings. "L-3," "we," "us" and "our" refer to L-3 Holdings and its
subsidiaries, including L-3 Communications, except where the content otherwise
requires. "Predecessor company" refers to the ten initial business units we
purchased from Lockheed Martin Corporation in 1997.
L-3
We are a leading merchant supplier of sophisticated secure communication
systems and specialized communication products. We produce secure, high data
rate communication systems, training and simulation systems, avionics and ocean
products, telemetry, instrumentation and space products and microwave
components. These systems and products are critical elements of virtually all
major communication, command and control, intelligence gathering and space
systems. Our systems and specialized products are used to connect a variety of
airborne, space, ground and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our customers include the U.S. Department of
Defense, which is commonly referred to as the DoD, certain U.S. Government
intelligence agencies, major aerospace and defense contractors, foreign
governments, commercial customers and certain other U.S. agencies. For the year
ended December 31, 2000, direct and indirect sales to the DoD provided 62.7% of
our sales, and sales to commercial customers, foreign governments and U.S.
Government agencies other than the DoD provided 37.3% of our sales. Our
business areas employ proprietary technologies and capabilities and have
leading positions in their respective primary markets. For the year ended
December 31, 2000, we had sales of $1,910.1 million and operating income of
$222.7 million. We have two reportable segments: Secure Communication Systems
and Specialized Communication Products.
SECURE COMMUNICATION SYSTEMS
We are an established leader in the development and production of secure,
high data rate communications for military and other U.S. Government
reconnaissance and surveillance applications and we believe that we have
developed virtually every high bandwidth data link that is currently used by
the DoD for surveillance and reconnaissance. Our major secure communication
programs and systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real-time information collection and dissemination to
users;
o strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management;
o communication software support services; and
o communication systems for surface and undersea vessels and manned space
flights.
Our Secure Communication Systems segment includes our training and
simulation business. We design, develop and manufacture advanced simulation
products, with high-fidelity representations of cockpits and operator stations
for aircraft and vehicle system simulation. We also provide a full range of
teaching, training and logistic services and training device support services
to domestic and international military customers and ballistic targets for the
DoD.
1
Our Secure Communication Systems segment provided $847.1 million or 44.3%
of our total sales for the year ended December 31, 2000.
SPECIALIZED COMMUNICATION PRODUCTS
We are a leading merchant supplier of products to military and commercial
customers. We focus on niche markets in which we believe we can achieve a
market leadership position. This reportable segment includes three product
categories:
o avionics and ocean products including our aviation recorders, airborne
collision avoidance products, displays, antennas, acoustic undersea
warfare products and naval power distribution, conditioning, switching
and protection equipment;
o telemetry, instrumentation and space products including our commercial
off-the-shelf, real-time data collection and transmission products and
components for missile, aircraft and space-based electronic systems; and
o microwave components including our commercial off-the-shelf,
high-performance microwave components and frequency monitoring equipment.
Our Specialized Communication Products segment provided $1,063.0 million
or 55.7% of our total sales for the year ended December 31, 2000.
DEVELOPING COMMERCIAL OPPORTUNITIES
An integral part of our growth strategy is to identify and exploit
commercial applications for select products and technologies that we currently
sell to defense customers. We have currently identified two vertical markets
within our Secure Communication Systems and Specialized Communication Products
segments where we believe there are significant opportunities to expand our
existing commercial sales: transportation products and broadband wireless
communications products. We believe that these vertical markets, together with
our existing commercial products, provide us with the opportunity for
substantial commercial growth in future years.
Within the transportation market, we have developed and are offering an
explosive detection system for checked baggage at airports, cruise ship voyage
recorders, power propulsion systems and power switches and displays for rail
transportation and internet service providers. We are developing additional
products, including an enhanced airborne collision avoidance product that
incorporates ground proximity warning.
Within the communications product market, we are offering local wireless
access equipment for voice DSL (Digital Subscriber Line) and internet access,
transceivers for LMDS (Local Multipoint Distribution Service) and a broad range
of commercial components and digital test equipment for broadband
communications providers.
We have developed the majority of our commercial products employing
technology funded by and used in our defense businesses, thereby minimizing any
required incremental development expenses. Sales generated from our developing
commercial opportunities have not yet been material to us.
2
BUSINESS STRATEGY
We intend to grow our sales, enhance our profitability and build on our
position as a leading merchant supplier of communication systems and products
to the major contractors in the aerospace and defense industry as well as the
U.S. Government. We intend to leverage our expertise and products into new
commercial business areas where we can adapt our existing products and
technologies. Our strategy to achieve our objectives includes:
o EXPAND MERCHANT SUPPLIER RELATIONSHIPS. As an independent merchant
supplier, we intend to identify opportunities where we will be able to use our
strong relationships to increase our business presence, allow customers to
reduce their costs and to be the desired merchant supplier to multiple bidders
on prime contract bids;
o SUPPORT CUSTOMER REQUIREMENTS. We intend to continue to align our
research and development, manufacturing and new business efforts to complement
our customers' requirements and provide state-of-the-art products;
o ENHANCE OPERATING MARGINS. We intend to continue to enhance our
operating performance by reducing overhead expenses, continuing consolidation
and increasing productivity;
o LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. We are applying
our market-leading technical expertise and capabilities to several closely
aligned commercial business areas and applications and will continue to explore
other similar commercial opportunities;
o MAINTAIN DIVERSIFIED BUSINESS MIX. We have a diverse business mix
which limits our exposure to the risks of particular programs, a balance of
cost plus and fixed price contracts, a significant sole-source follow-on
business and an attractive customer profile; and
o CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. We intend to
enhance our existing product base through internal research and development
efforts and selective acquisitions, and we seek to add new products to our
product base through acquisitions in areas synergistic with our present
technologies. As of December 31, 2000, we have acquired ten businesses for an
aggregate purchase price of $590.2 million, subject to adjustments.
We are incorporated in Delaware, and the address of our principal
executive offices is 600 Third Avenue, New York, New York 10016. Our telephone
number is (212) 697-1111. Our internet address is (http://www.L-3com.com).
L-3com.com is an interactive textual reference only, meaning that the
information contained on the website is not part of this prospectus and is not
incorporated in this prospectus by reference.
3
THE OFFERING
Common stock offered by the selling stockholders .... 297,229 shares
Common stock to be outstanding after this offering .. 34,272,921 shares
The number of shares of common stock to be outstanding after this
offering:
o excludes an aggregate of 3,756,644 shares of common stock reserved for
issuance under our stock option plans for key employees and non-employee
directors of L-3;
o excludes 3,680,982 shares of common stock issuable upon conversion of
our outstanding 5.25% Convertible Senior Subordinated Notes due 2009;
Use of proceeds from this offering ......... We will receive none of the proceeds from
this offering.
NYSE Symbol ................................ "LLL"
Risk Factors ............................... You should carefully read and consider the
information set forth in "Risk Factors" and
all other information set forth in this
prospectus before investing in our common
stock.
4
SUMMARY FINANCIAL DATA
We derived the summary financial data presented below as of December 31,
2000 and 1999 and for each of the three years in the period ended December 31,
2000 from our audited consolidated financial statements included elsewhere
herein. We derived the summary financial data presented below as of December
31, 1998 and 1997 and for the nine months ended December 31, 1997 from our
audited consolidated financial statements not included herein. We derived the
summary financial data presented below as of December 31, 1996, for the three
months ended March 31, 1997 and for the year ended December 31, 1996 from the
audited combined financial statements of our predecessor company not included
herein. You should read the summary financial data together with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in another part of this prospectus.
L-3 PREDECESSOR COMPANY
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NINE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
----------------------------------------- DECEMBER 31, MARCH 31, DECEMBER 31,
2000(1) 1999(1) 1998(1) 1997(2) 1997 1996(3)
------------- ------------- ------------- --------------- ------------- ------------
(in millions, except per share data and ratios)
STATEMENT OF OPERATIONS DATA:
Sales ....................................... $ 1,910.1 $ 1,405.5 $ 1,037.0 $ 546.5 $ 158.9 $ 543.1
Operating income ............................ 222.7 150.5 100.3 51.5(4) 7.9 43.7
Interest expense, net of interest and other
income ..................................... 88.6 55.1 46.9 28.5 8.4 24.2
Provision (benefit) for income taxes ........ 51.4 36.7 20.9 10.7 (0.2) 7.8
Net income (loss) ........................... 82.7 58.7 32.6 12.3(4) (0.3) 11.7
Earnings per common share:
Basic ...................................... $ 2.48 $ 1.83 $ 1.32 $ 0.62(4) -- --
Diluted .................................... 2.37 1.75 1.26 0.61(4) -- --
Weighted average common shares
outstanding:
Basic ...................................... 33.4 32.1 24.7 20.0 -- --
Diluted .................................... 35.0 33.5 25.9 20.0 -- --
BALANCE SHEET DATA (AT PERIOD END):
Working capital ............................. $ 360.9 $ 255.5 $ 157.8 $ 143.2 -- $ 98.8
Total assets ................................ 2,463.5 1,628.7 1,285.4 697.0 -- 590.6
Long-term debt .............................. 1,095.0 605.0 605.0 392.0 -- --
Invested equity ............................. -- -- -- -- -- 473.6
Stockholders' equity ........................ 692.6 583.2 300.0 113.7 -- --
OTHER DATA:
EBITDA(5) ................................... $ 297.0 $ 204.2 $ 140.7 $ 78.0 $ 15.7 $ 71.8
Net cash from (used in) operating
activities ................................. 113.8 99.0 85.1 73.9 (16.3) 30.7
Net cash (used in) investing activities ..... (608.2) (284.8) (472.9) (457.8) (4.3) (298.0)
Net cash from financing activities .......... 484.3 202.4 336.4 461.4 20.6 267.3
Depreciation expense ........................ 36.2 29.5 22.5 13.3 4.5 14.9
Amortization expense ........................ 38.1 24.2 17.9 8.9 3.3 13.2
Capital expenditures ........................ 33.6 23.5 23.4 11.9 4.3 13.5
(Footnotes on the following page)
5
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(1) Our results of operations are impacted significantly by our acquisitions,
which are described elsewhere in this prospectus.
(2) Reflects the acquisition of our predecessor company and the commencement
of our operations effective April 1, 1997.
(3) Reflects our predecessor company's ownership of nine business units
acquired by Lockheed Martin Corporation from Loral Corporation effective
April 1, 1996. Prior to April 1, 1996, the predecessor company had only
one business unit.
(4) Includes a nonrecurring, noncash compensation charge of $4.4 million
($0.22 per share) related to our initial capitalization, which we
recorded effective April 1, 1997.
(5) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt
issuance costs) and the nonrecurring, noncash compensation charge of $4.4
million recorded effective April 1, 1997. EBITDA is not a substitute for
operating income, net income and cash flow from operating activities as
determined in accordance with accounting principles generally accepted in
the United States of America as a measure of profitability or liquidity.
EBITDA is presented as additional information because we believe it to be
a useful indicator of our ability to meet our debt service and capital
expenditure requirements. EBITDA as we define it may differ from
similarly named measures used by other entities.
6
RISK FACTORS
Investing in our common stock involves risk. You should carefully consider
the information in this prospectus before deciding to invest in our common
stock. Any of these risks could materially adversely affect our business,
financial condition, results of operations and cash flow which could in turn
materially adversely affect the price of the common stock.
RISKS RELATED TO L-3
OUR SIGNIFICANT LEVEL OF DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING
ACTIVITY.
We have incurred substantial indebtedness to finance our acquisitions. As
of December 31, 2000, we had $1,095.0 million of indebtedness outstanding
(excluding outstanding letters of credit). Our ratio of net debt to EBITDA at
December 31, 2000 was 3.6x. In the future we may borrow more money, subject to
limitations imposed on us by our debt agreements.
Based on our current level of operations and anticipated improvements to
our operations, we believe that our cash flow from operations and amounts we
are able to borrow under our senior credit facilities will be adequate to meet
our anticipated requirements for working capital, capital expenditures,
research and development expenditures, program and other discretionary
investments, interest payments and scheduled principal payments for the
foreseeable future, at least for the next three years. Our ability to make
scheduled payments of principal and interest on our indebtedness and to
refinance our indebtedness depends on our future performance. We do not have
complete control over our future performance because it is subject to economic,
political, financial, competitive, regulatory and other factors affecting the
aerospace and defense industry. It is possible that in the future our business
may not generate sufficient cash flow from operations to allow us to service
our debt and make necessary capital expenditures. If this situation occurs, we
may have to sell assets, restructure debt or obtain additional equity capital.
We cannot be sure that we would be able to do so or do so without additional
expense.
Our level of indebtedness has important consequences to you and your
investment in our common stock. These consequences may include:
o requiring a substantial portion of our cash flow from operations to be
used to pay interest and principal on our debt and therefore be
unavailable for other purposes including capital expenditures, research
and development and other investments;
o limiting our ability to obtain additional financing for acquisitions or
working capital to make investments or other expenditures, which may
limit our ability to carry out our acquisition strategy;
o higher interest expenses due to increases in interest rates on our
borrowings that have variable interest rates;
o heightening our vulnerability to downturns in our business or in the
general economy and restricting us from making acquisitions, introducing
new technologies and products or exploiting business opportunities; and
o covenants that limit our ability to borrow additional funds, dispose of
assets or pay cash dividends. Failure to comply with such covenants could
result in an event of default which, if not cured or waived, could have a
material adverse effect on our financial position and results of
operations due to financial and restrictive covenants.
OUR ACQUISITION STRATEGY INVOLVES RISKS, AND WE MAY NOT SUCCESSFULLY IMPLEMENT
OUR STRATEGY.
We seek to acquire companies that complement our business. We cannot
assure you, however, that we will be able to identify acquisition candidates on
commercially reasonable terms or at all. If we make additional acquisitions, we
also cannot be sure that any benefits anticipated from the
7
acquisitions will actually be realized. Likewise, we cannot be sure that we
will be able to obtain additional financing for acquisitions. Such additional
financing could be restricted by the terms of our debt agreements.
The process of integrating acquired operations, including our recent
acquisitions, into our existing operations may result in unforeseen operating
difficulties and may require significant financial and managerial resources
that would otherwise be available for the ongoing development or expansion of
our existing operations. Possible future acquisitions could result in the
incurrence of additional debt and related interest expense, contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, all of which could have a materially adverse effect on our financial
condition, operating results and cash flow. We consider and execute strategic
acquisitions on an ongoing basis and may be evaluating acquisitions or engaged
in acquisition negotiations at any given time. We regularly evaluate potential
acquisitions and joint venture transactions, but we have not entered into any
agreements with respect to any material transactions at this time.
WE RELY ON SALES TO U.S. GOVERNMENT ENTITIES, AND THE LOSS OF SUCH CONTRACTS
WOULD HAVE A MATERIAL IMPACT ON OUR OPERATING RESULTS.
Our government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Approximately
67.9%, or $1,296.1 million, of our sales for the year ended December 31, 2000,
were made directly or indirectly to agencies of the U.S. Government, including
the DoD. At December 31, 2000, the number of contracts with a value exceeding
$1.0 million was approximately 600. Our largest program is a long-term,
cost-plus contract for the U.S. Air Force aerial reconnaissance program that
provided 3.8% of our sales for the same period. No other program provided more
than 2.3% of our sales for the year ended December 31, 2000. The loss of all or
a substantial portion of our sales to the U.S. Government would have a material
adverse effect on our results of operations, income and cash flow.
OUR GOVERNMENT CONTRACTS ENTAIL CERTAIN RISKS.
o Government contracts are dependent upon the U.S. defense budget.
The reduction in the U.S. defense budget in the early 1990s caused most
defense-related government contractors to experience decreased sales, increased
downward pressure on operating margins and, in certain cases, net losses. Our
predecessor company experienced a substantial decline in sales during that
period. A significant decline in U.S. military expenditures in the future could
materially adversely affect our sales, earnings and cash flow. The loss or
significant reduction in government funding of a large program in which we
participate could also materially adversely affect our future sales, earnings
and cash flows and thus our ability to meet our financial obligations. U.S.
Government contracts are also conditioned upon the continuing approval by
Congress of the amount of necessary spending. Congress usually appropriates
funds for a given program each fiscal year even though contract periods of
performance may exceed one year. Consequently, at the beginning of a major
program, the contract is usually partially funded, and additional monies are
normally committed to the contract only if appropriations are made by Congress
for future fiscal years.
o Government contracts contain unfavorable termination provisions and
are subject to audit and modification.
Companies engaged primarily in supplying defense-related equipment and
services to U.S. Government agencies are subject to certain business risks
peculiar to the defense industry. These risks include the ability of the U.S.
Government to unilaterally:
o suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
o terminate existing contracts;
o reduce the value of existing contracts;
8
o audit our contract-related costs and fees, including allocated indirect
costs; and
o control and potentially prohibit the export of our products.
All of our U.S. Government contracts can be terminated by the U.S.
Government either for its convenience or if we default by failing to perform
under the contract. Termination for convenience provisions provide only for our
recovery of costs incurred or committed, settlement expenses and profit on the
work completed prior to termination. Termination for default provisions provide
for the contractor to be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from another source. Our contracts
with foreign governments generally contain similar provisions relating to
termination at the convenience of the customer.
The U.S. Government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. Government may adjust our contract-related
costs and fees, including allocated indirect costs. In addition, under U.S.
Government purchasing regulations, some of our costs, including most financing
costs, amortization of goodwill, portions of research and development costs,
and certain marketing expenses may not be reimbursable under U.S. Government
contracts. Further, as a U.S. Government contractor, we are subject to
investigation, legal action and/or liability that would not apply to a
commercial company.
o Government contracts are subject to competitive bidding and we are
required to obtain licenses for non-U.S. sales.
We obtain many of our U.S. Government contracts through a competitive
bidding process. We cannot assure you that we will continue to win
competitively awarded contracts or that awarded contracts will generate sales
sufficient to result in our profitability. We are also subject to risks
associated with the following:
o the frequent need to bid on programs in advance of the completion of
their design (which may result in unforeseen technological difficulties
and/or cost overruns);
o the substantial time and effort including the relatively unproductive
design and development required to prepare bids and proposals for
competitively awarded contracts which may not be awarded to us;
o design complexity and rapid technological obsolescence; and
o the constant need for design improvement.
In addition to these U.S. Government contract risks, we are required to
obtain licenses from U.S. Government agencies to export many of our products
and systems. Additionally, we are not permitted to export some of our products.
We cannot be sure of our ability to gain any licenses required to export our
products, and failure to receive required licenses would eliminate our ability
to sell our products outside the United States.
OUR FIXED PRICE AND COST PLUS CONTRACTS MAY COMMIT US TO UNFAVORABLE TERMS.
We provide our products and services primarily through fixed price or cost
plus contracts. Fixed price contracts provided 71.4% of our sales for the year
ended December 31, 2000. In a fixed price contract, the price is not subject to
adjustment based on cost incurred to perform the required work under the
contract. Therefore, we fully absorb cost overruns on fixed price contracts and
this reduces our profit margin on the contract. Those cost overruns may result
in a loss. A further risk associated with fixed price contracts is the
difficulty of estimating sales and costs that are related to performance in
accordance with contract specifications and the possibility of obsolescence in
connection with long-term procurements. Failure to anticipate technical
problems, estimate costs accurately or control costs during performance of a
fixed price contract may reduce our profitability or cause a loss.
Cost plus contracts provided 28.6% of our sales for the year ended
December 31, 2000. In a cost plus contract, we are reimbursed for allowable
incurred costs plus a fee, which may be fixed or
9
variable depending on the contract arrangement. The price on a cost plus
contract is based on allowable cost incurred, but generally is subject to
contract funding limitations. U.S. Government regulations require that we
notify our customer of any cost overruns or underruns on a cost plus contract.
If we incur costs in excess of the funding limitation specified in the
contract, we may not be able to recover those cost overruns.
We record sales and profits on substantially all of our contracts using
percentage-of-completion methods of accounting. As a result, revisions made to
our estimates of sales and profits are recorded in the period in which the
conditions that require such revisions become known and can be estimated.
Although we believe that adequate provisions for losses for our fixed price
contracts are recorded in our financial statements, as required under U.S.
generally accepted accounting principles, we cannot assure you that our
contract loss provisions, which are based on estimates, will be adequate to
cover all actual future losses.
OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE.
The rapid change of technology is a key feature of the communication
equipment industry as a whole, and for defense applications in particular. To
succeed in the future, we will need to continue to design, develop,
manufacture, assemble, test, market and support new products and enhancements
on a timely and cost-effective basis. Historically, our technology has been
developed through customer-funded research and development as well as from
internally funded research and development. We cannot guarantee that we will
continue to maintain comparable levels of research and development. In the past
we have allocated substantial funds to capital expenditures, programs and other
investments. This practice will continue to be required in the future. Even so,
we cannot assure you that we will successfully identify new opportunities and
continue to have the needed financial resources to develop new products in a
timely or cost-effective manner. At the same time, products and technologies
developed by others may render our products and systems obsolete or
non-competitive.
WE MAY NOT SUCCESSFULLY IMPLEMENT OUR PLAN TO EXPAND INTO COMMERCIAL MARKETS.
Our revenues have primarily come from business with the DoD and other U.S.
Government agencies. In addition to continuing to pursue these market areas, we
will continue applying our technical capabilities and expertise to related
commercial markets. Some of our commercial products, such as local wireless
loop telecommunications equipment, airport security equipment and voyage
recorders, have only recently been introduced. As such, these new products are
subject to certain risks and may require us to:
o develop and maintain marketing, sales and customer support capabilities;
o secure sales and customer support capabilities;
o obtain customer and/or regulatory certification;
o respond to rapid technological advances; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in commercial markets may require
significant resources, including additional working capital and capital
expenditures, as well as the use of our management's time. Our efforts to sell
certain commercial products, particularly our broadband wireless communications
products, may also depend to a significant degree on the efforts of independent
distributors or communication service providers. In addition, we have made
equity investments in entities that plan to commence operations as
communications service providers using some of our commercial products. We can
give no assurance that these distributors or service providers will be able to
market our products or their services successfully or that we will be able to
realize a return on our investment in them. We cannot assure you that we will
be successful in addressing these risks or in developing these commercial
business opportunities.
10
CONSOLIDATION AND INTENSE COMPETITION IN OUR INDUSTRY COULD LIMIT OUR ABILITY
TO ATTRACT AND RETAIN CUSTOMERS.
The communications equipment industry as a whole, and the market for
defense applications in particular, is highly competitive. The defense industry
has experienced substantial consolidation due to declining defense budgets and
increasing pressures for cost reductions. We expect that the DoD's increased
use of commercial off-the-shelf products and components in military equipment
will continue to encourage new competitors to enter the market. We also expect
that competition for original equipment manufacturing business will increase
due to the continued emergence of merchant suppliers. Our ability to compete
for defense contracts largely depends on the following factors:
o the effectiveness and innovations of our research and development
programs;
o our ability to offer better performance than our competitors at a lower
cost to the U.S. Government; and
o the readiness of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, the U.S. Government directs all work for a particular
project to a single supplier, commonly known as a sole-source project. In such
cases, other suppliers who may otherwise be able to compete for the programs
involved can only do so if the U.S. Government chooses to reopen the particular
program to competition. Additionally, many of our competitors are larger than
us and have substantially greater financial and other resources than we have.
OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO FINANCE OUR FUTURE OPERATIONS AND,
IF WE ARE UNABLE TO MEET OUR FINANCIAL RATIOS, COULD CAUSE OUR EXISTING DEBT TO
BE ACCELERATED.
Our debt agreements contain a number of significant provisions that, among
other things, restrict our ability to:
o sell assets;
o incur more indebtedness;
o repay certain indebtedness;
o pay dividends;
o make certain investments or acquisitions;
o repurchase or redeem capital stock;
o engage in mergers or consolidations; and
o engage in certain transactions with subsidiaries and affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or engage in other business activities that may be in our
interest. In addition, some of our debt agreements also require us to maintain
compliance with certain financial ratios, including total consolidated earnings
before interest, taxes, depreciation and amortization to total consolidated
cash interest expense and net debt to total consolidated earnings before
interest, taxes, depreciation and amortization, and to limit our capital
expenditures. Our ability to comply with these ratios and limits may be
affected by events beyond our control. A breach of any of these agreements or
our inability to comply with the required financial ratios or limits could
result in a default under those debt agreements. In the event of any such
default, the lenders under those debt agreements could elect to:
o declare all outstanding debt, accrued interest and fees to be due and
immediately payable;
o require us to apply all of our available cash to repay our outstanding
senior debt; and
o prevent us from making debt service payments on our other debt.
11
If we were unable to repay any of these borrowings when due, the lenders
under our senior credit facilities could proceed against their collateral,
which consists of a first priority security interest in the capital stock of
our material subsidiaries, including L-3 Communications. If the indebtedness
under the existing debt agreements were to be accelerated, we cannot assure you
that our assets would be sufficient to repay such indebtedness in full.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY
BECOME UNABLE TO OPERATE OUR BUSINESS EFFECTIVELY.
Our future success depends to a significant degree upon the continued
contributions of our management, including Messrs. Lanza and LaPenta, and our
ability to attract and retain other highly qualified management and technical
personnel. We do not maintain any key person life insurance policies for
members of our management. As of March 12, 2001, Messrs. Lanza and LaPenta
owned, in the aggregate, 14.3% of our common stock. We have entered into
employment agreements with Messrs. Lanza and LaPenta. We face competition for
management and technical personnel from other companies and organizations.
Failure to attract and retain such personnel would damage our prospects.
ENVIRONMENTAL LAWS AND REGULATION MAY SUBJECT US TO SIGNIFICANT LIABILITY.
Our operations are subject to various U.S. federal, state and local as
well as certain foreign environmental laws and regulations within the countries
in which we operate relating to the discharge, storage, treatment, handling,
disposal and remediation of certain materials, substances and wastes used in
our operations.
New laws and regulations, stricter enforcement of existing laws and
regulations, the discovery of previously unknown contamination or the
imposition of new clean-up requirements may require us to incur costs in the
future that could have a negative effect on our financial condition, results of
operations or cash flow.
TERMINATION OF OUR BACKLOG OF ORDERS COULD NEGATIVELY IMPACT OUR SALES.
We currently have a backlog of orders, primarily under contracts with the
U.S. Government. The U.S. Government may unilaterally modify or terminate these
contracts. Accordingly, most of our backlog could be modified or terminated by
the U.S. Government. We cannot assure you that our existing backlog will result
in sales. Further, we cannot be sure that the margin we record on sales from
any contract included in backlog will be profitable.
OUR PENSION PLAN LIABILITIES MAY RESULT IN SIGNIFICANT EXPENSES.
We have assumed certain liabilities relating to defined benefit pension
plans for present and former employees and retirees of certain businesses which
we acquired. Prior to our formation, Lockheed Martin received a letter from the
Pension Benefit Guaranty Corporation (the "PBGC"), which requested information
regarding the transfer of these pension plans and indicated that the PBGC
believed certain of these pension plans were underfunded using its actuarial
assumptions. These assumptions resulted in a larger liability for accrued
benefits than the assumptions used for financial reporting under Statement of
Financial Accounting Standards No. 87.
With respect to these plans, Lockheed Martin entered into an agreement
with us and the PBGC dated as of April 30, 1997. Under that agreement, Lockheed
Martin agreed, upon the occurrence of certain circumstances, either to:
o assume sponsorship of the subject plans; or
o provide another form of financial support.
If Lockheed Martin did assume sponsorship of these plans, it would be
primarily liable for the costs associated with funding these plans or any costs
associated with the termination of them, but we
12
would be required to reimburse Lockheed Martin for its obligations. To date,
the impact on our pension expense and funding requirements resulting from this
arrangement has not been material to our results of operations, financial
position or cash flow. However, should Lockheed Martin assume sponsorship of
the subject plans, or if these plans were terminated, the impact of any
increased pension expenses or funding requirements could be material to us.
RISKS RELATED TO OUR COMMON STOCK
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER THE STOCK
PRICE.
We may, in the future, sell additional shares of common stock in
subsequent public offerings. We may also issue additional shares of common
stock to finance future acquisitions, including acquisitions larger than those
we have done in the past through the use of equity. Additionally, a substantial
number of shares of our common stock is available for future sale pursuant to
stock options, registration rights agreements and upon conversion of our
convertible notes due 2009. We cannot predict the size of future issuances of
our common stock or the effect, if any, that future sales and issuances of
shares of our common stock will have on the market price of our common stock.
Sales of substantial amounts of common stock (including shares issued upon the
exercise of stock options, acquisition financing or the conversion of our
outstanding convertible notes), or the perception that such sales could occur,
may adversely affect prevailing market prices for our common stock.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
A number of factors could cause the market price of our common stock to
fluctuate significantly, including:
o our quarterly operating results or those of other aerospace and defense
companies;
o the public's reaction to our press releases, announcements and our
filings with the SEC;
o changes in earnings estimates or recommendations by research analysts;
o changes in general conditions in the U.S. economy, financial markets or
defense industry;
o natural disasters; and
o other developments affecting us or our competitors.
In recent years, the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. See "Price Range of Common Stock."
DELAWARE LAW AND OUR CHARTER DOCUMENTS MAY IMPEDE OR DISCOURAGE A TAKEOVER,
WHICH COULD CAUSE THE MARKET PRICE OF OUR SHARES TO DECLINE.
We are a Delaware corporation and the anti-takeover provisions of Delaware
law impose various impediments to the ability of a third party to acquire
control of us, even if a change in control would be beneficial to our existing
stockholders. In addition, our board of directors has the power, without
stockholders' approval, to designate the terms of one or more series of
preferred stock and issue shares of preferred stock, which could be used
defensively if a takeover is threatened. Our certificate of incorporation and
by-laws provide for a classified board of directors serving staggered
three-year terms, restrictions on who may call a special meeting of
stockholders and a prohibition on stockholder action by written consent. All
options issued under our stock option plans automatically vest upon a change in
control of L-3 Holdings. Our incorporation under Delaware law, the ability of
our board of directors to create and issue a new series of preferred stock, the
acceleration of the vesting of the outstanding stock options that we have
granted upon a change in control of L-3 Holdings, and certain provisions of L-3
Holdings' certificate of incorporation and by-laws could impede a merger,
takeover
13
or other business combination involving L-3 Holdings or discourage a potential
acquiror from making a tender offer for the common stock of L-3 Holdings,
which, under certain circumstances, could reduce the market value of our common
stock.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH MAY NOT BE CORRECT.
Certain of the matters discussed concerning our operations, economic
performance and financial condition, including in particular, the likelihood of
our success in developing and expanding our business and the realization of
sales from backlog, include forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" and similar expressions are
forward-looking statements. Although we believe that these forward-looking
statements are based upon reasonable assumptions, we can give no assurance that
they will be achieved.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of our
common stock offered by the selling stockholders.
PRICE RANGE OF COMMON STOCK
The common stock of L-3 Holdings trades on the New York Stock Exchange
under the symbol "LLL." The last reported sale price for our common stock on
April 10, 2001 was $86.65 per share, as reported on the NYSE. The table below
sets forth closing information on the high and low closing prices for our
common stock during the periods indicated.
PRICE RANGE
OF COMMON STOCK
-------------------------
HIGH LOW
----------- -----------
FISCAL YEAR ENDED DECEMBER 31, 1999:
Quarter Ended:
March 31, 1999 ................................. $ 47.88 $ 39.38
June 30, 1999 .................................. 52.88 44.31
September 30, 1999 ............................. 48.44 36.38
December 31, 1999 .............................. 45.13 34.81
FISCAL YEAR ENDED DECEMBER 31, 2000:
Quarter Ended:
March 31, 2000 ................................. $ 51.94 $ 35.69
June 30, 2000 .................................. 58.63 45.25
September 30, 2000 ............................. 63.75 52.56
December 31, 2000 .............................. 77.56 57.19
FISCAL YEAR ENDING DECEMBER 31, 2001:
Quarter Ended:
March 31, 2001 ................................. $ 90.00 $ 65.00
June 30, 2001 (through April 10, 2001) ......... 86.65 79.13
DIVIDEND POLICY
Since its inception, L-3 Holdings has never paid a cash dividend on its
common stock. We currently intend to retain our earnings to finance future
growth and, therefore, do not anticipate paying any cash dividends on our
common stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon our future results of operations, capital
requirements and financial condition and such other facts as our board of
directors may consider, including any contractual or statutory restrictions on
our ability to pay dividends. Moreover, L-3 Holdings is a holding company and
its ability to pay dividends is dependent upon receipt of dividends,
distributions, advances, loans or other cash transfers from our wholly owned
operating subsidiary, L-3 Communications. Certain outstanding indebtedness of
L-3 Communications limit its ability to pay dividends or other distributions on
its common stock or to make advances, loans or other cash transfers to us.
14
CAPITALIZATION
The table below presents our capitalization at December 31, 2000, before
and after, an adjustment to give effect to the issuance of our shares of common
stock offered in this prospectus to the selling stockholders assuming a stock
price of $79.13 per share at the date of issuance.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements included elsewhere in this prospectus.
DECEMBER 31, 2000
---------------------------
(in millions)
AS
ACTUAL ADJUSTED
------------ ------------
Cash and cash equivalents ............................................ $ 32.7 $ 32.7
========= =========
Senior credit facilities(1) .......................................... $ 190.0 $ 190.0
10 3/8% Senior Subordinated Notes due May 1, 2007 .................... 225.0 225.0
8 1/2% Senior Subordinated Notes due May 15, 2008 .................... 180.0 180.0
8% Senior Subordinated Notes due August 1, 2008 ...................... 200.0 200.0
5 1/4% Convertible Senior Subordinated Notes due June 1, 2009 ........ 300.0 300.0
--------- ---------
Total debt ........................................................ $ 1,095.0 $ 1,095.0
--------- ---------
Stockholders' equity .................................................
Common stock ........................................................ $ 0.3 $ 0.3
Additional paid-in capital .......................................... 515.6 539.1
Retained earnings ................................................... 186.3 186.3
Unearned compensation ............................................... (2.4) (2.4)
Accumulated other comprehensive loss ................................ (7.2) (7.2)
--------- ---------
Total stockholders' equity ........................................ $ 692.6 $ 716.1
--------- ---------
Total capitalization .............................................. $ 1,787.6 $ 1,811.1
========= =========
- ----------
(1) There were $400.9 million of available borrowings under our senior credit
facilities as of December 31, 2000. Availability under the senior credit
facilities at any given time is $700.0 million (subject to compliance
with covenants), less the amount of outstanding borrowings (which was
$190.0 million at December 31, 2000) and outstanding letters of credit
(which was $109.1 million at December 31, 2000).
15
SELECTED FINANCIAL DATA
We derived the selected financial data presented below as of December 31,
2000 and 1999 and for each of the three years in the period ended December 31,
2000 from our audited consolidated financial statements included elsewhere
herein. We derived the selected financial data presented below as of December
31, 1998 and 1997 and for the nine months ended December 31, 1997 from our
audited consolidated financial statements not included herein. We derived the
selected financial data presented below as of December 31, 1996, for the three
months ended March 31, 1997 and for the year ended December 31, 1996 from the
audited combined financial statements of our predecessor company not included
herein. You should read the selected financial data together with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in another part of this prospectus.
L-3 PREDECESSOR COMPANY
---------------------------------------------------------- -------------------------
NINE THREE
MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
----------------------------------------- DECEMBER 31, MARCH 31, DECEMBER 31,
2000(1) 1999(1) 1998(1) 1997(2) 1997 1996(3)
------------- ------------- ------------- ---------------- ----------- -------------
(in millions, except per share data and ratios)
STATEMENT OF OPERATIONS DATA:
Sales ..................................... $ 1,910.1 $ 1,405.5 $ 1,037.0 $ 546.5 $ 158.9 $ 543.1
Operating income .......................... 222.7 150.5 100.3 51.5 (4) 7.9 43.7
Interest expense, net of interest and other
income ................................... 88.6 55.1 46.9 28.5 8.4 24.2
Provision (benefit) for income taxes ...... 51.4 36.7 20.9 10.7 ( 0.2) 7.8
Net income (loss) ......................... 82.7 58.7 32.6 12.3 (4) ( 0.3) 11.7
Earnings per common share:
Basic .................................... $ 2.48 $ 1.83 $ 1.32 $ 0.62(4) -- --
Diluted .................................. 2.37 1.75 1.26 0.61 (4) -- --
Weighted average common shares
outstanding:
Basic .................................... 33.4 32.1 24.7 20.0 -- --
Diluted .................................. 35.0 33.5 25.9 20.0 -- --
BALANCE SHEET DATA (AT PERIOD END):
Working capital ........................... $ 360.9 $ 255.5 $ 157.8 $ 143.2 -- $ 98.8
Total assets .............................. 2,463.5 1,628.7 1,285.4 697.0 -- 590.6
Long-term debt ............................ 1,095.0 605.0 605.0 392.0 -- --
Invested equity ........................... -- -- -- -- -- 473.6
Stockholders' equity ...................... 692.6 583.2 300.0 113.7 -- --
OTHER DATA:
EBITDA(5) ................................. $ 297.0 $ 204.2 $ 140.7 $ 78.0 $ 15.7 $ 71.8
Net cash from (used in) operating
activities ............................... 113.8 99.0 85.1 73.9 ( 16.3) 30.7
Net cash (used in) investing activities ... ( 608.2) ( 284.8) ( 472.9) (457.8) ( 4.3) (298.0)
Net cash from financing activities ........ 484.3 202.4 336.4 461.4 20.6 267.3
Depreciation expense ...................... 36.2 29.5 22.5 13.3 4.5 14.9
Amortization expense ...................... 38.1 24.2 17.9 8.9 3.3 13.2
Capital expenditures ...................... 33.6 23.5 23.4 11.9 4.3 13.5
(Footnotes on the following page)
16
- ----------
(1) Our results of operations are impacted significantly by our acquisitions,
which are described elsewhere in this prospectus.
(2) Reflects the acquisition of our predecessor company and the commencement
of our operations effective April 1, 1997.
(3) Reflects our predecessor company's ownership of nine business units
acquired by Lockheed Martin Corporation from Loral Corporation effective
April 1, 1996. Prior to April 1, 1996, the predecessor company had only
one business unit.
(4) Includes a nonrecurring, noncash compensation charge of $4.4 million
($0.22 per share) related to our initial capitalization, which we
recorded effective April 1, 1997.
(5) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of deferred debt
issuance costs) and the nonrecurring, noncash compensation charge of $4.4
million recorded effective April 1, 1997. EBITDA is not a substitute for
operating income, net income and cash flow from operating activities as
determined in accordance with accounting principles generally accepted in
the United States of America as a measure of profitability or liquidity.
EBITDA is presented as additional information because we believe it to be
a useful indicator of our ability to meet our debt service and capital
expenditure requirements. EBITDA as we define it may differ from
similarly named measures used by other entities.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are a leading merchant supplier of sophisticated secure communication
systems and specialized communication products. These systems and products are
critical elements of virtually all major communication, command and control,
intelligence gathering and space systems. Our customers include the DoD,
certain U.S. Government agencies, major aerospace and defense contractors,
foreign governments and commercial customers. We have two reportable segments:
Secure Communication Systems and Specialized Communication Products.
Our Secure Communication Systems segment provides secure, high data rate
communications systems for military and other U.S. Government reconnaissance
and surveillance applications. The Secure Communication Systems segment also
produces advanced simulation and training products, and provides communication
software support services and a full range of teaching, training, logistic and
training device support services to domestic and international customers. Our
Specialized Communication Products segment includes three product categories:
avionics and ocean products, telemetry, instrumentation and space products and
microwave components.
All of our domestic government contracts and subcontracts are subject to
audit and various cost controls, and include standard provisions for
termination for the convenience of the U.S. Government. Multiyear U.S.
Government contracts and related orders are subject to cancellation if funds
for contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the relevant foreign government.
ACQUISITIONS
In April 1997, we completed our acquisition of the predecessor company and
began operating as L-3. Our predecessor company was comprised of nine business
units that Lockheed Martin acquired from Loral Corporation in April 1996 and
one business unit purchased by Lockheed Martin as part of its acquisition of
the aerospace business of General Electric Company in April 1993.
On February 5, 1998, we purchased the assets of the Satellite Transmission
Systems division of California Microwave, Inc. for cash of $26.1 million. On
March 4, 1998, we acquired the assets of the ILEX Systems business for cash of
$54.3 million. On March 30, 1998, we purchased the assets of the Ocean Systems
business of the former Allied Signal, Inc. for cash of $68.8 million. On August
13, 1998, we purchased all of the outstanding stock of SPD Technologies, Inc.
for cash of $238.3 million. In August 1999, we issued 150,955 shares of our
common stock valued at $6.4 million as additional consideration for the ILEX
acquisition based on the 1998 financial performance of ILEX. As of December 31,
2000, we had recorded a liability of $17.7 million for shares of our common
stock to be issued in connection with this offering as additional consideration
for the ILEX acquisition based on the financial performance of ILEX in 1999 and
2000. There is no other remaining contingent consideration for the ILEX
acquisition.
On January 8, 1999, we acquired all of the outstanding common stock of
Microdyne Corporation for $94.2 million in cash including expenses. On April
16, 1999, we acquired all of the outstanding common stock of Aydin Corporation
for $75.7 million in cash including expenses. On June 30, 1999, we acquired all
of the outstanding common stock of Interstate Electronics Corporation ("IEC")
from Scott Technologies Inc. for $40.7 million in cash incuding expenses. On
December 31, 1999, we completed our acquisition of the assets of Space and
Navigation Systems from Honeywell Inc. for $55.0 million in cash plus expenses,
subject to adjustment.
On February 10, 2000, we acquired the assets of the Training Devices and
Training Services ("TDTS") business of the Raytheon Company for $160.0 million
in cash plus expenses, subject to adjustment. Following the acquisition we
changed TDTS's name to L-3 Communications Link
18
Simulation and Training. On February 14, 2000, we acquired the assets of Trex
Communications Corporation for $50.0 million in cash including expenses.
On April 28, 2000, we acquired the Traffic Alert and Collision Avoidance
System ("TCAS") product line from Honeywell for a purchase price of $239.6
million in cash including expenses. In anticipation of the TCAS acquisition, on
February 25, 2000, we entered into a Memorandum of Agreement with Thomson-CSF
Sextant S.A., a subsidiary of Thomson-CSF, under which the parties agreed to
create a limited liability corporation for TCAS, contribute 100% of the TCAS
assets to be acquired from Honeywell to TCAS LLC, and sell a 30% interest in
the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final
purchase price we paid to Honeywell for TCAS (approximately $71.7 million). We
will consolidate the financial statements of the TCAS LLC. We expect to
complete this transaction during the first half of 2001.
On June 30, 2000, we acquired all of the outstanding stock of MPRI, Inc.
for $35.7 million in cash including expenses, subject to additional
consideration not to exceed $4.0 million based on the financial performance of
MPRI for the twelve months ending June 30, 2001.
On July 11, 2000, we acquired 53.5% of the outstanding common stock of
LogiMetrics, Inc. ("LogiMetrics") for a purchase price of $15.0 million, of
which $8.5 million was paid in cash at closing and the balance was paid in
installments that were completed in the first quarter of 2001. We also agreed
to invest an additional $5.0 million in cash during 2001 for additional common
stock.
On December 29, 2000, we acquired all of the outstanding common stock of
Coleman Research Corporation ("Coleman"), a subsidiary of Thermo Electron
Corporation, for $60.0 million in cash plus expenses, subject to adjustment and
additional consideration not to exceed $5.0 million based on the financial
performance of Coleman for the year ending December 31, 2001.
Additionally, during 1998, 1999 and 2000 we purchased several other
operations and product lines, which individually and in the aggregate were not
material to our results of operations or financial position.
All of our acquisitions have been accounted for as purchase business
combinations and are included in our results of operations from their
respective effective dates.
As described above, on February 10, 2000, we acquired the assets of the
TDTS business of Raytheon Company and on April 28, 2000, we acquired the TCAS
product line from Honeywell. The rules of the SEC require us to file separate
audited financial statements and unaudited pro forma financial information for
each of these two acquired businesses for periods prior to their acquisitions
within 75 days of the completion of each acquisition. We were unable to
complete these SEC filings within their required filing dates because, prior to
the acquisitions, each of the operations of TDTS and TCAS were not stand-alone
entities and their financial statements were not audited. However, the audits
of these financial statements were recently completed and filed on Form 8-K/A
with the SEC.
We regularly evaluate potential acquisitions and joint venture
transactions, but we have not entered into any agreements with respect to any
material transactions at this time.
19
RESULTS OF OPERATIONS
The following information should be read in conjunction with our
consolidated financial statements. Our results of operations for the periods
presented are impacted significantly by our acquisitions. The table below
provides selected income statement data for L-3 for the years ended December
31, 2000, 1999 and 1998.
SEGMENT OPERATING DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
(in millions)
Sales(1):
Secure Communication Systems .................... $ 847.1 $ 542.9 $ 483.5
Specialized Communication Products .............. 1,063.0 862.6 553.5
--------- --------- ---------
Total ........................................ $ 1,910.1 $ 1,405.5 $ 1,037.0
========= ========= =========
Operating income:
Secure Communication Systems .................... $ 91.3 $ 47.0 $ 39.9
Specialized Communication Products .............. 131.4 103.5 60.4
--------- --------- ---------
Operating income ............................. $ 222.7 $ 150.5 $ 100.3
========= ========= =========
Depreciation and amortization expenses included in
operating income:
Secure Communication Systems .................... $ 26.4 $ 18.4 $ 17.3
Specialized Communication Products .............. 47.9 35.3 23.1
--------- --------- ---------
Total ........................................ $ 74.3 $ 53.7 $ 40.4
========= ========= =========
EBITDA(2)
Secure Communication Systems .................... $ 117.7 $ 65.4 $ 57.2
Specialized Communication Products .............. 179.3 138.8 83.5
--------- --------- ---------
Total ........................................ $ 297.0 $ 204.2 $ 140.7
========= ========= =========
- ----------
(1) Sales are after intersegment eliminations. See Note 16 to the
consolidated financial statements.
(2) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs).
EBITDA is not a substitute for operating income, net income or cash flow
from operating activities as determined in accordance with accounting
principles generally accepted in the United States of America as a
measure of profitability or liquidity. We present EBITDA as additional
information because we believe it to be a useful indicator of our ability
to meet debt service and capital expenditure requirements. EBITDA as we
define it may differ from similarly named measures used by other
entities.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Sales increased $504.6 million to $1,910.1 million in 2000. Sales grew
$304.2 million in the Secure Communication Systems segment and $200.4 million
in the Specialized Communication Systems segment. Operating income increased
$72.2 million to $222.7 million in 2000. Operating income as a percentage of
sales ("operating margin") improved to 11.7% from 10.7%. Depreciation and
amortization expenses increased $20.6 million to $74.3 million in 2000,
reflecting increased goodwill amortization associated with our acquisitions and
additional depreciation related to our capital expenditures and acquired
businesses. Our EBITDA for 2000 increased $92.8 million to $297.0 million.
EBITDA as a percentage of sales ("EBITDA margin") increased to 15.5% in 2000
from 14.5% in 1999. Basic earnings per share ("EPS") grew 35.5% to $2.48 in
2000 and diluted EPS grew 35.4% to $2.37 in 2000. Basic weighted-average common
shares outstanding increased 3.9% in 2000, and diluted weighted-average common
shares outstanding increased 4.3% in 2000, primarily because of common stock
issued for exercises of employee stock options.
Sales of our Secure Communication Systems segment increased $304.2 million
to $847.1 million in 2000. Operating income increased $44.3 million in 2000.
Operating margin improved to 10.8% from 8.7%. We attribute the increase in
sales principally to the acquisitions of Link Training and Simulation and MPRI
and increased sales of secure telephone equipment ("STE"), wideband secure data
link programs, communication software support services and airport security
equipment. The increase in
20
operating margin was principally attributable to improved margin on military
communication systems and high data rate communications systems. These margin
improvements arose from cost reductions and improved operating efficiencies.
Additionally, during 2000 a larger percentage of our sales was generated from
fixed price contracts which generally have higher margins than sales generated
from cost-plus contracts. EBITDA increased $52.3 million to $117.7 million in
2000 and EBITDA margin improved to 13.9% from 12.0% in 1999. We expect
operating margins for our Secure Communications Systems segment in 2001 to
remain relatively unchanged from those in 2000 and we do not expect a
significant change in our mix of fixed price and cost-plus contracts from that
in 2000.
Sales within our Specialized Communication Products segment increased
$200.4 million to $1,063.0 million in 2000. Operating income increased $27.9
million in 2000. Operating margin improved to 12.4% from 12.0%. We attribute
this increase in sales principally to the acquisitions of TCAS and Space and
Navigation Systems and volume increases on airborne dipping sonar systems,
aviation recorders, and display products. These increases in sales were
partially offset by decreased shipments of naval power systems in 2000 compared
with 1999 principally due to the slippage of certain sales into 2001 which were
previously anticipated to occur in 2000. Sales of our telemetry products were
essentially unchanged in 2000 compared with 1999 due to continued softness in
the space and broadband commercial communications markets. We attribute our
increase in operating margin principally to improved margins on avionics and
ocean products. These margin improvements arose from sales volume increases,
cost reductions and the higher margins from the TCAS business. Lower margins on
our naval power systems due to less shipments and on our telemetry products and
microwave components due to changes in product sales mix partially offset these
operating margin improvements. EBITDA increased $40.5 million to $179.3 million
in 2000 and EBITDA margin improved to 16.9% from 16.1% in 1999.
Interest expense increased $32.4 million to $93.0 million in 2000
principally because of the higher average outstanding debt during 2000.
Interest and other income decreased $1.1 million to $4.4 million. Interest and
other income for 2000 includes gains of $14.9 million from the sales of our
interests in certain businesses. These gains were largely offset by losses of
$12.4 million on the write-down in the carrying value of certain investments
and intangible assets. The net gain contributed $0.04 to our 2000 diluted EPS.
Excluding the net gain, diluted EPS was $2.33, an increase of 33.1% in 2000
compared with 1999. The income tax provision for 2000 reflects our effective
income tax rate for 2000 of 38.3% compared with the effective tax rate of 38.5%
for 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Sales increased $368.5 million to $1,405.5 million in 1999. Sales in the
Secure Communication Systems segment grew $59.4 million and sales in the
Specialized Communication Products segment grew $309.1 million in 1999.
Operating income increased $50.2 million to $150.5 million in 1999. Operating
margin improved to 10.7% from 9.7%. Depreciation and amortization expenses
increased $13.3 million to $53.7 million in 1999, reflecting increased goodwill
amortization associated with our acquisitions and additional depreciation
related to our capital expenditures and acquired businesses. Our EBITDA for
1999 increased $63.5 million to $204.2 million. EBITDA margin improved to 14.5%
in 1999 from 13.6% in 1998. Basic earnings per common share grew 38.6% to $1.83
in 1999 and diluted earnings per share grew 38.9% to $1.75 in 1999. Basic
weighted-average common shares outstanding increased 30.1% in 1999 and diluted
weighted-average common shares outstanding increased 29.4% in 1999, principally
because of the timing of the issuance of 5.0 million shares of common stock in
connection with L-3 Holdings' February 1999 stock offering.
Sales within our Secure Communication Systems segment increased $59.4
million to $542.9 million in 1999. Operating income increased $7.1 million to
$47.0 million in 1999. Operating margin improved to 8.7% from 8.3%. We
attribute this increase in sales to greater sales on the U-2 Support Program,
STE and airport security systems and our acquisition of Microdyne. Declines in
sales on secure wideband data link programs, communication subsystems for the
ISS (International Space Station) and LMD/KP (Local Management Device/Key
Processor) units which occurred from the scheduled phasedown of these programs
partially offset our sales gains. We attribute the improvement in operating
margin to military communication systems and high data rate
21
communication systems. These margin improvements arose from cost reductions and
operating efficiencies and sales volume increases on STE, and were partially
offset by lower margins from our Microdyne acquired businesses and costs
incurred for network security systems. EBITDA increased $8.2 million to $65.4
million in 1999 and EBITDA margin improved to 12.0% from 11.8% in 1998.
Sales within our Specialized Communication Products segment increased
$309.1 million to $862.6 million in 1999. Operating income increased $43.1
million to $103.5 million in 1999, and operating margin increased to 12.0% from
10.9%. The increase in sales was principally attributable to the timing of our
Aydin and IEC acquisitions in 1999 and the SPD and Ocean Systems acquisitions
in 1998, as well as volume increases on ocean products, primarily for power
distribution, control and conversion systems, aviation recorders and space and
satellite control products. Lower volume on microwave components and decreased
shipments of displays and antenna products partially offset our sales gains. We
attribute the increase in operating margin to higher margins on ocean products
and aviation recorders caused by volume increases and cost reductions, higher
margins from the SPD business and improved margins in 1999 for the STS business
acquired in February 1998. Lower operating margins from the Aydin and IEC
businesses and lower margins due to declines in sales on microwave components
and antenna products partially offset our operating margin improvements. EBITDA
increased $55.3 million to $138.8 million in 1999, and EBITDA margin increased
to 16.1% from 15.1% in 1998.
Interest expense increased $11.0 million to $60.6 million in 1999 because
of the higher average outstanding debt during 1999 compared with 1998
principally because of the $200.0 million of senior subordinated notes that we
sold in December 1998. Interest and other income for 1999 included $0.4 million
for a gain on the sale of a business. The income tax provision for 1999
reflects our effective income tax rate for 1999 of 38.5%, compared with the
effective tax rate of 39.1% for 1998.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
During 2000, contracts in process increased $221.0 million to $700.1
million at December 31, 2000. The increase included $154.6 million related to
acquired businesses, and the remaining increase of $66.4 million was
principally from:
o increases in unbilled contract receivables principally arising from an
increase in programs in production phases, during which unbilled costs
and profits generally exceed progress payments and advances received from
the customers until contract shipments are completed; and
o increases in inventories for production on certain programs and
products.
The increases in deferred tax assets, property, plant and equipment,
intangibles, accrued employment costs and accrued expenses during 2000 were
principally related to acquired businesses. The increase in accounts payable
was principally related to balances of acquired businesses and the timing of
payments to vendors. The increase in other current liabilities and other
liabilities was principally due to increases in estimated costs in excess of
billings to complete contracts in process including the AVCATT contract that
were assumed as part of the TDTS acquisition. The increase in accrued interest
was attributable to higher outstanding debt balances and the timing of interest
payments.
22
STATEMENT OF CASH FLOWS
The table below presents selected cash flow data for the periods
indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ------------ ------------
(in millions)
Net cash from operating activities .............. $ 113.8 $ 99.0 $ 85.1
Net cash (used in) investing activities ......... $ (608.2) $ (284.8) $ (472.9)
Net cash from financing activities .............. $ 484.3 $ 202.4 $ 336.4
OPERATING ACTIVITIES
During 2000, we generated $113.8 million of cash from our operating
activities, an increase of $14.8 million from the $99.0 million generated
during 1999. Earnings adjusted for non-cash items and deferred taxes increased
$48.5 million to $200.3 million in 2000 from $151.8 million in 1999. During
2000, our working capital and operating assets and liabilities increased $86.5
million compared with an increase of $52.8 million in 1999. Our cash flows from
operating activities during 2000 include uses of cash relating to performance
on certain contracts in process including the AVCATT contract that were assumed
in the TDTS acquisition for which the estimated costs exceed the estimated
billings to complete these contracts. We expect to continue to experience
negative impacts on our cash flows as a result of the completion of these TDTS
acquired contracts in process during 2001, but to a lesser extent than in 2000.
Additionally, we expect our working capital to increase during the first half
of 2001 in connection with certain commercial programs and products.
During 1999, we generated $99.0 million in cash from operating activities,
an increase of $13.9 million over 1998. Earnings adjusted for non-cash items
and deferred taxes increased $55.6 million to $151.8 million in 1999 from $96.2
million in 1998. During 1999 our working capital and other operating assets and
liabilities increased $52.8 million compared with an increase of $11.1 million
in 1998. The increase was principally related to the greater working capital
requirements primarily for contracts in process.
INVESTING ACTIVITIES
We continued to pursue our acquisition strategy during 2000 and invested
$599.6 million to acquire businesses, compared with $272.2 million in 1999. We
used $448.0 million in 1998 to acquire businesses.
We make capital expenditures for improvement of manufacturing facilities
and equipment. We expect that our capital expenditures for the year ending
December 31, 2001 will be between $40.0 million and $45.0 million, compared
with $33.6 million for the year ended December 31, 2000. The anticipated
increase is principally due to capital expenditures for our acquired
businesses. Dispositions of property, plant and equipment for 2000 include net
proceeds of $13.3 million related to a facility located in Hauppauge, NY which
we sold and leased back in December 2000.
In 2000, we sold our interests in two businesses for net cash proceeds of
$19.6 million, which are included in other investing activities.
FINANCING ACTIVITIES
At December 31, 2000, available revolver borrowings under our senior
credit facilities were $400.9 million after reductions for outstanding
borrowings of $190.0 million used principally to finance acquisitions and
outstanding letters of credit of $109.1 million. At December 31, 1999, there
were no borrowings outstanding under our senior credit facilities.
On April 28, 2000 we entered into a new 364-day revolving senior credit
facility for $300.0 million that expires on April 27, 2001, which increased our
senior credit facilities to $700.0 million. On April 28, 2000 we borrowed
$237.0 million under the facility to finance the TCAS acquisition. These
23
borrowings were repaid in November 2000 with a portion of the proceeds from our
offering of the convertible senior subordinated notes which are described
below. At December 31, 2000, there were no borrowings outstanding under this
credit facility. Additionally, on April 28, 2000 we amended all of the senior
credit facilities to change the spreads used to calculate the interest rates on
borrowings and commitment fees on the unused commitments under the senior
credit facilities. The spreads are the same for all senior credit facilities,
and the lenders all rank pari passu under our senior credit facilities.
In August 2000, the other outstanding revolving 364-day credit facility
for $200.0 million that was scheduled to expire was renewed for an additional
364 days and will expire on August 9, 2001. At that time, we may extend the
term, with the consent of our lenders, for a period of 364 days and we also may
exercise an option to convert 80% of the borrowings outstanding into term loans
which fully amortize over an eighteen month period beginning September 30,
2001.
During the first half of 2001 we intend to restructure our $300.0 million
364-day revolving credit facility that expires April 27, 2001 together with all
of our senior credit facilities to extend their maturities.
In the fourth quarter of 2000 we sold $300.0 million of 5.25% Convertible
Senior Subordinated Notes due 2009 (the "Convertible Notes") in a private
placement. The net proceeds from this offering amounted to $290.5 million after
debt issuance costs, and were used to repay revolver borrowings outstanding
under our senior credit facilities. The Convertible Notes may be converted at
any time into our common stock at a conversion price of $81.50 per share. The
Convertible Notes are jointly and severally guaranteed (the "Guarantees") by
certain of our existing and future direct and indirect domestic subsidiaries,
including L-3 Communications (the "Guarantors"). The Guarantees are
subordinated in right of payment to all existing and future senior debt of the
Guarantors and rank pari passu with the other senior subordinated indebtedness
of the Guarantors, which are described below.
On February 4, 1999, we sold 5.0 million shares of L-3 Holdings common
stock in a public offering for $42.00 per share which generated net proceeds of
$201.6 million. In addition, as part of the same transaction, 6.5 million
shares of L-3 Holdings common stock were sold by Lehman Brothers Capital
Partners III, L.P., LB I Group Inc. and Lockheed Martin in a secondary public
offering. In October 1999, Lockheed Martin sold its remaining L-3 Holdings
common stock. In December 1999, Lehman Brothers Capital Partners III, L.P.
distributed approximately 3.8 million shares of L-3 Holdings common stock. As
of March 12, 2001, Lehman Brothers Capital Partners III, L.P. and its
affiliates that directly own L-3 Holdings common stock, described in this
prospectus as the Lehman Partnership, owned approximately 15.9% of the
outstanding common stock of L-3 Holdings.
In April 1997, May 1998 and December 1998, L-3 Communications sold $225.0
million of 10 3/8% Senior Subordinated Notes due 2007, $180.0 million of 8 1/2%
Senior Subordinated Notes due 2008, and $200.0 million of 8% Senior
Subordinated Notes due 2008 (collectively, the "Senior Subordinated Notes"),
whose aggregate net proceeds amounted to $576.0 million after debt issuance
costs.
The senior credit facilities, Senior Subordinated Notes and Convertible
Notes contain financial covenants which remain in effect so long as we owe any
amount or any commitment to lend exists thereunder. As of December 31, 2000,
L-3 Communications had been in compliance with the covenants of the agreements
governing those loans at all times. The borrowings under the senior credit
facilities are guaranteed by L-3 Holdings and by substantially all of the
domestic subsidiaries of L-3 Communications. The payments of principal and
premium, if any, and interest on the Senior Subordinated Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally, by L-3 Holdings and substantially all of its direct and indirect
wholly owned subsidiaries, including L-3 Communications. See Note 7 to our
consolidated financial statements for a description of our debt and related
financial covenants at December 31, 2000.
Based upon our current level of operations, we believe that our cash from
operating activities, together with available borrowings under the senior
credit facilities, will be adequate to meet our
24
anticipated requirements for working capital, capital expenditures, research
and development expenditures, program and other discretionary investments, and
interest payments for the foreseeable future, including at least the next three
years. There can be no assurance, however, that our business will continue to
generate cash flow at current levels, or that currently anticipated
improvements will be achieved. If we are unable to generate sufficient cash
flow from operations to service our debt, we may be required to sell assets,
reduce capital expenditures, refinance all or a portion of our existing debt or
obtain additional financing. Our ability to make scheduled principal payments
or to pay interest on or to refinance our indebtedness depends on our future
performance and financial results, which, to a certain extent, are subject to
general conditions in or affecting the defense industry and to general
economic, political, financial, competitive, legislative and regulatory factors
beyond our control. There can be no assurance that sufficient funds will be
available to enable us to service our indebtedness, to make necessary capital
expenditures and to make discretionary investments.
MARKET RISKS
All of our financial instruments that are sensitive to market risk are
entered into for purposes other than trading.
INTEREST RATE RISK. Our financial instruments that are sensitive to
changes in interest rates include borrowings under the senior credit
facilities, purchased interest rate cap contracts and written interest rate
floor contracts, all of which are denominated in U.S. dollars. The weighted
average interest rate on our borrowings outstanding under the senior credit
facilities at December 31, 2000 was 8.5%. The Senior Subordinated Notes and the
Convertible Notes are fixed rate instruments and are not affected by changes in
interest rates.
To mitigate risks associated with changing interest rates on borrowings
under the senior credit facilities that bear interest at variable rates we
entered into interest rate cap and floor contracts. The interest rate cap
contract provides protection against increases in interest rates on borrowings
to the extent:
o those borrowings are less than or equal to the notional amount of the
cap contract; and
o the interest rate paid on the borrowings rises above the sum of the cap
reference rate plus our applicable borrowing spread.
However, the written interest rate floor limits our ability to enjoy
decreases in interest rates on our borrowings to the extent:
o those borrowings are less than or equal to the notional amount of the
floor contract; and
o the interest rate paid on those borrowings falls below the sum of the
floor reference rate plus our applicable borrowing spread.
We attempt to manage exposure to counterparty credit risk by entering into
interest rate agreements only with major financial institutions that are
expected to perform fully under the terms of such agreements. Cash payments
between us and the counterparties are made at the end of each quarter. Such
payments are recorded as adjustments to interest expense and were not material
to our interest expense or cash flows for 2000, 1999 or 1998. Additional data
on our debt obligations, the applicable borrowing spreads included in the
interest rates we pay on our borrowings under the senior credit facilities and
interest rate agreements are provided in Notes 7 and 8 to our consolidated
financial statements.
25
For the interest rate agreements, the table below presents significant
contract terms and fair values on December 31, 2000.
CAPS FLOORS
----------------- ------------------
(in millions)
Notional amount ................. $ 100.0 $ 50.0
Cap/floor interest rate ......... 7.5% 5.5%
Reference rate .................. 3 month LIBOR 3 month LIBOR
Designated maturity ............. Quarterly Quarterly
Expiration date ................. March 28, 2002 March 28, 2002
Fair value ...................... -- $ 0.1)
FOREIGN CURRENCY EXCHANGE RISK. We conduct some of our operations outside
the U.S. in functional currencies other than the U.S. dollar. Additionally,
some of our U.S. operations have contracts with foreign customers denominated
in foreign currencies. To mitigate the risk associated with certain of these
contracts denominated in foreign currency we have entered into foreign currency
forward contracts. At December 31, 2000, the notional value of foreign currency
forward contracts was $6.9 million and the fair value of these contracts was
$0.4 million. We account for these contracts as hedges.
EQUITY PRICE RISK. Our investments in common equities are subject to
equity price risk. Both the carrying values and estimated fair values of such
instruments amounted to $9.0 million at the end of 2000.
There were no significant changes in our market risks during 2000.
BACKLOG AND ORDERS
We define funded backlog as the value of contract awards received from the
U.S. Government, which the U.S. Government has appropriated funds, plus the
value of contract awards and orders received from customers other than the U.S.
Government which have yet to be recognized as sales. Our funded backlog as of
December 31, 2000 was $1,354.0 million and as of December 31, 1999 was $1,003.7
million. We expect to record as sales approximately 72% of our December 31,
2000 funded backlog during 2001. However, there can be no assurance that our
funded backlog will become sales in any particular period, if at all. Our
funded orders were $2,013.7 million for 2000, $1,423.1 million for 1999 and
$1,057.0 million for 1998.
Our funded backlog does not include the full value of our contract awards
including those pertaining to multi-year, cost-plus reimbursable contracts,
which are generally funded on an annual basis. Funded backlog also excludes the
sales value of unexercised contract options that may be exercised by customers
under existing contracts and the sales value of purchase orders that may be
issued under indefinite quantity contracts or basic ordering agreements.
RESEARCH AND DEVELOPMENT
Company-funded research and development costs including bid and proposal
costs were $101.9 million for 2000, $76.1 million for 1999, and $59.9 million
for 1998. Customer-funded research and development costs were $299.3 million
for 2000, $226.3 million for 1999, and $181.4 million for 1998.
CONTINGENCIES
We are engaged in providing products and services under contracts with the
U.S. Government and to a lesser degree, under foreign government contracts,
some of which are funded by the U.S. Government. All such contracts are subject
to extensive legal and regulatory requirements, and, periodically, agencies of
the U.S. Government investigate whether such contracts were and are being
conducted in accordance with these requirements. Under government procurement
regulations, an indictment by a federal grand jury could result in the
suspension for a period of time from eligibility
26
for awards of new government contracts. A conviction could result in debarment
from contracting with the federal government for a specified term.
Additionally, in the event that U.S. Government expenditures for products and
services of the type we manufacture and provide are reduced, and not offset by
greater commercial sales or other new programs or products, or acquisitions,
there may be a reduction in the volume of contracts or subcontracts awarded to
us.
We continually assess our obligations with respect to applicable
environmental protection laws. While it is difficult to determine the timing
and ultimate cost to be incurred in order to comply with these laws, based upon
available internal and external assessments, with respect to those
environmental loss contingencies of which we are aware, we believe that even
without considering potential insurance recoveries, if any, there are no
environmental loss contingencies that, individually or in the aggregate, would
be material to our consolidated results of operations. Also, we have been
periodically subject to litigation, claims or assessments and various
contingent liabilities incidental to our business. We accrue for these
contingencies when it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated.
With respect to those investigative actions, items of litigation, claims
or assessments of which we are aware, we are of the opinion that the
probability is remote that, after taking into account certain provisions that
have been made with respect to these matters, the ultimate resolution of any
such investigative actions, items of litigation, claims or assessments will
have a material adverse effect on our financial position or results of
operations.
On December 27, 2000, we filed a complaint against Raytheon and Raytheon
Technical Services Company in the Court of Chancery for the State of Delaware
in and for New Castle County, alleging that Raytheon failed to disclose
material liabilities in connection with the sale of TDTS to us in February
2000. Specifically, the complaint alleges that Raytheon misrepresented the
financial liabilities associated with the AVCATT contract which will cause us
to incur damages of approximately $100 million. We assumed the AVCATT contract
as part of our acquisition of TDTS from Raytheon which was completed in
February 2000. The complaint seeks rescission of the TDTS Asset Purchase and
Sale Agreement and alternatively, rescission of the AVCATT contract, rescissory
damages and breach of contract.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value and
is effective for all quarters of fiscal years beginning after June 15, 2000. We
do not expect SFAS 133 to have a material impact on our consolidated results of
operations or financial position.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"), which replaces SFAS 125. SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. We do not expect SFAS 140 to have a material impact on our consolidated
results of operations or financial position.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- An Interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the definition of an employee for purposes of calculating stock-based
compensation, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of previously fixed stock
27
options or awards, and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is primarily effective July 1, 2000,
with some provisions effective earlier. We have adopted the accounting and
disclosures required by FIN 44 for all periods presented.
INFLATION
The effect of inflation on our sales and earnings has not been
significant. Although a majority of our sales are made under long-term
contracts, the selling prices of such contracts, established for deliveries in
the future, generally reflect estimated costs to be incurred in these future
periods. In addition, some contracts provide for price adjustments through
escalation clauses.
28
BUSINESS
GENERAL
We are a leading merchant supplier of sophisticated secure communication
systems and specialized communication products. We produce secure, high data
rate communication systems, training and simulation systems, avionics and ocean
products, telemetry, instrumentation and space products and microwave
components. These systems and products are critical elements of virtually all
major communication, command and control, intelligence gathering and space
systems. Our systems and specialized products are used to connect a variety of
airborne, space, ground-and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our customers include the U.S. Department of
Defense, certain U.S. Government intelligence agencies, major aerospace and
defense contractors, foreign governments, commercial customers and certain
other U.S. agencies. For the year ended December 31, 2000, direct and indirect
sales to the DoD provided 62.7% of our sales, and sales to commercial
customers, foreign governments and U.S. Government agencies other than the DoD
provided 37.3% of our sales. Our business areas employ proprietary technologies
and capabilities and have leading positions in their respective primary
markets. For the year ended December 31, 2000 we had sales of $1.9 billion and
operating income of $222.7 million. We have two reportable segments: Secure
Communication Systems and Specialized Communication Products. Information on
our reportable segments is included in Note 16 of our consolidated financial
statements included in this prospectus.
SECURE COMMUNICATION SYSTEMS
We are an established leader in secure, high data rate communications for
military and other U.S. Government reconnaissance and surveillance applications
and we believe that we have developed virtually every high bandwidth data link
that is currently used by the DoD for surveillance and reconnaissance. Our
major secure communication programs and systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real time information collection and dissemination to
users;
o strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management;
o communication software support services; and
o communication systems for surface and undersea vessels and manned space
flights.
Our Secure Communication Systems segment includes our training and
simulation business. We design, develop and manufacture advanced simulation
products with high-fidelity representations of cockpits and operator stations
for aircraft and vehicle system simulation. We also provide a full range of
teaching, training, logistic and training device support services to domestic
and international military customers, and ballistic targets for the DoD.
Our Secure Communication Systems segment provided $847.1 million or 44.3%
of our total sales for the year ended December 31, 2000.
SPECIALIZED COMMUNICATION PRODUCTS
We are a leading merchant supplier of products to military and commercial
customers. We focus on niche markets in which we believe we can achieve a
market leadership position. This reportable segment includes three product
categories:
o Avionics and Ocean Products;
o Telemetry, Instrumentation and Space Products; and
o Microwave Components.
29
Avionics and Ocean Products. This business area includes our aviation
recorders, airborne collision avoidance products, displays, antennas, acoustic
undersea warfare products and naval power distribution, conditioning, switching
and protection equipment. We believe we are the leading manufacturer of
commercial cockpit voice and flight data recorders (known as "black boxes") and
a leading supplier of acoustic undersea warfare products and airborne dipping
sonars to the U.S. Navy and over 20 foreign navies. These products represented
56.0% of our Specialized Communications Products segment sales for the year
ended December 31, 2000.
Telemetry, Instrumentation and Space Products. We develop and manufacture
commercial off-the-shelf, real-time data collection and transmission products
and components for missile, aircraft and space-based electronic systems. These
products are used to gather flight data and other critical information and
transmit it from air or space to the ground. We are also a leading global
satellite communications systems provider offering systems and services used in
the satellite transmission of voice, video and data through earth stations for
uplink and downlink terminals. We provide commercial, off-the-shelf satellite
control software, telemetry, tracking and control, mission processors and
software engineering services to foreign governments and commercial satellite
markets. We are a leading producer of navigation products, gyroscopes,
controlled momentum devices and star sensors for commercial, military and other
applications. These products represented 35.4% of our Specialized
Communications Products segment sales for the year ended December 31, 2000.
Microwave Components. We believe we are a premier worldwide supplier of
commercial off-the-shelf, high-performance microwave components and frequency
monitoring equipment. Our microwave components are sold under the
industry-recognized Narda brand name using a standard catalog for the wireless,
industrial and military communication markets. We also provide
state-of-the-art, space-qualified communication components including channel
amplifiers and frequency filters for the commercial communications satellite
market. These products represented 8.6% of our Specialized Communications
Products segment sales for the year ended December 31, 2000.
Our Specialized Communication Products segment provided $1,063.0 million
or 55.7% of our total sales for the year ended December 31, 2000.
DEVELOPING COMMERCIAL OPPORTUNITIES
An integral part of our growth strategy is to identify and exploit
commercial applications for select products and technologies currently sold to
defense customers. We have currently identified two vertical markets where we
believe there are significant opportunities to expand our existing commercial
sales: Transportation Products and Broadband Wireless Communications Products.
We believe that these vertical markets, together with our existing commercial
products, provide us with the opportunity for substantial commercial growth in
future years.
Within the transportation market, we have developed and are offering an
explosive detection system for checked baggage at airports, cruise ship voyage
recorders, power propulsion systems and power switches and displays for rail
transportation and internet service providers. We are developing additional
products, including an enhanced collision avoidance product that incorporates
ground proximity warning.
Within the communications product market, we are offering local wireless
access equipment for voice, DSL and internet access, transceivers for LMDS
(Local Multipoint Distribution Service) and a broad range of commercial
components and digital test equipment for broadband communications providers.
We have developed the majority of our commercial products employing
technology funded by and used in our defense electronics businesses, thereby
minimizing any required incremental development expenses. Sales generated from
our developing commercial opportunities have not yet been material to us.
INDUSTRY OVERVIEW
The U.S. defense industry has undergone significant changes precipitated
by ongoing U.S. federal budget pressures and adjustments in political roles and
missions to reflect changing strategic and
30
tactical threats. From the mid-1980s to the late 1990s, the U.S. defense budget
experienced a decline in real dollars. This trend was reversed by an increase
in defense spending in 1999, followed by current dollar increases in fiscal
2000 and 2001, with an anticipated increase in fiscal 2002 to $310.0 billion.
In addition, the DoD has increased its focus on enhancing military readiness,
modernization, joint operations and digital command and control communications
capabilities by incorporating advanced electronics to improve performance,
reduce operating cost, and extend the life expectancy of its existing and
future platforms. As a result, defense budget program allocations have shifted
in favor of advanced information technologies related to command and control
communications, computers, intelligence, surveillance and reconnaissance. In
addition, the DoD's emphasis on system interoperability, force multipliers and
providing battlefield commanders with real-time data is increasing the
electronics content of nearly all of the major military procurement and
research programs. As a result, the DoD's budget for communications and defense
electronics is expected to grow.
The U.S. defense industry has also undergone dramatic consolidation
resulting in the emergence of four dominant prime system contractors: The
Boeing Company, Lockheed Martin, Northrop Grumman Corporation and Raytheon
Company. One outcome of this consolidation is that the DoD wants to ensure that
vertical integration does not further diminish the fragmented, yet critical DoD
vendor base. Additionally, it has become economically unfeasible for the prime
contractors to design, develop or manufacture numerous essential products,
components and systems for their own use. This situation creates opportunities
for merchant suppliers such as L-3. As the prime contractors continue to
evaluate their core competencies and competitive position, focusing their
resources on larger programs and platforms, we expect the prime contractors to
continue to exit non-strategic business areas and procure these needed elements
on more favorable terms from independent, commercially-oriented merchant
suppliers. Recent examples of this trend include divestitures of certain
non-core defense-related businesses by Lockheed Martin and Raytheon Company.
The focus on cost reduction by the prime contractors and DoD is also
driving increased use of commercial off-the-shelf products for upgrades of
existing systems and in new systems. We believe the prime contractors will
continue to be under pressure to reduce their costs and will increasingly seek
to focus their resources and capabilities on major systems, turning to
commercially oriented best of breed merchant suppliers to produce subsystems,
components and products. We believe successful merchant suppliers will continue
to use their resources to complement and support, rather than compete with, the
prime contractors. We anticipate that the relationships between the major prime
contractors and their primary suppliers will continue to evolve in a fashion
similar to those employed in the automotive and commercial aircraft industries.
We expect that these relationships will be defined by critical partnerships
encompassing increasingly greater outsourcing of non-core products and systems
by the prime contractors to their key merchant suppliers and increasing
supplier participation in the development of future programs. We believe early
involvement in the upgrading of existing systems and the design and engineering
of new systems incorporating these outsourced products will provide merchant
suppliers, including us, with a competitive advantage in securing new business
and provide the prime contractors with significant cost reduction opportunities
through coordination of the design, development and manufacturing processes.
BUSINESS STRATEGY
We intend to grow our sales, enhance our profitability and build on our
position as a leading merchant supplier of communication systems and products
to the major contractors in the aerospace and defense industry as well as the
U.S. Government. We also intend to leverage our expertise and products into new
commercial business areas where we can adapt our existing products and
technologies. Our strategy to achieve our objectives includes:
EXPAND MERCHANT SUPPLIER RELATIONSHIPS. We have developed strong
relationships with the DoD, several other U.S. Government agencies and all of
the major U.S. defense prime contractors, enabling us to identify new business
opportunities and anticipate customer needs. As an independent merchant
supplier, we anticipate that our growth will be driven by expanding our share
of existing programs and
31
by participating in new programs. We identify opportunities where we are able
to use our strong relationships to increase our business presence and allow
customers to reduce their costs. We also expect to benefit from increased
outsourcing by prime contractors who in the past may have limited their
purchases to captive suppliers and who are now expected to view our
capabilities on a more favorable basis due to our status as an independent
company, which positions us to be a merchant supplier to multiple bidders on
prime contract bids.
SUPPORT CUSTOMER REQUIREMENTS. A significant portion of our sales is
derived from strategic, long-term programs and from programs for which we have
been the incumbent supplier, and in many cases acted as the sole provider over
many years. Our customer satisfaction and excellent performance record are
evidenced by our performance-based award fees exceeding an average of 90% of
the available award fees since our inception in April 1997. We believe that
prime contractors will increasingly award long-term, outsourcing contracts to
the best-of-breed merchant suppliers they believe to be most capable on the
basis of quality, responsiveness, design, engineering and program management
support as well as cost. We intend to continue to align our research and
development, manufacturing and new business efforts to complement our
customers' requirements and provide state-of-the-art products.
ENHANCE OPERATING MARGINS. We have a history of improving the operating
performance of the businesses we acquire through the reduction of corporate
administrative expenses and facilities costs, increasing sales, improving
contract bidding controls and practices and increasing competitive contract
award win rates. We have a tradition of enhancing operating margins, primarily
due to efficient management and elimination of significant corporate expense
allocations. We intend to continue to enhance our operating performance by
reducing overhead expenses, continuing consolidation and increasing
productivity.
LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. We have developed
strong, proprietary technical capabilities that have enabled us to capture a
number one or two market position in most of our key business areas, including
secure, high data rate communications systems, solid state aviation recorders,
telemetry, instrumentation and space products, advanced antenna products and
high performance microwave components. We continue to invest in L-3 sponsored
independent research and development, including bid and proposal costs, in
addition to making substantial investments in our technical and manufacturing
resources. Further, we have a highly skilled workforce, including approximately
5,600 engineers. We are applying our technical expertise and capabilities to
several closely aligned commercial business markets and applications such as
transportation and broadband wireless communications and will continue to
explore other similar commercial opportunities.
MAINTAIN DIVERSIFIED BUSINESS MIX. We have a diverse and broad business
mix with limited reliance on any particular program, a balance of cost-plus and
fixed price contracts, a significant follow-on business and an attractive
customer profile. Our largest program represented 3.8% of our sales for the
year ended December 31, 2000 and is a long term, cost-plus contract for the
U.S. Air Force aerial reconnaissance program. No other program represented more
than 2.3% of sales for the year ended December 31, 2000. Furthermore, 28.6% of
our sales for the same period were from cost-plus contracts, and 71.4% were
from fixed price contracts, providing us with a mix of predictable
profitability (cost-plus) and higher margin (fixed price) business. We also
enjoy a mix of defense and non-defense business, with direct and indirect sales
to the DoD accounting for 62.7%, and sales to commercial customers, foreign
governments and U.S. Government agencies other than the DoD accounting for
37.3% of our sales for the year ended December 31, 2000. We intend to leverage
this business profile to expand our merchant supplier business base.
CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent industry
consolidation has significantly reduced the number of traditional middle-tier
aerospace and defense companies. We intend to enhance our existing product base
through internal research and development efforts and selective acquisitions
that will add new products in areas that complement our present technologies.
We intend to acquire potential targets with the following criteria:
o significant market position in their business area;
32
o product offerings which complement and/or extend our product offerings;
and
o positive future growth and earnings prospects.
During the year ended December 31, 2000, we acquired ten businesses for an
aggregate purchase price of $590.2 million, subject to adjustment and, in three
cases, additional purchase price contingent upon the post-acquisition financial
performance of the acquired company. The following chart summarizes our primary
acquisitions as of December 31, 2000.
SELECTED RECENT ACQUISITIONS
PRICE
BUSINESS NAME DATE ACQUIRED ACQUIRED FROM ($ MM) BUSINESS DESCRIPTION
- ----------------------- ------------------- ------------------- ---------- -----------------------------------
Coleman Research December 29, 2000 Thermo Electron $ 60.0 Provides communications, signal
Corporation Corporation processing, intelligence and
space instrumentation
equipment, as well as simulation,
training, missile targeting,
modeling and exercise support
services.
LogiMetrics, Inc. July 11, 2000 LogiMetrics, Inc. 15.0 Designs, manufactures and
(531/2% interest) markets solid state, broadband
wireless communications
infrastructure equipment,
subsystems and modules used to
provide point-to-multipoint
terrestrial and satellite-based
distribution services in frequency
bands from 24 to 38 gigahertz.
MPRI, Inc. June 30, 2000 MPRI Stockholders 35.6 Provides teaching and training
programs to the U.S. and
international governments and
to commercial customers.
Traffic Alert and April 28, 2000 Honeywell Inc. 239.1 Produces airborne collision
Collision Avoidance avoidance products that reduce
Systems mid-air collisions and near-miss
incidents among aircraft.
Trex Communications February 14, 2000 MCK 49.3 Provides antennas and tracking
Communications for telemetry, tracking and
Statutory Trust control systems, flight
termination systems, fixed and
portable command and control
ground stations, and portable
commercial satellite news
gathering uplinks and satellite
components.
Training Devices and February 10, 2000 Raytheon Company 160.0 Produces and supports training
Training Services systems and equipment designed
to enhance operational
proficiency.
33
PRODUCTS AND SERVICES
The systems, products and services, selected applications and platforms or
end users of our Secure Communication Systems segment as of December 31, 2000
are summarized in the table below.
SECURE COMMUNICATION SYSTEMS PRODUCTS AND SERVICES
SYSTEMS/PRODUCTS/SERVICES SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ---------------------------------------- -------------------------------------- --------------------------------------
HIGH DATA RATE COMMUNICATIONS
o Wideband data links and ground o High performance, wideband o Manned and unmanned aircraft,
terminals secure communication links for naval ships, terminals and
relaying of intelligence and satellites
reconnaissance information
SATELLITE COMMUNICATION TERMINALS
o Ground-based satellite o Interoperable, transportable o Remote personnel provided with
communication terminals and ground terminals communication links to distant
payloads forces
SPACE COMMUNICATION AND SATELLITE CONTROL
o Satellite communication and o On-board satellite external o International Space Station,
tracking system communications, video systems, Space Shuttle and various
solid state recorders and ground satellites
support equipment
o Satellite command and control o Software integration, test and o U.S. Air Force Satellite Control
sustainment and support maintenance support satellite Network and rocket launch
control network and engineering system
support for satellite launch
system
MILITARY COMMUNICATIONS
o Shipboard communications o Internal and external o Naval vessels
systems communications (radio room)
o Communication software o Value-added, critical software o DoD
support services support for C3I (Command,
Control, Communication and
Intelligence)
INFORMATION SECURITY SYSTEMS
o STE (Secure Terminal o Secure and non-secure voice, o U.S. Armed services, intelligence
Equipment) data and video communication and security agencies
for office and battlefield utilizing
ISDN and ATM commercial
network technologies
TRAINING AND SIMULATION
o Military Flight Simulators o Training for pilots, navigators, o Military fixed and rotary winged
flight engineers, gunners and aircraft and ground vehicles
operators
o Battlefield and Weapon o Missile system modeling and o U.S. Army Missile Command
Simulation simulation
o Design and manufacture ballistic o U.S. Army Missile Command
missile ground launched and air
launched for threat replication
targets
o Training o Training for soldiers on complex o DoD
command and control systems
o Training and logistics services o DoD and foreign governments
and training device support
o Human Patient Simulators o Medical training o Medical schools, nursing schools,
and DoD
34
SECURE COMMUNICATION SYSTEMS
We are an established leader in the development, construction and
installation of communication systems for high performance intelligence
collection, imagery processing and ground, air, sea and satellite
communications for the DoD and other U.S. Government agencies. We provide
secure, high data rate, real-time communication systems for surveillance,
reconnaissance and other intelligence collection systems. We also design,
develop, produce and integrate communication systems and support equipment for
space, ground and naval applications, as well as provide communication software
support services to military and related government intelligence markets.
Product lines of the Secure Communication Systems business include high data
rate communications links, satellite communications terminals, naval vessel
communication systems, space communications and satellite control systems,
signal intelligence information processing systems, information security
systems, tactical battlefield sensor systems and commercial communication
systems.
High Data Rate Communications
We are a technology leader in high data rate, covert, jam-resistant
microwave communications used in military and other national agency
reconnaissance and surveillance applications. Our product line covers a full
range of tactical and strategic secure point-to-point and relay data
transmission systems, products and support services that conform to military
and intelligence specifications. Our systems and products are capable of
providing battlefield commanders with real-time, secure surveillance and
targeting information and were used extensively by U.S. armed forces in the
Persian Gulf War and during operations in Bosnia.
Our current family of strategic and tactical data links or CDL (Common
Data Link) systems are considered DoD standards for data link hardware. Our
primary focus is spread spectrum secure communication links technology, which
involves transmitting a data signal with a high-rate noise signal making it
difficult to detect by others, and then re-capturing the signal and removing
the noise. Our data links are capable of providing information at over 300
megabytes per second and use point-to-point and point-to-multipoint
architectures.
We provide these secure high bandwidth products to the U.S. Air Force, the
U.S. Navy, the U.S. Army and various U.S. Government agencies, many through
long-term sole-source programs. The scope of these programs include
air-to-ground, air-to-air, ground-to-air and satellite communications such as
the U-2 Support Program, CHBDL (Common High Band-Width Data Link), LAMPS (Light
Airborne Multi-Purpose System) GUARDRAIL, ASTOR and major UAV (unmanned aerial
vehicle) programs, such as Predator and Globalhawk.
Satellite Communication Terminals
We provide ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals
used to communicate with commercial, military and international satellites.
These terminals provide remote personnel with constant and effective
communication capability and provide communications links to distant forces.
Our TSS (TriBand SATCOM Subsystem) employs a 6.25 meter tactical dish with a
single point feed that provides C, Ku and X band communication to support the
U.S. Army. We also offer an 11.3 meter dish which is transportable on two C-130
aircraft. The SHF PTS (Portable Terminal System) is a lightweight (28 lbs.),
portable terminal, which communicates through DSCS, NATO or SKYNET satellites
and brings connectivity to small military tactical units and mobile command
posts. We delivered 14 of these terminals for use by NATO forces in Bosnia.
Space Communications and Satellite Control
We are currently producing and delivering three communication subsystems
for the ISS (International Space Station). These systems will control all ISS
radio frequency communications and external video activities. We also provide
solid-state recorders and memory units for data capture, storage, transfer and
retrieval for space applications. Our standard NASA tape recorder has
35
completed over five million hours of service without a mission failure. Our
recorders are on National Oceanic & Atmospheric Administration weather
satellites, the Earth Observing Satellite, AM spacecraft and Landsat-7
Earth-monitoring spacecraft. We also provide space and satellite system
simulation, satellite operations and computer system training, depot support,
network engineering, resource scheduling, launch system engineering, support,
software integration and test through cost-plus contracts with the U.S. Air
Force.
Military Communications
We provide integrated, computer controlled switching systems for the
interior and exterior voice and data needs of naval vessels. Our products
include Integrated Voice Communication Systems for Aegis class cruisers and
Arleigh Burke class destroyers and the Integrated Radio Room for Trident class
submarines, the first computer-controlled communications center in a submarine.
These products integrate the intercom, tactical and administrative
communications network into one system accessing various types of communication
terminals throughout the ship. Our MarCom 2000 secure digital switching system
provides an integrated approach to the specialized voice and data
communications needs of a shipboard environment for internal and external
communications, command and control and air traffic control. Along with the
Keyswitch Integrated Terminals, MarCom 2000 provides automated switching of
radio/crypto circuits, which results in significant time savings. We also offer
on-board, high data rate communications systems which provide a data link for
carrier battle groups which are interoperable with the U.S. Air Force's
surveillance/reconnaissance terminals. We supply the U.S. Army's Command and
Control Vehicle Mission Module Systems, which provide the "communications on
the move" capability needed for the digital battlefield by packaging advanced
communications into a modified Bradley Fighting Vehicle.
Information Security Systems
We are a leader in the development of secure communications equipment for
both military and commercial applications. We are producing the next generation
digital, ISDN-compatible STE (secure telephone equipment). STE provides clearer
voice and thirteen-times faster data/fax transmission capabilities than the
previous generation secure telecommunications equipment. STE also supports
secure conference calls and secure video teleconferencing. STE uses a
CryptoCard security system which consists of a small, portable, cryptographic
module holding the algorithms, keys and personalized credentials to identify
its user for secure communications access. We also provide the workstation
component of the U.S. Government's EKMS (Electronic Key Management System), the
next generation of information security systems. EKMS is the government system
to replace current "paper" encryption keys used to secure government
communications with "electronic" encryption keys. The component we provide
produces and distributes the electronic keys. We also develop specialized
strategic and tactical signal intelligence systems to detect, acquire, collect,
and process information derived from electronic sources. These systems are used
by classified customers for intelligence gathering and require high-speed
digital signal processing and high-density custom hardware designs.
Training and Simulation
We are a leading provider of fully-integrated simulation training systems
and related support services to the U.S. and foreign military agencies.
Our training devices business designs, develops and manufacturers advanced
virtual reality simulation and training products for training air crews with
high-fidelity representations of cockpits and operator stations for aircraft
and vehicle simulation. We believe that we have developed flight simulators for
most of the U.S. military aircraft in active operation. We have numerous
proprietary technologies and fully-developed systems integration capabilities
that provide competitive advantages. Our proprietary software is used for
visual display systems, high-fidelity system models, database production,
digital radar land mass image simulation and creation of synthetic
environments. We are
36
also a leader in developing DMT (Distributed Mission Training) systems which
allow multiple trainees at multiple sites to engage in group, unit and task
force training and combat simulations. In addition we are currently developing
all phases of the U.S. Air Force's warfighter training and combat readiness
program.
Our products and services can be designed to meet customer training
requirements for pilots, navigators, flight engineers, gunners, operators and
maintenance technicians for virtually any platform, including military fixed
and rotary wing aircraft, air vehicles and various ground vehicles. As one of
the leading suppliers of both simulator systems and training services, we
believe we are able to leverage our unique full-service capabilities to develop
fully-integrated, innovative solutions for training systems, propose and
provide program upgrades and modifications, as well as provide hands-on,
best-in-class training operations in accordance with virtually any customer
requirement in a timely manner.
Our training services business is a recognized provider of premium
training services and helps us maintain our market presence in training devices
by providing our primary customers, including the U.S. Air Force, U.S. Army and
U.S. Navy, with synergistic technical expertise in system instructional design,
maintainability, user requirements integration and system development.
We also design and develop prototypes of ballistic missle targets for
present and future threat scenarios. We provide high-fidelity custom targets to
the DoD that are complementary to the U.S. Government's growing focus and
priority on national missile defense and space programs.
We also develop and manage extensive programs in the United States and
internationally focusing on training and education, strategic planning,
organizational design, democracy transition and leadership development. To
provide these services, we utilize a pool of experienced former armed service,
law enforcement and other national security professionals. In the United
States, our personnel are instructors in the U.S. Army's ROTC program and are
involved in recruiting for the U.S. Army. In addition, we own a one-third
interest in Medical Education Technologies, Inc., which has developed and is
producing human patient simulators for sale to medical teaching and training
institutions and the DoD.
37
The products, selected applications and platforms or end users of our
Specialized Communication Products segment as of December 31, 2000, are
summarized in the table below.
SPECIALIZED COMMUNICATION PRODUCTS
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ------------------------------------------ -------------------------------------- -------------------------------------
AVIONICS AND OCEAN PRODUCTS
Aviation Products
o Solid state crash protected o Voice recorders continuously o Business and commercial aircraft
cockpit voice and flight data record most recent 30-120 and certain military transport
recorders minutes of voice and sounds aircraft; sold to both aircraft
from cockpit and aircraft manufacturers and airlines under
intercommunications. Flight data the Fairchild brand name
recorders record the last 25
hours of flight parameters
o TCAS (Traffic Alert and o Reduce the potential for midair o Commercial, business, regional
Collision Avoidance System) aircraft collisions by providing and military transport aircraft
visual and audible warnings and
maneuvering instructions to
pilots
Antenna Products
o Ultra-wide frequency and o Surveillance and radar detection o Military aircraft including
advanced radar antennas and surveillance, fighters and
rotary joints bombers, attack helicopters and
transport
o Precision antennas serving major o Antennas for high frequency, o Various military and commercial
military and commercial millimeter satellite customers including scientific
frequencies, including Ka band communications astronomers
Display Products
o Cockpit and mission displays o High performance, ruggedized o Military aircraft including
and controls flat panel and cathode ray tube surveillance, fighters and
displays and processors bombers, attack helicopters,
transport aircraft and land
vehicles
Ocean Products
o Airborne dipping sonars o Submarine detection and o Various military helicopters
localization
o Submarine and surface ship o Submarine and surface ship o U.S. Navy and foreign navies
towed arrays detection and localization
o Naval and commercial power o Switching, distribution and o All naval combatants:
delivery and switching products protection, as well as frequency submarines, surface ships and
and voltage conversion aircraft carriers
o Commercial transfer switches, o Production and maintenance of o Federal Aviation
uninterrupted power supplies systems and high-speed switches Administration, internet service
and power products for power interruption providers, financial institutions
prevention and rail transportation
38
SPECIALIZED COMMUNICATION PRODUCTS (CONT.)
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ----------------------------------------- -------------------------------------- --------------------------------------
TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS
Airborne, Ground and Space Telemetry
o Aircraft, missile and satellite o Real-time data acquisition, o Aircraft, missiles and satellites
telemetry and instrumentation measurement, processing,
systems simulation, distribution, display
and storage for flight testing
o GPS (Global Positioning o Tracking location o Guided projectiles
Systems) receivers
o Navigation systems and o Space navigation o Hubble Space Telescope,
subsystems, gyroscopes, reaction Delta IV launch vehicle and
wheels, star sensor satellites
Space Products
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private
systems video and data networks, direct to home
uplinks, satellite news gathering
and wideband applications
MICROWAVE COMPONENTS
o Passive components, switches o Radio transmission, switching o DoD, telephony service
and wireless assemblies and conditioning, antenna and providers and original
base station testing and equipment manufacturers
monitoring, broad-band and
narrow-band applications (PCS,
cellular, SMR and paging
infrastructure)
o Safety products o Radio frequency monitoring and o Monitor cellular base station and
measurement for safety industrial radio frequency
emissions
o Satellite and wireless o Satellite transponder control, o Communications satellites and
components (channel amplifiers, channel and frequency wireless communications
transceivers, converters, filters separation equipment
and multiplexers)
o Amplifiers and amplifier based o Automated test equipment, o DoD and commercial satellite
components (amplifiers, up/down military electronic warfare, operators
converters and Ka assemblies) ground and space
communications
SPECIALIZED COMMUNICATION PRODUCTS
Avionics and Ocean Products
Aviation Recorders. We manufacture commercial, solid-state,
crash-protected aviation recorders, commonly known as black boxes, under the
Fairchild brand name, and have delivered over 50,000 flight recorders to
airplane manufacturers and airlines around the world. We believe we are the
leading manufacturer of commercial cockpit voice recorders and flight data
recorders. We offer two types of recorders:
o the cockpit voice recorder, which records the last 30 to 120 minutes of
crew conversation and ambient sounds from the cockpit; and
o the flight data recorder, which records the last 25 hours of aircraft
flight parameters such as speed, altitude, acceleration, thrust from each
engine and direction of the flight in its final moments.
39
Recorders are highly ruggedized instruments, designed to absorb the shock
equivalent to that of an object traveling at 268 knots stopping in 18 inches,
fire resistant to 1,100 degrees centigrade and pressure resistant to 20,000
feet undersea for 30 days. Our recorders are mandated and regulated by various
worldwide agencies for use in commercial airlines and a large portion of
business aviation aircraft. We anticipate growth opportunities in aviation
recorders as a result of the current high level of orders for new commercial
aircraft. The U.S. military has recently required the installation of black
boxes in military transport aircraft. We believe this development will provide
us with new opportunities for expansion into the military market. Our recorders
were recently selected for installation on certain military transport aircraft.
We have completed development of a combined voice and data recorder and
are developing an enhanced recorder that monitors engine and other aircraft
parameters for use in maintenance and safety applications.
Antenna Products. We produce high performance antennas under the Randtron
brand name which are designed for:
o surveillance of high-resolution, ultra-wide frequency bands;
o detection of low radar cross-section targets and low radar cross-section
installations;
o severe environmental applications; and
o polarization diversity.
Our primary product is a sophisticated 24-foot diameter antenna used on
all E-2C surveillance aircraft. This airborne antenna is a rotating aerodynamic
radome containing a UHF surveillance radar antenna, an IFF antenna, and forward
and aft auxiliary antennas. Production is planned beyond 2000 for the E-2C, P-3
and C-130 AEW aircraft. We have been funded to begin the development of the
next generation for this antenna. We also produce broadband antennas for a
variety of tactical aircraft, as well as rotary joints for the AWAC antenna. We
have delivered over 2,000 sets of antennas for aircraft and have a backlog of
orders through 2004.
We are a leading supplier of ground based radomes used for air traffic
control, weather radar, defense and scientific purposes. These radomes enclose
an antenna system as a protective shield against the environment and are
intended to enhance the performance of an antenna system.
Display Products. We design, develop and manufacture ruggedized displays
for military and high-end commercial applications. Our current product line
includes a family of high performance display processing systems, which use
either a cathode ray tube or active matrix liquid crystal display. Our displays
are used in numerous airborne, ship-board and ground based platforms and are
designed to survive in military and harsh environments.
Ocean Products. We are one of the world's leading suppliers of acoustic
undersea warfare systems. Our experience spans a wide range of platforms,
including helicopters, submarines and surface ships. Our products include towed
array sonar, hull mounted sonar, airborne dipping sonar and ocean mapping sonar
for navies around the world.
We are also a leading provider of state-of-the-art electronics and
electrical power delivery systems and subsystems, as well as communications and
control systems for the military and commercial customers. We offer the
following:
o military power delivery equipment and components which focus on
switching, distribution and protection, providing engineering design and
development, manufacturing and overhaul and repair services;
o high technology electrical power distribution, control and conversion
equipment, which focus on frequency and voltage conversion for military
and commercial applications; and
o ship control and interior communications equipment.
40
We have been able to apply our static transfer switch technology, which we
developed for the U.S. military, to commercial applications. Our commercial
customers for static transfer switches are primarily financial institutions and
internet service providers, including American Express, AOL Time Warner, AT&T,
Schwab and the Federal Aviation Administration. In addition, we provide
electrical products for rail transportation and utilities businesses.
Telemetry, Instrumentation and Space Products
We are a leader in the development and marketing of component products and
systems used in telemetry and instrumentation for airborne applications such as
satellites, aircraft, UAVs, launch vehicles, guided missiles, projectiles and
targets. Telemetry involves the collection of data of various equipment
performance parameters and is required when the object under test is moving too
quickly or is of too great a distance to use direct connection. Telemetry
measures as many as 1,000 different parameters of the platform's operation such
as heat, vibration, stress and operational performance and transmits this data
to the ground.
Additionally, our satellite telemetry equipment transmits data necessary
for ground processing. These applications demand high reliability of components
because of the high cost of satellite repair and the need for uninterrupted
service. Telemetry also provides the data used to terminate the flight of
missiles and rockets under errant conditions and/or at the end of a mission.
These telemetry and command/control products are currently used for a variety
of missile and satellite programs.
Airborne, Ground and Space Telemetry. We provide airborne equipment and
data link systems that gather critical information and then process, format and
transmit the data to the ground from communications satellites, spacecraft,
aircraft and missiles. These products are available in both commercial
off-the-shelf and custom configurations and include software and software
engineering services. Primary customers include many of the major defense
contractors who manufacture aircraft, missiles, warheads, launch vehicles and
munitions. Our ground station instrumentation receives, encrypts and/or
decrypts the serial stream of combined data in real-time as it is received from
the airborne platform. We are a leader in digital GPS (Global Positioning
System) receiver technology for high performance military applications. These
GPS receivers are currently in use on aircraft, cruise missiles and precision
guided bombs and provide highly accurate positioning and navigational
information. Additionally, we provide navigation systems for high performance
weapon pointing and positioning systems for programs such as MLRS (Multiple
Launch Rocket System) and MFCS (Mortar Fire Control System).
Space Products. We offer value-added solutions that provide our customers
with complex product integration and comprehensive support. We focus on the
following niches within the satellite ground segment equipment market:
telephony, video broadcasting and multimedia. Our customers include foreign
communications companies, domestic and international prime communications
infrastructure contractors, telecommunications or satellite service providers,
broadcasters and media-related companies. We also provide space products for
advanced guidance and control systems including gyroscopes, controlled momentum
devices and star sensors. These products are used on satellites, launch
vehicles, the Hubble Telescope, the Space Shuttle and the International Space
Station.
Microwave Components
We believe we are a premier worldwide supplier of commercial
off-the-shelf, high performance RF (radio frequency) microwave components,
assemblies and instruments supplying the wireless communications, industrial
and military markets. We are also a leading provider of state-of-the-art
space-qualified commercial satellite and strategic military RF products and
millimeter amplifier based products. We sell many of these components under the
well-recognized Narda brand name through a comprehensive catalog of standard,
stocked hardware. We also sell our products through a direct sales force and an
extensive network of market representatives. Specific catalog offerings include
wireless products, electro-mechanical switches, power dividers and hybrids,
couplers/detectors, attenuators,
41
terminations and phase shifters, isolators and circulators, adapters, control
products, sources, mixers, waveguide components, RF safety products, power
meters/monitors and custom passive products.
Passive components are generally purchased in narrow frequency
configurations by wireless equipment manufacturers, wireless service providers
and military equipment suppliers. Commercial applications include cellular and
PCS base station automated test equipment, and equipment for the paging
industry. Military applications include electronic surveillance and
countermeasure systems.
Our space-qualified and wireless components separate various signals and
direct them to sections of the satellites' payload. Our main satellite products
are channel amplifiers and linearizers, payload products, transponders and
antennas. Channel amplifiers amplify the weak signals received from earth
stations, and then drive the power amplifier tubes that broadcast the signal
back to earth. Linearizers, used either in conjunction with a channel amplifier
or by themselves, pre-distort a signal to be transmitted back to earth before
it enters a traveling wave tube for amplification. This pre-distortion is
exactly the opposite of the distortion created at peak power by the traveling
wave tube and, consequently, has a cancellation effect that keeps the signal
linear over a much larger power band of the tube. The traveling wave tube and
area covered by the satellite is significantly increased.
We design and manufacture both broad and narrow band amplifiers and
amplifier-based products in the microwave and millimeter wave frequencies. We
use these amplifiers in defense and communications applications. These devices
can be narrow band for communication needs or broadband for electronic warfare.
We offer standard packaged amplifiers for use in various test equipment
and system applications. We design and manufacture millimeter range (at least
20 to 38 GHz) amplifier products for use in emerging communication applications
such as back haul radios, LMDS (Local Multipoint Distribution Service) and
ground terminals for LEO satellites. On July 11, 2000, to further our
millimeter wave efforts, we acquired a 53 1/2% equity interest in LogiMetrics,
Inc. LogiMetrics designs, manufactures and markets solid state, broadband
wireless communications infrastructure equipment, subsystems and modules used
to provide point-to-multipoint terrestrial and satellite-based distribution
services in frequency bands from 24 to 38 gigahertz. LogiMetrics' products
include solid-state power amplifiers, hub transmitters, active repeaters,
cell-to-cell relays, internet access systems and other millimeter wave-based
modules and subsystems. These products are used in various applications, such
as broadband communications, including LMDS, PMP (Point to Multipoint) local
loop services and Ka-band satellite communications.
DEVELOPING COMMERCIAL OPPORTUNITIES
Part of our growth strategy is to identify commercial applications for
select products and technologies currently sold to defense customers. We have
initially identified two vertical markets where we believe there are
significant opportunities to expand our products: transportation and broadband
wireless communications.
Transportation. Our products, designed to meet strict government quality
and reliability standards, are easily adapted to the commercial transportation
marketplace. Our aircraft voice recorders, designed to meet FAA requirements,
have been successfully marketed to the cruise ship, marine shipping and
railroad industries. Similarly, our state-of-the-art power propulsion products,
originally designed for the U.S. Navy, meet the needs of commuter railroads,
including Philadelphia's regional rail system and New York City's Metropolitan
Transportation Authority. Our explosive detection system, the eXaminer 3DXTM
6000, enables the rapid scanning of passenger checked baggage at airports using
state-of-the-art technology.
Communications. The wireless communications technology we developed for
our military customers also meets the needs of a growing commercial marketplace
for technologically advanced communications products. Some of the products we
have developed or are developing to exploit this market include wireless loop
products, transceivers, LMDS, compression products, remote sensing internet
networks, microwave links and products for microwave base stations. Our fixed
wireless loop products are an example of our expanding involvement in the
commercial communications industry.
42
Using synchronous CDMA technology that supports terrestrial, space, fixed and
mobile communications, we produce wireless loop equipment for use in areas that
do not have an adequate telecommunications infrastructure, including emerging
market countries and customers in rural areas.
In the expanding broadband wireless commercial communications market, we
also have developed a broad assortment of other products including
transponders, payloads, uplinks, downlinks, fly-away SATCOM terminals,
telemetry tracking and control and test equipment and waveform generators.
BACKLOG AND ORDERS
We define funded backlog as the value of contract awards received from the
U.S. Government, which the U.S. Government has appropriated funds, plus the
value of contract awards and orders received from customers other than the U.S.
Government, which have yet to be recognized as sales. Our funded backlog as of
December 31, 2000 was $1,354.0 million and as of December 31, 1999 was $1,003.7
million. We expect to record as sales approximately 72.0% of our funded backlog
as of December 31, 2000 during 2001. However, there can be no assurance that
our backlog will become sales in any particular period, if at all. Our funded
orders for the year ended December 31, 2000 was $2,013.7 million, for the year
ended December 31, 1999 was $1,423.1 million and for the year ended December
31, 1998 was $1,057.0 million.
Our funded backlog does not include the full value of our contract awards
including those pertaining to multi-year, cost-plus reimbursable contracts,
which are generally funded on an annual basis. Funded backlog also excludes the
sales value of unexercised contract options that may be exercised by customers
under existing contracts and the sales value of purchase orders that may be
issued under indefinite quantity contracts or basic ordering agreements.
MAJOR CUSTOMERS
For the year ended December 31, 2000, direct and indirect sales to the DoD
provided 62.7% of our sales, and sales to commercial, foreign governments and
U.S. Government agencies other than the DoD provided 37.3% of our sales.
Our government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Various U.S.
Government agencies and contracting entities exercise independent purchasing
decisions. Therefore, we do not regard sales to the U.S. Government generally
as constituting sales to one customer. Instead, we regard each contracting
entity as a separate customer. As of December 31, 2000, we had approximately
600 contracts each with a value exceeding $1.0 million. For the year ended
December 31, 2000, sales to our five largest customers amounted to $196.3
million or 10.3% of our sales. We are working to grow our relationships with
our major commercial customers, and believe that we have established a
competitive position in the markets that we have entered.
RESEARCH AND DEVELOPMENT
We conduct research and development activities that consist of projects
involving basic research, applied research, development, and systems and other
concept studies. We employ scientific, engineering and other personnel to
improve our existing product lines and develop new products and technologies.
As of December 31, 2000, we employed approximately 5,600 engineers, a
substantial portion of whom held advanced degrees. Company-funded research and
development costs including bid and proposal costs were $101.9 million for
2000, $76.1 million for 1999 and $59.9 million for 1998. Customer-funded
research and development were $299.3 million for 2000, $226.3 million for 1999
and $181.4 million for 1998.
COMPETITION
We encounter intense competition in all of our businesses. We believe that
we are a significant supplier of many of the products that we manufacture and
services we provide in our defense and government businesses, as well as in our
commercial activities.
43
Defense and Government Business
Our ability to compete for defense contracts depends on a variety of
factors, including:
o the effectiveness and innovation of our research and development
programs;
o our ability to offer better program performance than our competitors at
a lower cost; and
o the availability of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, programs are sole-source or work directed by the
customer to a single supplier. In such cases, there may be other suppliers who
have the capability to compete for the programs involved, but they can only
enter or reenter the market if the customer chooses to reopen the particular
program to competition. Competitive contracts accounted for approximately 39%
of our total sales for the year ended December 31, 2000. The majority of our
sales are derived from contracts with the U.S. Government and its prime
contractors, which are principally awarded on the basis of negotiations or
competitive bids.
We compete with various industrial firms, some of which have substantially
greater resources than we have available to us. Several of these companies are
listed below. We do not believe that any of these individual competitors, nor
any small number of these competitors together, are dominant in any of our
business areas.
o CAE Electronics Ltd.;
o Cubic Corporation;
o Eaton Corporation;
o Harris Corporation;
o Motorola, Inc.;
o Scientific-Atlanta, Inc.;
o Thomson Marconi Sonar Ltd.;
o Titan Corporation; and
o TRW Inc.
We believe that we will continue to be a successful participant in the
business areas in which we compete, based upon the quality and cost
competitiveness of our products and services.
Commercial Activities
Our commercial activities have become an increasingly significant portion
of our business mix, and comprised 25.2% of our total sales for the year ended
December 31, 2000. Our ability to compete for commercial business depends on a
variety of factors, including:
o brand recognition;
o customer relationships, service and support;
o pricing;
o product features and performance; and
o reliability, scalability and compatibility.
In these markets, we compete with various companies, several of which are
listed below.
o Agilent Technologies, Inc.;
o Globecomm Systems, Inc.;
o Honeywell Inc.;
o Smiths Industries; and
o ViaSat, Inc.
We believe that our sales in these business areas will continue to grow as
a percentage of our total sales, even though several of our competitors may
have greater resources and technologies than we have available to us.
PATENTS AND LICENSES
Although we own some patents and have filed applications for additional
patents, we do not believe that our operations depend upon our ownership of
patents. In addition, our U.S. Government contracts generally permit us to use
patents owned by others. Similar provisions in U.S. Government
44
contracts awarded to other companies make it impossible for us to prevent the
use of our patents in most domestic work performed by other companies for the
U.S. Government.
CONTRACTS
A significant portion of our sales are derived from strategic, long-term
programs and from programs for which we are the incumbent supplier or have been
the sole provider for many years. Approximately 61% of our sales for the year
ended December 31, 2000, were generated from sole-source contracts. Our
customer satisfaction and performance record are evidenced by our receipt of
performance-based award fees exceeding 90% of the available award fees on
average during the year ended December 31, 2000. We believe that our customers
will award long-term, sole-source, outsourcing contracts to the most capable
merchant supplier in terms of quality, responsiveness, design, engineering and
program management support as well as cost. As a consequence of our strong
competitive position, for the year ended December 31, 2000, we won contract
awards in excess of 57.0% on new competitive contracts that we bid on, and in
excess of 90.0% of the contracts for which we were the incumbent supplier.
We have a diverse business mix with limited reliance on any single
program, a balance of cost plus and fixed price contracts, a significant
sole-source follow-on business and an attractive customer profile. For the year
ended December 31, 2000, 28.6% of our sales were generated from cost plus
contracts and 71.4% from fixed price contracts, providing us with a mix of
predictable profitability (cost plus) and higher profit margin (fixed price)
business. In a fixed price contract, the price is not subject to adjustment
based on cost incurred to perform the required work under the contract. In a
cost plus contract, we are reimbursed for allowable incurred costs plus a fee,
which may be fixed or variable depending on the contract arrangement. The price
on a cost plus contract is based on allowable cost incurred, but generally is
subject to contract funding limitations.
Under firm fixed price contracts we agree to perform for a predetermined
contract price. Although our fixed price contracts generally permit us to keep
profits if costs are less than projected, we bear the risk that increased or
unexpected costs may reduce profit or cause us to sustain losses on the
contracts. Generally, firm fixed price contracts offer higher margins than cost
plus type contracts. All domestic defense contracts and subcontracts to which
we are a party are subject to audit, various profit and cost controls and
standard provisions for termination at the convenience of the U.S. Government.
Upon termination other than for a contractor's default, the contractor will
normally be entitled to reimbursement for allowable costs and an allowance for
profit. Foreign defense contracts generally contain comparable provisions
permitting termination at the convenience of the government. To date, none of
our significant fixed price contracts have been terminated.
Companies supplying defense-related equipment to the U.S Government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the U.S. Government to unilaterally suspend a
company from new contracts pending resolution of alleged violations of
procurement laws or regulations. Other risks include a dependence on
appropriations by the U.S. Government, changes in the U.S. Government's
procurement policies (such as greater emphasis on competitive procurements) and
the need to bid on programs in advance of design completion. A reduction in
expenditures by the U.S. Government for products and services of the type we
manufacture and provide, lower margins resulting from increasingly competitive
procurement policies, a reduction in the volume of contracts or subcontracts
awarded to us or substantial cost overruns could have an adverse effect on us.
ENVIRONMENTAL MATTERS
Our operations are subject to various U.S. federal, state and local as
well as certain foreign environmental laws and regulations relating to the
discharge, storage, treatment, handling, disposal and remediation of certain
materials, substances and wastes used in our operations. We continually assess
our obligations and compliance with respect to these requirements. We have also
assessed the risk of environmental contamination on various manufacturing
facilities of our acquired businesses
45
and, where appropriate, have obtained indemnification, either from the sellers
of those acquired businesses or through pollution liability insurance. We
believe that our current operations are in substantial compliance with all
existing applicable environmental laws and permits. We believe our current
expenditures will allow us to continue to be in compliance with applicable
environmental laws and regulations. While it is difficult to determine the
timing and ultimate cost to be incurred in order to comply with these laws,
based upon available internal and external assessments, with respect to those
environmental loss contingencies of which we are aware, we believe that even
without considering potential insurance recoveries, if any, there are no
environmental loss contingencies that, individually or in the aggregate, would
be material to our consolidated results of operations.
We continually assess our obligations and compliance with these
requirements. We believe that our operations are in substantial compliance with
all applicable environmental laws and permits. We do not expect to incur any
material expenditures to maintain our compliance with applicable environmental
laws and regulations.
PENSION PLANS
In connection with our acquisition of the predecessor company, we assumed
certain liabilities relating to defined benefit pension plans for present and
former employees and retirees of certain businesses which were transferred from
Lockheed Martin to us. Prior to the consummation of our acquisition of the
predecessor company, Lockheed Martin received a letter from the Pension Benefit
Guaranty Corporation (the "PBGC") which requested information regarding the
transfer of such pension plans and indicated that the PBGC believed certain of
such pension plans were underfunded using the PBGC's actuarial assumptions. The
PBGC assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under Statement of Financial
Accounting Standards No. 87. The PBGC underfunding is related to the
Communication Systems -- West and Aviation Recorders pension plans (the
"Subject Plans").
With respect to the Subject Plans, Lockheed Martin entered into an
agreement (the "Lockheed Martin Commitment") among Lockheed Martin, L-3
Communications and the PBGC dated as of April 30, 1997. The material terms and
conditions of the Lockheed Martin Commitment include a commitment by Lockheed
Martin to the PBGC to, under certain circumstances, assume sponsorship of the
Subject Plans or provide another form of financial support for the Subject
Plans. The Lockheed Martin Commitment will continue with respect to any Subject
Plan until such time as such Subject Plan is no longer underfunded on a PBGC
basis for two consecutive years or, at any time after May 31, 2002, the Company
achieves investment grade credit ratings. Pursuant to the Lockheed Martin
Commitment, the PBGC agreed that it would take no further action in connection
with the L-3 Acquisition.
Upon the occurrence of certain events, Lockheed Martin, at its option, has
the right to decide whether to cause the Company to transfer sponsorship of any
or all of the Subject Plans to Lockheed Martin, even if the PBGC has not sought
to terminate the Subject Plans. Such a triggering event occurred in 1998, but
reversed in 1999, relating to a decrease in the PBGC-mandated discount rate in
1998 that had resulted in an increase in the underlying liability. We notified
Lockheed Martin of the 1998 triggering event, and in February 1999, Lockheed
Martin informed the Company that it had no present intention to exercise its
right to cause the Company to transfer sponsorship of the Subject Plans. If
Lockheed Martin did assume sponsorship of these plans, it would be primarily
liable for the costs associated with funding the Subject Plans or any costs
associated with the termination of the Subject Plans but L-3 Communications
would be required to reimburse Lockheed Martin for these costs. To date, the
impact on pension expense and funding requirements resulting from this
arrangement has not been significant. However, should Lockheed Martin assume
sponsorship of the Subject Plans or if these plans were terminated, the impact
of any increased pension expenses or funding requirements could be material to
the Company. The Company has performed its obligations under the letter
agreement with Lockheed Martin and the Lockheed Martin Commitment and has not
received any communications from the PBGC concerning actions which the PBGC
contemplates taking in respect of the Subject Plans.
46
EMPLOYEES
As of December 31, 2000, we employed approximately 14,000 full-time and
part-time employees, the majority of whom are located in the United States. Of
these employees, approximately 10.9% are covered by 23 separate collective
bargaining agreements with various labor unions. We have a continuing need for
skilled and professional personnel to meet contract schedules and obtain new
and ongoing orders for our products. We believe that relations with our
employees are good.
PROPERTIES
As of December 31, 2000, we operated at 198 facilities serving a variety
of manufacturing, administrative and sales functions. Of these, we owned space
at 27 locations, aggregating approximately 1.1 million square feet, and we
leased space at 171 locations, aggregating approximately 4.5 million square
feet.
The table below presents certain information with respect to our
significant facilities and properties as of December 31, 2000.
LOCATION OWNED LEASED
- -------------------------------------------------- --------- ---------
(thousands of square
feet)
L-3 Headquarters, New York, NY ................... -- 35.4
L-3 Washington Operations, Arlington, VA ......... -- 6.3
SECURE COMMUNICATION SYSTEMS:
Camden, NJ ...................................... -- 580.6
Arlington, TX ................................... 82.5 182.6
Salt Lake City, UT .............................. -- 497.5
Orlando, FL ..................................... -- 153.6
SPECIALIZED COMMUNICATION PRODUCTS:
Anaheim, CA ..................................... 293.6 242.0
Folsom, CA ...................................... -- 57.5
Menlo Park, CA .................................. -- 93.1
San Diego, CA ................................... 196.0 68.9
Sylmar, CA ...................................... -- 253.0
Ocala, FL ....................................... 112.0 --
Sarasota, FL .................................... -- 143.7
Alpharetta, GA .................................. 93.0 --
Concord, MA ..................................... -- 60.0
Newburyport, MA ................................. -- 82.5
Teterboro, NJ ................................... -- 250.0
Binghamton, NY .................................. -- 428.0
Hauppauge, NY ................................... 90.0 149.9
Newton, PA ...................................... 78.0 --
Philadelphia, PA ................................ -- 230.0
Kiel, Germany ................................... -- 67.2
Leer, Germany ................................... -- 26.5
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe we have adequately reserved for
these liabilities and that there is no litigation pending that could have a
material adverse effect on our results of operations and financial condition.
On December 27, 2000, we filed a complaint against Raytheon and Raytheon
Technical Services Company in the Court of Chancery for the State of Delaware
in and for New Castle County, alleging that Raytheon failed to disclose
material liabilities in connection with the sale of the Training Devices and
Training Service businesses ("TDTS") to us in February 2000. Specifically, the
complaint alleges that Raytheon misrepresented the financial liabilities
associated with the U.S. Army Aviation
47
Combined Arms Tactical Trainer ("AVCATT") contract which will cause us to incur
damages of approximately $100 million. We assumed the AVCATT contract as part
of our acquisition of TDTS from Raytheon which was completed in February 2000.
The complaint seeks rescission of the TDTS Asset Purchase and Sale Agreement
and, alternatively, rescission of the AVCATT contract, rescissory damages and
damages for breach of contract.
48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information concerning the directors and
executive officers of L-3 Holdings as of March 31, 2001:
NAME AGE POSITION
- ----------------------------------- ----- -------------------------------------------------------
Frank C. Lanza .................... 69 Chairman, Chief Executive Officer and Director
Robert V. LaPenta ................. 55 President, Chief Financial Officer and Director
Christopher C. Cambria ............ 42 Senior Vice President -- General Counsel and Secretary
Michael T. Strianese .............. 45 Senior Vice President -- Finance
Jimmie V. Adams ................... 64 Vice President -- Washington D.C. Operations
David T. Butler III ............... 44 Vice President -- Planning
Lawrence W. O'Brien ............... 51 Vice President -- Treasurer
Joseph S. Paresi .................. 45 Vice President -- Product Development
Robert W. RisCassi ................ 65 Vice President -- Washington D.C. Operations
Charles J. Schafer ................ 53 Vice President -- Business Operations
Jill J. Wittels ................... 51 Vice President -- Business Development
Ralph G. D'Ambrosio ............... 33 Controller
David J. Brand(1) ................. 39 Director
Thomas A. Corcoran ................ 56 Director
Alberto M. Finali ................. 46 Director
Robert B. Millard(2) .............. 50 Director
John E. Montague(2) ............... 46 Director
John M. Shalikashvili(1) .......... 64 Director
Arthur L. Simon(1) ................ 69 Director
Alan H. Washkowitz(2) ............. 60 Director
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Frank C. Lanza, Chairman and Chief Executive Officer. Mr. Lanza joined us
in April 1997. From April 1996, when Loral was acquired by Lockheed Martin
Corporation, until April 1997, Mr. Lanza was Executive Vice President of
Lockheed Martin Corporation, a member of Lockheed Martin Corporation's
Executive Council and Board of Directors and President and Chief Operating
Officer of Lockheed Martin Corporation's C3I (command, control, communications
and intelligence) and Systems Integration Sector, which comprised many of the
businesses acquired by Lockheed Martin Corporation from Loral. Prior to the
April 1996 acquisition of Loral, Mr. Lanza was President and COO of Loral, a
position he held since 1981. He joined Loral in 1972 as President of its
largest division, Electronic Systems. His earlier experience was with Dalmo
Victor and Philco Western Development Laboratory.
Robert V. LaPenta, President and Chief Financial Officer. Mr. LaPenta
joined us in April 1997. From April 1996, when Loral was acquired by Lockheed
Martin Corporation, until April 1997, Mr. LaPenta was a Vice President of
Lockheed Martin Corporation and was Vice President and Chief Financial Officer
of Lockheed Martin Corporation's C3I and Systems Integration Sector. Prior to
the April 1996 acquisition of Loral, he was Loral's Senior Vice President and
Controller, a position he held since 1981. He joined Loral in 1972 and was
named Vice President and Controller of its largest division in 1974. He became
Corporate Controller in 1978 and was named Vice President in 1979. Mr. LaPenta
is on the Board of Directors of Core Software and on the Board of Trustees of
Iona College and the American College of Greece.
49
Christopher C. Cambria, Senior Vice President -- General Counsel and
Secretary. Mr. Cambria joined us in June 1997 as Vice President -- General
Counsel and Secretary. He became a Senior Vice President in March 2001. From
1994 until joining the Company, Mr. Cambria was an associate with Fried, Frank,
Harris, Shriver & Jacobson. From 1986 until 1993, he was an associate with
Cravath, Swaine & Moore.
Michael T. Strianese, Senior Vice President -- Finance. Mr. Strianese
joined us in April 1997 as Vice President -- Finance and Controller. He became
a Senior Vice President in March 2001. From April 1996, when Loral was acquired
by Lockheed Martin Corporation, until April 1997, Mr. Strianese was Vice
President and Controller of Lockheed Martin Corporation's C3I and Systems
Integration Sector. From 1991 to the April 1996 acquisition of Loral, he held
various financial positions with Loral. Mr. Strianese is a Certified Public
Accountant.
Jimmie V. Adams, Vice President -- Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) joined us in May 1997. From April 1996 until
April 1997, he was Vice President of Lockheed Martin Corporation's Washington
Operations for the C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position at Loral since 1993. Before
joining Loral in 1993, he was Commander in Chief, Pacific Air Forces, Hickam
Air Force Base, Hawaii, capping a 35-year career with the U.S. Air Force. He
was also Deputy Chief of Staff for plans and operation for U.S. Air Force
headquarters and Vice Commander of Headquarters Tactical Air Command and Vice
Commander in Chief of the U.S. Air Forces Atlantic at Langley Air Force Base.
He is a command pilot with more than 141 combat missions.
David T. Butler III, Vice President -- Planning. Mr. Butler became our
Vice President -- Planning in December 2000. He joined us in 1997 and until
December was our corporate director of planning and strategic development.
Prior to joining us, he was the controller for Lockheed Martin Fairchild
Systems from 1996 to 1997. Prior to the acquisition of Loral, Mr. Butler was
controller of Loral Fairchild Systems from 1992 to 1996. From 1981 to 1992 Mr.
Butler held a number of financial positions with Loral Electronic Systems.
Lawrence W. O'Brien, Vice President -- Treasurer. Mr. O'Brien joined us in
June 1997. Prior to joining us, he was the Vice President and Treasurer of
Pechiney Corporation, the North American arm of the Pechiney Group of France,
where he held a number of financial positions since 1981.
Joseph S. Paresi, Vice President -- Product Development. Mr. Paresi joined
us in April 1997. From April 1996 until April 1997, Mr. Paresi was Corporate
Director of Technology for Lockheed Martin Corporation's C3I and System
Integration Sector. Prior to the April 1996 acquisition of Loral, Mr. Paresi
was Corporate Director of Technology for Loral, a position he held since 1993.
From 1978 to 1993, Mr. Paresi was a Systems Engineer, Director of Marketing and
Director of International Programs at Loral Electronic Systems.
Robert W. RisCassi, Vice President -- Washington, D.C. Operations. General
Robert W. RisCassi (U.S. Army-ret.) joined us in April 1997. From April 1996
until April 1997, he was Vice President of Land Systems for Lockheed Martin
Corporation's C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, he had held the same position for Loral since 1993. He
joined Loral in 1993 after retiring as U.S. Army Commander in Chief, United
Nations Command/Korea. His 35-year military career included posts as Army Vice
Chief of Staff; Director, Joint Staff, Joint Chiefs of Staff; Deputy Chief of
Staff for Operations and Plans; and Commander of the Combined Arms Center.
General RisCassi is currently a director of Alliant Techsystems Inc.
Charles J. Schafer, Vice President -- Business Operations and President of
the Products Group. Mr. Schafer joined us in August 1998 as Vice President --
Business Operations and was appointed President of our Products Group in
September 1999. Prior to August 1998, he was President of Lockheed Martin's
Tactical Defense Systems Division, a position he also held at Loral since
September 1994. Prior to the April 1996 acquisition of Loral, Mr. Schafer held
various executive positions with Loral, which he joined in 1984.
50
Jill J. Wittels, Vice President -- Business Development. Dr. Wittels
joined us in February 2001. From July 1998 to February 2001, Dr. Wittels was
Vice President and General Manager for the Information and Electronic Warfare
Systems/Infrared Imaging Systems Division of BAE Systems, formerly a division
of Lockheed Martin Corporation and its predecessors, Loral Corporation and
Honeywell Inc. Between November 1979 and July 1998, she held a variety of
positions at Infrared Imaging Systems. Dr. Wittels began her career as a
physicist and has also served as a Congressional Fellow for the American
Physical Society, a research associate at Massachusetts Institute of Technology
and a senior visiting scientist for the National Academy of Sciences. Dr.
Wittels serves on the Board of Overseers for the Department of Energy's Fermi
National Accelerator Laboratory and is a member of the American Physical
Society.
Ralph G. D'Ambrosio, Controller. Mr. D'Ambrosio became Controller in
August 2000. He joined us in August 1997, and until July 2000 was our Assistant
Controller. Prior to joining us, he was a senior manager at Coopers & Lybrand
L.L.P., where he held a number of positions since 1989. Mr. D'Ambrosio is a
Certified Public Accountant.
David J. Brand, Director. Mr. Brand has served as one of our directors
since April 1997 and is a member of the audit committee. Mr. Brand is a
Managing Director of Lehman Brothers and a principal in the Global Mergers &
Acquisitions Group, leading Lehman Brothers' Technology Mergers and
Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and has been
responsible for merger and corporate finance advisory services for many of
Lehman Brothers' technology and defense industry clients. Mr. Brand is
currently a director of K&F Industries, Inc.
Thomas A. Corcoran, Director. Mr. Corcoran has served as one of our
directors since July 1997. Mr. Corcoran is president of Corcoran Enterprises, a
private management consulting firm. Mr. Corcoran was the President and Chief
Executive Officer of Allegheney Teledyne Incorporated from October 1999 to
December 2000. From October 1998 to September 1999, he was President and Chief
Operating Officer of the Space & Strategic Missiles Sector of Lockheed Martin
Corporation. From March 1995 to September 1998 he was the President and Chief
Operating Officer of the Electronic Systems Sector of Lockheed Martin
Corporation. From 1993 to 1995, Mr. Corcoran was President of the Electronics
Group of Martin Marietta Corporation. Prior to that he worked for General
Electric for 26 years and from 1983 to 1993 he held various management
positions with GE Aerospace and was a company officer from 1990 to 1993. Mr.
Corcoran is a member of the Board of Trustees of Worcester Polytechnic
Institute, the Board of Trustees of Stevens Institute of Technology, a director
of REMEC Corporation.
Alberto M. Finali, Director. Mr. Finali has served as one of our directors
since April 1997 and is a Managing Director of Lehman Brothers and principal of
the Merchant Banking Group, based in New York. Prior to joining the Merchant
Banking Group, Mr. Finali spent four years in Lehman Brothers' London office as
a senior member of the M&A Group. Mr. Finali joined Lehman Brothers in 1987 as
a member of the M&A Group in New York and became a Managing Director in 1997.
Prior to joining Lehman Brothers, Mr. Finali worked in the Pipelines and
Production Technology Group of Bechtel, Inc. in San Francisco. Mr. Finali is
currently a director of CP Kelco ApS.
Robert B. Millard, Director. Mr. Millard has served as one of our
directors since April 1997 and is a Managing Director of Lehman Brothers, head
of Lehman Brothers' Principal Trading & Investments Group and principal of the
Merchant Banking Group. He is also a member of the Compensation Committee. Mr.
Millard joined Kuhn Loeb & Co. in 1976 and became a Managing Director of Lehman
Brothers in 1983. Mr. Millard is currently a director of GulfMark
International, Kirch Media GmbH and Weatherford International, Inc.
John E. Montague, Director. Mr. Montague has served as one of our
directors since April 1997 and is a member of the compensation committee. He
has been Vice President and Chief Financial Officer of Lockheed Martin
Corporation Global Telecommunications, Inc., a wholly owned subsidiary of
Lockheed Martin Corporation, since September 1998. He served as Vice President,
Financial Strategies at Lockheed Martin Corporation responsible for mergers,
acquisitions and divestiture activities and shareholder value strategies from
March 1995 until September 1998. Previously, he was
51
Vice President, Corporate Development and Investor Relations at Martin Marietta
Corporation from 1991 to 1995. From 1988 to 1991, he was Director of Corporate
Development at Martin Marietta Corporation, which he joined in 1977 as a member
of the engineering staff. Mr. Montague is a director of Rational Software
Corporation, Lockheed Martin Intersputnik and Asian Cellular Satellite Systems,
Inc.
John M. Shalikashvili, Director. General Shalikashvili (U.S. Army-ret.)
has served as one of our directors since August 1998 and is the chairman of the
audit committee. General Shalikashvili is an independent consultant and a
Visiting Professor at Stanford University. Prior to his appointment, he was the
senior officer of the United States military and principal military advisor to
the President of the United States, the Secretary of Defense and National
Security Council in his capacity as the thirteenth Chairman of the Joint Chiefs
of Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his
tenure as Chairman of the Joint Chiefs of Staff, he served as the Commander in
Chief of all United States forces in Europe and as NATO's tenth Supreme Allied
Commander, Europe (SACEUR). He has also served in a variety of command and
staff positions in the continental United States, Alaska, Belgium, Germany,
Italy, Korea, Turkey and Vietnam. Mr. Shalikashvili is currently a director of
The Boeing Company, Frank Russell Trust Company, Plug Power, Inc. and United
Defense Industries, Inc.
Arthur L. Simon, Director. Mr. Simon has served as one of our directors
and member of the Audit Committee since April 2000 and is an independent
consultant. From 1968 until 1994, Mr. Simon was a partner at Coopers & Lybrand
L.L.P. He is a Director of Loral Space & Communications, Inc. and Globalstar
Telecommunications Limited.
Alan H. Washkowitz, Director. Mr. Washkowitz has served as one of our
directors since April 1997 and is a Managing Director of Lehman Brothers and
head of the Merchant Banking Group, and is responsible for the oversight of
Lehman Brothers Merchant Banking Portfolio Partnership L.P. He is also a member
of the compensation committee. Mr. Washkowitz joined Lehman Brothers in 1978
when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr. Washkowitz is
currently a director of CP Kelco ApS, K&F Industries, Inc. and P&L Coal
Holdings.
Our certificate of incorporation provides for a classified board of
directors divided into three classes. Class I will expire at the annual meeting
of the stockholders to be held in 2002; Class II will expire at the annual
meeting of the stockholders to be held in 2001; and Class III will expire at
the annual meeting of the stockholders to be held in 2003. At each annual
meeting, our stockholders will elect the successors to directors whose terms
will then expire to serve from the time of election and qualification until the
third annual meeting following election and until their successors have been
elected and qualified, or until their earlier resignation or removal, if any.
Increases or decreases in the number of directorships will be distributed among
the three classes so that, as nearly as possible, each class will consist of an
equal number of directors.
Our executive officers and key employees serve at the discretion of our
board of directors.
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors directs the management of our business and affairs,
as provided by Delaware law, and conducts its business through meetings of the
board of directors and two standing committees: the audit committee and the
compensation committee. In addition, from time to time, special committees may
be established under the direction of the board of directors when necessary to
address specific issues. We have no nominating committee or similar committee.
Each executive officer serves at the discretion of the board of directors.
During the fiscal year ended December 31, 2000, the board of directors held
four regularly scheduled meetings and one special meeting.
The audit committee currently consists of Messrs. Brand, Shalikashvili
(chairman) and Simon. This committee is responsible generally for recommending
to the board of directors the independent accountants to be nominated to audit
our financial statements; approving the compensation of the independent
accountants; meeting with our independent accountants to review the proposed
scope of the annual audit of our financial statements; reviewing the findings
of the independent accountants
52
with respect to the annual audit; and reviewing with management and the
independent accountants our periodic reports prior to our filing them with the
SEC and reporting annually to the board of directors with respect thereto.
The compensation committee consists of Messrs. Millard (Chairman),
Montague and Washkowitz. This committee is responsible for administering L-3
Holdings' 1997 Stock Option Plan for Key Employees (the "1997 Plan") and L-3
Holdings' 1999 Long Term Performances Plan (the "1999 Plan") and has limited
authority to adopt amendments to those plans. This Committee is also
responsible for recommending to the board of directors the salaries to be paid
to our Chief Executive Officer and President, and reviewing and approving the
Chief Executive Officer's and the President's other annual cash compensation
and long-term incentives and the total compensation to be paid to certain of
our other officers.
COMPENSATION OF DIRECTORS
The directors who are also our employees or employees of our subsidiaries
or affiliates do not receive compensation for their services as directors. The
non-affiliated directors receive annual compensation of $30,000 for service on
the board of directors, of which $25,000 is paid in cash, and $5,000 is paid in
shares of our common stock. In addition, non-affiliated directors receive an
annual stock option grant of 1,500 shares of our common stock, which will vest
in three equal annual installments. The non-affiliated directors are entitled
to reimbursement for their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the board of directors or
committees thereof. In addition, the non-affiliated directors will be
compensated $1,000 per meeting attended, including committee meetings, up to a
maximum of $2,000 per day.
Non-affiliated directors may defer up to 100 percent of the cash portion
of the compensation (including meeting fees) otherwise payable to the director.
Subject to certain limitations, a participating director's deferred
compensation will be distributed in a lump sum on, or distribution in annual
installments commencing on, the 30th day following the date he or she ceases to
be a director. Deferral elections are irrevocable during any calendar year and
must be made before the beginning of the calendar year in which compensation is
earned. Earnings are accrued on deferred amounts. Depending on a director's
investment election, deferred amounts earn interest at a rate based on the
90-day U.S. Government Treasury Bill or the performance of our common stock.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides summary information concerning compensation
paid or accrued by us to or on behalf of our Chief Executive Officer and each
of our four other most highly compensated executive officers who served in such
capacities as of December 31, 2000, collectively referred to herein as the
named executive officers, for services rendered to us during each of the last
three years.
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION
-------------------------- SECURITIES
UNDERLYING
STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(1)
- --------------------------------- ------ ------------ ----------- ------------- --------------------
Frank C. Lanza 2000 $750,000 $500,000 -- $ 6,858
(Chairman and Chief Executive 1999 750,000 200,000 -- 9,536
Officer) ....................... 1998 750,000 -- -- 11,341
Robert V. LaPenta 2000 500,000 400,000 -- 32,907
(President and Chief Financial 1999 500,000 200,000 -- 27,900
Officer) ....................... 1998 500,000 -- -- 27,591
Christopher C. Cambria 2000 228,025 225,000 -- 10,827
(Senior Vice President, 1999 207,000 190,000 47,500 7,317
Secretary and General Counsel) 1998 190,000 140,000 -- 7,351
Michael T. Strianese 2000 209,673 225,000 -- 73,515
(Senior Vice President, Finance) 1999 180,000 175,000 47,500 69,969
1998 165,000 140,000 -- 69,993
53
LONG TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------------- STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(1)
- -------------------------------- ------ ------------ ----------- ------------- --------------------
Charles J. Schafer
(Vice President, Business 2000 230,000 175,000 -- $118,368
Operations and President of the 1999 212,608 85,000 22,500 215,873
Products Group) ............... 1998 69,600 75,000 20,000 135,925
- ----------
(1) Amounts for the year ended December 31, 2000 include: (a) our matching
contributions of $6,800 under our savings plan for Messrs. LaPenta,
Cambria, Strianese and Schafer; (b) the value of supplemental life
insurance programs in the amounts of $6,858 for Mr. Lanza, $26,107 for
Mr. LaPenta, $4,027 for Mr. Cambria, $6,715 for Mr. Strianese and $8,568
for Mr. Schafer; (c) a special annual bonus of $60,000 for Mr. Strianese
related to our formation and (d) an employment signing bonus of $103,000
for Mr. Schafer.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options to purchase common stock granted in fiscal year 2000
to the named executive officers.
OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
The following table provides information on options to purchase our common
stock that were exercised during 2000 by our named executive officers; the
total numbers of exercisable and non-exercisable options to purchase our common
stock owned by the named executive officers at December 31, 2000, and the
aggregate dollar value of such options that were in-the-money at December 31,
2000.
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS OPTIONS AT
ACQUIRED VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
ON REALIZED -------------------------------- -------------------------------
NAME AND PRINCIPAL POSITION EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
- -------------------------------- ------------- ------------- ------------- ------------------ ------------- -----------------
Frank C. Lanza
(Chairman and Chief Executive
Officer) ...................... -- -- 685,714 228,572 $48,363,408 $16,121,183
Robert V. LaPenta
(President and Chief Financial
Officer) ...................... 100,000 $4,349,875 585,714 228,572 41,310,408 16,121,183
Christopher C. Cambria
(Senior Vice President,
Secretary and General Counsel) 6,600 313,079 29,234 31,666 1,558,045 1,225,809
Michael T. Strianese
(Senior Vice President,
Finance) ...................... 12,000 555,860 35,834 34,666 1,914,833 1,390,809
Charles J. Schafer
(Vice President, Business
Operations and President of the
Products Group) ............... 4,000 124,750 17,500 21,000 846,250 922,500
- ----------
(1) In accordance with SEC rules, the values of the in-the-money options were
calculated by subtracting the exercise prices of the options from the
December 29, 2000 closing stock price of our common stock of $77.00.
(2) These options are unexercisable because they have not yet vested under
their terms.
54
PENSION PLAN
The following table shows the estimated annual pension benefits payable
under the L-3 Communications Corporation Pension Plan and Supplemental Employee
Retirement Plan to a covered participant upon retirement at normal retirement
age, based on career average compensation (salary and bonus) and years of
credited service.
AVERAGE YEARS OF CREDITED SERVICE
COMPENSATION --------------------------------------------------------------------------
AT RETIREMENT 5 10 15 20 25 30 35
- -------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------
$ 300,000.......... $19,048 $ 34,317 $ 46,563 $ 60,535 $ 71,839 80,981 88,348
400,000 ......... 25,701 46,308 62,837 81,621 96,789 109,031 118,885
500,000 ......... 32,352 58,297 79,109 102,708 121,740 137,082 149,424
600,000 ......... 39,004 70,289 95,386 123,797 146,688 165,130 179,959
700,000 ......... 45,655 82,275 111,654 144,881 171,638 193,179 210,495
800,000 ......... 52,308 94,268 127,931 165,969 196,588 221,226 241,031
900,000 ......... 58,961 106,258 144,204 187,055 221,534 249,274 271,563
1,000,000 ......... 65,612 118,247 160,476 208,141 246,483 277,322 302,100
1,100,000 ......... 72,264 130,236 176,749 229,229 271,435 305,375 332,639
1,200,000 ......... 78,915 142,225 193,022 250,314 296,384 333,421 363,173
1,300,000 ......... 85,567 154,215 209,295 271,402 321,334 361,472 393,710
1,400,000 ......... 92,219 166,205 225,568 292,487 346,280 389,518 424,245
1,500,000 ......... 98,871 178,195 241,841 313,574 371,230 417,569 454,782
As of December 31, 2000, the current annual compensation and current years
of credited service (including for Messrs. LaPenta and Strianese, years of
credited service as an employee of Loral and Lockheed Martin) for each of the
following persons were: Mr. Lanza, $950,000 and 4 years; Mr. LaPenta, $700,000
and 29 years; Mr. Strianese, $384,673 and 11 years; Mr. Cambria, $418,025 and 4
years; and Mr. Schafer, $315,000 and 2 years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the 2000 fiscal year, Messrs. Robert Millard, John Montague and
Alan Washkowitz served as members of the compensation committee of the board of
directors. None of these individuals served as an officer or employee of us or
any of our subsidiaries. Messrs. Millard and Washkowitz are limited partners of
Lehman Brothers Capital Partners III, L.P., one of our stockholders.
Pursuant to a Stockholders Agreement entered into in connection with our
incorporation and described under "Certain Relationships and Related
Transactions--Stockholders Agreement", the Lehman Partnership has the right,
from time to time subject to certain conditions, to require L-3 Holdings to
register under the Securities Act shares of its common stock that the Lehman
Partnership holds. The Lehman Partnership has the right to request up to four
demand registrations and also has piggyback registration rights. L-3 Holdings
has agreed in the Stockholders Agreement to pay expenses in connection with,
among other things, (i) up to three demand registrations requested by the
Lehman Partnership and (ii) any registration in which the existing stockholders
participate through piggyback registration rights granted under such agreement.
The Stockholders Agreement also provides that Lehman Brothers Inc. has the
exclusive right to provide investment banking services, other than in
connection with cash acquisitions undertaken by us, to L-3 Holdings through
April 30, 2002, so long as the Lehman Partnership owns at least 10% of our
outstanding common stock. This exclusivity period ended on April 30, 2000, as
to cash acquisitions undertaken by L-3. In the event that Lehman Brothers Inc.
agrees to provide any investment banking services to us, it will be paid fees
that are mutually agreed upon based on similar transactions and practices in
the investment banking industry.
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of L-3 Holdings' board of directors or
compensation committee.
55
STOCK OPTION PLANS
1999 LONG-TERM PERFORMANCE PLAN
In April 1999, we adopted the 1999 Plan. Awards under the 1999 Plan may be
granted to any of our, or any of our subsidiaries' employees, including any of
our officers, and to any individual who provides services to us or any of our
subsidiaries on our behalf or on behalf of any of our subsidiaries. The number
of shares authorized for grant of options or awards under this plan was
1,000,000 shares of our common stock.
1997 STOCK OPTION PLAN
In April 1997, we adopted the 1997 Plan, which authorizes the compensation
committee to grant options to our and our subsidiaries' key employees. The
number of shares authorized for grant of options or awards under this plan was
4,255,815 shares of our common stock. The 1997 Plan remains in effect for 10
years following the date of approval.
On April 30, 1997, we granted each of Messrs. Lanza and LaPenta options to
purchase 1,142,857 shares of our common stock at $6.47 per share. See
"--Employment Agreements" for a description of the terms of these grants. On
April 5, 1999, we amended the performance options previously granted to Mr.
Lanza and Mr. LaPenta on April 30, 1997 to purchase 1,142,857 shares of L-3
Holdings common stock at $6.47 per share. The amendment eliminated the
performance target acceleration provisions and provided that the unvested
portion of the performance options, which aggregated 914,286 options at April
5, 1999, became exercisable as of April 30, 2000. These performance options
would have originally vested nine years after the grant date, but would have
become exercisable with respect to 20% of the shares subject to such
performance options on each of March 2, 1998, April 30, 1999, 2000, 2001 and
2002, to the extent certain targets for our EBITDA were achieved.
Each employee option was granted pursuant to an individual agreement that
provides (i) 33% of shares underlying the option will become exercisable on
each of the first three anniversaries of the grant date; (ii) all shares
underlying the option will become exercisable upon certain events constituting
a change of control; and (iii) the option will expire upon the earliest to
occur of (A) the tenth anniversary of the grant date, (B) one year after
termination of employment due to the optionee's death or permanent disability,
(C) immediately upon termination of the optionee's employment for cause and (D)
three months after termination of optionee's employment for any other reason.
As of December 31, 2000, 420,395 shares in the aggregate of our common
stock were available for additional awards that can be granted under the 1997
Plan and the 1999 Plan combined.
EMPLOYMENT AGREEMENTS
L-3 Holdings entered into an employment agreement effective on April 30,
1997 with each of Mr. Lanza, Chairman and Chief Executive Officer of L-3
Holdings and L-3 Communications, who will receive a base salary of $750,000 per
annum and appropriate executive level benefits, and Mr. LaPenta, President and
Chief Financial Officer of L-3 Holdings and L-3 Communications, who will
receive a base salary of $500,000 per annum and appropriate executive level
benefits. These employment agreements provide for an initial term of five
years, and will automatically renew for subsequent one-year periods, unless a
party thereto gives notice of its intent to terminate at least 90 days prior to
the expiration of the term.
Upon a termination without cause or resignation for good reason, L-3
Holdings will be obligated, through the end of the term, to (i) continue to pay
the base salary and (ii) continue to provide life insurance and medical and
hospitalization benefits comparable to those provided to other senior
executives; provide, however, that any such coverage shall terminate to the
extent that Mr. Lanza or Mr. LaPenta, as the case may be, is offered or obtains
comparable benefits coverage from any other employer. The employment agreements
provide for confidentiality during employment and at all times
56
thereafter. There is also a noncompetition and non-solicitation covenant which
is effective during the employment term and for one year thereafter; provided,
however, that if the employment terminates following the expiration of the
initial term, the noncompetition covenant will only be effective during the
period, if any, that L-3 Holdings pays the severance described above.
We have granted each of Messrs. Lanza and LaPenta nonqualified options to
purchase, at $6.47 per share, 1,142,857 shares of common stock. In each case,
half of the options were structured as "time options" and half were structured
initially as "performance options," collectively referred to herein as the
options. The time options became exercisable with respect to 20% of the shares
subject to the time options on each of March 2, 1998, April 30, 1999 and April
2000 and will become exercisable with respect to an additional 20% of the
shares subject to the time options on each of April 30, 2001 and 2002 if
employment continues through and including these dates. The performance options
were initially structured to become exercisable nine years after the grant
date, but became exercisable earlier if certain targets for our earnings before
interest, income taxes, depreciation and amortization were achieved. On April
5, 1999, we amended the performance options to eliminate the performance target
acceleration provisions and to provide that the unvested portion of the
performance options vest and become exercisable as of April 30, 2000. The
option term is ten years through April 30, 2007; except that if (i) the
option-holder is fired for cause or resigns without good reason, the options
will expire upon termination of employment or (ii) the option-holder is fired
without cause, resigns for good reason, dies, becomes disabled or retires, the
options will expire one year after termination of employment. Unexercisable
options will terminate upon termination of employment, unless acceleration is
expressly provided for. Upon a change of control, we may terminate the options,
so long as the option-holders are cashed out or permitted to exercise their
options prior to this change of control.
We also have entered into a split-dollar life insurance agreement with Mr.
LaPenta. Under the split-dollar agreement, we own and pay the premiums on the
life insurance policy, and Mr. LaPenta has the right to designate a beneficiary
to receive a fixed portion of the policy death benefit. The balance of the
death benefit will be payable to us as a recovery of our investment.
57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
In connection with our incorporation we, Lehman Brothers Capital Partners
III, L.P. and certain of its affiliates, Messrs. Lanza and LaPenta and Lockheed
Martin entered into the Stockholders Agreement, which terminated upon the
completion of our initial public offering, except for the terms relating to:
o registration rights;
o provision of services to us by Lehman Brothers Inc.; and
o the standstill agreement by Lockheed Martin.
Pursuant to the Stockholders Agreement, at this time Messrs. Lanza and
LaPenta and the Lehman Partnership have the right, subject to certain
conditions, to require L-3 Holdings to register their shares of common stock
under the Securities Act of 1933. The Lehman Partnership has four demand rights
and each of Messrs. Lanza and LaPenta has one demand registration right.
Lockheed Martin sold all of its shares of our common stock in 1999. In
addition, the Stockholders Agreement also provides some existing stockholders
with piggyback registration rights. The Stockholders Agreement provides, among
other things, that L-3 Holdings will pay expenses incurred in connection with:
o up to three demand registrations requested by the Lehman Partnership and
the two demand registrations requested by each of Messrs. Lanza and
LaPenta; and
o any registration in which those parties participate through piggyback
registration rights granted under the agreement.
The Lehman Partnership sold 2.0 million shares of their common stock of
L-3 Holdings through the exercise of their piggyback registration rights in the
February 1999 common stock offering of L-3 Holdings.
The Stockholders Agreement also provides that Lehman Brothers Inc. has the
exclusive right to provide investment banking services to us, other than in
connection with cash acquisitions undertaken by us, through April 30, 2002, so
long as the Lehman Partnership owns at least 10% of our outstanding common
stock. In the event that Lehman Brothers Inc. agrees to provide any investment
banking services to us, we will pay fees that are mutually agreed upon based on
similar transactions and practices in the investment banking industry.
Under the Stockholders Agreement, Lockheed Martin is subject to a
standstill arrangement that expires on April 30, 2002, which generally
prohibits its share ownership percentage in L-3 Holdings, if any, from
exceeding 34.9%.
TRANSACTIONS WITH AFFILIATES OF STOCKHOLDERS
As described above, one provision of the Stockholders Agreement gave
Lehman Brothers Inc. the exclusive right to provide investment banking services
to us, other than in connection with cash acquisitions undertaken by us,
through April 2002, so long as the Lehman Partnership owns at least 10% of our
common stock. As of March 12, 2001, the Lehman Partnership owned 15.9% of our
common stock.
Lehman Brothers Inc. has entered into various transactions with L-3
Holdings and its subsidiaries. As required by the Stockholders Agreement, all
fees paid in connection with such transactions and services were mutually
agreed upon and, in our opinion, based on similar transactions and practices in
the investment banking industry. We believe that all of these transactions were
entered into on terms and conditions at least as favorable to us as they would
have been had we entered into these transactions with other investment banks.
58
CAPITAL MARKETS SERVICES
In November and December 2000, Lehman Brothers Inc. was the sole initial
purchaser of $300 million of our 5.25% Convertible Senior Subordinated Notes
due 2009. In each of these financing transactions, Lehman Brothers Inc.
received customary fees, underwriting discounts and commissions.
SENIOR CREDIT FACILITIES
In connection with L-3 Communications' $300 million 364-day revolving
senior credit facility entered into in April 2000. Lehman Brothers Inc. acted
as joint lead arranger and joint book manager and Lehman Commercial Paper Inc.
acted as documentation agent, syndicate agent and lender. L-3 Communications
entered into this facility after arms-length negotiations and on the same terms
with all of the other parties thereunder. During the twelve-month period ended
February 28, 2001 Lehman Brothers Inc. and Lehman Commercial Paper Inc.
received interest payments and fees under these senior credit facilities
totaling approximately $2.7 million.
59
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 12, 2001, there were 33,953,182 shares of L-3 Holdings common
stock outstanding. The table below show beneficial owners of more than five
percent of our common stock outstanding before and after the issuance to the
selling stockholders of our shares of common stock offered in this prospectus.
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------- -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------------------- ----------- ------------ ----------- -----------
Lehman Brothers Holdings Inc. and certain
of its affiliates(1)
c/o Lehman Brothers Holdings Inc.
Three World Financial Center
New York, New York 10285 ............... 5,398,969 15.9% 5,398,969 15.8%
Citigroup Inc.(2)
153 East 53rd Street
New York, New York 10043 ............... 3,834,025 11.3% 3,834,025 11.2%
Frank C. Lanza(3)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016 ............... 2,425,571 7.1% 2,425,571 7.1%
Robert V. LaPenta(4)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016 ............... 2,453,223 7.2% 2,453,223 7.2%
- ----------
(1) As of March 12, 2001, Lehman Brothers Holdings, Inc. directly owned
1,251,873 shares of our common stock. Lehman Brothers Holdings, Inc. is
General Partner and a Limited Partner of Lehman Brothers Capital Partners
III, L.P. As of March 12, 2001, Lehman Brothers Capital Partners III,
L.P. directly owned 3,000,781 shares of our common stock of L-3 Holdings.
Lehman Brothers Inc. is a wholly owned subsidiary of Lehman Brothers
Holdings Inc. and is the parent of LB I Group Inc. As of March 12, 2001,
LB I Group Inc. directly owned 1,146,315 shares of Common Stock of L-3
Holdings. David J. Brand, Alberto M. Finali, Robert B. Millard and Alan
H. Washkowitz, each of whom is a member of our board of directors, are
each Managing Directors of Lehman Brothers Inc. As limited partners of
Lehman Brothers Capital Partners III, L.P., Messrs. Finali, Millard and
Washkowitz may be deemed to have shared beneficial ownership of shares of
the common stock held by Lehman Brothers Capital Partners III, L.P. Such
individuals disclaim any such beneficial ownership.
(2) Based on a Schedule 13G filed with the SEC, dated February 14, 2001, in
which Citigroup Inc. reported that it had shared voting and dispositive
power over 3,834,205 shares of our common stock.
(3) The shares of common stock beneficially owned includes 800,000 shares
issuable under employee stock options and exercisable within 60 days of
March 12, 2001.
(4) The shares of common stock beneficially owned includes 700,000 shares
issuable under employee stock options and exercisable within 60 days of
March 12, 2001 and 252 shares allocated to the account of Mr. LaPenta
under our savings plans.
60
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the amount of common stock beneficially owned
(unless otherwise indicated) by our executive officers, our directors, and by
all of our current executive officers and directors as a group. Except as
otherwise indicated, all information listed below is as of March 12, 2001.
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------------- -------------------------------
NAME OF BENEFICIAL OWNER NUMBER(1)(2) PERCENTAGE(3) NUMBER(1)(2) PERCENTAGE(3)
- ------------------------------------------- -------------- --------------- -------------- --------------
Directors and Executive Officers
Frank C. Lanza ............................ 2,425,571 7.1% 2,425,571 7.1%
Robert V. LaPenta ......................... 2,453,223 7.2% 2,453,223 7.2%
Michael T. Strianese ...................... 26,230 -- 26,230 --
Christopher C. Cambria .................... 8,638 -- 8,638 --
Charles J. Schafer ........................ 17,718 -- 17,718 --
David J. Brand(4) ......................... 49,479 -- 49,479 --
Thomas A. Corcoran(5) ..................... 1,619 -- 1,619 --
Alberto M. Finali(4) ...................... 40,125 -- 40,125 --
Robert B. Millard(4)(6) ................... 65,009 -- 65,009 --
John E. Montague(5) ....................... 1,619 -- 1,619 --
John M. Shalikashvili(5) .................. 1,731 -- 1,731 --
Arthur L. Simon(5) ........................ 3,500 -- 3,500 --
Alan M. Washkowitz(4)(7) .................. 129,965 -- 129,965 --
Directors and Executive Officers as a Group
(20 persons)(8) .......................... 5,260,754 15.5% 5,260,754 15.4%
- ----------
(1) The shares of our common stock beneficially owned include the number of
shares (i) issuable under employee stock options and exercisable within
60 days of March 12, 2001 and (ii) allocated to the accounts of executive
officers under our savings plans. Of the number of shares shown above,
(i) the following represent shares that may be acquired upon exercise of
employee stock options for the accounts of: Mr. Lanza, 800,000 shares;
Mr. LaPenta, 700,000 shares; Mr. Strianese, 26,000 shares, Mr. Cambria,
8,400 shares and Mr. Schafer, 17,500 shares; and (ii) the following
represent shares allocated under our saving plans to the accounts of: Mr.
LaPenta, 252 shares; Mr. Strianese, 230 shares; Mr. Cambria, 238 shares;
and Mr. Schafer, 218 shares.
(2) The number of shares shown includes shares that are individually or
jointly owned, as well as shares over which the individual has either
sole or shared investment or voting authority.
(3) Share ownership does not exceed one percent of the class unless otherwise
indicated.
(4) David J. Brand, Alberto M. Finali, Robert B. Millard and Alan H.
Washkowitz, each of whom is a member of our board of directors, are each
Managing Directors of Lehman Brothers Inc. As limited partners of Lehman
Brothers Capital Partners III, L.P., Messrs. Finali, Millard and
Washkowitz may be deemed to have shared beneficial ownership of shares of
our common stock held by Lehman Brothers Capital Partners III, L.P. Such
individuals disclaim any such beneficial ownership.
(5) Includes 1,500 shares issuable and exercisable under director stock
options within 60 days of March 12, 2001 in the case of Messrs. Corcoran,
Montague, and Shalikashvili and 500 shares in the case of Mr. Simon.
(6) Includes 52,639 shares owned by a charitable foundation of which Mr.
Millard and his wife are the sole trustees, and as to which Mr. Millard
disclaims beneficial ownership.
(7) Includes 55,665 shares in trust, for the benefit of Mr. Washkowitz's
children, for which Mr. Washkowitz and his wife are co-trustees and as to
which Mr. Washkowitz disclaims beneficial ownership.
(8) Includes 1,586,383 shares issuable under employee stock options and
exercisable under employee stock options within 60 days of March 12,
2001, and 4,982 shares allocated to the accounts of executive officers
under our savings plans.
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SELLING STOCKHOLDERS
The selling stockholders of ILEX Systems, Inc. (ILEX) listed below
received shares of our common stock as additional consideration in connection
with our acquisition of ILEX representing consideration that was contingent
upon the financial performance of ILEX for the years ended December 31, 1999
and 2000. There is no other remaining contingent consideration for the ILEX
acquisition.
The following table states the number of shares of our outstanding common
stock that the selling stockholders own resulting from payments made in our
common stock in connection with our acquisition of ILEX, the number of such
shares that may be sold for the account of the selling stockholders, and the
number of shares that will be owned by the selling stockholders assuming the
sale of all the shares offered hereby.
NUMBER OF
SHARES OF NUMBER OF SHARES
NUMBER OF SHARES OF COMMON STOCK TO OF COMMON STOCK
STOCKHOLDER NAME COMMON STOCK OWNED(2) BE SOLD OWNED AFTER SALE
- -------------------------------- ----------------------- ----------------- -----------------
Joseph Lopez ................... 198,269 120,513 77,756
Don Potter ..................... 51,248 42,801 8,447
Erwin Frech .................... 42,693 32,193 10,500
Roger DiFate ................... 19,034 12,155 6.879
Jerry Doerr .................... 11,512 11,512 --
Ralph Vitagliano ............... 23,575 10,284 13,291
John Munch ..................... 14,883 11,190 3,693
Richard Godfrey ................ 8,375 5,548 2,827
Rudy Wagner .................... 7,708 5,112 2,596
Donald Harbaugh ................ 6,676 4,427 2,249
Robert Robinson ................ 7,685 3,644 4,041
Jack Harris .................... 5,575 4,147 1,428
John Medea ..................... 14,291 2,132 12,159
Scott Feldmann ................. 8,522 2,768 5,754
Paul or Daisey Persons ......... 4,006 2,657 1,349
Howard Pines ................... 2,842 2,216 626
Richrad Karasik ................ 3,171 2,103 1,068
Stephanie Lopez ................ 3,102 2,059 1,043
Gregory Lopez .................. 3,102 2,059 1,043
Jeffrey Lopez .................. 2,059 2,059 --
June Curtis .................... 2,670 1,771 899
Robert Sass .................... 2,254 1,754 500
Peter Glick .................... 2,562 1,696 866
Richard Roth ................... 2,192 1,454 738
Scott Sargis ................... 1,602 996 606
Abbas Eliassieh ................ 1,207 1,007 200
Thomas Deet .................... 4,161 668 3,493
Rivas Family Trust (1) ......... 2,003 1,328 675
Robert Marchand ................ 4,472 557 3,915
Joseph Leadley ................. 4,647 487 4,160
Debra Iaconi ................... 1,382 775 607
Robert Banks ................... 1,169 775 394
Robert Potter .................. 1,269 842 427
Sydney Johnson-Potter .......... 1,269 842 427
Jeffrey Ransdell ............... 1,083 254 829
Edward Kimball ................. 635 222 413
Richard Peduto ................. 536 222 314
------- ------- -------
Total .......................... 473,441 297,229 176,212
======= ======= ========
- ----------
(1) R.F. Rivas and M.A. Rivas trustees FBO Rivas Family Trust
(2) Includes shares and common stock known by L-3 to be owned by the selling
stockholders as of March 7, 2001 and shares the selling stockholders will
be entitled to purchase within 60 days after March 7, 2001 pursuant to
outstanding stock options.
62
DESCRIPTION OF CAPITAL STOCK
GENERAL
The current certificate of incorporation of L-3 Holdings authorizes
100,000,000 shares of common stock with a par value of $.01 per share and
25,000,000 shares of preferred stock. As of March 12, 2001, the outstanding
capital stock of L-3 Holdings consisted of 33,953,182 shares of common stock
held by 152 stockholders of record, not including the stockholders for whom
shares are held in a "nominee" or "street" name. The following summaries of
certain provisions of the common stock do not purport to be complete and are
subject to, and qualified in their entirety by, the provisions of the
certificate of incorporation and bylaws of L-3 Holdings and by applicable law.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by stockholders of L-3 Holdings, and do not have
cumulative voting rights. The holders of our common stock are entitled to
ratably receive such dividends, if any, as may be declared from time to time by
our board of directors out of funds legally available for that purpose, subject
to preferences that may be applicable to any outstanding preferred stock and
any other provisions of the L-3 Holdings certificate of incorporation. See
"Dividend Policy". L-3 Holdings does not, however, anticipate paying any cash
dividends in the foreseeable future. Holders of common stock have no preemptive
or other rights to subscribe for additional shares. No shares of common stock
are subject to redemption or a sinking fund. In the event of any liquidation,
dissolution or winding up of L-3 Holdings, after payment of the debts and other
liabilities of L-3 Holdings, and subject to the rights of holders of shares of
preferred stock, holders of common stock are entitled to share in any
distribution to the stockholders on a pro-rata basis. All of the outstanding
shares of common stock of L-3 Holdings are, and the shares of common stock
offered hereby will be, fully paid and non-assessable.
PREFERRED STOCK
Our board of directors is authorized, without further vote or action by
holders of common stock, to issue 25,000,000 shares of preferred stock in one
or more series and to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including voting, redemption
and conversion rights. The board of directors may also designate dividend
rights and preferences in liquidation. It is not possible to state the effect
of the authorization and issuance of any series of preferred stock upon the
rights of such shares without further action by holders of common stock. In
addition, under certain circumstances, the issuance of preferred stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of L-3
Holdings' common stock or the removal of incumbent management, which could
thereby depress the market price of our common stock. We do not currently have
any preferred stock outstanding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Chicago
Trust Company of New York.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS
The certificate of incorporation of L-3 Holdings provides for our board of
directors to be divided into three classes, with staggered three-year terms. As
a result, only one class of directors will be elected at each annual meeting of
stockholders, with the other classes continuing for the remainder of their
respective three-year terms. Stockholders have no cumulative voting rights, and
the stockholders representing a majority of the shares of common stock
outstanding are able to elect all of the directors.
63
The certificate of incorporation of L-3 Holdings also requires that any
action required or permitted to be taken by our stockholders must be effected
at a duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. Our stockholders may amend our bylaws or
adopt new bylaws, by the affirmative vote of 662/3% of the outstanding voting
securities. A special meeting of the stockholders may be called by our
Chairman, Chief Executive Officer or any stockholders owning 10% or more of the
outstanding shares of common stock. These provisions may have the effect of
delaying, deferring or preventing a change in control.
The classification of the board of directors and lack of cumulative voting
will make it more difficult not only for another party to obtain control of us
by replacing our board of directors, but also for our existing stockholders to
replace our board of directors. Since the board of directors has the power to
retain and discharge our officers, these provisions could also make it more
difficult for existing stockholders or another party to effect a change in
management.
Our anti-takeover and other provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management. They are
intended to enhance the likelihood of continued stability in the composition of
our board of directors and in the policies of our board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change in control. Additionally, these provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal. The provisions
also are intended to discourage certain tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect
of preventing changes in our management.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We, as a Delaware corporation, are subject to Section 203 of the Delaware
General Corporation Law, which, subject to certain exceptions, prohibits us
from engaging in any business combination with any interested stockholder for a
period of three years following the time that such stockholder became an
interested stockholder, unless:
o prior to such time, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested holder;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85.0% of our outstanding voting stock at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or
o at or subsequent to such time, the business combination is approved by
our board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 662/3% of our outstanding voting stock that is not owned by the
interested stockholder.
In general, Section 203 defines "business combination" to include the
following:
o any merger or consolidation involving the interested stockholder and us;
o any sale, transfer, pledge or other disposition of 10% or more of assets
involving the interested stockholder;
o subject to certain exceptions, any transaction that results in our
issuance or transfer of any of our stock to the interested stockholder;
o any transaction involving us that has the effect of increasing the
proportionate share of the stock or any class or series of our stock
beneficially owned by the interested stockholder; or
64
o the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits by or through
us.
In general, Section 203 defines "interested stockholder" as an entity or
person beneficially owning 15% or more of our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person.
65
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS
The following summary describes the material United States federal income
and estate tax consequences of the ownership of common stock by a Non-U.S.
Holder (as defined below) as of the date hereof. This discussion does not
address all aspects of United States federal income and estate taxes and does
not deal with foreign, state and local consequences that may be relevant to
such Non-U.S. Holders in light of their personal circumstances. Special rules
may apply to certain Non-U.S. Holders, such as "controlled foreign
corporations", "passive foreign investment companies", "foreign personal
holding companies" and corporations that accumulate earnings to avoid U.S.
federal income tax, that are subject to special treatment under the Code. Such
entities should consult their own tax advisors to determine the U.S. federal,
state, local and other tax consequences that may be relevant to them.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may
be repealed, revoked or modified so as to result in United States federal
income tax consequences different from those discussed below. PERSONS
CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF COMMON STOCK SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
As used herein, a "U.S. Holder" of common stock means a holder that is (i)
a citizen or resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source and (iv) a trust (X)
that is subject to the supervision of a court within the United States and the
control of one or more United States persons as described in section
7701(a)(30) of the Code or (Y) that has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a United States person. A
"Non-U.S. Holder" is a holder that is not a U.S. Holder.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the conduct of a trade
or business by the Non-U.S. Holder within the United States and, where a tax
treaty applies, are attributable to a United States permanent establishment of
the Non-U.S. Holder, are not subject to the withholding tax, but instead are
subject to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates. Certain certification and disclosure
requirements must be complied with in order for effectively connected income to
be exempt from withholding. Any such effectively connected dividends received
by a foreign corporation may be subject to an additional "branch profits tax"
at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty.
A Non-U.S. Holder of common stock who wishes to claim the benefit of an
applicable treaty rate (and avoid back-up withholding as discussed below) for
dividends paid will be required to satisfy applicable certification and other
requirements.
A Non-U.S. Holder of common stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
common stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder, (ii)
66
in the case of a Non-U.S. Holder who is an individual and holds the common
stock as a capital asset, such holder is present in the United States for 183
or more days in the taxable year of the sale or other disposition and certain
other conditions are met, or (iii) the Company is or has been a "U.S. real
property holding corporation" for United States federal income tax purposes.
A Non-U.S. Holder described in clause (i) above will be subject to tax on
the net gain derived from the sale under regular graduated United States
federal income tax rates and, if it is a corporation, may be subject to the
branch profits tax at a rate equal to 30% of its effectively connected earnings
and profits or at such lower rate as may be specified by an applicable income
tax treaty. An individual Non-U.S. Holder described in clause (ii) above will
be subject to a flat 30% tax on the gain derived from the sale, which may be
offset by United States source capital losses (even though the individual is
not considered a resident of the United States).
The Company believes it is not and does not anticipate becoming a "U.S.
real property holding corporation" for United States federal income tax
purposes.
FEDERAL ESTATE TAX
Common stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder
the amount of dividends paid to such holder and the tax withheld with respect
to such dividends, regardless of whether withholding was required. Copies of
the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the Non-U.S.
Holder resides under the provisions of an applicable income tax treaty.
A Non-US Holder will be subject to back-up withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of common stock within the United States
or conducted through certain U.S. related financial intermediaries is subject
to both backup withholding and information reporting unless the beneficial
owner certifies under penalties of perjury that it is a Non-U.S. Holder (and
the payor does not have actual knowledge that the beneficial owner is a United
States person) or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
67
PLAN OF DISTRIBUTION
We have been advised that the distribution of the common stock by the
selling stockholders may be effected from time to time in one or more
transactions (which may involve block transactions) (i) on the New York Stock
Exchange or such other national security exchanges on which our common stock is
listed, in transactions that may include special offerings and exchange
distributions pursuant to and in accordance with the rules of such exchanges,
(ii) in the over-the-counter market, or (iii) in transactions otherwise than on
such exchanges or in the over-the-counter market, or in a combination of any
such transactions. Such transactions may be effected by the selling
stockholders at market prices prevailing at the time of sale, at prices related
to such prevailing market prices, at negotiated prices or at fixed prices. The
selling stockholders may effect such transactions by selling the common stock
to or through broker-dealers and such broker-dealers will receive compensation
in the form of discounts or commissions from the selling stockholders and may
receive commissions from the purchasers of the common stock for whom they may
act as agent (which discounts or commissions from the selling stockholders or
such purchasers will not exceed those customary in the type of transactions
involved).
Any broker-dealers that participate with the selling stockholders in the
distribution of the common stock, may be deemed to be "underwriters" within the
meaning of the Securities Act, and any commissions or discounts received by
such broker-dealers and any profit on the resale of the common stock by such
broker-dealers might be deemed to be underwriting discounts and commissions
under such act.
Upon being notified by the selling stockholders that any material
arrangement has been entered into with a broker or dealer for the sale of the
common stock through a secondary distribution, or a purchase by a broker or
dealer, a supplemented prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing:
o The names of such broker-dealers;
o The number of shares involved;
o The price at which such shares are being sold;
o The commission paid or the discounts or concessions allowed to such
broker-dealer;
o Where applicable, that such broker-dealers did not conduct any
investigation to verify the information set out or incorporated by
reference in this prospectus, as supplemented; and
o Other facts material to the transaction.
LEGAL MATTERS
Certain legal matters in connection with the common stock covered by this
prospectus are being passed upon by Simpson Thacher & Bartlett, New York, New
York.
EXPERTS
Our financial statements have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority
as experts in accounting and auditing.
68
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements as of December 31, 2000 and 1999 and for the
years ended December 31, 2000, 1999 and 1998.
Report of Independent Auditors ..................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999 .......... F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 1999
and 1998 ......................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2000, 1999 and 1998 .............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998 ......................................................................... F-6
Notes to Consolidated Financial Statements ......................................... F-7
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 2000 ............................................................. F-29
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
L-3 Communications Holdings, Inc.
We have audited the accompanying consolidated balance sheets of L-3
Communications Holdings, Inc. and subsidiaries (the "Company") as of December
31, 2000 and 1999, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2000 and 1999, their consolidated results of
operations and cash flows for each of the three years ended December 31, 2000,
in conformity with accounting principles generally accepted in the United
States of America.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 6, 2001
F-2
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------------
2000 1999
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 32,680 $ 42,788
Contracts in process .............................................. 700,133 479,143
Deferred income taxes ............................................. 89,732 32,985
Other current assets .............................................. 7,025 7,761
---------- ----------
Total current assets ............................................ 829,570 562,677
---------- ----------
Property, plant and equipment, net ................................. 156,128 140,971
Intangibles, primarily goodwill .................................... 1,371,368 821,552
Deferred income taxes .............................................. 57,111 56,858
Other assets ....................................................... 49,367 46,683
---------- ----------
Total assets .................................................... $2,463,544 $1,628,741
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ........................................... $ 159,901 $ 98,693
Accrued employment costs .......................................... 102,606 70,618
Accrued expenses .................................................. 55,576 29,030
Customer advances ................................................. 55,203 56,738
Accrued interest .................................................. 16,335 12,683
Income taxes ...................................................... 7,251 2,715
Other current liabilities ......................................... 71,797 36,680
---------- ----------
Total current liabilities ....................................... 468,669 307,157
---------- ----------
Pension and postretirement benefits ................................ 105,523 110,262
Other liabilities .................................................. 101,783 23,147
Long-term debt ..................................................... 1,095,000 605,000
Commitments and contingencies
Shareholders' equity:
Common stock; $.01 par value; authorized 100,000,000 shares,
issued and outstanding 33,606,645 and 32,794,547 shares ......... 515,926 483,694
Retained earnings ................................................. 186,272 103,545
Unearned compensation ............................................. (2,457) (1,661)
Accumulated other comprehensive loss .............................. (7,172) (2,403)
---------- ----------
Total shareholders' equity ......................................... 692,569 583,175
---------- ----------
Total liabilities and shareholders' equity ...................... $2,463,544 $1,628,741
========== ==========
See notes to consolidated financial statements.
F-3
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Sales ..................................... $1,910,061 $1,405,462 $1,037,045
Costs and expenses ........................ 1,687,343 1,254,976 936,696
---------- ---------- ----------
Operating income .......................... 222,718 150,486 100,349
Interest and other income ................. 4,393 5,534 2,659
Interest expense .......................... 93,032 60,590 49,558
---------- ---------- ----------
Income before income taxes ................ 134,079 95,430 53,450
Provision for income taxes ................ 51,352 36,741 20,899
---------- ---------- ----------
Net income ................................ $ 82,727 $ 58,689 $ 32,551
========== ========== ==========
Earnings per common share:
Basic .................................... $ 2.48 $ 1.83 $ 1.32
========== ========== ==========
Diluted .................................. $ 2.37 $ 1.75 $ 1.26
========== ========== ==========
Weighted average common shares outstanding:
Basic .................................... 33,355 32,107 24,679
========== ========== ==========
Diluted .................................. 34,953 33,516 25,900
========== ========== ==========
See notes to consolidated financial statements.
F-4
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
---------------- ADDITIONAL OTHER
SHARES PAR PAID-IN RETAINED UNEARNED COMPREHENSIVE
ISSUED VALUE CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL
-------- ------- ------------ ---------- -------------- -------------- -----------
Balance December 31, 1997 ...... 17,056 $171 $101,191 $ 12,305 $113,667
Comprehensive income:
Net income .................... 32,551 32,551
Minimum pension liability
adjustment, net of tax ....... $(9,514) (9,514)
Foreign currency translation
adjustment ................... (137) (137)
--------
22,900
Shares issued:
Sale of common stock .......... 6,900 69 139,431 139,500
Employee benefit plans ........ 22 -- 967 967
Exercise of stock options ..... 480 5 3,887 3,892
Conversion of common
stock subject to
repurchase agreement ......... 2,944 29 19,019 19,048
------ ---- -------- ------ --------- ----------- --------
Balance December 31, 1998 ...... 27,402 274 264,495 44,856 (9,651) 299,974
Comprehensive income:
Net income .................... 58,689 58,689
Minimum pension liability
adjustment, net of tax ....... 9,443 9,443
Unrealized loss on
securities, net of tax ....... (970) (970)
Foreign currency translation
adjustment ................... (1,225) (1,225)
--------
65,937
Shares issued:
Sale of common stock .......... 5,000 50 201,763 201,813
Employee benefit plans ........ 163 2 6,991 6,993
Acquisition consideration ..... 151 2 6,432 6,434
Exercise of stock options ..... 79 -- 1,764 1,764
Grant of restricted stock ...... 1,921 $ (1,921) --
Amortization of unearned
compensation .................. 260 260
------ ---- -------- ------ --------- ----------- --------
Balance December 31, 1999 ...... 32,795 328 483,366 103,545 (1,661) (2,403) 583,175
Comprehensive income:
Net income .................... 82,727 82,727
Minimum pension liability
adjustment, net of tax ....... (819) (819)
Foreign currency translation
adjustment ................... (1,222) (1,222)
Unrealized loss on
securities, net of tax ....... (2,728) (2,728)
--------
77,958
Shares issued:
Employee benefit plans ........ 235 2 12,640 12,642
Exercise of stock options ..... 577 6 18,056 18,062
Grant of restricted stock ...... 1,512 (1,512) --
Amortization of unearned
compensation .................. 716 716
Other .......................... 16 16
------ ---- -------- ------ --------- ----------- --------
Balance December 31, 2000 ...... 33,607 $336 $515,590 $186,272 $ (2,457) $(7,172) $692,569
====== ==== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-5
L-3 COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------- -------------
OPERATING ACTIVITIES:
Net income ...................................................... $ 82,727 $ 58,689 $ 32,551
Goodwill amortization ........................................... 35,327 20,970 13,966
Depreciation and other amortization ............................. 38,927 32,748 26,389
Amortization of deferred debt issue costs ....................... 5,724 3,904 2,564
Deferred income tax provision ................................... 25,103 28,831 19,786
Other noncash items ............................................. 12,517 6,617 967
Changes in operating assets and liabilities, net of amounts
acquired:
Contracts in process ........................................... (66,402) (61,670) (23,807)
Other current assets ........................................... (2,599) (70) 48
Other assets ................................................... (416) 552 (376)
Accounts payable ............................................... 38,065 2,896 23,480
Accrued employment costs ....................................... 6,239 2,052 8,653
Accrued expenses ............................................... 2,274 (6,280) (90)
Customer advances .............................................. (17,087) 5,766 (12,132)
Accrued interest ............................................... 3,637 5,985 2,279
Income taxes ................................................... 13,161 3,917 331
Other current liabilities ...................................... (59,286) (13,554) (12,281)
Pension and postretirement benefits ............................ (7,214) 1,788 18
Other liabilities .............................................. 1,959 7,102 2,873
All other operating activities ................................. 1,149 (1,225) (137)
--------- --------- ---------
Net cash from operating activities .............................. 113,805 99,018 85,082
--------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ................. (599,608) (272,195) (447,988)
Proceeds from net assets held for sale .......................... -- -- 6,653
Capital expenditures ............................................ (33,580) (23,456) (23,429)
Disposition of property, plant and equipment .................... 18,060 6,713 970
Other investing activities ...................................... 6,905 4,136 (9,069)
--------- --------- ---------
Net cash (used in) investing activities ......................... (608,223) (284,802) (472,863)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayment of borrowings under term loan facilities .............. -- -- (172,000)
Borrowings under revolving credit facility ...................... 858,500 74,700 367,000
Repayment of borrowings under revolving credit facility ......... (668,500) (74,700) (367,000)
Proceeds from sale of senior subordinated notes ................. -- -- 380,000
Proceeds from sale of convertible senior subordinated notes 300,000 -- --
Proceeds from sale of common stock, net ......................... -- 201,582 139,500
Debt issuance costs ............................................. (12,916) (323) (14,173)
Proceeds from exercise of stock options ......................... 8,954 658 3,110
Other financing activities ...................................... (1,728) 525 --
--------- --------- ---------
Net cash from financing activities .............................. 484,310 202,442 336,437
--------- --------- ---------
Net increase (decrease) in cash ................................. (10,108) 16,658 (51,344)
Cash and cash equivalents, beginning of period .................. 42,788 26,130 77,474
--------- --------- ---------
Cash and cash equivalents, end of period ........................ $ 32,680 $ 42,788 $ 26,130
========= ========= =========
See notes to consolidated financial statements.
F-6
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
L-3 Communications Holdings, Inc. ("L-3 Holdings"), and subsidiaries
("L-3" or the "Company"), including its wholly-owned subsidiary L-3
Communications Corporation ("L-3 Communications") is a merchant supplier of
sophisticated secure communication systems and specialized communication
products. The Company produces secure, high data rate communication systems,
training and simulation systems, avionics and ocean products, telemetry,
instrumentation and space products and microwave components. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. The Company's systems
and specialized products are used to connect a variety of airborne, space,
ground- and sea-based communication systems and are used in the transmission,
processing, recording, monitoring and dissemination functions of these
communication systems. The Company's customers include the U.S. Department of
Defense ("DoD"), certain U.S. Government intelligence agencies, major aerospace
and defense contractors, foreign governments, commercial customers and certain
other U.S. Government agencies. The Company has two reportable segments, Secure
Communication Systems and Specialized Communication Products.
Secure Communication Systems. This segment provides secure, high data rate
communications systems for military and other U.S. Government reconnaissance
and surveillance applications. The major secure communication programs and
systems include:
o secure data links for airborne, satellite, ground- and sea-based
remote platforms for real time information collection and
dissemination to users;
o strategic and tactical signal intelligence systems that detect,
collect, identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management;
o communication software support services; and
o communication systems for surface and undersea vessels and manned
space flights.
The Secure Communication Systems segment includes the training and
simulation business, which produces advanced simulation and training products,
with high-fidelity representations of cockpits and operator stations for
aircraft and vehicle system simulation. This segment also provides a full range
of teaching, training, logistic and training device support services to
domestic and international military customers, and ballistic targets for the
DoD.
Specialized Communication Products. This segment supplies products to
military and commercial customers, and focuses on niche markets in which the
Company believes it can achieve a market leadership position. This reportable
segment includes three product categories:
o avionics and ocean products including aviation recorders, airborne
collision avoidance products, displays, antennas, acoustic undersea
warfare products and naval power distribution, conditioning, switching
and protection equipment;
o telemetry, instrumentation and space products including commercial
off-the-shelf, real-time data collection and transmission products and
components for missile, aircraft and space-based electronic systems;
and
o microwave components including commercial off-the-shelf,
high-performance microwave components and frequency monitoring
equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the
Company include all wholly owned and significant majority-owned subsidiaries.
Investments over which the Company has significant influence but does not have
voting control are accounted for by the equity method.
F-7
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CASH AND CASH EQUIVALENTS: Cash equivalents consist of highly liquid
investments with a maturity of three months or less at time of purchase.
REVENUE RECOGNITION: Sales on production-type contracts which are within
the scope of the American Institute of Certified Public Accountants Statement
of Position 81-1 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts ("SOP 81-1") are recorded as units are shipped and
profits applicable to such shipments are recorded pro rata based upon estimated
total profit at completion of the contract. Sales and profits on cost
reimbursable contracts which are within the scope of SOP 81-1 are recognized as
costs are incurred. Sales and estimated profits under other long-term contracts
which are within the scope of SOP 81-1 are recognized under the percentage of
completion method of accounting using the cost-to-cost method. Amounts
representing contract change orders or claims are included in sales only when
they can be reliably estimated and their realization is reasonably assured.
Losses on contracts are recognized when determined. The impact of revisions in
profit estimates are recognized on a cumulative catch-up basis in the period in
which the revisions are made. Sales which are not within the scope of SOP 81-1
are recognized in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101.
CONTRACTS IN PROCESS: Costs accumulated on contracts in process include
direct costs and manufacturing overhead costs, and for U.S. Government
contracts and contracts with prime contractors or subcontractors of the U.S.
Government, general and administrative costs, independent research and
development costs and bid and proposal costs. Contracts in process contain
amounts relating to contracts and programs with long performance cycles, a
portion of which may not be realized within one year. Unbilled contract
receivables represent accumulated recoverable costs and earned profits on
contracts in process that have been recorded as sales, but have not yet been
billed to customers. Inventoried contract costs represent recoverable costs
incurred on contracts in process. Inventories other than inventoried contract
costs are stated at the lower of cost or market primarily using the average
cost method. Under the contractual arrangements on certain contracts with the
U.S. Government, the Company receives progress payments as it incurs costs. The
U.S. Government has a security interest in the unbilled contract receivables
and inventoried contract costs to which progress payments have been applied,
and such progress payments are reflected as an offset against the related
unbilled contract receivables and inventoried contract costs. Other customer
advances are classified as current liabilities.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed by applying principally the straight-line method
to the estimated useful lives of the related assets. Useful lives range
substantially from 10 to 40 years for buildings and improvements and 3 to 10
years for machinery, equipment, furniture and fixtures. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life
of the improvements.
DEBT ISSUANCE COSTS: Costs incurred to issue debt are deferred and
amortized as interest expense over the term of the related debt using a method
that approximates the effective interest method.
INTANGIBLES: Intangibles consist primarily of the excess of the purchase
cost of acquired businesses over the fair value of net assets acquired
("goodwill") and are amortized on a straight-line basis over periods ranging
from 15 to 40 years. Accumulated goodwill amortization was $76,001 at December
31, 2000 and $40,147 at December 31, 1999. The carrying amount of goodwill is
evaluated on a recurring basis. Current and estimated future profitability and
undiscounted cash flows excluding financing costs of the acquired businesses
are the primary indicators used to assess the recoverability of goodwill. For
the years ended December 31, 2000 and 1999, there were no material adjustments
to the carrying amounts of goodwill resulting from these evaluations.
F-8
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME TAXES: The Company provides for income taxes using the liability
method prescribed by the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Under the liability method, deferred income tax assets and
liabilities reflect tax carryforwards and the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes, as determined under enacted tax
laws and rates. The effect of changes in tax laws or rates is accounted for in
the period of enactment.
RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the
Company include bid and proposal costs related to government products and
services. These costs generally are allocated among all contracts in progress
under U.S. Government contractual arrangements. Customer-funded research and
development costs incurred pursuant to contracts are accounted for as direct
contract costs.
STOCK OPTIONS: In accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations, compensation expense for stock options is recognized in income
based on the excess, if any, of L-3 Holdings' fair value of the stock at the
grant date of the award or other measurement date over the amount an employee
must pay to acquire the stock. When the exercise price for stock options
granted to employees equals or exceeds the fair value of the L-3 Holdings
common stock at the date of grant, the Company does not recognize compensation
expense. The Company has adopted the disclosure only provisions of SFAS No.
123, Accounting for Stock-Based Compensation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
sales and costs and expenses during the reporting period. The most significant
of these estimates and assumptions relate to contract estimates of sales and
costs, estimated costs in excess of billings to complete contracts in process,
estimates of pension and postretirement benefit obligations, recoverability of
recorded amounts of fixed assets and goodwill, income taxes, litigation and
environmental obligations. Actual results could differ from these estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value and is effective for all
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect SFAS 133 to have a material impact on the consolidated results of
operations or financial position.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"), which replaces SFAS 125. SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company does not expect SFAS 140 to have a material impact on the
consolidated results of operations or financial position.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- An Interpretation of APB
F-9
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Opinion No. 25 ("FIN 44"). FIN 44 clarifies the definition of an employee for
purposes of calculating stock-based compensation, the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of previously fixed stock options or
awards, and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is primarily effective July 1, 2000, with some
provisions effective earlier. The Company adopted the accounting and
disclosures required by FIN 44 for all periods presented.
RECLASSIFICATIONS: Certain reclassifications have been made to conform
prior-year amounts to the current-year presentation.
3. ACQUISITIONS AND DIVESTITURES
On January 8, 1999 the Company acquired all of the outstanding common
stock of Microdyne Corporation ("Microdyne") for $94,228 in cash including
expenses and the repayment of assumed debt, net of cash acquired. On April 16,
1999 the Company acquired all of the outstanding common stock of Aydin
Corporation ("Aydin") for $60,034 in cash including expenses, net of cash
acquired. On June 30, 1999 the Company acquired all the outstanding common
stock of Interstate Electronics Corporation ("IEC") from Scott Technologies
Inc. for $40,610 in cash including expenses. On December 31, 1999, the Company
acquired the assets of the Space and Navigation Systems business ("SNS") of
Honeywell International Inc. ("Honeywell") for $55,000 in cash, plus expenses,
subject to adjustment based on closing date net assets, as defined.
On February 10, 2000, the Company acquired the assets of the Training
Devices and Training Services ("TDTS") business of Raytheon Company for
$160,000 in cash plus expenses, subject to adjustment based on closing date net
working capital, as defined. Following the acquisition, the Company changed
TDTS's name to L-3 Communications Link Simulation and Training ("Link
Simulation and Training").
On February 14, 2000, the Company acquired the assets of Trex
Communications Corporation ("TrexCom") for $50,210 in cash, plus expenses,
subject to adjustment based on closing date net worth, as defined.
On April 28, 2000, the Company acquired the Traffic Alert and Collision
Avoidance System ("TCAS") product line from Honeywell for a purchase price of
$239,594 in cash, including expenses. In anticipation of the TCAS acquisition,
on February 25, 2000, the Company entered into a Memorandum of Agreement with
Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which
L-3 agreed to create a limited liability corporation for TCAS, contribute 100%
of the TCAS assets to be acquired from Honeywell to the TCAS LLC, and sell a
30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30%
of the final purchase price paid to Honeywell for TCAS (which is expected to be
approximately $71,738). L-3 will consolidate the financial statements of the
TCAS LLC. The Company expects to complete this transaction during the first
half 2001.
On June 30, 2000, the Company acquired all the outstanding stock of MPRI
Inc. ("MPRI") for $35,686 in cash including expenses, subject to additional
consideration not to exceed $4,000 based on the financial performance of MPRI
for the year ending June 30, 2001.
On July 11, 2000, the Company acquired 53.5% of the outstanding common
stock of LogiMetrics, Inc. ("LogiMetrics") for $15,000, of which $8,500 of the
purchase price was paid in cash at closing, and the balance was paid in
installments that were completed in the first quarter of 2001. The Company also
agreed to invest an additional $5,000 in cash during 2001 for additional common
stock.
On December 29, 2000, the Company acquired all of the outstanding common
stock of Coleman Research Corporation ("Coleman"), a subsidiary of Thermo
Electron Corporation for $60,000 in cash,
F-10
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
subject to adjustment based on closing date net working capital, and additional
consideration not to exceed $5,000 based on the financial performance of
Coleman for the year ending December 31, 2001.
All of the acquisitions were financed with cash on hand or borrowings on
senior credit facilities.
All of the Company's acquisitions have been accounted for as purchase
business combinations and are included in the Company's results of operations
from their respective effective dates. The assets and liabilities recorded in
connection with the acquisitions of SNS, TDTS, TrexCom, TCAS, and LogiMetrics
were $763,845 and $247,943. The assets and liabilities recorded in connection
with the purchase price allocations for the acquisitions of MPRI and Coleman
are based upon preliminary estimates of fair values for contracts in process,
estimated costs in excess of billings to complete contracts in process,
inventories, and deferred taxes. Actual adjustments will be based on the final
purchase prices and final appraisals and other analyses of fair values which
are in process. The Company has valued acquired contracts in process at
contract price, less the estimated costs to complete and an allowance for
normal profit on the Company's effort to complete such contracts. The
preliminary assets and liabilities recorded in connection with the acquisitions
of MPRI and Coleman were $118,611 and $22,855. The Company does not expect the
differences between the preliminary and final purchase price allocations for
the acquisitions to be material. Goodwill is amortized on a straight-line basis
over periods of 40 years for SNS, TDTS, TCAS, Coleman and MPRI and 20 years for
LogiMetrics and TrexCom.
Had the acquisitions of TDTS, TCAS and Coleman and the related financing
transactions occurred on January 1, 2000, the unaudited pro forma sales, net
income and diluted earnings per share for the year ended December 31, 2000
would have been $2,072,300, $80,000 and $2.29. Had the acquisitions of
Microdyne, Aydin, IEC, SNS, TDTS, TCAS and Coleman and related financing
transactions occurred on January 1, 1999, the unaudited pro forma sales, net
income and diluted earnings per share for the year ended December 31, 1999
would have been $2,058,900, $43,200 and $1.29. The pro forma results are based
on various assumptions and are not necessarily indicative of the result of
operations that would have occurred had the acquisitions and the related
financing transactions occurred on January 1, 1999 and 2000.
Interest and other income for the year ended December 31, 2000 includes
gains of $14,940 from the sales of our interests in certain businesses. These
gains were largely offset by losses of $12,456 on the write-down in the
carrying value of certain investments and intangible assets. The net proceeds
from the sales were $19,638, and are included in Other Investing Activities on
the Statement of Cash Flows.
F-11
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. CONTRACTS IN PROCESS
The components of contracts in process are presented in the table below.
The unbilled contract receivables, inventoried contract costs and unliquidated
progress payments are principally related to contracts with the U.S. Government
and prime contractors or subcontractors of the U.S. Government.
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Billed receivables ............................. $319,780 $258,054
-------- --------
Unbilled contract receivables, gross ........... 279,474 123,969
Less: unliquidated progress payments ........... (52,153) (10,351)
-------- --------
Unbilled contract receivables, net ............ 227,321 113,618
-------- --------
Inventoried contract costs, gross .............. 72,504 65,967
Less: unliquidated progress payments ........... (23,061) (19,273)
-------- --------
Inventoried contract costs, net ............... 49,443 46,694
Inventories at lower of cost or market ......... 103,589 60,777
-------- --------
Total contracts in process .................... $700,133 $479,143
======== ========
The Company believes that approximately $203,000 of the unbilled contract
receivables at December 31, 2000 will be billed and collected within one year.
The selling, general and administrative ("SG&A") cost data presented in
the table below have been used in the determination of the costs and expenses
presented on the statements of operations.
YEAR ENDED DECEMBER 31
------------------------------------
2000 1999 1998
---------- ---------- ----------
SG&A costs included in inventoried contract
costs ...................................... $ 24,396 $ 23,637 $ 16,550
SG&A incurred costs ......................... 350,561 265,136 189,507
Independent research and development,
including bid and proposal costs included in
SG&A incurred costs ........................ 101,883 76,134 59,897
5. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
At December 31, 2000, other current liabilities include $31,737 of
estimated costs in excess of billings to complete contracts in process
principally related to contracts assumed as part of the TDTS business that was
acquired from Raytheon in February 2000, including the U.S. Army Aviation
Combined Arms Tactical Trainer ("AVCATT") contract. At December 31, 2000, other
liabilities include $59,641 for the non-current portion of estimated costs in
excess of billings to complete contracts in process, principally for the AVCATT
contract. At December 31, 1999, other current liabilities did not include any
items in excess of 5% of total current liabilities. At December 31, 2000 and
1999, other liabilities did not include any items in excess of 5% of total
liabilities.
F-12
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------------
2000 1999
---------- -----------
Land .................................................... $ 11,242 $ 9,658
Buildings and improvements .............................. 25,942 30,071
Machinery, equipment, furniture and fixtures ............ 178,603 137,665
Leasehold improvements .................................. 23,852 14,015
-------- --------
Gross property, plant and equipment .................... 239,639 191,409
Less: accumulated depreciation and amortization ......... 83,511 50,438
-------- --------
Property, plant and equipment, net ..................... $156,128 $140,971
======== ========
Depreciation and amortization expense for property, plant and equipment
was $36,158 for 2000, $29,554 for 1999, and $22,463 for 1998.
7. DEBT
The components of long-term debt are presented in the table below.
DECEMBER 31,
--------------------------
2000 1999
------------- ----------
Borrowings under Senior Credit Facilities .................... $ 190,000 $ --
10 3/8% Senior Subordinated Notes due 2007 ................... 225,000 225,000
8 1/2% Senior Subordinated Notes due 2008 .................... 180,000 180,000
8% Senior Subordinated Notes due 2008 ........................ 200,000 200,000
5.25% Convertible Senior Subordinated Notes due 2009 ......... 300,000 --
---------- --------
Total long-term debt ........................................ $1,095,000 $605,000
========== ========
The borrowings under the Senior Credit Facilities, 10 3/8% Senior
Subordinated Notes due 2007, 8 1/2% Senior Subordinated Notes due 2008 and 8%
Senior Subordinated Notes due 2008 are the indebtedness of L-3 Communications.
The 5.25% Convertible Senior Subordinated Notes due 2009 are the indebtedness
of L-3 Holdings. Details on all of the outstanding debt of both L-3
Communications and L-3 Holdings are discussed below.
L-3 Communications has three senior credit facilities that permit
borrowings of up to $700,000, of which $400,946 is available after reductions
for outstanding borrowings of $190,000 and letters of credit of $109,054. One
facility for $200,000 expires on March 31, 2003 (the "Revolving Credit
Facility"), a second facility for $200,000 expires August 9, 2001 (the
"Revolving 364 Day Facility"), and a third facility for $300,000 expires on
April 27, 2001 (the "New Revolving 364 Day Facility"). A portion of the
Revolving 364 Day Facility may be extended, with the consent of the lenders for
a period of 364 days following August 9, 2001 and L-3 Communications may
convert the outstanding principal amount of any or all of the loans outstanding
under the Revolving 364 Day Facility to term loans. In the event that any or
all of the outstanding principal amount under the Revolving 364 Day Facility is
converted, L-3 Communications would have to repay 20% of the resulting term
loans by August 16, 2001. L-3 Communications would have to repay the remaining
80% of the term loans in six consecutive quarterly installments commencing on
September 30, 2001. During the first half of 2001, L-3 Communications intends
to restructure the Revolving 364 Day Facility together with all of the Senior
Credit Facilities to extend their maturities.
F-13
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Borrowings under the Senior Credit Facilities bear interest, at L-3
Communications' option, at either: (i) a "base rate" equal to the higher of
0.50% per annum above the latest federal funds rate and the Bank of America
"reference rate" (as defined) plus a spread ranging from 1.75% to 0.375% per
annum depending on L-3 Communications' ratio of debt to EBITDA, as defined (the
"Debt to EBITDA Ratio") at the time of determination or (ii) a "LIBOR rate" (as
defined) plus a spread ranging from 2.75% to 1.25% per annum depending on L-3
Communications' Debt to EBITDA Ratio at the time of determination. At December
31, 2000 the weighted average interest rate on the borrowings outstanding under
the Senior Credit Facilities was 8.5%. L-3 Communications pays commitment fees
calculated on the daily amounts of the available unused commitments under the
Senior Credit Facilities at a rate ranging from 0.50% to 0.20% per annum,
depending on L-3 Communications' Debt to EBITDA Ratio in effect at the time of
determination. L-3 Communications pays letter of credit fees calculated at a
rate ranging from 1.375% to 0.625% per annum for performance letters of credit
and 2.75% to 1.25% for all other letters of credit, in each case depending on
L-3 Communications' Debt to EBITDA Ratio at the time of determination.
In April 1997, L-3 Communications sold $225,000 of 10 3/8% Senior
Subordinated Notes due May 1, 2007 (the "1997 Notes") with interest payable
semi-annually on May 1 and November 1 of each year commencing November 1, 1997.
The 1997 Notes are general unsecured obligations of L-3 Communications and are
subordinated in right of payment to all existing and future senior debt of L-3
Communications. The 1997 Notes are subject to redemption at any time, at the
option of L-3 Communications, in whole or in part, on or after May 1, 2002 at
redemption prices (plus accrued and unpaid interest) starting at 105.188% of
principal (plus accrued and unpaid interest) during the 12-month period
beginning May 1, 2002 and declining annually to 100% of principal (plus accrued
and unpaid interest) on May 1, 2005 and thereafter.
In May 1998, L-3 Communications sold $180,000 of 8 1/2% Senior
Subordinated Notes due May 15, 2008 (the "May 1998 Notes") with interest
payable semi-annually on May 15 and November 15 of each year commencing
November 15, 1998. The May 1998 Notes are general unsecured obligations of L-3
Communications and are subordinated in right of payment to all existing and
future senior debt of L-3 Communications. The May 1998 Notes are subject to
redemption at any time, at the option of L-3 Communications, in whole or in
part, on or after May 15, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 104.250% of principal (plus accrued and unpaid interest)
during the 12-month period beginning May 15, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on May 15, 2006 and
thereafter. In addition, prior to May 15, 2001, L-3 Communications may redeem
up to 35% of the aggregate principal amount of the May 1998 Notes with the net
proceeds of one or more equity offerings, at a price equal to 108.500% of the
principal (plus accrued and unpaid interest) to the extent such proceeds are
contributed (within 120 days of any such offering) to L-3 Communications as
common equity, provided that at least 65% of the original aggregate principal
amount of the May 1998 Notes remains outstanding thereafter.
In December 1998, L-3 Communications sold $200,000 of 8% Senior
Subordinated Notes due August 1, 2008 (the "December 1998 Notes") with interest
payable semi-annually on February 1 and August 1 of each year commencing
February 1, 1999. The December 1998 Notes are general unsecured obligations of
L-3 Communications and are subordinated in right of payment to all existing and
future senior debt of L-3 Communications. The December 1998 Notes are subject
to redemption at any time, at the option of L-3 Communications, in whole or in
part, on or after August 1, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 104% of principal (plus accrued and unpaid interest)
during the 12-month period beginning August 1, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on August 1, 2006 and
thereafter. In addition, prior to August 1, 2001, L-3 Communications may redeem
up to 35% of the aggregate principal amount of
F-14
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 1998 Notes with the net proceeds of one or more equity offerings, at a
price equal to 108% of the principal (plus accrued and unpaid interest) and to
the extent such proceeds are contributed (within 120 days of any such offering)
to L-3 Communications as common equity, provided that at least 65% of the
original aggregate principal amount of the December 1998 Notes remains
outstanding.
In the fourth quarter of 2000, L-3 Holdings sold $300,000 of 5.25%
Convertible Senior Subordinated Notes (the "Convertible Notes") due June 1,
2009 in a private placement. Interest is payable semi-annually on June 1 and
December 1 of each year commencing June 1, 2001. The Convertible Notes may be
converted at any time into L-3 Holdings common stock at a conversion price of
$81.50 per share. If all the Convertible Notes were converted, an additional
3,680,982 shares of L-3 Holdings common stock would have been outstanding at
December 31, 2000. The Convertible Notes are general unsecured obligations of
L-3 Holdings and are subordinated in right of payment to all existing and
future senior debt of L-3 Holdings and L-3 Communications. The Convertible
Notes are subject to redemption at any time, at the option of L-3 Holdings, in
whole or in part, on or after December 1, 2003 at redemption prices (plus
accrued and unpaid interest) starting at 102.625% of principal (plus accrued
and unpaid interest) during the 12-month period beginning December 1, 2003 and
declining annually to 100% of principal (plus accrued and unpaid interest) on
December 1, 2005 and thereafter.
Collectively the 1997 Notes, May 1998 Notes, December 1998 Notes comprise
the "Senior Subordinated Notes". The maturities on the Senior Subordinated
Notes and Convertible Notes are, $225,000 in 2007, $380,000 in 2008 and
$300,000 in 2009.
The Senior Credit Facilities, Senior Subordinated Notes and Convertible
Notes agreements contain financial and other restrictive covenants that limit,
among other things, the ability of the Company to borrow additional funds,
dispose of assets, or pay cash dividends. The Senior Credit Facilities contain
the most restrictive financial covenants which require that (i) the Company's
Debt to EBITDA Ratio be less than or equal to 4.50 for the quarter ended
December 31, 2000, and that the maximum allowable debt ratio, as defined,
thereafter declining over time to less than or equal to 3.25 for the quarters
ending September 30, 2002 and thereafter, and (ii) the Company's interest
coverage ratio, as defined, be greater than or equal to 2.50 for the quarter
ended December 31, 2000, and that the minimum allowable interest coverage
ratio, as defined, thereafter increasing over time to greater than or equal to
at least 3.00 for the quarters ending September 30, 2002 and thereafter. For
purposes of calculating the financial covenants under the Senior Credit
Facilities, the Convertible Notes are considered debt of L-3 Communications.
The Senior Credit Facilities also limit the payment of dividends by L-3
Communications to L-3 Holdings except for payment of franchise taxes, fees to
maintain L-3 Communications legal existence, interest accrued on the
Convertible Notes or to provide for operating costs of up to $1,000 annually.
Under the covenant, L-3 Communications may pay permitted dividends to L-3
Holdings from its excess cash flow, as defined, a cumulative amount of $5,000,
provided that the debt ratio is less than 3.5 to 1 as of the most recent fiscal
quarter. As a result, at December 31, 2000, $5,000 of L-3 Communications net
assets were available for payment of dividends to L-3 Holdings. Through
December 31, 2000 the Company was in compliance with these covenants at all
times.
In connection with the Senior Credit Facilities, the Company has granted
the lenders a first priority lien on the stock of L-3 Communications and
substantially all of its domestic subsidiaries. The borrowings under the Senior
Credit Facilities are guaranteed by L-3 Holdings and by substantially all of
the domestic subsidiaries of L-3 Communications. The payment of principal and
premium, if any, and interest on the Senior Subordinated Notes is
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally, by all of L-3 Communications' restricted subsidiaries other than
its foreign subsidiaries.
F-15
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Convertible Notes are jointly and severally guaranteed (the
"Guarantees") by certain existing direct and indirect, domestic subsidiaries of
L-3 Holdings, including L-3 Communications (the "Guarantors"). The Guarantees
are full and unconditional. The Guarantees are subordinated in right of payment
to all existing and future senior debt of the Guarantors and rank pari passu
with the other senior subordinated indebtedness of the Guarantors. L-3 Holdings
has no independent assets or operations other than through its wholly owned
subsidiary L-3 Communications, and all of L-3 Holdings' direct and indirect
subsidiaries other than the Guarantors are minor.
Pursuant to a registration rights agreement that L-3 Holdings entered into
with the initial purchaser of the Convertible Notes, L-3 Holdings agreed to
file a registration statement with the SEC within 135 days after the original
issuance of the Convertible Notes to cover resales by holders of the
Convertible Notes and the Guarantees and the L-3 Holdings common stock issuable
upon conversion of the Convertible Notes. If L-3 Holdings does not file the
registration statement with the SEC on or before April 5, 2001, liquidated
damages, in the form of additional interest, will accrue on the Convertible
Notes from April 5, 2001 to but excluding the day on which the registration
statement is filed. In no event will liquidated damages exceed 0.50% per annum
of the principal amount outstanding under the Convertible Notes. L-3 Holdings
expects to file the registration statement with the SEC by the end of March
2001.
8. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments. The Company's financial instruments
consist primarily of cash and cash equivalents, billed receivables,
investments, trade accounts payable, customer advances, Senior Credit
Facilities, Senior Subordinated Notes, Convertible Notes, foreign currency
forward contracts and interest rate cap and interest rate floor contracts. The
carrying amounts of cash and cash equivalents, billed receivables, trade
accounts payable, Senior Credit Facilities, and customer advances are
representative of their respective fair values because of the short-term
maturities or expected settlement dates of these instruments. The fair value of
the Company's investments are based on quoted market prices, as available, and
historical costs which approximate fair value. The Senior Subordinated Notes
are registered, unlisted public debt which are traded in the over-the-counter
market and their fair values are based on quoted trading activity. The fair
value of the Convertible Notes are based on quoted prices for the same or
similar issues. The fair value of foreign currency forward contracts were
estimated based on exchange rates at December 31, 2000 and 1999. The fair
values of the interest rate caps and floor contracts were estimated by
discounting expected cash flows using quoted market interest rates. The
carrying amounts and estimated fair value of the Company's financial
instruments are presented in the table below.
DECEMBER 31,
----------------------------------------------
2000 1999
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
Investments ................................. $ 8,985 $ 8,985 $ 12,068 $ 12,068
Senior Subordinated Notes ................... 605,000 586,300 605,000 582,000
Convertible Notes ........................... 300,000 331,350 -- --
Borrowings under Senior Credit Facilities ... 190,000 190,000 -- --
Interest rate caps .......................... 431 2 800 435
Interest rate floor ......................... (74) 104 (137) 49
Foreign currency forward contracts .......... -- 392 -- 264
Interest Rate Risk Management. To mitigate risks associated with changing
interest rates on borrowings under the Senior Credit Facilities, the Company
entered into interest rate caps and
F-16
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
interest rate floors (collectively, the "interest rate agreements"). The
interest rate agreements are denominated in U.S. dollars and have designated
maturities which occur every three months until the interest rate agreements
expire in March 2002. Cash payments received from or paid to the counterparties
on the interest rate agreements are the difference between the amount that the
reference interest rates are greater than or less than the contract rates on
the designated maturity dates, multiplied by the notional amounts underlying
the respective interest rate agreements. Cash payments or receipts between the
Company and counterparties are recorded as a component of interest expense. The
initial cost or receipt of these arrangements are deferred and amortized as a
component interest expense over the term of the interest rate agreement. The
Company manages exposure to counterparty credit risk by entering into the
interest rate agreements only with major financial institutions that are
expected to fully perform under the terms of such agreements. The notional
amounts are used to measure the volume of these agreements and do not represent
exposure to credit loss. The impact of the interest rate agreements was not
material to interest expense or cash flows for 2000, 1999 and 1998.
Foreign Currency Exchange Risk Management. Some of the Company's U.S.
operations have contracts with foreign customers which are denominated in
foreign currencies. To mitigate the risk associated with certain of these
contracts denominated in foreign currency, the Company has entered into foreign
currency forward contracts. The Company's activities involving foreign currency
forward contracts are designed to hedge the foreign denominated cash paid or
received, primarily Euro, Spanish Peseta and Italian Lira. The Company manages
exposure to counterparty credit risk by entering into foreign currency forward
contracts only with major financial institutions that are expected to fully
perform under the term of such contracts. The notional amounts are used to
measure the volume of these contracts and do not represent exposure to foreign
currency losses.
Information with respect to the interest rate agreements and foreign
currency forward contracts is presented in the table below.
DECEMBER 31,
------------------------------------------------------------
2000 1999
----------------------------- ----------------------------
NOTIONAL UNREALIZED NOTIONAL UNREALIZED
AMOUNT GAINS (LOSSES) AMOUNT GAINS (LOSSES)
---------- ---------------- ---------- ---------------
Interest rate caps ......................... $100,000 $(429) $100,000 $(365)
Interest rate floor ........................ 50,000 (30) 50,000 88
Foreign currency forward contracts ......... 6,863 (392) 7,290 (264)
9. COMMON STOCK
On February 4, 1999, L-3 Holdings sold 5.0 million shares of common stock
in a public offering for $42.00 per share (the "February 1999 Common Stock
Offering"); the net proceeds amounted to $201,582 and were contributed by L-3
Holdings to L-3 Communications. In addition, 6.5 million shares were also sold
in the February 1999 Common Stock Offering by the Lehman Partnership and
Lockheed Martin. In October 1999, Lockheed Martin sold its remaining interest
in L-3 Holdings' common stock. In December 1999, the Lehman Partnership
distributed to its partners approximately 3.8 million shares of L-3 Holdings
common stock. At December 31, 2000 the Lehman Partnership owned approximately
16.4% of the L-3 Holdings common stock.
On May 19, 1998, L-3 Holdings sold 6.9 million shares of its common stock
in an initial public offering ("IPO"). The net proceeds of the IPO amounted to
$139,500 and were contributed by L-3 Holdings to L-3 Communications. Prior to
the IPO, the common stock of L-3 Holdings consisted of three classes: Class A,
Class B, and Class C common stock. Immediately prior to the IPO, each
authorized share of L-3 Holdings Class A common stock, Class B common stock and
Class C common stock was converted into one class of common stock and the
authorized L-3 Holdings common stock was increased to 100 million shares.
F-17
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share ("EPS") is
presented in the table below.
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Basic:
Net income ......................................... $82,727 $58,689 $32,551
------- ------- -------
Weighted average common shares outstanding ......... 33,355 32,107 24,679
------- ------- -------
Basic earnings per share ........................... $ 2.48 $ 1.83 $ 1.32
======= ======= =======
Diluted:
Net income ......................................... $82,727 $58,689 $32,551
------- ------- -------
Common and potential shares:
Weighted average common shares outstanding ......... 33,355 32,107 24,679
Assumed exercise of stock options .................. 3,940 3,376 2,824
Assumed purchase of common shares for treasury ..... (2,342) (1,967) (1,603)
------- ------- -------
Common and potential common shares .................. 34,953 33,516 25,900
======= ======= =======
Diluted earnings per share .......................... $ 2.37 $ 1.75 $ 1.26
======= ======= =======
The 3,680,982 shares of L-3 Holdings common stock that are issuable upon
conversion of the Convertible Notes were not included in the computation of
diluted EPS for the year ended December 31, 2000 because, after the assumed
after-tax interest savings, the effect on conversion would have been
anti-dilutive.
11. INCOME TAXES
Pretax income of the Company was $134,079 for 2000, $95,430 for 1999 and
$53,450 for 1998 substantially all of which was derived from domestic
operations. The components of the Company's provision for income taxes are
presented in the table below.
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
Current income tax provision, primarily federal . ......... $26,249 $ 7,910 $ 1,113
Deferred income tax provision:
Federal .................................................. 23,130 27,881 18,203
State and local .......................................... 1,973 950 1,583
------- ------- -------
Subtotal ............................................... 25,103 28,831 19,786
------- ------- -------
Total provision for income taxes .......................... $51,352 $36,741 $20,899
======= ======= =======
F-18
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A reconciliation of the statutory federal income tax rate to the effective
income tax rate of the Company is presented in the table below.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Statutory federal income tax rate . ..................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ............................................ 4.4 4.6 4.7
Foreign sales corporation benefit ....................... (2.6) -- --
Nondeductible goodwill amortization and other
expenses ............................................... 6.8 5.2 4.6
Research and experimentation and other tax credits ...... (6.1) (7.1) (6.8)
Other, net .............................................. 0.8 0.8 1.6
---- ---- ----
Effective income tax rate ............................... 38.3% 38.5% 39.1%
==== ==== ====
The provision for income taxes excludes current tax benefits related to
the exercise of stock options credited directly to shareholders' equity of
$9,108 for 2000 and $1,011 for 1999, and $782 for 1998.
The significant components of the Company's net deferred tax assets and
liabilities are presented in the table below.
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Deferred tax assets:
Inventoried costs ...................................... $ 14,868 $ 11,033
Compensation and benefits .............................. 10,461 1,873
Pension and postretirement benefits .................... 39,486 31,768
Property, plant and equipment .......................... 9,081 17,149
Income recognition on contracts in process ............. 55,942 8,617
Accrued warranty costs . ............................... 3,349 2,401
Net operating loss carryforwards ....................... 9,660 12,749
Tax credit carryforwards ............................... 18,444 16,576
Other, net ............................................. 11,081 4,492
-------- --------
Total deferred tax assets ............................ 172,372 106,658
-------- --------
Deferred tax liabilities:
Goodwill ............................................... (18,903) (9,656)
Other, net ............................................. (6,626) (7,159)
-------- --------
Total deferred tax liabilities ....................... (25,529) (16,815)
-------- --------
Net deferred tax assets ............................. $146,843 $ 89,843
======== ========
The net deferred tax assets are classified as follows:
Current deferred tax assets . ........................... $ 89,732 $ 32,985
Long-term deferred tax assets ........................... 57,111 56,858
-------- --------
Total net deferred tax assets ........................ $146,843 $ 89,843
======== ========
F-19
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At December 31, 2000 and 1999 the Company had $28,104 and $29,325 of tax
carryforwards primarily related to U.S. federal net operating losses,
alternative minimum tax credits, research and experimentation tax credits, and
various state and local tax credits which primarily will expire, subject to
various limitations and restrictions, if unused beginning in 2011. The Company
believes that these carryforwards will be available to reduce future income tax
liabilities and has recorded these carryforwards as non-current deferred tax
assets.
12. STOCK OPTIONS
The Company adopted the 1999 Long Term Performance Plan in April 1999, and
adopted the 1997 Option Plan in April 1997. As of December 31, 2000 and 1999,
the number of shares authorized for grant of options or awards under these
plans was 5,255,815 of L-3 Holdings common stock. The grants may be awarded to
employees of the Company in the form of non-qualified stock options, incentive
stock options, stock appreciation rights, restricted stock or other incentive
awards. The price at which options may be granted shall not be less than 100%
of the fair market value of L-3 Holdings common stock on the date of grant. In
general, options expire after 10 years and are exercisable ratably over a 3
year period. As of December 31, 2000 the Company had 420,395 shares of L-3
Holdings' common stock available for awards under the these plans.
On January 1, 2000 and May 19, 1999, the Company awarded 42,896 and 40,339
shares of restricted stock of L-3 Holdings to employees which vest January 1,
2005 and 2004, respectively.
On April 5, 1999, the Company amended the performance options granted to
Mr. Lanza and Mr. LaPenta on April 30, 1997 to purchase at $6.47, 1,142,857
shares of L-3 Holdings common stock. Such amendment eliminated the performance
target acceleration provisions and provided that the unvested portion of the
performance options, which aggregated 914,286 options at April 5, 1999, became
exercisable as of April 30, 2000. These performance options would have
originally vested nine years after the grant date, but would have become
exercisable with respect to 25% of the shares subject to such performance
options on each of April 30, 1999, 2000, 2001 and 2002, to the extent certain
targets for the Company's EBITDA were achieved.
The table below presents the Company's stock option activity.
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------------- ---------
(IN THOUSANDS)
Balance at December 31, 1997 ......... 2,971 $ 6.47
Options granted ...................... 425 25.60
Options exercised .................... (481) 6.47
Options canceled ..................... (37) 8.19
-----
Balance at December 31, 1998 ......... 2,878 9.27
Options granted ...................... 1,004 39.10
Options exercised .................... (79) 8.37
Options canceled ..................... (43) 29.99
-----
Balance at December 31, 1999 ......... 3,760 17.02
Options granted ...................... 656 47.74
Options exercised .................... (577) 15.52
Options canceled ..................... (221) 39.82
-----
Balance at December 31, 2000 ......... 3,618 $21.42
=====
F-20
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below summarizes information about stock options outstanding at
December 31, 2000.
OUTSTANDING EXERCISABLE
------------------------------------------ -----------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OF OPTIONS LIFE (YEARS) PRICE OF OPTIONS LIFE (YEARS) PRICE
- ------------------------- ------------ -------------- ---------- ------------ -------------- ---------
$6.47 ................... 2,006 6.4 $ 6.47 1,549 6.4 $ 6.47
$22.00 .................. 179 7.3 $22.00 109 7.3 $22.00
$32.75 - $39.99 ......... 574 8.7 $37.27 184 8.6 $36.69
$40.00 - $47.00 ......... 643 8.6 $41.51 87 8.0 $40.50
Over $47.00 ............. 216 9.6 $58.00 -- -- --
----- -----
Total .................. 3,618 7.4 $21.42 1,929 6.7 $11.77
===== =====
The weighted average fair values of stock options at their grant date
during 2000, 1999 and 1998, where the exercise price equaled the market price
(estimated fair value) on the grant date were $20.19, $14.60 and $8.86,
respectively. In accordance with APB 25, no compensation expense was
recognized. The table below reflects pro forma net income and L-3 Holdings EPS
had the Company elected to adopt the fair value approach of SFAS 123.
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net income:
As reported ......... $82,727 $58,689 $32,551
Pro forma ........... 75,064 54,625 31,246
Basic EPS:
As reported ......... $ 2.48 $ 1.83 $ 1.32
Pro forma ........... 2.25 1.70 1.27
Diluted EPS:
As reported ......... $ 2.37 $ 1.75 $ 1.26
Pro forma ........... 2.15 1.63 1.21
The estimated fair value of options granted was calculated using the
Black-Scholes option-pricing valuation model. The weighted average assumptions
used in the valuation models are presented in the table below.
YEAR ENDED DECEMBER
31,
-------------------
2000 1999
-------- --------
Expected option term ............ 5.0 4.8
Expected volatility ............. 35.8% 31.0%
Expected dividend yield ......... -- --
Risk-free interest rate ......... 6.4% 4.7%
F-21
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2018. At December 31, 2000, future minimum
payments under noncancellable operating leases with initial or remaining terms
in excess of one year are presented in the table below.
OPERATING LEASES
----------------------------------------
REAL ESTATE EQUIPMENT TOTAL
------------- ----------- ----------
2001 ............... $ 26,612 $2,754 $ 29,366
2002 ............... 24,079 2,107 26,186
2003 ............... 19,207 1,111 20,318
2004 ............... 16,591 318 16,909
2005 ............... 19,812 34 19,846
Thereafter ......... 160,427 -- 160,427
-------- ------ --------
Total ............. $266,728 $6,324 $273,052
======== ====== ========
Real estate lease commitments have been reduced by minimum sublease rental
income of $15,434 due in the future under noncancellable subleases. Leases
covering major items of real estate and equipment contain renewal and or
purchase options. Rent expense, net of sublease income was $34,123 for 2000,
$22,452 for 1999, and $15,290 for 1998.
On March 30, 1998 and June 30, 1999, the Company entered into two separate
real estate lease agreements, as lessee, with unrelated lessors which expire on
March 30, 2001 and June 30, 2002, respectively, and are accounted for as
operating leases. On or before each lease expiration date, the Company can
exercise options under each lease agreement to either renew the lease, purchase
the properties for $12,500 and $15,500, respectively, or sell the property on
behalf of the lessor (the "Sale Option"). If the Company exercises the Sale
Option, the Company must pay the lessor a residual guarantee amount of $10,894
and $13,524, respectively, on or before the lease expiration date, and at the
time the property is sold, the Company must pay the lessor a supplemental rent
in the amount of $1,606 and $1,976, respectively, to the extent that the sales
proceeds exceed the respective residual guarantee amount by the supplemental
rent amounts. In the event that the sales proceeds are less than the sum of the
residual guarantee amount and the supplemental rent, the Company is required to
pay a supplemental rent to the extent that the reduction in the fair value of
the property is demonstrated by an independent appraisal to have been caused by
the Company's failure to properly maintain the property. Accordingly, the
aggregate residual guarantee amounts of $24,418 have been included in the
noncancellable real estate operating lease payments relating to the expiration
of such leases.
On December 28, 2000, the Company entered into a sale-leaseback
transaction on its facility located in Hauppauge, NY. The facility was sold for
$13,650. The lease agreement which is accounted for as an operating lease, has
an initial term of 14 years with a fixed annual rent that increases 2.5%
annually. The Company has the option to extend the lease term for an additional
3 terms of 5 years each. The gain of $4,110 on the sale of the facility has
been deferred and will be recognized ratably over the term of the lease.
The Company has a contract to provide and operate for the U.S. Air Force
("USAF") a full-service training facility including simulator systems near a
USAF base. The Company expects to lease the simulator systems from unrelated
third parties, and has entered into agreements with the owner-lessors of the
simulator systems, under which the Company is acting as the construction agent
F-22
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
on behalf of owner-lessors for procurement and construction for the simulator
systems. The estimated project costs to construct the simulator systems is
approximately $48,360. During the construction period, if certain events occur
that are caused by the Company's actions or failures to act, these agreements
may obligate the Company to make payments to the owner-lessors which may be
equal to 89.9% of the incurred project costs for the simulator systems at the
time of such defaults. At December 30, 2002, the estimated completion date of
the construction, pursuant to these agreements, the Company, as lessee, will
enter into leases each with a term of 15 years with the owner-lessors for the
use of the simulator systems. These leases are expected to be accounted for as
operating leases and the aggregate noncancellable rental payments under such
leases are estimated to be $89,241.
The Company is engaged in providing products and services under contracts
with the U.S. Government and to a lesser degree, under foreign government
contracts, some of which are funded by the U.S. Government. All such contracts
are subject to extensive legal and regulatory requirements, and, from time to
time, agencies of the U.S. Government investigate whether such contracts were
and are being conducted in accordance with these requirements. Under U.S.
Government procurement regulations, an indictment of the Company by a federal
grand jury could result in the Company being suspended for a period of time
from eligibility for awards of new government contracts. A conviction could
result in debarment from contracting with the federal government for a
specified term. Additionally, in the event that U.S. Government expenditures
for products and services of the type manufactured and provided by the Company
are reduced, and not offset by greater commercial sales or other new programs
or products, or acquisitions, there may be a reduction in the volume of
contracts or subcontracts awarded to the Company.
The Company has been periodically subject to litigation, claims or
assessments and various contingent liabilities incidental to its business.
Management continually assesses the Company's obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management is aware,
the Company believes that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's
consolidated results of operations. The Company accrues for these contingencies
when it is probable that a liability has been incurred and the amount of the
loss can be reasonably estimated.
With respect to those investigative actions, items of litigation, claims
or assessments of which it is aware, management of the Company is of the
opinion that the probability is remote that, after taking into account certain
provisions that have been made with respect to these matters, the ultimate
resolution of any such investigative actions, items of litigation, claims or
assessments will have a material adverse effect on the financial position or
results of operations of the Company.
On December 27, 2000, the Company filed a complaint against Raytheon and
Raytheon Technical Services Company in the Court of Chancery for the State of
Delaware in and for New Castle County, alleging that Raytheon failed to
disclose material liabilities in connection with the sale of TDTS to the
Company in February 2000. Specifically, the complaint alleges that Raytheon
misrepresented the financial liabilities associated with the AVCATT contract
which will cause the Company to incur damages of approximately $100,000. The
Company assumed the AVCATT contract as part of the acquisition of TDTS which
was completed in February 2000. The complaint seeks rescission of the TDTS
Asset Purchase and Sale Agreement and alternatively, rescission of the AVCATT
contract, rescissory damages and breach of contract.
14. PENSIONS AND OTHER EMPLOYEE BENEFITS
The Company maintains a number of pension plans, both contributory and
noncontributory, covering employees at certain locations. Eligibility for
participation in these plans varies and benefits
F-23
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
are generally based on the participant's compensation and/or years of service.
The Company's funding policy is generally to contribute in accordance with cost
accounting standards that affect government contractors, subject to the
Internal Revenue Code and regulations thereon. Plan assets are invested
primarily in U.S. government and agency obligations and listed stocks and
bonds.
The Company also provides postretirement medical and life insurance
benefits for retired employees and dependents at certain locations.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension plans.
These benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.
The table below summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and postretirement benefit plans.
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ...... $328,541 $340,483 $ 65,554 $ 75,262
Service cost ................................. 16,343 13,513 1,670 1,595
Interest cost ................................ 28,029 23,092 4,754 4,175
Participants' contributions .................. 36 20 -- --
Amendments ................................... 853 3,564 -- (1,429)
Actuarial loss (gain) ........................ 8,867 (41,372) (1,271) (11,201)
Acquisitions ................................. 48,187 -- 1,879 753
Benefits paid ................................ (15,373) (10,759) (4,048) (3,601)
-------- -------- -------- --------
Benefit obligation at end of year ............ $415,483 $328,541 $ 68,538 $ 65,554
-------- -------- -------- --------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year ........................................ $367,451 $288,502 $ -- $ --
Actual return on plan assets ................. (21,905) 81,800 -- --
Acquisitions ................................. 49,709 -- -- --
Employer contributions ....................... 11,345 7,888 4,048 3,601
Participants' contributions .................. 36 20 -- --
Benefits paid ................................ (15,373) (10,759) (4,048) (3,601)
-------- -------- -------- --------
Fair value of plan assets at end of year ..... $391,263 $367,451 $ -- $ --
-------- -------- -------- --------
FUNDED STATUS OF THE PLANS ................... $(24,220) $ 38,910 $(68,538) $(65,554)
Unrecognized actuarial loss (gain) ........... (5,044) (76,592) (9,401) (8,924)
Unrecognized prior service cost .............. 3,777 3,275 (1,207) (1,306)
-------- -------- -------- --------
Net amount recognized ........................ $(25,487) $(34,407) $(79,146) $(75,784)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET
CONSIST OF:
Accrued benefit liability .................... $(26,377) $(34,478) $(79,146) $(75,784)
Accumulated other comprehensive income........ 890 71 -- --
-------- -------- -------- --------
Net amount recognized ........................ $(25,487) $(34,407) $(79,146) $(75,784)
======== ======== ======== ========
RATE ASSUMPTIONS:
Discount rate ................................ 7.50% 7.75% 7.50% 7.75%
Rate of return on plan assets ................ 9.50% 9.50% n.a. n.a.
Salary increases ............................. 4.50% 4.50% 4.50% 4.50%
F-24
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------- -----------------------
2000 1999 2000 1999
------ ------ ---------- ----------
Annual increase in cost of benefits ......... n.a. n.a. 6.25% 6.50%
The annual increase in cost of benefits ("health care cost trend rate") is
assumed to be 5.0% in 2000 and decreases to a rate of 4.5% for 2001 and
thereafter. Assumed health care cost trend rates have a significant effect on
amounts reported for postretirement medical benefit plans. A one percentage
point decrease in the assumed health care cost trend rates would have the
effect of decreasing the aggregate service and interest cost components and the
postretirement medical obligations by $668 and $7,392, respectively. A one
percentage point increase in the assumed health care cost trend rate would have
the effect of increasing the aggregate service and interest cost components and
the postretirement medical obligations by $736 and $5,738, respectively.
The table below summarizes the components of net periodic pension and
postretirement medical costs.
POSTRETIREMENT
PENSION PLANS PENSION PLANS
--------------------------- ---------------------
2000 1999 2000 1999
------------ ------------ --------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ............................... $ 16,343 $ 13,513 $1,670 $1,595
Interest cost .............................. 28,029 23,092 4,754 4,175
Amortization of prior service cost ......... 351 289 (99) (123)
Expected return on plan assets ............. (39,109) (26,251) -- --
Recognized actuarial (gain) loss ........... (3,981) (30) (865) (112)
Recognition due to settlement .............. 307 -- -- --
-------- -------- ------ ------
Net periodic benefit cost ................. $ 1,940 $ 10,613 $5,460 $5,535
======== ======== ====== ======
The accumulated benefit obligation, projected benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $86,426, $92,180, and $78,773 respectively, as of
December 31, 2000 and $4,459, $5,307 and $893 respectively, as of December 31,
1999.
In connection with the Company's assumption of certain plan obligations
pursuant to the Company's acquisition of the predecessor company, Lockheed
Martin has provided the Pension Benefit Guaranty Corporation ("PBGC") with
commitments to assume sponsorship or other forms of financial support under
certain circumstances of the Company's pension plans for Communication Systems
- -- West and Aviation Recorders (the "Subject Plans"). Upon the occurrence of
certain events, Lockheed Martin, at its option, has the right to decide whether
to cause the Company to transfer sponsorship of any or all of the Subject Plans
to Lockheed Martin, even if the PBGC has not sought to terminate the Subject
Plans. Such a triggering event occurred in 1998, but reversed in 1999, relating
to a decrease in the PBGC-mandated discount rate in 1998 that had resulted in
an increase in the underlying liability. The Company notified Lockheed Martin
of the 1998 triggering event, and in February 1999, Lockheed Martin informed
the Company that it had no present intention to exercise its right to cause the
Company to transfer sponsorship of the Subject Plans. If Lockheed Martin did
assume sponsorship of these plans, it would be primarily liable for the costs
associated with funding the Subject Plans or any costs associated with the
termination of the Subject Plans but L-3 Communications would be required to
reimburse Lockheed Martin for these costs. To date, the impact on pension
expense and funding requirements resulting from this arrangement has not been
F-25
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
significant. However, should Lockheed Martin assume sponsorship of the Subject
Plans or if these plans were terminated, the impact of any increased pension
expenses or funding requirements could be material to the Company. The Company
has performed its obligations under the letter agreement with Lockheed Martin
and the Lockheed Martin Commitment and has not received any communications from
the PBGC concerning actions which the PBGC contemplates taking in respect of
the Subject Plans.
Employee Savings Plans. Under its various employee savings plans, the
Company matches the contributions of participating employees up to a designated
level. The extent of the match, vesting terms and the form of the matching
contributions vary among the plans. Under these plans, the Company's matching
contributions in L-3 Holdings common stock and cash were $15,201 for 2000,
$8,798 for 1999, and $6,366 for 1998.
15. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Interest paid .......................................... $81,390 $50,532 $42,908
Income taxes paid ...................................... 10,052 6,317 496
Noncash transactions:
Common stock issued related to acquisition ............ -- 6,434 --
Contribution in common stock to savings plans ......... 12,642 6,993 967
F-26
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. SEGMENT INFORMATION
The Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products, which are described in Note 1. The Company
evaluates the performance of its operating divisions and reportable segments
based on sales and operating income. All corporate expenses are allocated to
the Company's divisions using an allocation methodology prescribed by U.S.
Government regulations for government contractors. Accordingly, all costs and
expenses are included in the Company's measure of segment profitability.
SECURE SPECIALIZED ELIMINATION OF
COMMUNICATION COMMUNICATION INTERSEGMENT CONSOLIDATED
SYSTEMS PRODUCTS CORPORATE SALES TOTAL
--------------- --------------- ----------- --------------- -------------
2000
- ----
Sales ............................... $856,970 $1,065,136 $(12,045) $1,910,061
Operating income .................... 91,310 131,408 222,718
Total assets ........................ 792,949 1,480,790 $189,805 2,463,544
Capital expenditures ................ 10,750 22,830 33,580
Depreciation and amortization ....... 26,417 47,837 74,254
1999
- ----
Sales ............................... $544,418 $ 867,495 $ (6,451) $1,405,462
Operating income .................... 46,955 103,531 150,486
Total assets ........................ 370,918 1,065,236 $192,587 1,628,741
Capital expenditures . .............. 6,980 16,476 23,456
Depreciation and amortization ....... 18,451 35,267 53,718
1998
- ----
Sales ............................... $493,188 $ 561,393 $(17,536) $1,037,045
Operating income .................... 39,885 60,464 100,349
Total assets ........................ 368,891 797,469 $119,036 1,285,396
Capital expenditures . .............. 5,755 17,674 23,429
Depreciation and amortization ....... 17,325 23,030 40,355
Corporate assets not allocated to the reportable segments primarily
include cash and cash equivalents, corporate office fixed assets, deferred
income tax assets and deferred debt issuance costs.
Substantially all of the Company's operations are domestic. The Company's
foreign operations are not material to the Company's results of operations,
cash flows or financial position. Sales to principal customers are summarized
in the table below.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
U.S. Government agencies . .................. $1,284,379 $ 924,006 $ 716,234
Foreign governments ......................... 144,274 127,637 100,911
Commercial export . ......................... 172,101 144,274 85,331
Other (principally U.S. commercial) ......... 309,307 209,545 134,569
---------- ---------- ----------
Consolidated sales ......................... $1,910,061 $1,405,462 $1,037,045
========== ========== ==========
F-27
L-3 COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years ended
December 31, 2000 and 1999 is presented in the table below.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- -------------- ------------
2000
Sales .................... $377,052 $460,976 $514,415 $557,618
Operating income ......... 34,669 49,653 62,815 75,581
Net income ............... 10,929 16,459 24,110 31,229
Basic EPS ................ $ 0.33 $ 0.49 $ 0.72 $ 0.93
Diluted EPS .............. $ 0.32 $ 0.47 $ 0.69 $ 0.89
1999
Sales .................... $275,562 $314,432 $382,356 $433,112
Operating income ......... 26,167 31,149 42,840 50,330
Net income ............... 7,199 11,086 17,349 23,055
Basic EPS . .............. $ 0.24 $ 0.34 $ 0.53 $ 0.70
Diluted EPS .............. $ 0.23 $ 0.33 $ 0.51 $ 0.68
F-28
b. Pro Forma Financial Information
L-3 COMMUNICATIONS HOLDINGS, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2000
F-29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma statement of operations data gives
effect to the acquisitions by L-3 Communications Holdings, Inc. (the "Company")
of the Traffic Alert and Collision Avoidance System Business ("TCAS Business")
of Honeywell, Inc. which was completed in April 2000 and Training Devices and
Training Services Business ("TDTS Business") of Raytheon Company ("Raytheon")
which was completed in February 2000, as if they had occurred on January 1,
2000.
On April 28, 2000, the Company acquired the TCAS Business from Honeywell
Inc. for $239.6 million in cash including expenses. The TCAS acquisition was
financed with borrowings under a revolving 364-day senior credit facility.
On February 10, 2000, the Company acquired the assets of the TDTS Business
of Raytheon Company for $160.0 million in cash plus expenses subject to
adjustment. The acquisition was financed with borrowings under the Company's
senior credit facilities.
The unaudited condensed pro forma statement of operations does not reflect
any cost savings that management of the Company believes would have resulted
had the acquisitions occurred on January 1, 2000. The pro forma financial
information should be read in conjunction with the audited consolidated
financial statements of the Company as of December 31, 2000. The unaudited pro
forma condensed financial information may not be indicative of the results of
operations of the Company that actually would have occurred had the
acquisitions been completed on January 1, 2000 or the results of operations of
the Company that may be obtained in the future.
F-30
L-3 COMMUNICATIONS HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
TDTS(1) TCAS(2)
------------------ --------------------
ONE MONTH ENDED THREE MONTHS ENDED PRO FORMA
L-3 JANUARY 31, 2000 MARCH 31, 2000 ADJUSTMENTS PRO FORMA
------------- ------------------ -------------------- ----------------- --------------
(in millions except for per share data)
STATEMENT OF OPERATIONS DATA:
Sales .................................... $1,910.1 $17.8 $23.1 $ -- $1,951.0
Costs and expenses ....................... 1,687.4 21.6 12.4 1.5 (3) 1,722.9
-------- ----- ----- -------- --------
Operating income (loss) ................ 222.7 (3.8) 10.7 (1.5) 228.1
Interest and investment income
(expense) ............................... 4.4 -- -- -- 4.4
Interest expense ......................... 93.0 -- 0.1 5.3 (4) 98.4
-------- ----- ----- -------- --------
Income (loss) before income taxes ...... 134.1 (3.8) 10.6 (6.8) 134.1
Provision (benefit) for income taxes ..... 51.4 -- 4.2 (4.2)(5) 51.4
-------- ----- ----- -------- --------
Net income (loss) ...................... $ 82.7 $(3.8) $ 6.4 $(2.6) $ 82.7
======== ===== ===== ======== ========
EARNINGS PER SHARE:
Basic .................................. $ 2.48 $ 2.48
Diluted ................................ $ 2.37 $ 2.37
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................. 33.4 33.4
Diluted ................................ 35.0 35.0
F-31
L-3 COMMUNICATIONS HOLDINGS, INC.
1. On February 10, 2000, the Company acquired the assets of the TDTS Business
of Raytheon Company for $160.0 million in cash plus expenses, subject to
adjustment. The acquisition was financed with borrowings under the
Company's senior credit facilities. An estimated purchase price of $160.9
million, including expenses was assumed subject to adjustment.
2. On April 28, 2000, the Company acquired the TCAS Business from Honeywell
Inc. for $239.6 million in cash including expenses. The TCAS acquisition
was financed with borrowings under a new revolving 364-day senior credit
facility.
3. Estimated excess of purchase price, including expenses, over the estimated
fair value of the identifiable net assets acquired (goodwill) related to
the TDTS and TCAS acquisitions was $197.2 million and $214.3 million. The
goodwill is being amortized over 40 years. The table below presents the
estimated increase to goodwill amortization for the periods indicated that
would have occurred if the acquisitions were completed on January 1, 2000.
TDTS TCAS
ONE MONTH THREE MONTHS
ENDED ENDED
JANUARY 31, 2000 MARCH 31, 2000 TOTAL
------------------ ---------------- ---------
(in millions)
Pro forma amortization expense ......... $0.4 $ 1.3 $ 1.7
Less: historical amortization
expenses .............................. -- (0.2) (0.2)
---- ----- -----
Pro forma adjustment ................... $0.4 $ 1.1 $ 1.5
==== ===== =====
4. Pro forma interest expense was calculated using the average interest rate of
7.4% for the TDTS acquisition and 7.4% for the TCAS acquisition on the
Company's outstanding revolver borrowings during the period indicated below
and the borrowings of $160.0 million incurred to finance the TDTS
acquisition and the borrowings of $239.1 million incurred to finance the
TCAS acquisition. The table below presents the increase to interest expense
for the periods indicated that would have occurred if the acquisitions were
completed on January 1, 2000.
TDTS TCAS
ONE MONTH THREE MONTHS
ENDED ENDED
JANUARY 31, 2000 MARCH 31, 2000 TOTAL
------------------ ---------------- ---------
(in millions)
Pro forma amortization expense $1.0 $ 4.4 $ 5.4
Less: historical amortization
expenses .................... -- (0.1) (0.1)
---- ----- -----
Pro forma adjustment ......... $1.0 $ 4.3 $ 5.3
==== ===== =====
5. The pro forma adjustments were tax-effected, as appropriate, using a
statutory (federal and state) tax rate of 39.4%. The pro forma adjustments
also include an income tax benefit of $1.5 million for the reversal of the
tax valuation allowance included in the historical financial statements of
the TDTS Business for its net operating loss of $3.8 million. The Company
would have been able to utilize such net operating loss in its consolidated
income tax provision had the acquisition of the TDTS Business been
completed on January 1, 2000.
F-32
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated payable by us in connection with the offering described in
this Registration Statement are as follows:
Registration Fee .......................... $ 5,904.45
Legal fees and expenses ................... 50,000.00
------------
Accounting fees and expenses .............. 10,000.00
Printing and duplicating expenses ......... 50,000.00
Miscellaneous expenses .................... 6,000.00
Total .................................... $ 121,904.45
============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
for, among other things:
(i) permissive indemnification for expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by designated persons, including
directors and officers of a corporation, in the event such
persons are parties to litigation other than stockholder
derivative actions if certain conditions are met;
(ii) permissive indemnification for expenses (including attorneys'
fees) actually and reasonably incurred by designated persons,
including directors and officers of a corporation, in the event
such persons are parties to stockholder derivative actions if
certain conditions are met;
(iii) mandatory indemnification for expenses (including attorneys'
fees) actually and reasonably incurred by designated persons,
including directors and officers of a corporation, in the event
such persons are successful on the merits or otherwise in defense
of litigation covered by (i) and (ii) above; and
(iv) that the indemnification provided for by Section 145 is not
deemed exclusive of any other rights which may be provided under
any by-law, agreement, stockholder or disinterested director
vote, or otherwise.
In addition to the indemnification provisions of the DGCL described above,
our Certificate of Incorporation (the "Certificate of Incorporation") provides
that we shall, to the fullest extent permitted by the DGCL, (i) indemnify our
officers and directors and (ii) advance expenses incurred by such officers or
directors in relation to any action, suit or proceeding.
Our Bylaws (the "Bylaws") require the advancement of expenses to an
officer or director (without a determination as to his conduct) in advance of
the final disposition of a proceeding if such person furnishes a written
affirmation of his good faith belief that he has met the applicable standard of
conduct and furnishes a written undertaking to repay any advances if it is
ultimately determined that he is not entitled to indemnification. In connection
with proceedings by us or in our right, the Bylaws provide that indemnification
shall include not only reasonable expenses, but also judgments, fines,
penalties and amounts paid in settlement. The Bylaws provide that the
Registrant may, subject to authorization on a case by case basis, indemnify and
advance expenses to employees or agents to the same extent as a director or to
a lesser extent (or greater, as permitted by law) as determined by the board of
directors.
The Bylaws purport to confer upon officers and directors contractual
rights to indemnification and advancement of expenses as provided therein.
Our Certificate of Incorporation limits the personal liability of our
directors to us or our stockholders for monetary damages for breach of the
fiduciary duty as a director, other than liability
II-1
as a director (i) for breach of duty of loyalty to us or our stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL (certain
illegal distributions) or (iv) for any transaction for which the director
derived an improper personal benefit.
We maintain officers' and directors' insurance covering certain
liabilities that may be incurred by officers and directors in the performance
of their duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 11, 1998, L-3 Communications issued $200.0 million in
aggregate principal amount of its 8% Senior Subordinated Notes due August 1,
2008. The securities were sold to Lehman Brothers Inc. and NationsBanc
Montgomery Securities LLC pursuant to an exemption from registration under
Section 4(2) of the Securities Act.
On March 4, 1998, we acquired the assets of the ILEX Systems business for
cash of $54.3 million. In connection with this acquisition, in August 1999, we
issued 150,955 shares of our common stock and in April 2000, we issued 297,229
shares of our common stock to shareholders of the ILEX Systems business
pursuant to an exemption under Section 4(2) of the Securities Act.
On November 21, 2000, L-3 Holdings issued $250.0 million in aggregate
principal amount of its 5.25% Convertible Notes due 2009 in a private placement
pursuant to an exemption from registration under Section 4(2) of the Securities
Act. Lehman Brothers Inc. was the initial purchaser of the notes, and exercised
its over-allotment option to purchase an additional $50.0 million of the notes
on December 20, 2000.
ITEM 16. EXHIBITS
The following exhibits are filed as part of this registration statement:
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of L-3 Communications Holdings, Inc. (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 No.
333-46975).
3.2 By laws of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 No. 333-46975).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
*5.1 Opinion of Simpson Thacher & Bartlett.
10.1 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to L-3
Communications Corporation's Registration Statement on Form S-4 No. 333-31649).
10.2 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.3 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.51 to the
Registrant Statement on Form S-1 No. 333-46975).
10.4 Form of Stock Option Agreement for Employee Options (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
II-2
EXHIBIT
NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------
10.5 Form of 1997 Stock Option Plan for Key Employees (incorporated by reference to Exhibit
10.91 to Registrant's Registration Statement on Form S-1, No. 333-46975).
10.6 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Frank C. Lanza (incorporated by reference to Exhibit
10.12 to Registrant" Registration Statement on Form S-1, No. 333-70125).
10.7 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Robert V. LaPenta (incorporated by reference to
Exhibit 10.13 to Registrant's Registration Statement on Form S-1, No. 333-70125).
10.8 Option Plan for Non-Employee Directors of L-3 Communication's Holdings, Inc.
(incorporated by reference to Exhibit 10.15 to Registrant's annual report on Form 10-K
filed on March 31, 1999).
10.9 1999 Long Term Performance Plan dated as of April 27, 1999 (incorporated by reference to
Exhibit 10.16 to the Registrant's annual report on Form 10-K filed on March 30, 2000).
10.10 L-3 Communications Corporation Pension Plan (incorporated by reference to Exhibit 10.10
to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.11 Indenture dated as of May 22, 1998 between L-3 Communications Corporation and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 10.6 to L-3
Communications Corporation's Registration Statement on Form S-4 No. 333-70199).
10.12 Indenture dated as of December 11, 1998 among L-3 Communications Corporation, the
Guarantors named therein and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.32 to Registrant's Registration Statement on Form S-1, No.
333-70125).
10.13 Indenture dated as of November 21, 2000 among L-3 Communications Holdings, Inc., the
Guarantors named therein and the Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.33 to the Registrant's annual report on Form 10-K filed on
March 15, 2001).
10.14 Purchase Agreement dated as of November 21, 2000 among L-3 Communications Holdings,
Inc., the Guarantors included therein and Lehman Brothers Inc. (incorporated by reference
to Exhibit 10.34 to the Registrant's annual report on Form 10-K filed on March 15, 2001).
10.15 Registration Rights Agreement dated as of November 21, 2000 among L-3 Communications
Holdings, Inc., the Guarantors included therein and Lehman Brothers Inc. (incorporated by
reference to Exhibit 10.35 to the Registrant's annual report on Form 10-K filed on
March 15, 2001).
10.16 Consent, Waiver and First Amendment to Amended and Restated 364 Day Credit
Agreement dated as of April 28, 2000 among L-3 Communications Corporation and lenders
named therein (incorporated by reference to Exhibit 10.40 to the Registrant's annual report
on Form 10-K filed on March 15, 2001).
10.17 Consent, Waiver and First Amendment to Second Amended and Restated Credit
Agreement dated as of April 28, 2000 among L-3 Communications Corporation and lenders
named therein (incorporated by reference to Exhibit 10.41 to the Registrant's annual report
on Form 10-K filed on March 15, 2001).
10.18 Consent, Waiver and First Amendment to New 364 Day Credit Agreement dated as of
April 28, 2000 among L-3 Communications Corporation and lenders named therein
(incorporated by reference to Exhibit 10.42 to the Registrant's annual report on Form 10-K
filed on March 15, 2001).
10.19 New 364 Day Credit Agreement dated as of April 24, 2000 among L-3 Communications
Corporation and lenders named therein (incorporated by reference to Exhibit 10.43 to the
Registrant's annual report on Form 10-K filed on March 15, 2001).
II-3
EXHIBIT
NO. DESCRIPTION
- --------------- --------------------------------------------------------------------------------------------
10.20 Amended and Restated 364 Day Credit Agreement dated as of April 24, 2000 among L-3
Communications Corporation and lenders named therein (incorporated by reference to
Exhibit 10.44 to the Registrant's annual report on Form 10-K filed on March 15, 2001).
10.21 Second Amended and Restated Credit Agreement dated as of April 24, 2000 among L-3
Communications Corporation and lenders named therein (incorporated by reference to
Exhibit 10.45 to the Registrant's annual report on Form 10-K filed on March 15, 2001).
10.22 Consent and Third Amendment to Amended and Restated 364 Day Credit Agreement
dated as of November 16, 2000 among L-3 Communications Corporation and lenders
named therein (incorporated by reference to Exhibit 10.46 to the Registrant's annual report
on Form 10-K filed on March 15, 2001).
10.23 Consent and Second Amendment to New 364 Day Credit Agreement dated as of
November 16, 2000 among L-3 Communications Corporation and lenders named therein
(incorporated by reference to Exhibit 10.47 to the Registrant's annual report on Form 10-K
filed on March 15, 2001).
10.24 Consent and Second Amendment to Second Amended and Restated Credit Agreement
dated as of November 16, 2000 among L-3 Communication Corporation and lenders named
therein (incorporated by reference to Exhibit 10.48 to the Registrant's annual report on
Form 10-K filed on March 15, 2001).
10.25 Asset Purchase Agreement relating to the Honeywell TCAS Business by and among
Honeywell Inc., L-3 Communications Corporation and, solely in respect of the Guaranty in
Article XIV, Honeywell International Inc. dated as of February 10, 2000 (incorporated by
reference to Exhibit 10.91 to the Registrant's annual report on Form 10-K filed on
March 15, 2001).
10.26 Asset Purchase and Sale Agreement, dated January 7, 2000 by and between L-3
Communications Corporation and Raytheon Company (incorporated by reference to
Exhibit 10.92 to the Registrant's annual report on Form 10-K filed on March 15, 2001).
11.1 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted
Earnings Per Share (incorporated by reference to Exhibit 11 to the Registrant's annual
report on Form 10-K filed on March 15, 2001).
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registrant's
annual report on Form 10-K filed on March 15, 2001).
**23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1).
*24.1 Powers of Attorney (included on signature page).
- ----------
* Previously filed.
** Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of
II-4
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected on the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of New York, State of New York, on April 10, 2001.
L-3 Communications Holdings, Inc.
By: /s/ Christopher C. Cambria
----------------------------------------
Christopher C. Cambria
Senior Vice President-General Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE
- ------------------------------ -------------------------------------------------------
* Chairman, Chief Executive Officer and Director
-----------------------
Frank C. Lanza
* President, Chief Financial Officer and Director
- -------------------------
Robert V. LaPenta
/s/ Christopher C. Cambria Senior Vice President -- General Counsel and Secretary
- -------------------------
Christopher C. Cambria
* Senior Vice President -- Finance
- -------------------------
Michael T. Strianese
* Director
- -------------------------
David J. Brand
* Director
- -------------------------
Thomas A. Corcoran
* Director
- -------------------------
Alberto M. Finali
* Director
- -------------------------
Robert B. Millard
* Director
- -------------------------
John E. Montague
* Director
- -------------------------
John M. Shalikashvili
* Director
- -------------------------
Arthur L. Simon
* Director
- -------------------------
Alan H. Washkowitz
* By Christopher C. Cambria as attorney-in-fact.
II-6
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of L-3 Communications Holdings, Inc. (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 No.
333-46975).
3.2 By laws of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
*5.1 Opinion of Simpson Thacher & Bartlett.
10.1 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and
The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to L-3
Communications Corporation's Registration Statement on Form S-4 No. 333-31649).
10.2 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 No. 333-46975).
10.3 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3
Communications Holdings, Inc. (incorporated by reference to Exhibit 10.51 to the
Registrant Statement on Form S-1 No. 333-46975).
10.4 Form of Stock Option Agreement for Employee Options (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.5 Form of 1997 Stock Option Plan for Key Employees (incorporated by reference to
Exhibit 10.91 to Registrant's Registration Statement on Form S-1, No. 333-46975).
10.6 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Frank C. Lanza (incorporated by reference to
Exhibit 10.12 to Registrant's Registration Statement on Form S-1, No. 333-70125).
10.7 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3
Communications Holdings, Inc. and Robert V. LaPenta (incorporated by reference to
Exhibit 10.13 to Registrant's Registration Statement on Form S-1, No. 333-70125).
10.8 Option Plan for Non-Employee Directors of L-3 Communication's Holdings, Inc.
(incorporated by reference to Exhibit 10.15 to Registrant's annual report on Form 10-K
filed on March 31, 1999).
10.9 1999 Long Term Performance Plan dated as of April 27, 1999 (incorporated by
reference to Exhibit 10.16 to the Registrant's annual report on Form 10-K filed on
March 30, 2000).
10.10 L-3 Communications Corporation Pension Plan (incorporated by reference to Exhibit
10.10 to the Registrant's Registration Statement on Form S-1 No. 333-46975).
10.11 Indenture dated as of May 22, 1998 between L-3 Communications Corporation and
The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.6 to L-3
Communications Corporation's Registration Statement on Form S-4 No. 333-70199).
10.12 Indenture dated as of December 11, 1998 among L-3 Communications Corporation, the
Guarantors named therein and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.32 to Registrant's Registration Statement on Form S-1, No.
333-70125).
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------
10.13 Indenture dated as of November 21, 2000 among L-3 Communications Holdings, Inc.,
the Guarantors named therein and the Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.33 to the Registrant's annual report on Form 10-K filed on
March 15, 2001).
10.14 Purchase Agreement dated as of November 21, 2000 among L-3 Communications
Holdings, Inc., the Guarantors included therein and Lehman Brothers Inc.
(incorporated by reference to Exhibit 10.34 to the Registrant's annual report on Form
10-K filed on March 15, 2001).
10.15 Registration Rights Agreement dated as of November 21, 2000 among L-3
Communications Holdings, Inc., the Guarantors included therein and Lehman Brothers
Inc. (incorporated by reference to Exhibit 10.35 to the Registrant's annual report on
Form 10-K filed on March 15, 2001).
10.16 Consent, Waiver and First Amendment to Amended and Restated 364 Day Credit
Agreement dated as of April 28, 2000 among L-3 Communications Corporation and
lenders named therein (incorporated by reference to Exhibit 10.40 to the Registrant's
annual report on Form 10-K filed on March 15, 2001).
10.17 Consent, Waiver and First Amendment to Second Amended and Restated Credit
Agreement dated as of April 28, 2000 among L-3 Communications Corporation and
lenders named therein (incorporated by reference to Exhibit 10.41 to the Registrant's
annual report on Form 10-K filed on March 15, 2001).
10.18 Consent, Waiver and First Amendment to New 364 Day Credit Agreement dated as of
April 28, 2000 among L-3 Communications Corporation and lenders named therein
(incorporated by reference to Exhibit 10.42 to the Registrant's annual report on Form
10-K filed on March 15, 2001).
10.19 New 364 Day Credit Agreement dated as of April 24, 2000 among L-3
Communications Corporation and lenders named therein (incorporated by reference to
Exhibit 10.43 to the Registrant's annual report on Form 10-K filed on March 15, 2001).
10.20 Amended and Restated 364 Day Credit Agreement dated as of April 24, 2000 among
L-3 Communications Corporation and lenders named therein (incorporated by
reference to Exhibit 10.44 to the Registrant's annual report on Form 10-K filed on
March 15, 2001).
10.21 Second Amended and Restated Credit Agreement dated as of April 24, 2000 among
L-3 Communications Corporation and lenders named therein (incorporated by
reference to Exhibit 10.45 to the Registrant's annual report on Form 10-K filed on
March 15, 2001).
10.22 Consent and Third Amendment to Amended and Restated 364 Day Credit Agreement
dated as of November 16, 2000 among L-3 Communications Corporation and lenders
named therein (incorporated by reference to Exhibit 10.46 to the Registrant's annual
report on Form 10-K filed on March 15, 2001).
10.23 Consent and Second Amendment to New 364 Day Credit Agreement dated as of
November 16, 2000 among L-3 Communications Corporation and lenders named
therein (incorporated by reference to Exhibit 10.47 to the Registrant's annual report on
Form 10-K filed on March 15, 2001).
EXHIBIT NO. DESCRIPTION
- ----------------- ----------------------------------------------------------------------------------------
10.24 Consent and Second Amendment to Second Amended and Restated Credit Agreement
dated as of November 16, 2000 among L-3 Communication Corporation and lenders
named therein (incorporated by reference to Exhibit 10.48 to the Registrant's annual
report on Form 10-K filed on March 15, 2001).
10.25 Asset Purchase Agreement relating to the Honeywell TCAS Business by and among
Honeywell Inc., L-3 Communications Corporation and, solely in respect of the
Guaranty in Article XIV, Honeywell International Inc. dated as of February 10, 2000
(incorporated by reference to Exhibit 10.91 to the Registrant's annual report on Form
10-K filed on March 15, 2001).
10.26 Asset Purchase and Sale Agreement, dated January 7, 2000 by and between L-3
Communications Corporation and Raytheon Company (incorporated by reference to
Exhibit 10.92 to the Registrant's annual report on Form 10-K filed on March 15, 2001).
11.1 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and
Diluted Earnings Per Share (incorporated by reference to Exhibit 11 to the Registrant's
annual report on Form 10-K filed on March 15, 2001).
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the
Registrant's annual report on Form 10-K filed on March 15, 2001).
**23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1).
*24.1 Powers of Attorney (included on signature page).
- ----------
* Previously filed.
** Filed herewith.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement of L-3
Communications Holdings, Inc. and subsidiaries ("the Company") on Form S-1/A,
of our report dated February 6, 2001 on our audit of the consolidated financial
statements of the Company as of December 31, 2000 and 1999 and for each of the
three years ended December 31, 2000. We also consent to the reference to us
under the heading "Experts" in the Prospectus, which is a part of this
Registration Statement.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 11, 2001