As filed with the Securities and Exchange Commission
on January 20, 1998
PROSPECTUS
L-3 Communications Corporation
10 3/8% Series B Senior Subordinated Notes due 2007
_________________________
The 10 3/8% Series B Senior Subordinated Notes due 2007 (the "Exchange
Notes") of L-3 Communications Corporation (the "Company" or "L-3") were
issued in exchange for the 10 3/8% Senior Subordinated Notes due 2007
(the "Old Notes" and together with the Exchange Notes, the "Notes") by
the Company.
Interest on the Exchange Notes will be payable semi-annually on May 1
and November 1 of each year, commencing November 1, 1997. The Exchange
Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after May 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to the date of
redemption. In addition, prior to May 1, 2000, the Company may redeem up
to 35% of the aggregate principal amount of Exchange Notes at the
redemption price set forth herein plus accrued and unpaid interest
through the redemption date with the net cash proceeds of one or more
Equity Offerings (as defined). The Exchange Notes will not be subject to
any mandatory sinking fund. In the event of a Change of Control (as
defined), each holder of Exchange Notes will have the right, at the
holder's option, to require the Company to purchase such holder's
Exchange Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase. See
"Description of the Exchange Notes". The Company's ability to pay cash
to the holders of Notes upon a purchase may be limited by the Company's
then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
purchases.
The Exchange Notes will be general unsecured obligations of the Company,
subordinate in right of payment to all existing and future Senior Debt
(as defined) of the Company. As of March 31, 1997, after giving pro
forma effect to the Offering of the Old Notes, application of the net
proceeds therefrom and borrowings under the Senior Credit Facilities (as
defined), the Company would have had approximately $400.0 million of
indebtedness outstanding, of which $175.0 million would have been Senior
Debt (excluding letters of credit). See "Capitalization". On the date of
issuance of the Exchange Notes, the Company will not have any
subsidiaries; however, the Indenture (as defined) will permit the
Company to create subsidiaries in the future.
For a discussion of certain factors that should be considered in
connection with an investment in the Exchange Notes, see "Risk Factors"
beginning on page 15.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus has been prepared for and is to be used by Lehman
Brothers Inc. in connection with offers and sales in market-making
transactions of the Exchange Notes. The Company will not receive any of
the proceeds of such sales. Lehman Brothers Inc. may act as a principal
or agent in such transactions. The Exchange Notes may be offered in
negotiated transactions or otherwise.
_________________________
LEHMAN BROTHERS
_________________________
The date of this Prospectus is January 20, 1998
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement
on Form S-4 (together with all amendments, exhibits, schedules and
supplements thereto, the "Registration Statement") under the Securities
Act with respect to the Exchange Notes being offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement.
For further information with respect to the Company and the Exchange
Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such
statement is qualified by the provisions in such exhibit, to which
reference is hereby made. As a result of the offering of the Exchange
Notes, the Company will become subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and, in accordance therewith, will file reports and other information
with the Commission. The Registration Statement, such reports and other
information can be inspected and copied at the Public Reference Section
of the Commission located at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549 and at regional public reference
facilities maintained by the Commission 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, including copies of all or any portion of the Registration
Statement, can be obtained from the Public Reference Section of the
Commission at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet
(http://www.sec.gov).
So long as the Company is subject to the periodic reporting
requirements of the Exchange Act, it is required to furnish the
information required to be filed with the Commission to the Trustee and
the holders of the Old Notes and the Exchange Notes. The Company has
agreed that, even if it is not required under the Exchange Act to
furnish such information to the Commission, it will nonetheless continue
to furnish information that would be required to be furnished by the
Company by Section 13 of the Exchange Act to the Trustee and the holders
of the Old Notes or Exchange Notes as if it were subject to such
periodic reporting requirements.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in
this Prospectus. As used in this Prospectus, unless the context requires
otherwise: (i) "Businesses" or the "Predecessor" means the operations of
Lockheed Martin Corporation and its subsidiaries that were acquired by
the Company upon consummation of the Acquisition (as defined),
(ii) "L-3" or the "Company" means L-3 Communications Corporation and the
Businesses after giving effect to the Acquisition, (iii) "Holdings"
means L-3 Communications Holdings, Inc., the Company's sole shareholder
and (iv) "Lockheed Martin" means Lockheed Martin Corporation.
The Company
L-3 is a leading provider of sophisticated secure communication
systems and specialized communication products including secure, high
data rate communication systems, microwave components, avionics, and
telemetry and instrumentation products. 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 incorporated
into the transmission, processing, recording, monitoring and
dissemination functions of these communication systems. The Company's
customers include the U.S. Department of Defense (the "DoD"), selected
U.S. government (the "Government") intelligence agencies, major
aerospace/defense prime contractors, foreign governments and commercial
customers. In 1996, L-3 had pro forma sales of $675.3 million and pro
forma operating income of $56.0 million. The Company's funded backlog as
of December 31, 1996 was approximately $542.5 million.
All of the Company's business units enjoy proprietary technologies
and capabilities and are well positioned in their respective markets.
Management has organized the Company's operations into two business
areas: Secure Communication Systems and Specialized Communication
Products. In 1996, these areas generated approximately $371.5 million
and $303.8 million of pro forma sales, respectively, and $23.0 million
and $33.0 million of pro forma operating income, respectively.
Secure Communication Systems. L-3 is the established leader in
secure, high data rate communications in support of military and other
national agency reconnaissance and surveillance applications. The
Company's Secure Communication Systems operations are located in Salt
Lake City, Utah and Camden, New Jersey. Both operations are
predominantly cost plus, sole source prime system contractors supporting
long-term programs for the U.S. Armed Forces and classified customers.
The Company's major secure communication programs and systems include:
strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information and related support
contracts for military and national agency intelligence efforts; secure
data links for airborne, satellite, ground and sea-based information
collection and transmission; as well as secure telephone and network
equipment. The Company believes that it has developed virtually every
high bandwidth data link used by the military for surveillance and
reconnaissance in operation today. In addition to these core Government
programs, L-3 is expanding its business base into related commercial
communication equipment markets, including applying its wireless
communication expertise to develop local wireless loop equipment
primarily for emerging market countries and rural areas where existing
telecommunications infrastructure is inadequate or non-existent.
Specialized Communication Products. This business area comprises
the Microwave Components, Avionics, and Telemetry and Instrumentation
Products operations of the Company.
Microwave Components. L-3 is the preeminent worldwide supplier of
commercial off-the-shelf, high performance microwave components and
frequency monitoring equipment. L-3's microwave products are sold under
the industry-recognized Narda brand name through a standard catalog to
wireless, industrial and military communication markets. L-3 also
provides state-of-the-art communication components including channel
amplifiers and frequency filters for the commercial communications
satellite market.
Avionics. Avionics includes the Company's Aviation Recorders,
Display Systems and Antenna Systems operations. L-3 is the world's
leading manufacturer of commercial cockpit voice and flight data
recorders ("black boxes"). These recorders are sold under the Fairchild
brand name both on an original equipment manufacturer ("OEM") basis to
aircraft manufacturers as well as directly to the world's major airlines
for their existing fleets of aircraft. L-3 also provides military and
high-end commercial displays for use on a number of DoD programs
including the F-14, V-22, F-117 and E-2C. Further, L-3 manufactures high
performance surveillance antennas and related equipment for U.S. Air
Force and U.S. Navy aircraft including the F-16, AWACS, E-2C and B-2, as
well as the U.K.'s Nimrod aircraft.
Telemetry and Instrumentation Products. The Company's Telemetry and
Instrumentation Products operations 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 parameter data and other
critical information and transmit it from air or space to the ground.
Telemetry products are also used for range safety and training
applications to simulate battlefield situations. Further, the Company is
applying its technical capabilities in high data rate transmission to
the medical image archiving market in partnership with the General
Electric Company ("GE") through GE's medical systems business area ("GE
Medical Systems").
Industry Overview
The defense industry has recently undergone significant changes
precipitated by ongoing federal budget pressures and new roles and
missions to reflect changing strategic and tactical threats. Since the
mid-1980's, the overall U.S. defense budget has declined in real
dollars. In response, the DoD has focused its resources on enhancing its
military readiness, joint operations and multiple mission capabilities,
and incorporating advanced electronics to improve the performance,
reduce operating cost and extend the life expectancy of its existing and
future platforms. The 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. According to
Federal Sources, an independent private consulting group, the defense
budget for command, control, communications and intelligence ("C3I") is
expected to increase from $30.0 billion in the fiscal year ended
September 30, 1996 to $42.0 billion in the fiscal year ended
September 30, 2002, a compound annual growth rate of 5.8%.
The industry has also undergone dramatic consolidation resulting in
the emergence of four dominant prime system contractors. One outgrowth
of this consolidation among the remaining major prime contractors is
their desire to limit purchases of products and sub-systems from one
another. Despite this desire, there are numerous essential but
non-strategic products, components and systems that are not economical
for the major prime contractors to design, develop or manufacture for
their own internal use. As the prime contractors continue to evaluate
their core competencies and competitive position, focusing their
resources on larger programs and platforms, the Company expects the
prime contractors will seek to exit non-strategic business areas and
procure these needed elements on more favorable terms from independent,
commercially oriented merchant suppliers.
The focus on cost control is also driving increased use of
commercial off-the-shelf products for both upgrades of existing systems
and in new systems. The Company believes 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 merchant suppliers to produce
non-core sub-systems, components and products. Going forward, the
successful merchant suppliers will use their resources to complement and
support, rather than compete with the prime contractors. L-3 anticipates
the relationship between the major prime contractors and their primary
suppliers will, as in the automotive industry, develop into 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. Early involvement in the upgrading of existing systems
and the design and engineering of new systems incorporating these
outsourced products will provide top-tier suppliers, including the
Company, 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
L-3 intends to leverage its market position, diverse program base
and favorable mix of cost plus to fixed price contracts to enhance its
profitability, reduce its indebtedness and to establish itself as the
premier merchant supplier of communication systems and products to the
major prime contractors in the aerospace/defense industry as well as the
Government. The Company's strategy to achieve these objectives includes:
-- Expand Merchant Supplier Relationships. Senior Management (as
defined) has developed strong relationships with virtually all of the
prime contractors, the DoD and other major government agencies, enabling
L-3 to identify business opportunities and anticipate customer needs. As
an independent merchant supplier, the Company anticipates its future
growth will be driven by expanding its share of existing programs and by
participating in new programs. Management has already identified several
opportunities where the Company believes it will be able to use its
strong relationships to increase its business presence and allow its
customers to reduce their costs. The Company also expects 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 L-3's capabilities on a more favorable basis given its status as an
independent company.
-- Support Customer Requirements. A significant portion of L-3's
sales are derived from high-priority, long-term programs and from
programs for which the Company has been the incumbent supplier, and in
many cases acted as the sole provider, over many years. Approximately
67% of the Company's total pro forma 1996 sales were generated from sole
source contracts. L-3's customer satisfaction and excellent performance
record are evidenced by its performance-based award fees exceeding 90%
on average over the past two years. Going forward, management believes
prime contractors will award long-term, sole source, outsourcing
contracts to the merchant supplier they believe is most capable on the
basis of quality, responsiveness, design, engineering and program
management support as well as cost. Reflecting L-3's strong competitive
position, the Company has experienced a contract award win rate over the
past two years of approximately 50% on new competitive contracts for
which it competes and approximately 90% on contracts for which it is the
incumbent. The Company intends to continue to align its research and
development, manufacturing and new business efforts to complement its
customers' requirements.
-- Leverage Technical and Market Leadership Positions. L-3 has
developed strong, proprietary technical capabilities that have enabled
it to capture a number one or two market position in most of its key
business areas, including secure, high data rate communication systems,
solid state aviation recorders, advanced antenna systems and high
performance microwave components. Over the past three years, the Company
has invested over $100 million in Company-sponsored independent research
and development, including bid and proposal costs, in addition to making
substantial investments in its technical and manufacturing resources.
Further, the Company has a highly skilled workforce including over 1,500
engineers. As an independent company, management intends to leverage its
technical expertise and capabilities into several closely aligned
commercial business areas and applications, including opportunities in
wireless telephony and medical imaging archive management.
-- Maintain Diversified Business Mix. The Company enjoys a diverse
business mix with a limited program exposure, a favorable balance of
cost plus to fixed price contracts, a significant sole source business
and an attractive customer profile. The Company's largest program,
representing 14% of 1996 pro forma sales, is a long-term, sole source,
cost plus support program for the U-2 program Directorate for the DoD.
No other program represented more than 7% of pro forma 1996 sales.
Further, the Company's pro forma sales mix of contracts in 1996 was 42%
cost plus and 58% fixed price, providing the Company with a balanced mix
of predictable profitability (cost plus) and higher margin (fixed price)
business. L-3 also enjoys an attractive customer mix of defense and
commercial business, with DoD related sales accounting for 65% and
commercial and federal (non-DoD) sales accounting for 35% of 1996 pro
forma sales. The Company intends to leverage this favorable business
profile to expand its merchant supplier business base.
-- Enhance Operating Margins. As part of larger corporations (i.e.,
Lockheed Martin, Loral, GE, Unisys), the Businesses were historically
required to absorb significant corporate expense allocations. As an
independent company, L-3 believes that it will be able to leverage its
discretionary expenditures in a more focused and efficient manner,
enhance its operating performance and reduce overhead expenses
reflecting Senior Management's more flexible, entrepreneurial approach.
The Company believes that significant costs incurred by the Businesses
under Lockheed Martin's ownership will not be incurred going forward.
These cost savings include reduced corporate administrative and
facilities expenses and certain operating performance improvements.
-- Capitalize on Strategic Acquisition Opportunities. Recent
industry consolidation has virtually eliminated traditional middle-tier
aerospace/defense companies. This level of consolidation is now
beginning to draw the concern of the DoD and federal anti-trust
regulators. As a result, the Company anticipates the pending major
mergers as well as continued consolidation of the smaller participants
in the defense industry will create attractive complementary acquisition
candidates for L-3 in the future as these companies continue to evaluate
their core competencies and competitive position.
The Transaction
The Acquisition
Holdings and L-3 were formed by Mr. Frank C. Lanza, the former
President and Chief Operating Officer of Loral Corporation ("Loral"),
Mr. Robert V. LaPenta, the former Senior Vice President and Controller
of Loral (collectively, "Senior Management"), Lehman Brothers Capital
Partners III, L.P. and its affiliates (the "Lehman Partnership") and
Lockheed Martin to acquire (the "Acquisition") substantially all of the
assets and certain liabilities of (i) nine business units previously
purchased by Lockheed Martin as part of its acquisition of Loral in
April 1996 (the "Loral Acquired Businesses") and (ii) one business unit,
Communication Systems -- Camden, purchased by Lockheed Martin as part of
its acquisition of the aerospace business of GE ("GE Aerospace") in
April 1993 (collectively, the "Businesses"). Pursuant to a Transaction
Agreement dated March 28, 1997, among the parties named therein (the
"Transaction Agreement"), the total consideration paid to Lockheed
Martin was $525 million, comprising $480 million of cash before an
estimated $20 million reduction related to a purchase price adjustment,
and $45 million of common equity being retained by Lockheed Martin. L-3
is a wholly-owned subsidiary of Holdings. Holdings was capitalized with
$125 million of common equity, with Messrs. Lanza and LaPenta
collectively owning 15.0%, the Lehman Partnership owning 50.1% and
Lockheed Martin owning 34.9%. L-3 was capitalized with $125 million of
common equity provided by Holdings.
Recent Developments
On December 19, 1997, the Company signed a definitive agreement to
purchase substantially all the assets and liabilities of the Satellite
Transmission Systems division of California Microwave, Inc. The purchase
price of $27,000,000, subject to adjustment, will be financed through cash
on hand and/or borrowings under the Company's Senior Credit Facility.
On December 22, 1997, the Company signed a definitive agreement to
purchase substantially all the assets and liabilities of the Ocean Systems
division of Allied Signal Inc. The purchase price of $70,000,000, subject
to adjustment, will be financed through cash on hand and/or borrowings
available under the Company's Senior Credit Facility.
Sources and Uses of Funds
The Acquisition was structured as an asset purchase with customary
terms and conditions. Financing for the Acquisition was comprised of:
(i) $275 million of Senior Secured Credit Facilities, consisting of $175
million of term loan facilities (the "Term Loan Facilities") and a $100
million revolving credit facility (the "Revolving Credit Facility" and,
together with the Term Loan Facilities, the "Senior Credit Facilities");
(ii) $225 million of Senior Subordinated Exchange Notes; and (iii) $125
million of equity including the equity to be retained by Lockheed Martin
(collectively, the "Financing"). Approximately $480 million of the
proceeds from the Financing was used by the Company to (i) pay the
estimated $460 million cash portion of the purchase price after an
estimated purchase price adjustment and (ii) pay related fees and
expenses. The Revolving Credit Facility was not drawn (other than for
letters of credit) at the closing of the Transaction (the "Closing") and
is available for ongoing working capital financing needs. The following
table summarizes the sources and uses of funds in connection with the
Transaction.
($ in millions)
Sources of Funds Amount Uses of Funds Amount
---------------------------------------- ----------------- ---------------------------------------- -----------------
Revolving Credit Facility( . . . . . $ 0.0 Purchase of Assets
Term Loan Facilities . . . . . . . . . . 175.0 Cash Portion . . . . . . . . . . . . . $479.8
Senior Subordinated Notes . . . . . . . . 225.0 Lockheed Martin Equity in L-3 . . . . 45.2
------
Common Equity . . . . . . . . . . . . 125.0 525.0
------
Estimated Purchase Price Adjustment . . . (20.0)
Estimated Fees and Expenses . . . . . . . 20.0
------
Total Sources . . . . . . . . . . . . $525.0 Total Uses . . . . . . . . . . . . . . $525.0
====== ======
____________________
Availability of up to $100 million, none of which was drawn at
Closing other than letters of credit which were less than $10
million.
Includes $45 million of equity of Holdings retained by Lockheed
Martin.
The purchase price of $525 million is subject to an adjustment
based upon the difference between the audited combined net tangible
assets (as defined in the Transaction Agreement) of the Businesses and a
contractually agreed-upon amount. It is anticipated that this
adjustment, currently estimated to be $20 million, will have the effect
of reducing the purchase price. Prior to Closing, Lockheed Martin
estimated the purchase price adjustment and reduced the cash portion of
the purchase price by $15.9 million. Any difference between the actual
purchase price adjustment calculated post-closing and the amount
withheld at Closing will be paid, with interest, to the appropriate
party.
The Acquisition and the Financing are referred to herein as the
"Transaction".
Terms of the Exchange Notes
Securities Offered . . . . . . . $225,000,000 aggregate principal
amount of 10 3/8% Senior
Subordinated Exchange Notes due 2007
(the "Exchange Notes").
Maturity . . . . . . . . . . . . May 1, 2007.
Interest Payment Dates . . . . . May 1 and November 1, commencing
November 1, 1997.
Optional Redemption . . . . . . . The Exchange Notes may be redeemed
at the option of the Company, in
whole or in part, on or after May 1,
2002, at the redemption prices set
forth herein, plus accrued and
unpaid interest to the date of
redemption.
In addition, prior to May 1, 2000,
the Company may redeem up to an
aggregate of 35% of the Exchange
Notes originally issued at a
redemption price of 109.375% of the
principal amount thereof, plus
accrued and unpaid interest to the
date of redemption, with the net
cash proceeds of one or more Equity
Offerings; provided, however, that
at least 65% in aggregate principal
amount of the Exchange Notes
originally issued remain outstanding
following such redemption.
Change of Control . . . . . . . . In the event of a Change of Control
(as defined), the holders of the
Exchange Notes will have the right
to require the Company to purchase
their Exchange Notes at a price
equal to 101% of the aggregate
principal amount thereof, plus
accrued and unpaid interest to the
date of purchase.
Ranking . . . . . . . . . . . . . The Exchange Notes will be general
unsecured obligations of the
Company, subordinate in right of
payment to all current and future
Senior Debt including all
obligations of the Company and its
Subsidiaries under the Senior Credit
Facilities. The Company currently
has no subsidiaries. At June 30,
1997, on a pro forma basis after
giving effect to the Transaction,
the Company would have had $400.0
million of indebtedness outstanding,
of which $175.0 million would have
been Senior Debt (excluding letters
of credit). Borrowings under the
Senior Credit Facilities are secured
by substantially all of the assets
of the Company as well as the
capital stock of the Company and its
Subsidiaries. See "Risk Factors--
Substantial Leverage" and "--
Subordination".
Covenants . . . . . . . . . . . . The Indenture pursuant to which the
Exchange Notes will be issued (the
"Indenture") contains certain
covenants that, among other things,
limit the ability of the Company and
its Restricted Subsidiaries to incur
additional Indebtedness and issue
preferred stock, pay dividends or
make other distributions, repurchase
Equity Interests (as defined) or
subordinated Indebtedness, create
certain liens, enter into certain
transactions with affiliates, sell
assets of the Company or its
Restricted Subsidiaries, issue or
sell Equity Interests of the
Company's Restricted Subsidiaries or
enter into certain mergers and
consolidations. In addition, under
certain circumstances, the Company
is required to offer to purchase
Exchange Notes at a price equal to
100% of the principal amount
thereof, plus accrued and unpaid
interest to the date of purchase,
with the proceeds of certain Asset
Sales (as defined). See "Description
of the Exchange Notes".
For a discussion of certain risk factors that should be considered
in connection with an investment in the Exchange Notes, see "Risk
Factors".
Summary Unaudited Pro Forma Financial Data
The summary unaudited pro forma data as of September 30, 1997 and
for the nine months then ended and as of December 31, 1996 and for the
year then ended have been derived from, and should be read in
conjunction with, the unaudited pro forma combined financial statements
included elsewhere herein. The unaudited pro forma data reflect the
Acquisition and the Financing as if these transactions had occurred on
January 1, 1996 for the statement of operations and other data.
Nine Months
Ended Year Ended
September 30, 1997 December 31, 1996
-------------------------- --------------------------
($ in millions)
Statement of Operations Data:
Sales:
Secure Communication Systems . . . . . . . . . . . . . . . . . . $276.6 $371.5
Specialized Communication Products . . . . . . . . . . . . . . . 223.3 303.8
------ ------
Total sales . . . . . . . . . . . . . . . . . . . . . . . . . $499.9 $675.3
====== ======
Other Data:
EBITDA:
Secure Communication Systems . . . . . . . . . . . . . . . . . . $26.0 $ 41.6
Specialized Communication Products . . . . . . . . . . . . . . . 35.7 42.4
------ ------
Total EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . $61.7 $ 84.0
====== ======
EBITDA as a percentage of sales:
Secure Communication Systems . . . . . . . . . . . . . . . . . . 9.4% 11.2%
Specialized Communication Products . . . . . . . . . . . . . . . 16.0 14.0
------ ------
Total EBITDA as a percentage of sales . . . . . . . . . . . . 12.3% 12.4%
====== ======
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . $ 13.1 $ 18.0
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . 7.5<4> 10.0
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . 10.7 17.2
Ratio of earnings to fixed charges . . . . . . . . . . . . . . 2.33x 1.35x
Ratio of total EBITDA to cash interest expense . . . . . . . . 2.22x 2.18x
Ratio of total debt to total EBITDA . . . . . . . . . . . . . . . . N/A 4.76x
____________________
EBITDA is defined as pro forma income before deducting interest
expense, income taxes, depreciation and amortization. EBITDA is
not a substitute for operating income, net income and cash flow
from operating activities as determined in accordance with
generally accepted accounting principles as a measure of
profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful
indicator of the Company's ability to meet debt service and
capital expenditure requirements and because certain debt
covenants of L-3 utilize EBITDA to measure compliance with such
covenants.
For purposes of this computation, earnings consist of income
before income taxes plus fixed charges. Fixed charges consist of
interest on indebtedness plus that portion of lease rental
expense representative of the interest factor.
For purposes of this computation, cash interest expense consists
of pro forma interest expense before amortization of deferred
financing costs.
Includes amortization of deferred financing costs which is
reported as interest expense and, therefore, is not included
within EBITDA.
Summary Historical Financial Data
The following unaudited summary combined financial data as of
September 30, 1997 and 1996 and for the nine month periods then ended,
has been derived from, and should be read in conjunction with, the
unaudited interim condensed consolidated (combined) financial statements
of the Company and footnotes thereto included elsewhere herein. In the
opinion of the management, the unaudited condensed consolidated
(combined) financial statements include all adjustments (consisting of
normal recurring accruals) considered necessary for the fair
presentation of the information contained therein. Results for the
interim periods are not necessarily indicative of the results to be
expected for the entire year.
The summary combined financial data as of March 31, 1997 and for
the three month period ended March 31, 1997 and as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 have
been derived from, and should be read in conjunction with, the audited
Combined Financial Statements of the Businesses and footnotes thereto
included elsewhere herein.
The unaudited summary combined financial data as of December 31,
1994 and 1993, March 31, 1993 and December 31, 1992 for balance sheet
data and the nine months ended December 31, 1993, the three months ended
March 31, 1993 and the year ended December 31, 1992 for statement of
operations data have been derived from the unaudited financial
statements of Communication Systems--Camden. In the opinion of the
Businesses' management, such unaudited financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position and results of operations of
Communication Systems--Camden, also referred to as Lockheed Martin
Communication Systems Division in the Lockheed Martin Predecessor
Financial Statements, as of the dates and periods indicated. These
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the condensed consolidated (combined) financial
statements of the Company and the Combined Financial Statements of the
Lockheed Martin Predecessor Businesses and the Loral Acquired Businesses
included elsewhere herein.
The Company Predecessor Company
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
--------------------- --------------------- ---------------------
(Unaudited) ($ in millions) (Unaudited)
Sales . . . . . . . . . . . . . . . . . . . . . . . . $342.9 $158.8 $365.0
Cost and expenses . . . . . . . . . . . . . . . . . . 309.9 150.9 341.9
------ ------ ------
Operating income . . . . . . . . . . . . . . . . . . 33.0 7.9 23.1
Net Interest expense . . . . . . . . . . . . . . . . 19.3 8.4 16.8
------ ------ ------
Income (loss) before income taxes . . . . . . . . . . 13.7 (.5) 6.3
Income taxes . . . . . . . . . . . . . . . . . . . . 5.3 (.2) 3.1
------ ------ ------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 8.4 $ ( .3) $ 3.3
======= ====== =======
Other Data:
EBITDA. . . . . . . . . . . . . . . . . . . . . . 46.1 15.1 41.1
Depreciation expense . . . . . . . . . . . . . . . . 8.6 4.5 10.6
Amortization expense . . . . . . . . . . . . . . . . 5.5 2.7 7.4
Capital expenditures . . . . . . . . . . . . . . . . 6.4 4.3 8.0
Ratio of earnings to fixed charges . . . . . . . . . 2.60x - 2.29x
Cash from (used in) operating activities . . . . . . 56.4 (16.3) 6.0
Cash from (used in) investing activities . . . . . . (479.0) (4.3) (292.9)
Cash from (used in) financing activities . . . . . . 462.4 20.6 286.9
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . . . . . . 142.0 121.4 N/A
Total assets . . . . . . . . . . . . . . . . . . . . 684.8 608.5 N/A
Invested equity . . . . . . . . . . . . . . . . . . . - 493.9 N/A
Shareholders' equity . . . . . . . . . . . . . . . . 125.9 - N/A
Years Ended December 31,
--------------------------------------------------------------------------------
1993
--------------------------
Three
Nine Months Months
Ended Ended
1996 1995 1994 Dec. 31 March 31 1992
-------- -------- -------- ----------- ------------ --------
($ in millions)
Statement of Operations Data:
Sales . . . . . . . . . . . . . . . . $543.1 $166.8 $218.9 $200.0 $67.8 $368.5
Operating income . . . . . . . . . . 43.7 4.7 8.4 12.4 5.1 49.3
Interest expense . . . . . . . . 24.2 4.5 5.5 4.1 -- --
Provision (benefit) for income
taxes . . . . . . . . . . . . . 7.8 1.2 2.3 3.8 2.0 19.8
Net earnings (loss) . . . . . . . . . 11.7 (1.0) 0.6 4.5 3.1 29.5
Other Data:
EBITDA . . . . . . . . . . . . . $ 68.7 $ 16.2 $ 19.9 $ 23.4 $ 7.0 $ 58.5
Depreciation expense . . . . . . . . 14.9 5.5 5.4 6.1 1.8 8.9
Amortization expense . . . . . . . . 10.1 6.1 6.1 4.9 0.1 0.3
Capital expenditures . . . . . . . . 13.5 5.5 3.7 2.6 0.8 3.9
Ratio of earnings to fixed charges . 1.72x 1.03x 1.40x N/A N/A N/A
Cash from (used in) operating 31.0 9.4 21.8 N/A N/A N/A
activities . . . . . . . . . . . . .
Cash from (used in) investing (298.3) (5.5) (3.7) N/A N/A N/A
activities . . . . . . . . . . . . .
Cash from (used in) financing 267.3 (3.9) (18.1) N/A N/A N/A
activities . . . . . . . . . . . . .
Balance Sheet Data:
Working capital . . . . . . . . . . . $ 98.8 $ 21.1 $ 19.3 $ 24.7 $22.8 $ 35.8
Total assets . . . . . . . . . . . . 593.3 228.5 233.3 241.7 93.5 105.1
Invested equity . . . . . . . . . . . 473.6 194.7 199.5 202.0 59.9 72.8
Shareholders' Equity . . . . . . . . -- -- -- -- -- --
____________________
Reflects ownership of Loral's Communication Systems -- Salt Lake
and Specialized Communication Products businesses commencing
April 1, 1996.
Reflects ownership of Communication Systems -- Camden by Lockheed
Martin commencing April 1, 1993.
Reflects ownership of Communication Systems -- Camden by GE
Aerospace for the periods indicated. The amounts shown herein
include only those amounts as reflected in the financial records
of Communication Systems -- Camden.
For periods prior to April 1, 1997, interest expense and income
tax (benefit) provision were allocated from Lockheed Martin.
EBITDA is defined as income before deducting interest expense,
income taxes, depreciation and amortization. EBITDA is not a
substitute for operating income, net earnings and cash flow from
operating activities as determined in accordance with generally
accepted accounting principles as a measure of profitability or
liquidity. EBITDA is presented as additional information because
management believes it to be a useful indicator of the Company's
ability to meet debt service and capital expenditure requirements
and because certain debt covenants of L-3 utilize EBITDA to
measure compliance with such covenants.
RISK FACTORS
Holders of Notes should consider carefully, in addition to the
other information contained in this Prospectus, the following factors
before deciding to invest in Notes.
Substantial Leverage
The Company incurred substantial indebtedness in connection with
the Transaction and the Company is highly leveraged. To effect the
Transaction, the Company incurred $400 million of indebtedness
(excluding letters of credit) in addition to equity contributions of
approximately $116 million (after giving effect to EITF 88-16 (as
defined) accounting treatment relating to basis in leveraged buyout
transactions by Holdings). Of the total $525 million used to consummate
the Acquisition, $175 million (33.3%) was supplied by the Senior Credit
Facilities, $225 million (42.9%) was supplied by the Old Exchange Notes,
and, through Holdings, $80 million (15.2%) was supplied by equity
purchases by the Lehman Partnership and Senior Management and $45
million (8.6%) contributed through equity retention in L-3 by Lockheed
Martin. After giving pro forma effect to the Transaction, the Company's
ratio of earnings to fixed charges would have been 1.35:1 for the year
ended December 31, 1996, and for the three months ended March 31, 1997,
pro forma earnings would have been insufficient to cover fixed charges
by $.9 million. The Company's actual ratio of earnings to fixed charges
for the three months ended June 30, 1997 was 1.47:1. The Company may
incur additional indebtedness in the future, subject to limitations
imposed by the Senior Credit Facilities and the Indenture.
Based upon the current level of operations and anticipated
improvements, management believes that the Company's cash flow from
operations, together with available borrowings under the Revolving
Credit Facility, will be adequate to meet its 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.
There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels or that
currently anticipated improvements will be achieved. If the Company is
unable to generate sufficient cash flow from operations in the future to
service its debt, it may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing debt (including
the Notes) or obtain additional financing. The Company's ability to make
scheduled principal payments of, to pay interest on or to refinance its
indebtedness (including the Notes) depends on its future performance and
financial results, which, to a certain extent, are subject to general
economic, financial, competitive, legislative, regulatory and other
factors beyond its control. There can be no assurance that sufficient
funds will be available to enable the Company to service its
indebtedness, including the Notes, or make necessary capital
expenditures and program and other discretionary investments. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations".
The degree to which the Company is leveraged could have important
consequences to Holders of the Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not
be available for other purposes including capital expenditures, research
and development expenditures, and program and other discretionary
investments; (ii) the Company's ability to obtain additional financing
in the future could be limited; (iii) certain of the Company's
borrowings are at variable rates of interest, which could result in
higher interest expense in the event of increases in interest rates;
(iv) the Company may be more vulnerable to downturns in its business or
in the general economy and may be restricted from making acquisitions,
introducing new technologies and products or exploiting business
opportunities; and (v) the Senior Credit Facilities and the Indenture
contain financial and restrictive covenants that limit, among other
things, the ability of the Company to borrow additional funds, dispose
of assets or pay cash dividends. Failure by the Company 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 the Company. In
addition, the degree to which the Company is leveraged could prevent it
from repurchasing all Notes tendered to it upon the occurrence of a
Change in Control, which would constitute an Event of Default under the
Indenture. See "Description of the Exchange Notes" and "Description of
Senior Credit Facilities".
Lack of Independent Operating History
Prior to the consummation of the Transaction, the Company's
operations were conducted as divisions of Lockheed Martin, Loral, Unisys
and GE Aerospace. Following consummation of the Transaction the Company
operates independently of Lockheed Martin and is required to provide
many corporate services on a stand-alone basis that were previously
provided by Lockheed Martin, including corporate research and
development, marketing, and general and administrative services
including tax, treasury, management information systems, human resources
and legal services. The result of operations of the Predecessor Company
reflects the allocation of overhead costs, financing costs, income
taxes, pension and post employment benefit costs, among other costs,
that differ from the manner the Registrant will conduct its business as
a separate entity. Lockheed Martin and the Company have entered into a
Transition Services Agreement pursuant to which Lockheed Martin provides
certain of these services at costs consistent with past practices to the
Company until December 31, 1997 (or in the case of Communication Systems
-- Camden for a period of up to 18 months after the Closing). There can
be no assurance that the actual corporate services costs incurred in
operating the Company will not exceed historical charges or that upon
termination of the Transition Services Agreement the Company will be
able to obtain similar services on comparable terms.
Future Acquisition Strategy
The Company's strategy includes pursuing additional acquisitions
that will complement its business. There can be no assurance, however,
that the Company will be able to identify additional acquisition
candidates on commercially reasonable terms or at all or that, if
consummated, any anticipated benefits will be realized from such future
acquisitions. In addition, the availability of additional acquisition
financing cannot be assured and, depending on the terms of such
additional acquisitions, could be restricted by the terms of the Senior
Credit Facilities and/or the Indenture. The process of integrating
acquired operations into the Company's 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 the Company's existing operations.
Possible future acquisitions by the Company could result in the
incurrence of additional debt, contingent liabilities and amortization
expenses related to goodwill and other intangible assets, all of which
could materially adversely affect the Company's financial condition and
operating results.
Technological Change; New Product Development
The communication equipment industry for defense applications and
in general is characterized by rapidly changing technology. The
Company's ability to compete successfully in this market will depend on
its ability to design, develop, manufacture, assemble, test, market and
support new products and enhancements on a timely and cost-effective
basis. The Company has historically obtained technology from substantial
customer-sponsored research and development as well as from internally
funded research and development; however, there can be no assurance that
the Company will continue to maintain comparable levels of
customer-sponsored research and development in the future. See
"Business--Research and Development". Substantial funds have been
allocated to capital expenditures and program and other discretionary
investments in the past and will continue to be required in the future.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". There can be no assurance that the Company will
successfully identify new opportunities and continue to have financial
resources to develop new products in a timely or cost-effective manner,
or that products and technologies developed by others will not render
the Company's products and systems obsolete or non-competitive.
Entry into Commercial Business
The Company's revenues historically have been derived principally
from business with the DoD and other government agencies. In addition to
continuing to pursue this major market area, the Company intends to
pursue a strategy that leverages the technical capabilities and
expertise derived from its defense business to expand further into
related commercial markets. Certain of the Company's commercial
products, such as fixed wireless loop communication equipment and
medical image archiving equipment, have only been recently introduced.
As such, these new products are subject to certain risks, including the
need to develop and maintain marketing, sales and customer support
capabilities, to secure third-party manufacturing and distribution
arrangements, to respond to rapid technological advances and,
ultimately, to customer acceptance of these products. The Company's
efforts to expand its presence in the commercial market will require
significant resources including capital and management time. There can
be no assurance that the Company will be successful in addressing these
risks or in developing these commercial business opportunities.
Pension Plan Liabilities
The Transaction Agreement (as defined) provides that Lockheed
Martin transfer certain assets to Holdings and L-3 and that Holdings and
L-3 assume certain liabilities relating to defined benefit pension plans
for present and former employees and retirees of certain businesses
being transferred to Holdings and L-3. Lockheed Martin received a letter
from the Pension Benefit Guaranty Corporation (the "PBGC") which
requested information regarding the transfer of such pension plans. The
PBGC's letter indicated that it believed certain of the employee pension
plans are underfunded using the PBGC's actuarial assumptions (which
assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under Statement of Financial
Accounting Standards No. 87, "Accounting for Pension Costs" ("FASB
87")). The Company has calculated the net funding position of the
pension plans to be transferred and believes the plans to be overfunded
by approximately $1 million under ERISA (as defined) assumptions,
underfunded by approximately $9 million under FASB 87 assumptions and,
on a termination basis, underfunded by as much as $51 million under PBGC
assumptions. Substantially all of the PBGC underfunding is related to
two pension plans covering employees at L-3's Communication Systems --
Salt Lake and Aviation Recorders businesses.
The Company, Lockheed Martin and the PBGC entered into certain
agreements that include Lockheed Martin providing a commitment to the
PBGC with regard to the Subject Plans (as defined) and the Company
providing certain assurances to Lockheed Martin regarding such plans.
See "Business--Pension Plans". The Company expects, based in part upon
discussions with its consulting actuaries, that any increase in pension
expenses or future funding requirements from those previously
anticipated for the Subject Plans would not be material. However, there
can be no assurance that the impact of any increased pension expenses or
funding requirements under this arrangement would not be material to the
Company.
Significant Customers
The Company's sales are predominantly derived from contracts with
agencies of, and prime contractors to, the Government. Although the
various branches of the Government are subject to the same budgetary
pressures and other factors, the various Government customers exercise
independent purchasing decisions. The U.S. defense budget has declined
in real terms since the mid-1980s, resulting in delays for some new
program starts, program stretch-outs and program cancellations. The U.S.
defense budget has begun to stabilize and increased modestly in fiscal
1996. In 1996, the Company performed under approximately 180 contracts
with value exceeding $1 million for the Government. Pro forma sales in
1996 to the Government, including pro forma sales to the Government
through prime contractors, were $529 million, representing approximately
78.4% of the Company's corresponding sales. The Company's largest
Government program, a cost plus, sole source contract for support of the
U-2 Directorate of the DoD, contributed 14% of pro forma sales for 1996.
No other program represented more than 7% of the Company's pro forma
sales in 1996. The loss of all or a substantial portion of sales to the
Government would have a material adverse effect on the Company's income
and cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Government
Contracts".
Historical sales by the Company to Lockheed Martin were $70.7
million in 1996 or 13.0% of the Company's total reported historical
sales. As a part of the Acquisition, the Company and Lockheed Martin
intend to enter into certain purchase agreements for the sale of
products and systems to Lockheed Martin by the Company. The loss of all
or a substantial portion of such sales to Lockheed Martin would have a
material adverse effect on the Company's income and cash flow.
Dependence on Lockheed Martin
In addition to the above-mentioned sales to Lockheed Martin, the
Company continues to be dependent on Lockheed Martin for certain
services and continuing agreements. Lockheed Martin has agreed to
indemnify the Company, subject to certain limitations, for its breach of
representations and warranties contained in the Transaction Agreement.
Lockheed Martin also has agreed to provide to the Company certain
corporate services of a type currently provided to the Businesses at
costs consistent with past practices. The Company and Lockheed Martin
have entered into (i) supply agreements which reflect existing
intercompany work transfer agreements or similar support arrangements
with prices and other terms consistent with the present intercompany
arrangements, (ii) certain subleases of real property and
(iii) cross-licenses of intellectual property. There can be no assurance
that, after the termination of these arrangements, the Company will be
able to obtain these services or arrangements at comparable costs.
Further, Lockheed Martin and Holdings have entered into a Limited Non-
Competition Agreement (the "Noncompetition Agreement") which, for up to
three years, in certain circumstances, after the Closing, precludes
Lockheed Martin from engaging in the sale of any products that compete
with the products of L-3 that are set forth in the Noncompetition
Agreement for specifically identified applications of the products.
Under the Noncompetition Agreement, Lockheed Martin is prohibited, with
certain exceptions, from acquiring any business engaged in the sale of
the specified products referred to in the preceding sentence, although
Lockheed Martin may acquire such a business provided that it offers to
sell such business to L-3 within 90 days of its acquisition. The
Noncompetition Agreement does not, among other things, (i) apply to
businesses operated and managed by Lockheed Martin on behalf of the
United States government, (ii) prohibit Lockheed Martin from engaging in
any existing businesses and planned businesses or businesses as of the
closing of the Transaction that are reasonably related to existing or
planned businesses or (iii) apply to selling competing products where
such products are part of larger systems sold by Lockheed Martin. The
Company has also entered into agreements with Lockheed Martin relating
to the PBGC matter discussed above.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the
continued contributions of the Company's management, including Messrs.
Lanza and LaPenta, and its ability to attract and retain other highly
qualified management and technical personnel. As part of the
Transaction, Messrs. Lanza and LaPenta invested $15 million to purchase
15% of the initial capital stock of the Company. The Company has entered
into employment agreements with Messrs. Lanza and LaPenta. The Company
maintains key man life insurance to cover Senior Management. The Company
also faces competition for management and technical personnel from other
companies and organizations. There can be no assurance that the Company
will be successful in hiring and retaining key personnel. See
"Management--Directors and Executive Officers".
Environmental Liabilities
The Company's operations are subject to various federal, state and
local environmental laws and regulations relating to the discharge,
storage, treatment, handling, disposal and remediation of certain
materials, substances and wastes used in or resulting from its
operations. The Company continually assesses its obligations and
compliance with respect to these requirements. Based on a review by an
independent environmental consulting firm and its own internal
assessments, management believes that the Company's current operations
are in substantial compliance with all existing applicable environmental
laws and regulations. New environmental protection laws that will be
effective in 1997 and thereafter may require the installation of
environmental protection equipment at the Company's manufacturing
facilities. However, the Company does not believe that its environmental
expenditures, if any, will have a material adverse effect on its
financial condition or results of operations.
Pursuant to the Transaction Agreement, the Company has agreed to
assume certain on-site and off-site environmental liabilities related to
events or activities occurring prior to the consummation of the
Transaction. Lockheed Martin has agreed to retain all environmental
liabilities for all facilities no longer used by the Businesses and to
indemnify fully the Company for such prior site environmental
liabilities. Lockheed Martin has also agreed, for the first eight years
following the Closing, to pay 50% of all costs incurred by the Company
above those reserved for on the Company's balance sheet at closing
relating to certain Company-assumed environmental liabilities and, for
the seven years thereafter, to pay 40% of certain reasonable operation
and maintenance costs relating to any environmental remediation projects
undertaken in the first eight years. The Company is aware of
environmental contamination at two of its facilities that will require
ongoing remediation. Management believes that the Company has
established adequate reserves for the potential costs associated with
the assumed environmental liabilities. However, there can be no
assurance that any costs incurred will be reimbursable from the
Government or covered by Lockheed Martin under the terms of the
Transaction Agreement or that the Company's environmental reserves will
be sufficient.
Litigation
From time to time the Company is involved in legal proceedings
arising in the ordinary course of its business. As part of the
Acquisition, the Company has agreed to assume certain litigation
relating to the Businesses and Lockheed Martin has agreed to indemnify
the Company, up to certain limits, for a breach of its representations
and warranties. Management believes it is adequately reserved for these
liabilities and that there is no litigation pending that could have a
material adverse effect on the Company or its operations, except as
discussed below.
As of June 30, 1997, the Company and Universal Avionics Systems
Corporation ("Universal") has reached a settlement with respect to a
lawsuit brought by Universal against the Company's Aviation Recorders
operation ("Aviation Recorders"). The terms of this settlement will not
have a material adverse effect on the Company's financial condition or
results of operations.
Risks Inherent in Government Contracts
The reduction in the U.S. defense budget has caused most
defense-related government contractors to experience declining revenues,
increased pressure on operating margins and, in few cases, net losses.
The Company has experienced declining sales in each of its last five
fiscal years. Specifically, adjusted sales of the Company and its
predecessors have decreased from $925.5 million for the fiscal year
ended December 31, 1992 to $664.7 million for the fiscal year ended
December 31, 1996. A significant further decline in U.S. military
expenditures could materially adversely affect the Company's sales and
earnings. The loss or significant curtailment of a material program in
which the Company participates could also materially adversely affect
the Company's future sales and earnings and thus the Company's ability
to meet its financial obligations.
Companies engaged primarily in supplying defense-related equipment
and services to government agencies are subject to certain business
risks peculiar to the defense industry. These risks include, among other
things, the ability of the Government to: (i) suspend unilaterally the
Company from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations, (ii) terminate existing
contracts, (iii) audit the Company's contract related costs and fees,
including allocated indirect costs, and (iv) control and potentially
prohibit the export of the Company's products.
All of the Company's Government contracts are, by their terms,
subject to termination by the Government either for its convenience or
for default of the contractor. Termination for convenience provisions
provide only for the recovery by the Company of costs incurred or
committed, settlement expenses and profit on work completed prior to
termination. Termination for default provisions provide for the
contractor to be liable for excess costs incurred by the Government in
procuring undelivered items from another source. In addition to the
right of the Government to terminate, Government contracts are
conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds for a given program
on a fiscal-year basis even though contract performance may take more
than one year. Consequently, at the outset of a major program, the
contract is usually partially funded, and additional monies are normally
committed to the contract by the procuring agency only if, as and when
appropriations are made by Congress for future fiscal years. Foreign
defense contracts generally contain comparable provisions relating to
termination at the convenience of the government.
The Company is subject to audit and review by the Government of its
costs and performance on, and accounting and general business practices
relating to, Government contracts. The Company's contract related costs
and fees, including allocated indirect costs, are subject to adjustment
based on the results of such audits. In addition, under Government
purchasing regulations, certain of the Company's costs, including
certain financing costs, goodwill, portions of research and development
costs, and certain marketing expenses may not be reimbursable under
Government contracts. Further, as a government contractor, the Company
is also subject to investigation, legal action and/or liability that
would not apply to a commercial company.
The Company, like all defense businesses, is subject to risks
associated with the frequent need to bid on programs in advance of
design completion (which may result in unforeseen technological
difficulties and/or cost overruns), the substantial time and effort
required for relatively unproductive design and development, design
complexity and rapid obsolescence, and the constant necessity for design
improvement. The Company obtains many of its Government contracts
through a process of competitive bidding. There can be no assurance that
the Company will continue to be successful in winning competitively
awarded contracts or that awarded contracts will generate sufficient
sales to result in profitability for the Company. See "Business--Major
Customers" and "--Government Contracts".
In addition to these Government contract risks, many of the
Company's products and systems require licenses from Government agencies
for export from the United States, and certain of the Company's products
currently are not permitted to be exported. There can be no assurance
that the Company will be able to gain any and all licenses required to
export its products, and failure to receive the required licenses could
materially reduce the Company's ability to sell its products outside the
United States.
The Company's services are provided primarily through fixed price
or cost plus contracts. Approximately 58% of the Company's pro forma
sales in 1996 were attributable to fixed price contracts. The financial
results of long-term fixed price contracts are recognized using the
cost-to-cost percentage-of-completion method. As a result, revisions in
revenues and profit estimates are reflected in the period in which the
conditions that require such revisions become known and are estimable.
The risks inherent in long-term fixed price contracts include the
difficulty of forecasting costs and schedules, contract revenues that
are related to performance in accordance with contract specifications
and potential for component 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 the Company's profitability or cause a loss. Although the
Company believes that adequate provision for its fixed price contracts
is reflected in its financial statements, no assurance can be given that
this provision is adequate or that losses on fixed price and
time-and-material contracts will not occur in the future.
Backlog
The Company's backlog represents orders under contracts which are
primarily with the Government. The Government enjoys broad rights to
unilaterally modify or terminate such contracts. Accordingly, most of
the Company's backlog is subject to modification and termination at the
Government's will. There can be no assurance that the Company's backlog
will become revenues in any particular period or at all. Further, there
can be no assurance that the margins on any contract included in backlog
that does become revenue will be profitable.
Competition
The communications equipment industry for defense applications and
as a whole is highly competitive. Declining defense budgets and
increasing pressures for cost reductions have precipitated a major
consolidation in the defense industry. The DoD's increased use of
commercial off-the-shelf products and components in military equipment
is expected to increase the entrance of new competitors. In addition,
consolidation has resulted in delays in contract funding or awards and
significant predatory pricing pressures associated with increased
competition and reduced funding. The Company expects that the emergence
of merchant suppliers will increase competition for OEM business. The
Company's ability to compete for defense contracts depends to a large
extent on the effectiveness and innovativeness of its research and
development programs, its ability to offer better program performance
than its competitors at a lower cost to the Government customer and its
readiness in facilities, equipment and personnel to undertake the
programs for which it competes. In some instances, programs are sole
source or work directed by the Government 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 Government should choose to reopen the particular program to
competition. Many of the Company's competitors are larger and have
substantially greater financial and other resources than the Company.
See "Business--Competition".
Ownership of Holdings and the Company
The Lehman Partnership owns a majority of the outstanding voting
stock of Holdings, which owns all of the outstanding common stock of the
Company. By virtue of such ownership, the Lehman Partnership has the
power to direct the affairs of the Company and is able to determine the
outcome of substantially all matters required to be submitted to
stockholders for approval, including the election of a majority of the
Company's directors and, except to the extent otherwise required by law,
amendment of the Company's Certificate of Incorporation. See "The
Transaction" and "Ownership of Capital Stock".
Subordination
The Company's obligations under the Notes are subordinate and
junior in right of payment to all existing and future Senior Debt of the
Company. As of June 30, 1997, on a pro forma basis after giving effect
to the Transaction, the Company would have had approximately $400
million of indebtedness outstanding, of which $175 million would have
been Senior Debt (excluding letters of credit). Additional Senior Debt
may be incurred by the Company from time to time, subject to certain
restrictions. By reason of such subordination, in the event of an
insolvency, liquidation, or other reorganization of the Company, the
lenders under the Senior Credit Facilities and other creditors who are
holders of Senior Debt must be paid in full before the holders of the
Notes may be paid; accordingly, there may be insufficient assets
remaining after payment of prior claims to pay amounts due on the Notes.
In addition, under certain circumstances, no payments may be made with
respect to the Notes if a default exists with respect to certain Senior
Debt. See "Description of the Exchange Notes--Subordination".
Restrictions Imposed by the Senior Credit Facilities and the Indenture
The Senior Credit Facilities and the Indenture contain a number of
significant covenants that, among other things, restrict the ability of
the Company to dispose of assets, incur additional indebtedness, repay
other indebtedness, pay dividends, make certain investments or
acquisitions, repurchase or redeem capital stock, engage in mergers or
consolidations, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. There can be no
assurance that such restrictions will not adversely affect the Company's
ability to finance its future operations or capital needs or engage in
other business activities that may be in the interest of the Company. In
addition, the Senior Credit Facilities also require the Company to
maintain compliance with certain financial ratios, including total
EBITDA to total interest expense and total debt to total EBITDA, and
limit capital expenditures by the Company. The ability of the Company to
comply with such ratios and limits may be affected by events beyond the
Company's control. A breach of any of these covenants or the inability
of the Company to comply with the required financial ratios or limits
could result in a default under the Senior Credit Facilities. In the
event of any such default, the lenders under the Senior Credit
Facilities could elect to declare all borrowings outstanding under the
Senior Credit Facilities, together with accrued interest and other fees,
to be due and payable, to require the Company to apply all of its
available cash to repay such borrowings or to prevent the Company from
making debt service payments on the Notes, any of which would be an
Event of Default under the Notes. If the Company were unable to repay
any such borrowings when due, the lenders could proceed against their
collateral. In connection with the Senior Credit Facilities, the Company
has granted the lenders thereunder a first priority lien on
substantially all of its assets. The lenders under the Senior Credit
Facilities will also have a first priority security interest in all of
the capital stock of the Company and its subsidiaries. If the
indebtedness under the Senior Credit Facilities or the Notes were to be
accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay such indebtedness in full. See "Description
of the Exchange Notes" and "Description of Senior Credit Facilities".
Fraudulent Conveyance
The Old Notes were incurred to finance the acquisition of the
Businesses from Lockheed Martin. Management believes that the
indebtedness of the Company represented by the Senior Credit Facilities
and the Notes were incurred for proper purposes and in good faith, and
that, based on present forecasts and other financial information, after
the consummation of the Transaction and the issuance of the Notes, the
Company will be solvent, will have sufficient capital for carrying on
its business and will be able to pay its debts as they mature.
Notwithstanding management's belief, however, under federal and state
fraudulent transfer laws, if a court of competent jurisdiction in a suit
by an unpaid creditor or a representative of creditors (such as a
trustee in bankruptcy or a debtor-in-possession) were to find that, at
the time of the incurrence of such indebtedness, the Company was
insolvent, was rendered insolvent by reason of such incurrence, was
engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they
matured, or intended to hinder, delay or defraud its creditors, and that
the indebtedness was incurred for less than reasonably equivalent value,
then such court could, among other things, (i) void all or a portion of
the Company's obligations to the Holders of the Exchange Notes, the
effect of which would be that the Holders of the Exchange Notes might
not be repaid in full and/or (ii) subordinate the Company's obligations
to the Holders of the Exchange Notes to other existing and future
indebtedness of the Company to a greater extent than would otherwise be
the case, the effect of which would be to entitle such other creditors
to which the Exchange Notes were not previously subordinated to be paid
in full before any payment could be made on the Exchange Notes. See "--
Substantial Leverage" above.
Limitation on Change of Control
The Indenture provides that, upon the occurrence of a Change of
Control of the Company or Holdings, the Company will make an offer to
purchase all of the Exchange Notes at a price in cash equal to 101% of
the aggregate principal amount thereof together with accrued and unpaid
interest to the date of purchase. The Senior Credit Facilities currently
prohibit the Company from repurchasing any Exchange Notes except with
the proceeds of one or more Equity Offerings. The Senior Credit
Facilities also provide that certain change of control events with
respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control event occurs at a time when
the Company is prohibited from purchasing the Exchange Notes, or if the
Company is required to make a Net Proceeds Offer (as defined) pursuant
to the terms of the Exchange Notes, the Company could seek the consent
of its lenders to the purchase of the Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company
does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing the Exchange Notes. In such case,
the Company's failure to make such an offer or to purchase tendered
Exchange Notes would constitute an Event of Default under the Indenture.
If, as a result thereof, a default occurs with respect to any Senior
Debt, the subordination provisions in the Indenture would likely
restrict payments to the holders of the Exchange Notes. Finally, the
Company's ability to pay cash to the holders of Notes upon a purchase
may be limited by the Company's then-existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required purchases. Furthermore, the Change of
Control provisions may in certain circumstances make more difficult or
discourage a takeover of the Company. See "Description of the Exchange
Notes--Repurchase at the Option of Holders--Change of Control".
Lack of Market for the Exchange Notes
There is no existing trading market for the Exchange Notes, and
there can be no assurance regarding the future development of a market
for the Exchange Notes or the ability of the Holders of the Exchange
Notes to sell their Exchange Notes or the price at which such Holders
may be able to sell their Exchange Notes. If such market were to
develop, the Exchange Notes could trade at prices that may be higher or
lower than their initial offering price depending on many factors,
including prevailing interest rates, the Company's operating results and
the market for similar securities. Although it is not obligated to do
so, Lehman Brothers Inc. intends to make a market in the Exchange Notes.
Any such market-making activity may be discontinued at any time, for any
reason, without notice at the sole discretion of Lehman Brothers Inc. No
assurance can be given as to the liquidity of or the trading market for
the Exchange Notes.
Lehman Brothers Inc. may be deemed to be an affiliate of the
Company and, as such, may be required to deliver a prospectus in
connection with its market-making activities in the Exchange Notes.
Pursuant to the Registration Rights Agreement, the Company agreed to
file and maintain a registration statement that would allow Lehman
Brothers Inc. to engage in market-making transactions in the Exchange
Notes. Subject to certain exceptions set forth in the Registration
Rights Agreement, the registration statement will remain effective for
as long as Lehman Brothers Inc. may be required to deliver a prospectus
in connection with market-making transactions in the Exchange Notes. The
Company has agreed to bear substantially all the costs and expenses
related to such registration statement.
Forward Looking Statements
This Prospectus contains forward looking statements concerning the
Company's operations, economic performance and financial condition,
including in particular, the likelihood of the Company's success in
operating as an independent company and developing and expanding its
business and the realization of sales from backlog. These statements are
based upon a number of assumptions and estimates which are inherently
subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company, and reflect future business
decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur
which will affect the Company's future results. All such forward looking
statements are qualified by reference to matters discussed under this
section entitled "Risk Factors".
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the
Exchange Notes by Lehman Brothers Inc. in market-making transactions.
The Company will not receive any of the proceeds from such transactions.
CAPITALIZATION
The following table sets forth the capitalization of L-3 at
September 30, 1997.
September 30, 1997
---------------------------------------
($ in millions)
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Term Loan Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173.0
10 3/8% Senior Subordinated Notes due 2007 . . . . . . . . . . . . . . . . . . . . 225.0
------
Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398.0
Shareholders' Equity Capital
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.0
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4
Deemed Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.5)
------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . $125.9
------
Total Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . $523.9
======
__________________________
Availability of up to $100 million, none of which was drawn at
Closing other than letters of credit, which were less than $10
million.
Reflects the "Push Down" of Holdings' basis of its investment in
the Company. The Acquisition was accounted for by Holdings as a
purchase transaction in accordance with Accounting Principles Board
Opinion No. 16. However, as a result of the 34.9% ownership
retained by Lockheed Martin, the provisions of the Financial
Accounting Standards Board's Emerging Issues Task Force Issue No.
88-16, "Basis in Leveraged Buyout Transactions" ("EITF 88-16"), is
applied in connection with the allocation of purchase price to the
acquired net assets. The application of the provisions of EITF
88-16 results in recording net assets acquired at approximately
34.9% of Lockheed Martin's carrying values plus 65.1% of fair value
and the recording of a deemed distribution, estimated to be
approximately $7.5 million.
/TABLE
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED (COMBINED) FINANCIAL
STATEMENTS
The following unaudited pro forma financial information gives
effect to (i) the purchase of the Businesses by Holdings and the
Company, (ii) the transfer of certain other assets and liabilities to
the Company by Lockheed Martin, (iii) the Financing, (iv) the initial
capitalization of the Company and (v) the "push down" of Holdings' basis
of its investment in the Company. The unaudited pro forma condensed
consolidated statement of operations assumes the transactions occurred
as of January 1, 1996. The pro forma financial information is based on
the historical consolidated (combined) financial statements of the
Company for the nine months ended September 30, 1997 (which include the
historical combined financial statements of the Lockheed Martin
Predecessor Businesses for the three months ended March 31, 1997) and
the year ended December 31, 1996 (which include the results of the Loral
Acquired Businesses for the nine months ended December 31, 1996) and the
Loral Acquired Businesses for the three months ended March 31, 1996
using the purchase method of accounting and the assumptions and
adjustments in the accompanying notes to the unaudited pro forma
condensed consolidated (combined) financial statements.
The pro forma adjustments are based upon preliminary estimates.
Actual adjustments will be based on final appraisals and other analyses
of fair values and adjustment of the final purchase price. Changes
between preliminary and financial allocations for the valuation of
contracts in process inventories, pension liabilities, fixed assets and
deferred taxes could be material. The pro forma statement of operations
does not reflect any costs savings that management believes would have
resulted had the transactions occurred on January 1, 1996. The pro forma
financial information should be read in conjunction with the unaudited
interim condensed consolidated (combined) financial statements of the
Company as of September 30, 1997 and for the nine month period ended
September 30, 1997 and the audited combined financial statements as of
December 31, 1996 and for the year ended December 31, 1996 of the
Businesses. The pro forma data may not be indicative of the results that
actually would have occurred had the transactions been in effect on the
dates indicated or results that may be obtained in the future.
Unaudited Pro Forma Condensed Consolidated Statement of Operations Data
Nine Months Ended September 30, 1997 Year Ended December 31, 1996
--------------------------------------------- ---------------------------------------------
The
Company Lockheed Lockheed
Six Martin Martin
Months Pre- Pre- Loral
Ended decessor Pro decessor Acquired Pro
Septem- Busi- forma Busi- Busi- forma
ber 30, nesses Pro forma Consoli- nesses nesses Pro forma Consoli-
1997 Adjustments dated Adjustments dated
-------- ------- -------------- ------- -------- -------- --------------- --------
($ in millions)
($ in millions)
Statement of Operations Data:
Sales . . . . . . . . . . . . . . 342.9 $158.9 $(1.9) $499.9 $ 543.1 $132.2 $ -- $675.3
Cost of sales . . . . . . . . . 309.9 151.0 (3.1) 457.8 499.4 124.4 (4.5) 619.3
------ ----- ------ ------- ------ ----- ------
Operating income . . . . . . . 33.0 7.9 1.2 42.1 43.7 7.8 4.5 56.0
Interest expense . . . . . . . . 19.3 8.4 1.5 29.2 24.2 4.4 (12.0) 40.6
====== ----- ------ ------- ------ ----- ------
Earnings (loss) before
income taxes . . . . . . . . . 13.7 (.5) (.3) 12.9
19.5 3.4 (7.5) 15.4
Income tax expense (benefit) . . 5.3 (.2) (.1) 5.0 7.8 1.3 (3.0)(4) 6.1
------ ------- ------ ------- ------- ------- ----- -------
Net income (loss) . . . . . . . $ 8.4 $ (.3) (.2) 7.9 $ 11.7 $ 2.1 $(4.5) $ 9.3
====== ====== ===== ====== ======= ====== ===== =======
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
The following facts and assumptions were used in determining the pro
forma effect of the Transaction.
[FN]
Holdings and Lockheed Martin entered into a Transaction Agreement dated
as of March 28, 1997 ("Transaction Agreement") whereby Holdings acquired
effective April 1, 1997 substantially all of the assets and certain
liabilities of ten business units of Lockheed Martin that comprise the
Company's Secured Communication Systems and Specialized Communication
Products businesses. As a result of the Acquisition, Lockheed Martin,
the Lehman Partnership and Senior Management own 34.9%, 50.1% and 15.0%
of common equity, respectively, of Holdings, the sole stockholder of the
Company. The purchase price of $525.0 million comprised $479.8 million
of cash and $45.2 million of Holdings' common equity retained by
Lockheed Martin. The cash portion of the purchase price is subject to
certain agreed upon adjustments and other adjustments based upon the
closing tangible net asset value as defined in the Transaction
Agreement. For purposes of the pro forma financial information, a
reduction in the purchase price of $20.0 million has been assumed
pursuant to the Transaction Agreement. Costs related to the Transaction
are estimated to approximate $20.0 million of which $14.0 million is
related to the Financing and is included in other assets. Holdings and
the Company had no operations until the consummation of the acquisition;
accordingly, the pro forma financial statements reflect the combined
statement of operations of the Lockheed Martin Predecessor Businesses
for the three month period ended March 31, 1997 and for the year ended
December 31, 1996 and the combined statement of operations of the Loral
Acquired Businesses for the three months ended March 31, 1996.
The Acquisition was financed with the proceeds of $175 million of Term
Loan Facilities, $225 million of Exchange Notes and capital
contributions of $125 million, including the $45.2 million retained by
Lockheed Martin. Prior to April 1, 1997, interest expense was allocated
to the Lockheed Martin Predecessor Businesses from Lockheed Martin. The
pro forma statement of operations reflects the elimination of allocated
interest expense of $8.4 million for the three months ended March 31,
1997 and $28.6 million for the year ended December 31, 1996 and the
following additional adjustments to interest expense.
Three Months
Ended Year Ended
March 31, 1997 December 31, 1996
----------------- --------------------
($ in millions)
($ in millions)
Interest on Notes (10.375% on $225 million) . . . . . . . . . . . . . . . . . . . . $ 5.8 $23.3
Interest on borrowings under the Senior Credit Facilities (8.40% on $175 million) . 3.7 14.7
Commitment fee of 0.50% on unused Revolving Credit Facility . . . . . . . . . . . . .1 .5
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . .6 2.1
----- -----
$10.2 $40.6
===== ======
The estimated excess of purchase price over net assets acquired of
$316.5 million is being amortized over 40 years resulting in a pro forma
charge of $7.9 million for 1996 and $2.0 million for the three months
ended March 31, 1997. Further, the pro forma balance sheet includes the
elimination of $283.8 million of intangibles, primarily cost in excess
of net assets acquired, included in the Lockheed Martin Predecessor
historical balance sheet, and the pro forma statement of operations
includes the elimination of $10.1 million and $2.7 million for 1996 and
the three months ended March 31, 1997, respectively, of related
amortization expense. The preliminary purchase price allocation includes
an estimated $4.4 million adjustment relating to a reduction of
contracts in process resulting from valuing acquired contracts in
process at contract price, less the estimated cost to complete and an
allowance for normal profit margin on the Company's effort to complete
such contracts. In addition, contracts in process include an estimated
increase of $3.0 million related to valuing certain commercial finished
goods inventory at their fair values. The non-recurring charges to
income in 1996 resulting from the above-mentioned adjustments are not
material to the pro forma statement of operations.
A combined statutory (federal and state) tax rate of 41% was assumed on
the pro forma adjustments.
In connection with the Acquisition, Lockheed Martin also transferred the
assets and liabilities of a microwave semiconductor product line, a
building to be used by one of the acquired divisions, and certain
leasehold improvements. No adjustment has been made to the pro forma
statement of operations for the effect of these transfers because they
are not material. In addition, L-3 has agreed to assume the assets and
liabilities of certain defined benefit pension plans and a liability for
retiree medical and life insurance for certain employees. The pro forma
statement of operations for the nine months ended September 30, 1997 (for
the three months ended March 31, 1997) and the year ended December 31,
1996 includes a net reduction to costs and expenses of $.6 million and
$2.5 million, respectively, to record estimated pension cost on a separate
company basis net of the reversal of the allocated pension cost included
in the historical financial statements. No such adjustment has been made
to the pro forma statement of operations for retiree medical and life
insurance benefits because the estimated expense of those benefits on a
separate company basis approximates the cost included in the historical
financial statements.
SELECTED FINANCIAL INFORMATION
The following unaudited selected consolidated (combined) financial data
as of September 30, 1997 and for the nine month periods then ended
September 30, 1997 and 1996 have been derived from, and should be read in
conjunction with, the unaudited interim condensed consolidated (combined)
financial statements of the Company and footnotes thereto as of September 30,
1997 included elsewhere herein. In the opinion of the management, the
unaudited combined financial statements include all adjustments (consisting
of normal recurring accruals) considered necessary for the fair presentation
of the information contained therein. Results for the interim periods are not
necessarily indicative of the results to be expected for the entire year.
The following selected combined financial data as of March 31, 1997 and
for the three months ended March 31, 1997 and as of December 31, 1996 and
1995 and for the years ended December 31, 1996, 1995 and 1994 have been
derived from, and should be read in conjunction with, the audited Combined
Financial Statements of the Businesses and footnotes thereto included
elsewhere herein.
The unaudited selected combined financial data as of December 31, 1994
and 1993, March 31, 1993 and December 31, 1992 for balance sheet data and the
nine months ended December 31, 1993, the three months ended March 31, 1993
and the year ended December 31, 1992 for statement of operations data have
been derived from the unaudited financial statements of Communication Systems
- -- Camden. In the opinion of the Businesses' management, such unaudited
financial statements reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position and results
of operations of Communication Systems -- Camden, also referred to as
Lockheed Martin Communication Systems Division in the Lockheed Martin
Predecessor Financial Statements, as of the dates and periods indicated.
These selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the condensed consolidated (combined) financial statements of
the Company and the Combined Financial Statements of the Lockheed Martin
Predecessor Businesses and the Loral Acquired Businesses included elsewhere
herein.
The Company Predecessor Company
---------------------- ---------------------------------------------
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
---------------------- ---------------------- ----------------------
(Unaudited) ($ in millions) (Unaudited)
Sales . . . . . . . . . . . . . . . . . . . . . . . . $ 342.9 $ 158,873 $365,041
Cost and expenses . . . . . . . . . . . . . . . . . . 309.9 150,937 341,914
------- --------- --------
Operating income . . . . . . . . . . . . . . . . . . 33.0 7,936 23,127
Net Interest expense . . . . . . . . . . . . . . . . 19.3 8,441 16,780
------- --------- ---------
Income (loss) before income taxes . . . . . . . . . . 13.7 (505) 6,347
Income taxes . . . . . . . . . . . . . . . . . . . . 5.3 (247) 3,052
------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 8.4 $ (258) $ 3,295
======= ========= ========
Other Data:
EBITDA. . . . . . . . . . . . . . . . . . . . . . 46.1 15.1 41.1
Depreciation expense . . . . . . . . . . . . . . . . 8.6 4.5 10.6
Amortization expense . . . . . . . . . . . . . . . . 5.5 2.7 7.4
Capital expenditures . . . . . . . . . . . . . . . . 6.4 4.3 8.0
Ratio of earnings to fixed charges . . . . . . . . . 2.60x - 2.29x
Cash from (used in) operating activities . . . . . . 56.4 (16.3) 6.0
Cash from (used in) investing activities . . . . . . (479.0) (4.3) (292.9)
Cash from (used in) financing activities . . . . . . 462.4 20.6 286.9
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . . . . . . 142.0 121.4 N/A
Total assets . . . . . . . . . . . . . . . . . . . . 684.8 608.5 N/A
Invested equity . . . . . . . . . . . . . . . . . . . - 493.9 N/A
Shareholders' equity . . . . . . . . . . . . . . . . 125.9 - N/A
Year Ended December 31,
----------------------------------------------------------------------------------
1993
--------------------------
Three
Nine Months
Months Ended
Ended March
1996 1995 1994 Dec. 31 31 1992
----------- ----------- ----------- ------------ ------------ --------------
($ in millions)
Statement of Operations Data:
Sales . . . . . . . . . . . . . . . . . . $543.1 $166.8 $218.9 $ 200.0 $67.8 $ 368.5
Operating income . . . . . . . . . . . . . 43.7 4.7 8.4 12.4 5.1 49.3
Interest expense . . . . . . . . . . . 24.2 4.5 5.5 4.1 -- --
Provision (benefit) for income 7.8 1.2 2.3 3.8 2.0 19.8
taxes . . . . . . . . . . . .
Net earnings (loss) . . . . . . . . . . . 11.7 (1.0) 0.6 4.5 3.1 29.5
Other Data:
EBITDA . . . . . . . . . . . . . . . $ 68.7 $ 16.2 $ 19.9 $ 23.4 $ 7.0 $ 58.5
Depreciation expense . . . . . . . . . . . 14.9 5.5 5.4 6.1 1.8 8.9
Amortization expense . . . . . . . . . . . 10.1 6.1 6.1 4.9 0.1 0.3
Capital expenditures . . . . . . . . . . . 13.5 5.5 3.7 2.6 0.8 3.9
Ratio of earnings to fixed charges . . . . 1.72x 1.03x 1.40x N/A N/A N/A
Cash from (used in) operating
activities . . . . . . . . . . . 31.0 9.4 21.8 N/A N/A N/A
Cash from (used in) investing
activities . . . . . . . . . . . (298.3) (5.5) (3.7) N/A N/A N/A
Cash from (used in) financing
activities . . . . . . . . . . . 267.3 (3.9) (18.1) N/A N/A N/A
Balance Sheet Data:
Working capital . . . . . . . . . . . . . $ 98.8 $ 21.1 $ 19.3 $ 24.7 $22.8 $ 35.8
Total assets . . . . . . . . . . . . . . 593.3 228.5 233.3 241.7 93.5 105.1
Invested equity . . . . . . . . . . . . . 473.6 194.7 199.5 202.0 59.9 72.8
Shareholders' equity . . . . . . . . . . . -- -- -- -- -- --
____________________
Reflects ownership of Loral's Communication Systems -- Salt Lake
and Specialized Communication Products businesses commencing
April 1, 1996.
Reflects ownership of Communication Systems -- Camden by Lockheed
Martin commencing April 1, 1993.
Reflects ownership of Communication Systems -- Camden by GE
Aerospace for the periods indicated. The amounts shown herein
include only those amounts as reflected in the financial
records of Communication Systems -- Camden.
For periods prior to April 1, 1997, interest expense and income
tax (benefit) provision were allocated from Lockheed Martin.
EBITDA is defined as income before deducting interest expense,
income taxes, depreciation and amortization. EBITDA is not a
substitute for operating income, net earnings and cash flow
from operating activities as determined in accordance with
generally accepted accounting principles as a measure of
profitability or liquidity. EBITDA is presented as additional
information because management believes it to be a useful
indicator of the Company's ability to meet debt service and
capital expenditure requirements and because certain debt
covenants of L-3 utilize EBITDA to measure compliance with
such covenants.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a supplier of sophisticated secure communication systems
and specialized communication products including secure, high data rate
communication systems commercial fixed wireless communication products,
microwave components, avionic displays and recorders and instruments
products. The Company's customers include the DoD, selected U.S. government
intelligence agencies, major aerospace/defense prime contractors and
commercial customers. The Company operates primarily in one industry segment,
electronic components and systems.
Substantially all the Company's products are sold to agencies of the
U.S. Government, primarily the DoD, to foreign government agencies or to
prime contractors or subcontractors thereof. All domestic government
contracts and subcontracts of the Businesses are subject to audit and various
cost controls, and include standard provisions for termination for the
convenience of the U.S. Government. Multi-year 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 government.
The decline in the U.S. defense budget since the mid 1980s has resulted
in program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Company's
programs; however, in the event that U.S. Government expenditures for
products of the type manufactured 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.
In response to the decline in the defense budget, the DoD has focused
its resources on enhancing its military readiness, joint operations and
multiple mission capabilities and on incorporating advance electronics to
improve performance, reduce operating costs and extend life expectancy of its
existing and future platforms. The 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. According to
Federal Sources, an independent private consulting group, the U.S. defense
budget for command, control, communications and intelligence ("C3I") is
projected to increase at a compound annual growth rate of 5.8% through 2002.
Management believes that L-3 will benefit from this growth due to its
substantial position in the markets for secure communication systems, antenna
systems, display systems, microwave components and other related areas.
The following information should be read in conjunction with condensed
consolidated (combined) financial statements and the notes thereto.
Results of Operations
The Company's financial statements reflect operations since the
effective date of the acquisition (April 1, 1997); accordingly comparisons
for the nine months ended September 30, 1997 to the prior period of the
Predecessor Company are not meaningful. To facilitate meaningful comparisons
of the operating results of the periods set forth below, the results of
operations for the nine months September 30, 1997 were obtained by combining,
without adjustment, the results of operations of the Predecessor Company for
the period January 1, 1997 through March 31, 1997 and the Company for the
period April 1, 1997 through September 30, 1997. The results of operations
for the nine months ended September 30, 1996 represent the results of
operations of the Predecessor Company, and include the results of operations
of the Loral Acquired Businesses beginning on April 1, 1996, the effective
date of that acquisition. See Note 3 to the condensed consolidated (combined)
financial statements. Interest expense and income taxes expense for the
periods are not comparable and the impact of interest expense and income
taxes expense on the Company is discussed below.
The results of operations of the Predecessor Company for the three
months ended March 31, 1997 and the nine months ended September 30, 1996,
include certain costs and expenses allocated by Lockheed Martin for corporate
office expenses based primarily on the allocation methodology prescribed by
government regulations pertaining to government contractors. Interest
expense was allocated based on Lockheed Martin's actual weighted average
consolidated interest rate applied to the portion of the beginning of the
year invested equity deemed to be financed by consolidated debt based on
Lockheed Martin's debt to equity ratio on such date. The provision (benefit)
for income taxes was allocated to the Predecessor Company as if it were a
separate taxpayer, calculated by applying statutory rates to reported pre-tax
income after considering items that do not enter into the determination of
taxable income and tax credits related to the Predecessor Company. Also,
pension and postemployment benefit costs were allocated based on employee
headcount. Accordingly, the results of operations and financial position
hereinafter of the Predecessor Company may not be the same as would have
occurred had the Predecessor Company been an independent entity.
Three Months Ended September 30, 1997 Compared with Three Months Ended
September 30, 1996
The Company Predecessor Company
----------------------- -----------------------
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
----------------------- -----------------------
($ in millions)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174.8 $158.6
Cost and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156.9 146.4
------ ------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.9 12.2
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 7.4
------ ------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 8.6 4.8
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 1.7
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.3 $ 3.1
====== ======
Sales for the quarter ended September 30, 1997 increased to $174.8
million from $158.6 million for the quarter ended September 30, 1996 (the
"prior period"). Operating income increased to $17.9 million compared with
$12.2 million in the prior period. Net income increased to $5.3 million
compared to $3.1 million in the prior period.
The sales increase was attributable to increased volume on sales of
Common High-bandwidth Data Link (CHBDL) systems, Predator unmanned aerial
vehicle systems, microwave components, power supplies, and E-2C display
systems, which were partially offset by lower volume on E-2C Trac-A antenna
and U-2 Support programs.
Operating income as a percentage of sales increased to 10.2% in the
quarter ended September 30, 1997 compared to 7.7% in the prior period. The
increase in operating income was attributable to the increased sales volume
on higher margin sales noted above and improved margins on microwave
components.
Net interest expense for the quarter ended September 30, 1997 was $9.3
million representing interest expense on the Company's senior secured credit
facility, the 10 3/8% Senior Subordinated Notes, and amortization of debt
issuance costs, less interest income of $0.4 million. See Note 6 to the
condensed (combined) consolidated financial statements. Interest expense for
the prior period was $7.4 million and was allocated to the Predecessor
Company by applying Lockheed Martin's weighted average consolidated interest
rate to the portion of the Predecessor Company's invested equity account
deemed to be financed by Lockheed Martin's consolidated debt.
The income tax provision for the quarter ended September 30, 1997
reflects the expected estimated effective income tax rate of 39% for the nine
months ended December 31, 1997. In the prior period, income taxes were
allocated to the Predecessor Company by Lockheed Martin and the effective
income tax rate was significantly impacted by amortization of costs in excess
of net assets acquired, which were not deductible for income tax purposes.
Nine Months Ended September 30, 1997 Compared with Nine Months Ended
September 30, 1996
The following table sets forth selected statement data of operations for
the Company and the Predecessor Company for the periods indicated.
Predecessor Predecessor
The Company Company Combined Company
--------------------- -------------------- -------------------- --------------------
Six Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1997 September 30, 1996
--------------------- -------------------- -------------------- --------------------
($ in millions)
Sales . . . . . . . . . . . . . . . $342.9 $158.8 $501.7 $365.0
Cost and expenses . . . . . . . . . 309.9 150.9 460.8 341.9
------ ------ ------ ------
Operating income . . . . . . . . . 33.0 7.9 40.9 23.1
Net interest expense . . . . . . . 19.3 8.4 27.7 16.8
------ ------ ------ ------
Income (loss) before income taxes . 13.7 (0.5) 13.2 6.3
Income taxes . . . . . . . . . . . 5.3 (0.2) 5.1 3.0
------ ------ ------ ------
Net income (loss) . . . . . . . . . $ 8.4 $ (0.3) $ 8.1 $ 3.3
====== ====== ====== ======
Sales for the nine months ended September 30, 1997 (the "current
period") increased to $501.7 million from $365.0 million for the nine months
ended September 30, 1996 (the "prior period"). Operating income increased to
$40.9 million from $23.1 million in the prior period. Net income increased to
$8.1 million from $3.3 million in the prior period.
The sales increase in the current period was attributable primarily to
the sales of the Loral Acquired Businesses which contributed $378.4 million
for the nine months ended September 30, 1997 compared to $243.0 in the prior
year period. Sales of Communication Systems--Camden increased by $1.2 million
to $123.3 million in the current period compared to prior period. The
acquisition of the Loral Acquired Businesses was effective April 1, 1996, and
accordingly, the prior period only includes the results of operations of the
Loral Acquired Businesses for the six months from April 1, 1996 to
September 30, 1996. See Note 3 to the condensed (combined) consolidated
financial statements. Sales of the Loral Acquired Businesses (excluding the
Hycor business) for the six month period ended September 30, 1997 increased
$21.1 million to $258.6 million from $237.5 million for the six month period
ended September 30, 1996.
Operating income as a percentage of sales increased to 8.2% in the nine
months ended September 30, 1997 compared to 6.3% in the prior period
reflecting higher margins on the sales of the Loral Acquired Businesses and
operating improvements at Communications Systems--Camden. The increase in
operating income also was largely attributable to the Loral Acquired
Businesses, which contributed operating income of $34.6 million for the nine
months ended September 30, 1997 compared to $18.1 million in the prior period
which only reflected six months of operations of the Loral Acquired
Businesses. Operating income for the Loral Acquired Businesses (excluding the
Hycor business) in the six month period ended September 30, 1997 increased
36% to $24.6 million from $18.1 million in the comparable period in 1996.
This increase is due to the higher sales volume discussed above and improved
margins on avionic and microwave product sales and increased sales on the
CHBDL program.
Net interest expense for the six months ended September 30, 1997 was
$19.3 million representing interest expense on the Company's senior secured
credit facility, the 10 3/8% Senior Subordinated Notes, and amortization of
debt issuance costs, less interest income of $0.5 million. See Note 6 to the
condensed (combined) consolidated financial statements. Interest expense for
the three months ended March 31, 1997 and the prior period was $8.4 million
and $16.8 million, respectively, and was allocated to the Predecessor
Company by applying Lockheed Martin's weighted average consolidated interest
rate to the portion of the Predecessor Company's invested equity account
deemed to be financed by Lockheed Martin's consolidated debt.
The income tax provision for the quarter ended September 30, 1997,
reflects the estimated effective income tax rate of 39% for the nine months
ended December 31, 1997. In the prior period, income taxes were allocated to
the Predecessor Company by Lockheed Martin and the effective income tax rate
was significantly impacted by amortization of costs in excess of net assets
acquired, which were not deductible for income tax purposes.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The following table sets forth selected income statement data for the
Predecessor Company for the periods indicated.
Predecessor Company
-------------------------------------
Year Ended
-------------------------------------
December 31, December 31,
1996 1995
------------------ ------------------
($ in millions)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $543.1 $166.8
Cost and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499.4 162.1
------ ------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.7 4.7
Allocated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2 4.5
------ ------
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.5 .2
Allocated income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 1.2
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11.7 $ (1.0)
------ ------
During 1996, sales increased to $543.1 million from $166.8 million in
the prior year. Operating income increased to $43.7 million compared with
$4.7 million in the prior year. Net earnings increased to $11.7 million
compared to a loss of $1.0 million in the prior year. The Loral Acquired
Businesses contributed $13.6 million to 1996 net earnings.
The sales increase was attributed to the sales of the Loral Acquired
Businesses which contributed $381.1 million of the increase. Sales of
Communication Systems--Camden decreased by $4.8 million compared to 1995
primarily due to lower volume on Aegis power supplies and SIGINT system
production, partially offset by Local Management Device/Key Processor
("LMD/KP") production startup.
The increase in operating income also was largely attributable to the
Loral Acquired Businesses, which contributed $36.9 million of the increase.
Communication Systems--Camden operating income increased $2.2 million
primarily due to improved operating performance on the Shipboard Telephone
Communications ("STC-2") program partially offset by increased costs on the
Space Station contract. As a percentage of sales, operating income increased
to 8.0% from 2.8%. This increase is attributable to the improvement in
Communication Systems -- Camden noted above, higher margins and operating
improvements in the Loral Acquired Businesses.
Allocated interest expense increased to $24.2 million from $4.5 million
in the prior year due primarily to the acquisition of the Loral Acquired
Businesses, which was assumed to be fully financed by debt, coupled with a
higher debt-to-equity ratio used in the allocation for Communication
Systems--Camden.
The effective income tax rate declined to 40% as compared to 681% in the
prior year. The 1995 effective rate was significantly impacted by
amortization of costs in excess of net assets acquired, which is not
deductible for income tax purposes. As a percentage of income subject to tax,
such amortization declined significantly in 1996.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
The following table sets forth selected income statement data for the
Predecessor Company for the periods indicated.
Predecessor Company
-----------------------------------------
Year Ended
-----------------------------------------
December 31, December 31,
1995 1994
------------------- -------------------
($ in millions)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $166.8 $218.9
Cost and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162.1 210.5
------ ------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 8.4
Allocated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 5.5
------ ------
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.9
Allocated income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 2.3
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.0) $ .6
====== ------
Results for 1995 and 1994 reflect only the results of Communication
Systems -- Camden. During 1995, sales decreased to $166.8 million from $218.9
million in the prior year. Operating income decreased to $4.7 million from
$8.4 million and the net loss for 1995 was $1.0 million compared to net
earnings of $0.6 million in 1994.
The decrease in sales was primarily due to the completion of the
IREMBASS and termination of the SCAMP program and lower volume on the STC-2
program.
The decline in operating income was partially due to the sales decrease
described above. In addition, as a percentage of sales, operating income
decreased to 2.8% in 1995 from 3.8% in 1994. The decrease in 1995 margins is
primarily due to a cost overrun on the STE program.
Allocated interest expense decreased to $4.5 million in 1995 from $5.5
million in 1994 due to the lower invested equity balance at January 1, 1995
compared to January 1, 1994, offset by a slightly higher weighted average
consolidated interest rate.
The effective income tax rates in 1995 and 1994 were significantly
impacted by amortization of costs in excess of net assets acquired, which is
not deductible for income tax purposes. The effective income tax rate in 1995
increased to 681% compared to 78% in 1994. The increase is primarily the
result of the above described amortization increasing as a percent of pre-tax
income in 1995 compared to the respective percent relationship in 1994.
Liquidity and Capital Resources
Effective April 1, 1997, the Company was purchased from Lockheed Martin
Corporation for approximately $525 million, before an estimated purchase
price adjustment of $20 million, plus estimated acquisition costs of $6.6
million.
The acquisition was funded by a combination of debt and equity. The
equity was provided by Holdings who contributed $125 million, including $45
million retained by Lockheed Martin, in exchange for all of the capital stock
of the Company. The funded debt consisted of $175 million of Term Loans
under the Credit Agreement and $225 million of 10 3/8% Senior Subordinated
Notes. The required principal payments under the Term Loans are: $1.0 million
in the remainder of 1997, $5.0 million in 1998, $11.0 million in 1999, $19.0
million in 2000, $25.0 million in 2001, $33.2 million in 2002, $20.0 million
in 2003, and $25.2 million in 2004, $24.9 million 2005, and $8.7 million in
2006. With respect to the Term Loans, interest payments vary in accordance
with the type of borrowings and are made at a minimum every three months.
Other than upon a change in control, the Company will not be required to make
principal payments in respect of the 10 3/8% Senior Subordinated Notes until
maturity on May 1, 2007. The Company is required to make semi-annual interest
payments with respect to the 10 3/8% Senior Subordinated Notes. The Company
typically makes capital expenditures related primarily to improvement of
manufacturing facilities and equipment.
On November 5, 1997, the Company and Lockheed Martin amended the
Transaction Agreement to finalize the purchase price adjustment which
amounted to $21.2 million of which $15.9 million was received on the closing
date and $5.3 million was received on November 7, 1997, plus interest
thereon. The amendment also included the assignment to the Company from
Lockheed Martin of a contract for the production of mission communication
systems for track vehicles.
The Credit Agreement contains financial covenants, which remain in
effect so long as any amount is owed by the Company under the senior secured
credit facility. These financial covenants require that (i) the Company's
debt ratio be less than or equal to 5.75 for the quarter ending September 30,
1997, and that the maximum allowable debt ratio thereafter be further reduced
to less than or equal to 3.1 for the quarters ending after June 30, 2002, and
(ii) the Company's interest coverage ratio be at least 1.5 for the quarter
ending September 30, 1997, thereafter increase the interest coverage ratio to
at least 3.10 for any fiscal quarters ending after June 30, 2002. At
September 30, 1997, the Company was in compliance with these covenants.
The Company has a substantial amount of indebtedness. Based upon the
current level of operation and anticipated improvements, management believes
that the Company's cash flow from operations, together with available
borrowings under the Revolving Credit Facility, will be adequate to meet its
anticipated requirements for working capital, expenditures, research and
development expenditures, program and other discretionary investments,
interest payments and scheduled principal payments for the foreseeable future
including at least the next three years. There can be no assurance, however,
that the Company's business will continue to generate cash flow at or above
current levels or that currently anticipated improvements will be achieved.
If the Company is unable to generate sufficient cash flow from operations in
the future to service its debt, it may be required to sell assets, reduce
capital expenditures, refinance all or a portion of its existing debt or
obtain additional financing. The Company's ability to make scheduled
principal payments, to pay interest on or to refinance its indebtedness
depends on its future performance and financial results, which, to a certain
extent, are subject to general economic financial, competitive, legislative,
regulatory and other factors beyond its control. There can be no assurance
that sufficient funds will be available to enable the Company to service its
indebtedness, including the Notes, or make necessary capital expenditures and
program and other disciplinary investments. The Senior Credit Facilities and
the 10 3/8% Senior Subordinated Notes credit agreements contain financial and
restrictive covenants that limit, among other things, the ability of the
Company to borrow additional funds, dispose of assets, or pay cash dividends.
In September 1997, the Company filed a registration statement to
initiate an offer to exchange an aggregate of up to $225.0 million principal
amount of 10 3/8% Series B Senior Subordinated Notes due 2007 (the "Exchange
Notes") for the outstanding Old Notes. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except that the Exchange
Notes have been registered under the Securities Act of 1933. On November 5,
1997, the exchange offer was concluded; all of the $225.0 million Old Notes
were exchanged. The Exchange Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after May 1, 2002, at various
redemption prices plus accrued and unpaid interest to the applicable
redemption date. In addition, prior to May 1, 2000, the Company may redeem up
to 35% of the aggregate principal amount of Exchange Notes at a redemption
price of 109.375% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date with the net cash proceeds of one or more
equity offerings by Holdings that are contributed to the Company as common
equity capital.
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company the periods indicated:
Predecessor Predecessor
The Company Company Combined Company
------------------- ---------------- ------------------- -------------------
Six Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1997 September 30, 1996
------------------- ---------------- ------------------- -------------------
($ in millions)
Net cash from (used in) operating activities $ 56.4 $(16.3) $ 40.1 $ 6.0
Net cash used in investing activities . . . (479.0) 4.3 (483.3) (292.9)
Net cash from financing activities . . . . 462.4 20.6 483.0 286.9
------ ------ ------ ------
Net change in cash . . . . . . . . . . . . $ 39.8 -- $ 39.8 --
====== ====== ====== ======
Net cash provided by operating activities of the Company for the six
months ended September 30, 1997 was $56.4 million. Cash provided by
operations benefited from improved operating results, effective management of
contracts in process resulting in reduced levels of receivables and increases
in accrued interest and accrued employment costs.
Net cash used for operating activities of the Predecessor Company was
$16.3 million for the quarter ended March 31, 1997, resulting primarily from
the increase in contracts in process and decrease in current liabilities,
offset by cash flows provided by the Loral Acquired Businesses. Without the
Loral Acquired Businesses, cash used for operating activities for
Communication Systems--Camden amounted to $6.1 million.
Net cash from operating activities of the Predecessor Company was $6.0
million for the nine months ended September 30, 1996. The acquisition of the
Loral Acquired Businesses was effective April 1, 1996, and accordingly, net
cash from operating activities for the nine months ended September 30, 1996,
include the cash flows of the Loral Acquired Businesses for the six month
period from April 1, 1996 to September 30, 1996.
The Company's current ratio at September 30, 1997 increased slightly to
2.2:1 from the Predecessor Company's current ratio of 2.0:1 at December 31,
1996. The Predecessor Company's current ratio at March 31, 1997 was 2.2:1.
Net cash used in investing activities for the six months ended September
30, 1997 consisted primarily of $470.7 million paid by the Company for the
acquisition of Businesses from Lockheed Martin Corporation. See Note 1 to
condensed consolidated (combined) financial statements. During the nine
months ended September 30, 1996, $287.8 million was paid by the Predecessor
Company for the acquisition of the Loral Acquired Businesses. See Note 3 to
the condensed consolidated (combined) financial statements. In addition, for
the six months ended September 30, 1997, $6.4 million was used for capital
expenditures.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
and to Year Ended December 31, 1994
Net Cash Provided by Operating Activities: Cash provided by operating
activities was $31.0 million in 1996, $9.4 million in 1995 and $21.8 million
in 1994. The increase of $21.6 million or 230% in 1996 is due primarily to
the impact of the Loral Acquired Businesses. Earnings after adjustment for
non-cash items provided $37.0 million, offset by changes in other operating
assets and liabilities. The decrease in 1995 of $12.4 million is attributable
to an increase in contracts in process compared to 1994, a net loss in 1995
and gain on sales of assets in 1994. Without the Loral Acquired Businesses,
cash provided by operating activities for Communication Systems -- Camden
increased to $13.7 million in 1996, or 46% over the prior year.
Contracts in process, before reduction for unliquidated progress
payments, increased by $189.2 million to $233.9 million at December 31, 1996,
primarily due to the addition of the Loral Acquired Businesses. See Notes 2
and 4 to the Combined Financial Statements. As is customary in the defense
industry, unbilled contract receivables and inventoried costs are partially
financed by progress payments. The unliquidated balance of such progress
payments increased by $33.5 million to $35.8 million at December 31, 1996,
compared with $2.3 million at December 31, 1995. As a result, net contracts
in process increased to $198.1 million in 1996 from $42.5 million in the
prior year.
The Businesses' current ratio improved slightly to 2.0:1 at December 31,
1996, from 1.9:1 at December 31, 1995, as a result of the acquisition of the
Loral Acquired Businesses.
Net Cash Used in Investing Activities: Cash used in investing activities
increased to $298.2 million in 1996 from $5.5 million in 1995 and $3.7
million in 1994. The purchase price allocated by Lockheed Martin to the Loral
Acquired Businesses was $287.8 million. Capital expenditures during the year
amounted to $13.5 million.
Net Assets of Acquired Business Held for Sale
The Company has accounted for the allocation of purchase price and the
net assets to its Hycor business which it acquired as part of the Businesses
and intends to sell in accordance with the FASB's Emerging Issues Task Force
Issue 87-11 "Allocation of Purchase Price to Assets to be Sold" ("EITF
87-11"). Accordingly, the net assets related to the Hycor business as of
April 1, 1997 have been reflected on a single line item in the accompanying
condensed consolidated balance sheet as "Net assets held for sale". The fair
value assigned to such net assets is based upon management's estimate of the
proceeds from the sale of the Hycor business less the estimated income from
operations for such business during the holding period of April 1997 through
December 1997 (the "holding period"), plus interest expense on debt allocated
to such net assets during the holding period. The purchase price allocated to
the Businesses by Holdings and L-3 discussed in Note 2 reflects these
allocations of purchase price. In accordance with EITF 87-11, income from the
operations of the Hycor business of $112,000 and interest expense of $436,000
on the debt allocated to the Hycor net assets have been excluded from the
Company's consolidated statements of operations for the period April 1, 1997
to September 30, 1997.
Also, included in net assets held for sale at September 30, 1997 is the
Company's Sarasota, Florida facility which was sold effective October 24,
1997.
Backlog
The Company's funded backlog at December 31, 1996, was $542.5 million,
compared with $96.3 million at December 31, 1995 and $120.4 million at
December 31, 1994. New orders in 1996 totaled $619.5 million, compared with
$142.6 million in 1995 and $194.6 million in 1994. It is expected that
approximately 77% of the December 31, 1996 backlog will be shipped in 1997.
However, there can be no assurance that the Company's backlog will become
revenues in any particular period, if at all. See "Risk Factors--Backlog".
Approximately 81% of the total backlog was directly or indirectly for defense
contracts for end use by the Government.
Research and Development
Company-sponsored research and development, including bid and proposal
costs, increased to $36.5 million in 1996 from $9.8 million in 1995. In
addition, customer-funded research and development was $153.5 million in
1996, compared with $74.9 million for 1995. The increase in research and
development in 1996 was due primarily to the Loral Acquired Businesses.
Contingencies
Management does not believe there are any contingencies that, after
taking into account its existing reserves, would have a material adverse
effect on the Company's operations or financial condition. See Note 8 to the
Combined Financial Statements and "Risk Factors--Pension Plan Liabilities".
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 establishes accounting standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. In February 1997, the
FASB issued SFAS No. 129, "Disclosures of Information about Capital
Structure." SFAS No. 129 requires disclosure of for all type of securities
issued and applies to all entities that have issued securities. In June 1997,
the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosure about Segments of an Enterprise and related Information."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set general-purpose financial statements. SFAS No. 131 establishes accounting
standards for the way that public business enterprises report information
about operating segments and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 128 and SFAS No. 129 are required to be adjusted for
periods ending after December 15, 1997, and SFAS No. 130 and SFAS No. 131 are
required to be adopted by 1998. The Company is currently evaluating the
impact, if any, of these new FASB statements.
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes the accounting standards for the impairment of long-lived assets,
certain intangible assets and cost in excess of net assets acquired to be
held and used for long-lived assets and certain intangible assets to be
disposed of. The impact of adopting SFAS 121 was not material.
Inflation
The effect of inflation on the Company's sales and earnings is minimal.
Although a majority of the Company's 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.
BUSINESS
Company Overview
L-3 is a leading provider of sophisticated secure communication systems
and specialized communication products including secure, high data rate
communication systems, microwave components, avionics, and telemetry and
instrumentation products. 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 incorporated into the transmission, processing,
recording, monitoring and dissemination functions of these communication
systems. The Company's customers include the DoD, selected Government
intelligence agencies, major aerospace/defense prime contractors, foreign
governments and commercial customers. In 1996, L-3 had pro forma sales of
$675.3 million and pro forma operating income of $56.0 million. The Company's
funded backlog as of December 31, 1996 was approximately $542.5 million.
All of the Company's business units enjoy proprietary technologies and
capabilities and are well positioned in their respective markets. Management
has organized the Company's operations into two business areas: Secure
Communication Systems and Specialized Communication Products. In 1996, these
areas generated approximately $371.5 million and $303.8 million of pro forma
sales, respectively, and $23.0 million and $33.0 million of pro forma
operating income, respectively.
Secure Communication Systems. L-3 is the established leader in secure,
high data rate communications in support of military and other national
agency reconnaissance and surveillance applications. The Company's Secure
Communication Systems operations are located in Salt Lake City, Utah and
Camden, New Jersey. Both operations are predominantly cost plus, sole source
prime system contractors supporting long-term programs for the U.S. Armed
Forces and classified customers. The Company's major secure communication
programs and systems include: strategic and tactical signal intelligence
systems that detect, collect, identify, analyze and disseminate information
and related support contracts for military and national agency intelligence
efforts; secure data links for airborne, satellite, ground and sea-based
information collection and transmission; as well as secure telephone and
network equipment. The Company believes that it has developed virtually every
high bandwidth data link used by the military for surveillance and
reconnaissance in operation today. In addition to these core Government
programs, L-3 is expanding its business base into related commercial
communication equipment markets, including applying its wireless
communication expertise to develop local wireless loop equipment primarily
for emerging market countries and rural areas where existing
telecommunications infrastructure is inadequate or non-existent.
Specialized Communication Products. This business area comprises the
Microwave Components, Avionics, and Telemetry and Instrumentation Products
operations of the Company.
Microwave Components. L-3 is the preeminent worldwide supplier of
commercial off-the-shelf, high performance microwave components and frequency
monitoring equipment. L-3's microwave products are sold under the
industry-recognized Narda brand name through a standard catalog to wireless,
industrial and military communication markets. L-3 also provides
state-of-the-art communication components including channel amplifiers and
frequency filters for the commercial communications satellite market.
Avionics. Avionics includes the Company's Aviation Recorders, Display
Systems and Antenna Systems operations. L-3 is the world's leading
manufacturer of commercial cockpit voice and flight data recorders. These
recorders are sold under the Fairchild brand name both on an OEM basis to
aircraft manufacturers as well as directly to the world's major airlines for
their existing fleets of aircraft. L-3 also provides military and high-end
commercial displays for use on a number of DoD programs including the F-14,
V-22, F-117 and E-2C. Further, L-3 manufactures high performance surveillance
antennas and related equipment for U.S. Air Force and U.S. Navy aircraft
including the F-16, AWACS, E-2C and B-2, as well as the U.K.'s Nimrod
aircraft.
Telemetry and Instrumentation Products. The Company's Telemetry and
Instrumentation Products operations 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 parameter data and other critical
information and transmit it from air or space to the ground. Telemetry
products are also used for range safety and training applications to simulate
battlefield situations. Further, the Company is applying its technical
capabilities in high data rate transmission to the medical image archiving
market in partnership with GE Medical Systems.
The Company's systems and products are summarized in the following
tables:
Secure Communication Systems (1996 Pro Forma Sales: $372 million)
Selected Platforms/
Systems Selected Applications End Uses
- ------- --------------------- ------------------
Secure High Data
Rate Communications
- - Broad-band data - High performance, - Used on aircraft and
links secure communication naval ships, unmanned
links for interoperable aerial vehicles with
tactical communication military and commercial
and reconnaissance satellites
Satellite
Communication
Terminals
- - Ground-based - Interoperable, - Provide remote personnel
transportable ground with communication
terminals for remote links to distant forces
links to distant
segments via commercial
or military satellites
Satellite
Communication
and Satellite
Control
- - Satellite - On-board satellite - International Space
communication external communications, Stations; Earth Observing
and tracking video systems, solid Satellite; Landsat-7;
systems state recorders and National Oceanic and
ground support equipment Atmospheric
Administration weather
satellites
- - Satellite - Software integration, - Air Force satellite
command and test and maintenance network; Titan IV
control support for Air Force launch system
sustainment satellite control
and support network; engineering
support for satellite
launch systems
Information
Security Systems
- - Secure Telephone - Secure and non-secure - Office and battlefield
Unit (STU III)/ voice, data and video secure and non-secure
Secure Terminal communication utilizing communication for armed
Equipment (STE) ISDN and ATM commercial services, intelligence
network technologies and security agencies
Selected Platforms/
Systems Selected Applications End Uses
- ------- --------------------- ------------------
- - Local - Provides electronic key - User authorization and
management material accounting, recognition and message
device/key system management and encryption for secure
processor audit support functions communication
(LMD/KP) for secure data
communication
Selected Platforms/
Productions Selected Applications End Uses
- ----------- --------------------- ------------------
- - Information - Custom designed - Classified military and
processing strategic and tactical national agency
systems signal intelligence intelligence efforts
systems that detect,
collect, identify,
analyze and disseminate
information and related
support contracts
Microwave
Components
- - Passive - Radio transmission, - Broad-band and narrow-
components, switching and band commercial
mechanical conditioning; antennae applications (PCS,
switches and and base station cellular, SMR, and
wireless testing and monitoring paging infrastructure)
assemblies sold under the Narda
brand name; broad-band
military applications
- - Safety - Radio frequency (RF) - Monitor cellular base
products monitoring and management station and industrial
RF Emissions frequency
monitoring
- - Semiconductors - Radio frequency switches - Various industrial and
(diodes, limiters, voltage control military and uses,
capacitors) oscillators, harmonic including commercial
generators satellites, avionics
and specialty
communication products
- - Satellite and - Satellite transponder - F-16, E-2C China Sat
wireless control, channel
components and frequency
(channel separation
amplifiers,
transceivers,
converters,
filters and
multiplexers)
Selected Platforms/
Productions Selected Applications End Uses
- ----------- --------------------- ------------------
Avionics
Aviation Recorders
- - Solid state - Voice recorders - Installed on all business
cockpit voice and continuously record and commercial aircraft
flight data most recent 30-120 and certain military
recorders minutes of voice and transport aircraft; sold
sounds from cockpit to both aircraft OEMs
and aircraft inter- and airlines under the
communications. Flight Fairchild brand name
data recorders record
the last 25 hours of
flight parameters
Display Systems
- - Cockpit and - High performance ruggedized - E-2C, V-22, F-14, F-117,
mission display flat panel and cathode ray E-6B, C-130, AWACS and
systems tube displays JSTARS
Antenna Systems
- - Ultra-wide - Surveillance; radar - F-15, F-16, F-18, E-2C,
frequency detection A-7, EF-111, P-3, C-130,
antennae B-2, AWACS, Apache, Cobra,
systems and Mirage (France), Nimrod
rotary joints (U.K.) and Tornado (U.K.)
Telemetry and
Instrumentation
Telemetry
- - Aircraft, missile - Real time data acquisition, - F-15, F-18, F-22, Comanche
and satellite measurement, processing, Nimrod (U.K.), Tactical
telemetry systems simulation, distribution, Hellfire Titan, EELV, and
display and storage for A2100
- - Training range - Battlefield simulation - Combat simulation
telemetry systems
Instrumentation
and Other
- - Medical imaging - X-Ray cardiology, echo - Filmless, high speed image
and archiving cardiology and radiology management and archiving
image management, review for cardiology and
and archiving radiology
flight testing
Industry Overview
The defense industry has recently undergone significant change
precipitated by ongoing federal budget pressures and new roles and missions
to reflect changing strategic and tactical threats. Since the mid-1980's, the
overall U.S. defense budget has declined in real dollars. In response, the
DoD has focused its resources on enhancing its military readiness, joint
operations and multiple mission capabilities, and incorporating advanced
electronics to improve the performance, reduce operating cost and extend the
life expectancy of its existing and future platforms. The 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.
According to Federal Sources, an independent private consulting group, the
defense budget for C3I is expected to increase from $30.0 billion in the
fiscal year ended September 30, 1996 to $42.0 billion in the fiscal year
ended September 30, 2002, a compound annual growth rate of 5.8%.
The industry has also undergone dramatic consolidation resulting in the
emergence of four dominant prime system contractors. One outgrowth of this
consolidation among the remaining major prime contractors is their desire to
limit purchases of products and sub-systems from one another. Despite this
desire, there are numerous essential but non-strategic products, components
and systems that are not economical for the major prime contractors to
design, develop or manufacture for their own internal use. As the prime
contractors continue to evaluate their core competencies and competitive
position, focusing their resources on larger programs and platforms, the
Company expects the prime contractors will seek to exit non-strategic
business areas and procure these needed elements on more favorable terms from
independent, commercially oriented merchant suppliers.
The focus on cost control is also driving increased use of commercial
off-the-shelf products for both upgrades of existing systems and in new
systems. The Company believes 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
merchant suppliers to produce non-core sub-systems, components and products.
Going forward, the successful merchant suppliers will use their resources to
complement and support, rather than compete with the prime contractors. L-3
anticipates the relationship between the major prime contractors and their
primary suppliers will, as in the automotive industry, develop into 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.
Early involvement in the upgrading of existing systems and the design and
engineering of new systems incorporating these outsourced products will
provide top-tier suppliers, including the Company, 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
L-3 intends to leverage its market position, diverse program base and
favorable mix of cost plus to fixed price contracts to enhance its
profitability, reduce its indebtedness and to establish itself as the premier
merchant supplier of communication systems and products to the major prime
contractors in the aerospace/defense industry as well as the Government. The
Company's strategy to achieve these objectives includes:
-- Expand Merchant Supplier Relationships. Senior Management has
developed strong relationships with virtually all of the prime contractors,
the DoD and other major government agencies, enabling L-3 to identify
business opportunities and anticipate customer needs. As an independent
merchant supplier, the Company anticipates its future growth will be driven
by expanding its share of existing programs and by participating in new
programs. Management has already identified several opportunities where the
Company believes it will be able to use its strong relationships to increase
its business presence and allow its customers to reduce their costs. The
Company also expects 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 L-3's capabilities on a more
favorable basis given its status as an independent company.
-- Support Customer Requirements. A significant portion of L-3's sales
are derived from high-priority, long-term programs and from programs for
which the Company has been the incumbent supplier, and in many cases acted as
the sole provider, over many years. Approximately 67% of the Company's total
pro forma 1996 sales were generated from sole source contracts. L-3's
customer satisfaction and excellent performance record are evidenced by its
performance-based award fees exceeding 90% on average over the past two
years. Going forward, management believes prime contractors will award
long-term, sole source, outsourcing contracts to the merchant supplier they
believe is most capable on the basis of quality, responsiveness, design,
engineering and program management support as well as cost. Reflecting L-3's
strong competitive position, the Company has experienced a contract award win
rate over the past two years of approximately 50% on new competitive
contracts for which it competes and approximately 90% on contracts for which
it is the incumbent. The Company intends to continue to align its research
and development, manufacturing and new business efforts to complement its
customers' requirements.
-- Leverage Technical and Market Leadership Positions. L-3 has developed
strong, proprietary technical capabilities that have enabled it to capture a
number one or two market position in most of its key business areas,
including secure, high data rate communication systems, solid state aviation
recorders, advanced antenna systems and high performance microwave
components. Over the past three years, the Company and its Predecessors have
invested over $100 million in Company-sponsored independent research and
development, including bid and proposal costs, in addition to making
substantial investments in its technical and manufacturing resources.
Further, the Company has a highly skilled workforce including over 1,500
engineers. As an independent company, management intends to leverage its
technical expertise and capabilities into several closely aligned commercial
business areas and applications, including opportunities in wireless
telephony and medical imaging archive management.
-- Maintain Diversified Business Mix. The Company enjoys a diverse
business mix with a limited program exposure, a favorable balance of cost
plus to fixed price contracts, a significant sole source business and an
attractive customer profile. The Company's largest program, representing 14%
of 1996 pro forma sales, is a long-term, sole source, cost plus support
program for the U-2 program Directorate for the DoD. No other program
represented more than 7% of pro forma 1996 sales. Further, the Company's pro
forma sales mix of contracts in 1996 was 42% cost plus and 58% fixed price,
providing the Company with a balanced mix of predictable profitability (cost
plus) and higher margin (fixed price) business. L-3 also enjoys an attractive
customer mix of defense and commercial business, with DoD related sales
accounting for 65% and commercial and federal (non-DoD) sales accounting for
35% of 1996 pro forma sales. The Company intends to leverage this favorable
business profile to expand its merchant supplier business base.
-- Enhance Operating Margins. As part of larger corporations (i.e.,
Lockheed Martin, Loral, GE, Unisys), the Businesses were historically
required to absorb significant corporate expense allocations. As an
independent company, L-3 believes that it will be able to leverage its
discretionary expenditures in a more focused and efficient manner, enhance
its operating performance and reduce overhead expenses reflecting Senior
Management's more flexible, entrepreneurial approach. The Company believes
that significant costs incurred by the Businesses under Lockheed Martin's
ownership will not be incurred going forward. These cost savings include
reduced corporate administrative and facilities expenses and certain
operating performance improvements.
-- Capitalize on Strategic Acquisition Opportunities. Recent industry
consolidation has virtually eliminated traditional middle-tier
aerospace/defense companies. This level of consolidation is now beginning to
draw the concern of the DoD and federal anti-trust regulators. As a result,
the Company anticipates the pending major mergers as well as continued
consolidation of the smaller participants in the defense industry will create
attractive complementary acquisition candidates for L-3 in the future as
these companies continue to evaluate their core competencies and competitive
position.
Products and Services
Secure Communication Systems
L-3 is a leader in communication systems for high performance
intelligence collection, imagery processing and ground, air, sea and
satellite communications for the DoD and other government agencies. The
Company's Secure Communication Systems operations are located in Salt Lake
City, Utah and Camden, New Jersey, and together had pro forma sales of $371.5
million and EBITDA of $41.6 million in 1996. The Salt Lake City operation
provides secure, high data rate, real-time communication systems for
surveillance, reconnaissance and other intelligence collection systems. The
Camden operation designs, develops, produces and integrates communication
systems and support equipment for space, ground and naval applications.
Product lines of the Secure Communication Systems business include high data
rate communication links, satellite communication ("SATCOM") terminals, Navy
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
The Company is a technology leader in high data rate, covert,
jam-resistant microwave communications in support of military and other
national agency reconnaissance and surveillance applications. L-3's 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. The Company's 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.
During the 1980s, largely based on its prior experience with command and
control guidance systems for remotely-piloted vehicles, L-3 developed its
current family of strategic and tactical data links, including its Modular
Interoperable Data Link ("MIDL") systems and Modular Interoperable Surface
Terminals ("MIST"). MIDL and MIST technologies are considered virtual DoD
standards in terms of data link hardware. The Company's primary focus is
spread spectrum communication (based on CDMA technology), which involves
transmitting a signal as noise so as to make it difficult to detect to
others, and then re-capturing the signal and removing the noise. The
Company's data links are capable of providing information at over 200 Mb/s.
L-3 provides these secure high band width services to the U.S. Air
Force, Navy, Army and various 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. Government programs
include: U-2 Support, Common High-Band Width Data Link Surface Terminal
("CHBDL-ST"), Battle Group Passive Horizon Extension System ("BGPHES"), Light
Airborne Multi-Purpose System (LAMPS), TriBand SATCOM Subsystem ("TSS"), all
unmanned aerial vehicle ("UAV") programs and Direct Air-Satellite Relay
("DASR").
- -- Satellite Communication Terminals
L-3 provides ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals
to communicate with commercial, military and international satellites. These
terminals provide remote personnel with anywhere, anytime effective
communication capability and provide communications links to distant forces.
The Company's TriBand SATCOM Subsystem ("TSS") 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. The Company also offers an 11.3 meter dish which is
transportable on two C-130 aircraft. The SHF Portable Terminal System ("PTS")
is a lightweight (28 lbs.), manportable terminal, which communicates through
DSCS, NATO or SKYNET satellites and brings unprecedented connectivity to
small military tactical units and mobile command posts. L-3 recently
delivered 14 of these terminals for use by NATO forces in Bosnia.
- -- Space Communications and Satellite Control
Continuing L-3's tradition of providing communications for every manned
U.S. space flight since Mercury, the Company is currently designing and
testing three communication subsystems for the International Space Station
("ISS"). These systems will control all ISS radio frequency ("RF")
communications and external video activities. The Company also provides
solid-state recorders and memory units for data capture, storage, transfer
and retrieval for space applications. The standard NASA tape recorder, which
was developed and produced by the Company, has completed over three million
hours of service without a mission failure. Current programs include
recorders for the National Oceanic & Atmospheric Administration ("NOAA")
weather satellites, the Earth Observing Satellite ("EOS") AM spacecraft and
Landsat-7 Earth-monitoring spacecraft. The Company also provides 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
The Company provides integrated, computer controlled switching systems
for the interior and exterior voice and data needs of today's Navy military
vessels. The Company's products include Integrated Voice Communication
Systems ("IVCS") for Aegis cruisers and destroyers and the Integrated Radio
Room ("IRR") 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. The Company's
MarCom 2000 secure digital switching system is in development for the Los
Angeles class attack submarine and 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. The Company also offers 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 terminal
platforms.
- -- Information Security Systems
The Company has produced more than 100,000 secure telephone units ("STU
III") which are in use today by the U.S. Armed Forces to provide secure
telephone capabilities for classified confidential communication over public
commercial telephone networks. The Company has begun producing the
next-generation digital, ISDN-compatible STE. STE provides clearer voice and
seven-times faster data/fax transmission capability than the STU III. STE
also supports secure conference calls and secure video teleconferencing. STE
uses a CryptoCard security system which consists of a small, portable,
cryptographic module mounted on a PCMCIA card holding the algorithms, keys
and personalized credentials to identify its user for secure communications
access. The Company also provides LMD/KP which is the workstation component
of the Government's Electronic Key Management System ("EKMS"), the next
generation of information security systems. EKMS is the Government system to
replace current "paper" secret keys used to secure government communications
with "electronic" secret keys. LMD/KP is the component of the EKMS which
produces and distributes the electronic keys. L-3 also develops specialized
strategic and tactical SIGINT 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.
- -- Tactical Security Systems
The Company manufactures the IREMBASS, an unattended ground sensor
system which uses sensors placed along likely avenues of enemy approach or
intrusion in a battlefield environment. The sensors respond to seismic and
acoustic disturbances, infrared energy and magnetic field changes and thus
detect enemy activities. IREMBASS is currently in use by U.S. Special
Operations Forces, the U.S. Army's Light Divisions and several foreign
governments. The Company also provides the Intrusion Detection Early Warning
System ("IDEWS"), a sensor system designed for platoon-level physical
security applications. Weighing less than two pounds, this sensor system is
ideal for covert perimeter intrusion detection, border protection and
airfield or military installation security.
- -- Commercial Communications
The Company is applying its wireless communication expertise to
introduce local wireless loop equipment using a synchronous Code Division
Multiple Access technology protocol ("CDMA") supporting terrestrial and space
based, fixed and mobile communication services. The system's principal
targeted customer base is emerging market countries and rural areas where
existing telecommunications infrastructure is inadequate or non-existent. The
Company's system will have the potential to interface with low earth orbit
("LEO") PCS systems such as Globalstar, Iridium and or any local public
telephone network. The Company expects to manufacture for sale certain of the
infrastructure equipment and to license its technology to third-party
providers. The Company expects to partner with third parties for service and
distribution capabilities. The Company has entered into product distribution
agreements with Granger Telecom for distribution in parts of Africa, the
Middle East and the United Kingdom, and with Unisys for distribution in parts
of Mexico and South America.
Specialized Communication Products
Microwave Components
L-3 is the pre-eminent worldwide supplier of commercial off-the-shelf,
high performance radio frequency ("RF") microwave components, assemblies and
instruments supplying the wireless communication, industrial and military
markets. The Company is also a leading provider of state-of-the-art
space-qualified commercial satellite and strategic military RF products. L-3
sells many of these components under the well-recognized Narda brand name and
through the world's most comprehensive catalogue of standard, stocked
hardware. L-3 also sells its products through a direct sales force and an
extensive network of premier market representatives. Specific catalog
offerings include wireless products, electro-mechanical switches, power
dividers and hybrids, couplers/detectors, attenuators, terminations and phase
shifters, isolators and circulators, adapters, control products, sources,
mixers, waveguide components, RF safety products, power meters/monitors and
custom passive products. The Company operates from two sites, Hauppauge, New
York ("Narda East"), and Sacramento, California ("Narda West").
Narda East represents approximately 62% of L-3's microwave sales volume,
offering high performance microwave components, networks and instruments to
the wireless, industrial and military communications markets. Narda East's
products can be divided into three major categories: passive components,
higher level wireless assemblies/monitoring systems and safety instruments.
Passive components are generally purchased in narrow frequency
configurations by wireless OEM equipment manufacturers and service providers.
Similar components are purchased in wide frequency configurations by first
tier military equipment suppliers. Commercial applications for Narda
components are primarily in cellular or PCS base stations. Narda also
manufactures higher level assemblies for wireless base stations and the
paging industry. These products include communication antenna test sets,
devices that monitor reflected power to determine if a cellular base station
is working. Military applications include general procurement for test
equipment or electronic surveillance and countermeasure systems. RF safety
products are instruments which are used to measure the level of non-ionizing
radiation in a given area, i.e., from an antenna, test set or other emitting
source.
Narda West designs and manufactures state-of-the-art space-qualified and
wireless components. Space qualified components include channel amplifiers
for satellite transponder control and diplexers/ multiplexers, which are used
to separate various signals and direct them to the appropriate other sections
of the payload. Narda West's primary areas of focus are communication
satellite payload products. Channel amplifiers constitute Narda West's main
satellite product. These components amplify the weak signals received from
earth stations by a factor of 1 million, and then drive the power amplifier
tubes that broadcast the signal back to earth. These products are sold to
satellite manufacturers and offer lower cost, lower weight and improved
performance versus in-house alternatives. On a typical satellite, for which
there are 20 to 50 channel amps, Narda West's channel amps offer cost savings
of up to 60% (up to $1 million per satellite) and decrease launch weight by
up to 25 kilograms.
The operation also offers a wide variety of high-reliability power
splitters, combiners and filters for spacecraft and launch vehicles, such as
LLV, Tiros N, THAAD, Mars Surveyor, Peacekeeper, Galileo, Skynet, Cassini,
Milstar, Space Shuttle, LandSat, FltSatCom, GPS, GPS Block IIR, IUS, ACE,
SMEX and certain classified programs. Narda West also produces ground
transceivers for communication with satellites. These Very Small Aperture
Terminal ("VSAT") transceivers are used in medium and high data rate
applications in the C and Ku frequency bands normally used for
transmit/receiver applications. Other Narda West products include wireless
microwave components for cellular and PCS base station applications. These
products include filters used for transmit and receive channel separation as
well as ferrite components, which isolate certain microwave functions,
thereby preventing undesired signal interaction. The balance of the
operation's business is of a historical nature and involves wideband filters
used for electronic warfare applications and cavity oscillators used in
commercial test equipment and terrestrial radio applications.
Avionics
- -- Aviation Recorders
L-3 manufactures commercial solid-state crash-protected aviation
recorders ("black boxes") under the Fairchild brand name, and has delivered
over 40,000 flight recorders to airplane manufacturers and airlines around
the world. Recorders are mandated and regulated by various worldwide agencies
for commercial airlines and a large portion of business aviation aircraft.
Management anticipates growth opportunities in Aviation Recorders as a result
of the current high level of orders for new commercial aircraft. Additional
growth opportunities exist in the military market as a result of recent
military aircraft accidents. There are two types of recorders: (i) the
Cockpit Voice Recorder ("CVR") which records the last 30 to 120 minutes of
crew conversation and ambient sounds from the cockpit and (ii) the Flight
Data Recorder ("FDR") 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. 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 resistance equal to 20,000 feet undersea for 30 days.
Management believes that the Company has the leading worldwide market
position for CVR's and FDR's.
- -- Antenna Systems
Under the Randtron brand name, L-3 produces high performance antennas
designed for surveillance, high-resolution, ultra-wide frequency bands,
detection of low radar cross section ("LRCS") targets, LRCS installations,
severe environmental applications and polarization diversity. L-3's main
antenna product is a sophisticated 24-foot diameter antenna operational on
all E-2C aircraft. This airborne antenna consists of a 24-foot rotating
aerodynamic oblate spheroid radome containing a UHF surveillance radar
antenna, IFF antenna and forward and aft auxiliary antennas. This antenna
began production in the early 1980s, and production is planned beyond 2000
for the E-2C, P3 and C-130 AEW aircraft. L-3 also produces broad-band
antennas for a variety of tactical aircraft and rotary joints for the AWAC's
and E-2C's antenna. Randtron has delivered approximately 2,000 aircraft sets
of antennas and has a current backlog through 1999.
- -- Display Systems
L-3 specializes in the design, development and manufacture of ruggedized
display system solutions for military and high-end commercial applications.
L-3's current product lines include cathode ray tubes ("CRTs") and the
Actiview family of active matrix liquid crystal displays ("AMLCD"). L-3
manufactures flat-panel displays with diagonal screen sizes of 10.4 and 20.1
inches that are in platforms such as E-2C (enhanced main display unit and
Q-70 advanced display system), F-14, F-117 and V-22.
Telemetry and Instrumentation
The Company is a leader in component products used in telemetry and
instrumentation for satellites, aircraft, UAVs, launch vehicles and missiles.
Telemetry involves the collection of data from these platforms, its
transmission to ground stations for analysis, and its further dissemination
or transportation to another platform. A principal use of this telemetry data
is to measure as many as 1,000 different parameters of the platform's
operation (in much the same way as a flight data recorder on an airplane
measures various flight parameters) and transmits this data to the ground.
Additionally, for satellite platforms, the equipment also provides the
command uplink that controls the satellite. In these applications, high
reliability of components is crucial because of the high cost of satellite
repair and the length of uninterrupted service required. Telemetry also
provides the data to terminate the flight of missiles and rockets under
errant conditions and/or at the end of mission.
- -- Airborne, Ground and Space Telemetry
The Company provides airborne equipment and data link systems to gather
critical information and to process, format and transmit it to the ground
through communication data links from a communications satellite, spacecraft,
aircraft and/or missile. These products are available in both COTS and custom
configurations. Major customers are the major defense contractors who
manufacture aircraft, missiles, warheads, launch vehicles, munitions and
bombs. Ground instrumentation activity occurs at the ground station where the
serial stream of combined data is received and decoded in real-time, as it is
received from the airborne platform. Data can be encrypted and decrypted
during this process, an additional expertise that the Company offers. L-3
offers the System 500 which interfaces with airborne telemetry and helps
determine if it is within certain parameters of its flight pattern and
displays the information graphically on a ground station terminal. The
Company is currently developing the NeTstar ground station terminal which is
capable of handling compressed satellite mission time frames.
- -- Range Instrumentation
A ground-based application for the Company is range instrumentation,
where equipment that is worn by soldiers or mounted in vehicles transmit and
receive data that is used for test and evaluation of training missions. The
Company's Digital Communication Network Subsystem ("DCNS") product allows for
more effective monitoring and control of training and testing ranges.
- -- Transportable Radios
The Company also manufactures transportable, tunable, microwave radios
used for commercial and military voice and data communication service
restoration and features rugged, modularized systems capable of data rates up
to 155 Mb/s. Frequencies are tunable in RF bands from 1.7 GHz to 19.7 GHz
with simple plug-in radio frequency heads. The radios are encased in
portable, all-weather outdoor housing for use in restoration and temporary
service and military tactical communications.
- -- Expendable Countermeasure Systems
L-3 designs, develops and produces radar, infrared, electro-optical and
acoustic expendable countermeasure systems, computer-controlled launchers and
dispensers for ships, aircraft, ground vehicles and base defense. L-3 is the
world leader in the design, development and production of passive off-board
ship defense countermeasures systems for the U.S. Navy and international
customers. The products include the MK 214 and MK 216 Sea Gnat Decoys, which
are the seduction and distraction decoys used by the U.S. Navy and NATO for
ship defense against radar-guided threats. L-3 also manufactures Automatic
Launch of Expendables ("ALEX"), a completely automated ship-defense launch
system that takes threat information from the ship's warning system and
speed, direction and wind conditions from the ship's navigation system and
initiates the optimum countermeasure response and/or maneuver based on the
decoy load-out inventory.
- -- Commercial Communication Products
The Company and GE Medical Systems have jointly developed
GEMnet(Trademark), a cardiac image management and archive system.
GEMnet(Trademark) eliminates the use of cinefilm in a cardiac catheterization
laboratory by providing a direct digital connection to the laboratory. The
system provides for acquisition, display, analysis and short-and long-term
archive of cardiac patient studies, providing significant cost savings and
process improvements to the hospital. EchoNet(Trademark) is a digital archive
management and review system designed by the Company specifically for the
echocardiology profession. Echonet(Trademark) is the result of an exclusive
strategic partnership with Heartlab, Inc. and is distributed by Nova
Microsonics. The system accepts digital echocardiology studies from a variety
of currently available ultrasound systems, manages the studies, making them
available on a network, and allows the physicians and technicians to become
more productive. DICOMView(Trademark) is a multimodal, low-cost viewing
station designed by the Company for use with standard IBM-compatible and
Macintosh personal computer platforms. It makes full motion, full fidelity
diagnostic images accessible for the cardiologist, surgeon and referring
physician. EchoNet(Trademark) and DICOMView(Trademark) are trademarks of
Heartlab, Inc. GEMnet(Trademark) is a trademark of GE.
Major Customers
The Company's sales are predominantly derived from contracts with
agencies of, and prime contractors to, the Government. The various Government
customers exercise independent purchasing decisions. Sales to the Government
generally are not regarded as constituting sales to one customer. Instead,
each contracting entity is considered to be a separate customer. In 1996, the
Company performed under approximately 180 contracts with value exceeding $1
million for the Government. Government pro forma sales in 1996, including pro
forma sales to the Government through prime contractors, were $529 million.
Historical sales to Lockheed Martin were $70.7 million in 1996. The Company's
largest program, representing 14% of 1996 pro forma sales, is a long-term,
sole source cost plus support program for the U-2 Directorate. No other
program represented more than 7% of pro forma 1996 sales.
Research and Development
The Company employs scientific, engineering and other personnel to
improve its existing product lines and to develop new products and
technologies in the same or related fields. As of December 31, 1996, the
Company employed approximately 1,580 engineers (of whom over 35% hold
advanced degrees). The pro forma amounts of research and development
performed under customer-funded contracts and Company-sponsored research
projects, including bid and proposal costs, for 1996 were $153.5 million and
$36.5 million, respectively.
Competition
The Company's ability to compete for defense contracts depends to a
large extent on the effectiveness and innovativeness of its research and
development programs, its ability to offer better program performance than
its competitors at a lower cost to the Government customer, and its readiness
in facilities, equipment and personnel to undertake the programs for which it
competes. In some instances, programs are sole source or work directed by the
Government 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 Government should choose to reopen
the particular program to competition. Approximately 67% of the Company's
1996 pro forma sales related to sole source contracts.
The Company experiences competition from industrial firms and U.S.
government agencies, some of which have substantially greater resources.
These competitors include: Allied Signal Inc., AMP, Inc., Aydin Corporation,
Cubic Corporation, GTE Corporation, Harris Corporation, GM Hughes
Electronics, Motorola, Inc., Raytheon Company and Titan Corporation. A
majority of the sales of the Company is derived from contracts with the
Government and its prime contractors, and such contracts are awarded on the
basis of negotiations or competitive bids. Management does not believe any
one competitor or a small number of competitors is dominant in any of the
business areas of the Company. Management believes the Company will continue
to be able to compete successfully based upon the quality and cost
competitiveness of its products and services.
Patents and Licenses
Although the Company owns some patents and has filed applications for
additional patents, it does not believe that its operations depend upon its
patents. In addition, the Company's Government contracts generally license it
to use patents owned by others. Similar provisions in the Government
contracts awarded to other companies make it impossible for the Company to
prevent the use by other companies of its patents in most domestic work.
Backlog
As of December 31, 1996, the Company's funded backlog was approximately
$542.5 million. This backlog provides management with a useful tool to
project sales and plan its business on an on-going basis; however, no
assurance can be given that the Company's backlog will become revenues in any
particular period or at all. Funded backlog does not include the total
contract value of multi-year, cost-plus reimbursable contracts, which are
funded as costs are incurred by the Company. Funded backlog also does not
include unexercised contract options which represent the amount of revenue
which would be recognized from the performance of contract options that may
be exercised by customers under existing contracts and from purchase orders
to be issued under indefinite quantity contracts or basic ordering
agreements. Backlog is a more relevant predictor of future sales in the
Secure Communication Systems business area. Current funded backlog in Secure
Communication Systems as of December 31, 1996 was $331.5 million, of which
approximately 81.3% is expected to be shipped in 1997. The Company believes
backlog is a less relevant factor in the Specialized Communication Products
business area given the nature of its catalog and commercial oriented
business. Overall, approximately 77% of the Company's December 31, 1996
funded backlog is expected to be shipped in 1997.
Funded Backlog as of
December 31, 1996
--------------------
($ in millions)
Secure Communication Systems . . . . . . . . . . $331.5
Communication Products . . . . . . . . . . . . . 211.0
------
$542.5
======
Government Contracts
Approximately 78.4% of the Company's 1996 pro forma sales were made to
agencies of the Government or to prime contractors or subcontractors of the
Government.
Approximately 58% of the Company's pro forma 1996 sales mix of contracts
were firm fixed price contracts under which the Company agrees to perform for
a predetermined price. Although the Company's fixed price contracts generally
permit the Company to keep profits if costs are less than projected, the
Company does bear the risk that increased or unexpected costs may reduce
profit or cause the Company to sustain losses on the contract. Generally,
firm fixed price contracts offer higher margin than cost plus type contracts.
All domestic defense contracts and subcontracts to which the Company is a
party are subject to audit, various profit and cost controls and standard
provisions for termination at the convenience of the Government. Upon
termination, other than for a contractor's default, the contractor will
normally be entitled to reimbursement for allowable costs and to an allowance
for profit. Foreign defense contracts generally contain comparable provisions
relating to termination at the convenience of the government. To date, no
significant fixed price contract of the Company has been terminated.
Companies supplying defense-related equipment to the Government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the Government to unilaterally suspend the
Company from new contracts pending resolution of alleged violations of
procurement laws or regulations. Other risks include a dependence on
appropriations by the Government, changes in the 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 Government for products of the type manufactured by the
Company, lower margins resulting from increasingly competitive procurement
policies, a reduction in the volume of contracts or subcontracts awarded to
the Company or substantial cost overruns would have an adverse effect on the
Company's cash flow.
Properties
The table below sets forth, as of December 31, 1996, certain information
with respect to L-3's manufacturing facilities and properties.
Location Owned Leased
-------- ----- ------
(thousands of square feet)
L-3 Headquarters, NY . . . . . . . . . . . . . . -- 58.5
Secure Communication Systems:
Camarillo, CA . . . . . . . . . . . . . . . . -- 1.8
El Segundo, CA . . . . . . . . . . . . . . . -- 1.4
Santa Clara, CA . . . . . . . . . . . . . . . -- 5.9
Santa Maria, CA . . . . . . . . . . . . . . . -- 9.8
Colorado Springs, CO . . . . . . . . . . . . -- 5.8
Camden, NJ . . . . . . . . . . . . . . . . . -- 588.6
Tinton Falls, NJ . . . . . . . . . . . . . . -- 0.8
Salt Lake City, UT . . . . . . . . . . . . . -- 457.6
Specialized Communication Products:
Folsom, CA . . . . . . . . . . . . . . . . . -- 57.5
Lancaster, CA . . . . . . . . . . . . . . . . -- 5.4
Menlo Park, CA . . . . . . . . . . . . . . . -- 93.0
Rancho Cordova, CA . . . . . . . . . . . . . -- 40.4
Redwood City, CA . . . . . . . . . . . . . . -- 5.2
San Diego, CA . . . . . . . . . . . . . . . . 196.0 68.9
San Mateo, CA . . . . . . . . . . . . . . . . -- 14.8
Santa Clara, CA . . . . . . . . . . . . . . . -- 2.0
Merrill Island, FL . . . . . . . . . . . . . -- 1.2
Sarasota, FL . . . . . . . . . . . . . . . . 303.6 --
Alpharetta, GA . . . . . . . . . . . . . . . 40.0 --
Atlanta, GA . . . . . . . . . . . . . . . . . 52.1 --
Norcross, GA . . . . . . . . . . . . . . . . -- 4.8
Haverhill, MA . . . . . . . . . . . . . . . . 8.0 --
Lowell, MA . . . . . . . . . . . . . . . . . -- 47.0
Woburn, MA . . . . . . . . . . . . . . . . . 106.0 --
Hauppauge, NY . . . . . . . . . . . . . . . . 150.0 --
Warminster, PA . . . . . . . . . . . . . . . 44.7 --
Slough, Berkshire (U.K.) . . . . . . . . . . -- 1.4
----- =======
Total . . . . . . . . . . . . . . . . . . . . . . 900.4 1,471.8
===== =======
Legal Proceedings
From time to time the Company is involved in legal proceedings arising
in the ordinary course of its business. As part of the Acquisition, the
Company has agreed to assume certain litigation relating to the Businesses
and Lockheed Martin has agreed to indemnify the Company, up to certain
limits, for a breach of its representations and warranties. Management
believes it is adequately reserved for these liabilities and that there is no
litigation pending that could have a material adverse effect on the Company
or its operations, except as discussed below.
As of June 30, 1997, the Company and Universal Avionics Systems
Corporation ("Universal") has reached a settlement with respect to a lawsuit
brought by Universal against the Company's Aviation Recorders operation
("Aviation Recorders"). The terms of this settlement will not have a material
adverse effect on the Company's financial condition or results of operations.
Environmental Matters
The Company's operations are subject to various federal, state and local
environmental laws and regulations relating to the discharge, storage,
treatment, handling, disposal and remediation of certain materials,
substances and wastes used in or resulting from its operations. The Company
continually assesses its obligations and compliance with respect to these
requirements. Based on a review by an independent environmental consulting
firm and its own internal assessments, management believes that the Company's
current operations are in substantial compliance with all existing applicable
environmental laws and regulations. New environmental protection laws that
will be effective in 1997 and thereafter may require the installation of
environmental protection equipment at the Company's manufacturing facilities.
However, the Company does not believe that its environmental expenditures, if
any, will have a material adverse effect on its financial condition or
results of operations.
Pursuant to the Transaction Agreement, the Company has agreed to assume
certain on-site and off-site environmental liabilities related to events or
activities occurring prior to the consummation of the Transaction. Lockheed
Martin has agreed to retain all environmental liabilities for all facilities
not used by the Businesses as of the Closing and to indemnify fully the
Company for such prior site environmental liabilities. Lockheed Martin has
also agreed, for the first eight years following the Closing, to pay 50% of
all costs incurred by the Company above those reserved for on the Company's
balance sheet at Closing relating to certain Company-assumed environmental
liabilities and, for the seven years thereafter, to pay 40% of certain
reasonable operation and maintenance costs relating to any environmental
remediation projects undertaken in the first eight years. The Company is
aware of environmental contamination at two of its facilities that will
require ongoing remediation. Management believes that the Company has
established adequate reserves for the potential costs associated with the
assumed environmental liabilities. However, there can be no assurance that
any costs incurred will be reimbursable from the Government or covered by
Lockheed Martin under the terms of the Transaction Agreement or that the
Company's environmental reserves will be sufficient.
Pension Plans
The Transaction Agreement provides for transfer by Lockheed Martin of
certain assets to L-3 and assumption by L-3 of certain liabilities relating
to defined benefit pension plans for present and former employees and
retirees of certain businesses transferred to L-3. Lockheed Martin received a
letter from the Pension Benefit Guaranty Corporation (the "PBGC") which
requested information regarding the transfer of such pension plans. The
PBGC's letter indicated that it believed certain of the employee pension
plans were underfunded using the PBGC's actuarial assumptions (which
assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under Statement of Financial
Accounting Standards No. 87, "Accounting for Pension Costs" ("FASB 87")). The
Company has calculated the net funding position of the pension plans to be
transferred and believes the plans to be overfunded by approximately $1
million under ERISA assumptions, underfunded by approximately $9 million
under FASB 87 assumptions and, on a termination basis, underfunded by as much
as $51 million under PBGC assumptions. Substantially all of the PBGC
underfunding is related to two pension plans covering employees at L-3's
Communication Systems -- Salt Lake and Aviation Recorders businesses (the
"Salt Lake and Fairchild Plans").
Pursuant to the PBGC's inquiry, representatives of the Company and
Lockheed Martin met with the PBGC on April 7, 1997. At this meeting, the PBGC
stated that it would seek some form of commitment or undertaking from
Lockheed Martin acceptable to it with regard to the Salt Lake and Fairchild
Plans and the pension plan covering employees at Hycor, another business
being acquired by L-3 in the Acquisition (collectively, the "Subject Plans").
Lockheed Martin has agreed to provide such a commitment in an agreement (the
"Lockheed Martin Commitment Agreement") among Lockheed Martin, L-3 and the
PBGC dated as of April 30, 1997. The material terms and conditions of the
Lockheed Martin Commitment Agreement include a commitment by Lockheed Martin
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 Agreement will continue until such time as the Subject
Plans are 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 Agreement, the PBGC has
agreed that it will take no further action in connection with the
Transaction.
In return for the Lockheed Martin Commitment, the Company has entered
into an agreement with Lockheed Martin, dated as of April 30, 1997, pursuant
to which the Company will provide certain assurances to Lockheed Martin
including, but not necessarily limited to, (i) continuing to fund the Subject
Plans consistent with prior practices and to the extent deductible for tax
purposes and, where appropriate, recoverable under Government contracts,
(ii) agreeing to not increase benefits under the Subject Plans without the
consent of Lockheed Martin, (iii) restricting the Company from a sale of any
businesses employing individuals covered by the Subject Plans if such sale
would not result in reduction or elimination of the Lockheed Martin
Commitment with regard to the specific plan and (iv) if the Subject Plans
were returned to Lockheed Martin, granting Lockheed Martin the right to seek
recovery from the Company of those amounts actually paid, if any, by Lockheed
Martin with regard to the Subject Plans after their return. In addition, upon
the occurrence of certain events, Lockheed Martin, at its option, will have
the right to decide whether to assume sponsorship of any or all of the
Subject Plans, even if the PBGC has not sought to terminate the Subject
Plans.
The Company believes, based in part upon discussions with its consulting
actuaries, that the increase in pension expenses and future funding
requirements, if any, from those currently anticipated for the Subject Plans
would not be material.
Employees
As of March 31, 1997, the Company employed approximately 5,000 full-time
and part-time employees. The Company believes that its relations with its
employees are good.
Approximately 580 of the Company's employees at its Communication
Systems -- Camden operation in Camden, New Jersey are represented by four
unions, the Association of Scientists and Professional Engineering Personnel,
the International Federation of Professional and Technical Engineers, the
International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers and an affiliate of the International Brotherhood of
Teamsters. Three of the four collective bargaining agreements expire in
mid-1998. While the Company has not yet initiated discussions with
representatives of these unions, management believes it will be able to
negotiate, without material disruption to its business, satisfactory new
collective bargaining agreements with these employees. However, there can be
no assurance that a satisfactory agreement will be reached with the covered
employees or that a material disruption to the Company's Camden operations
will not occur.
THE TRANSACTION
The Acquisition
Holdings and L-3 were formed by Mr. Frank C. Lanza, the former President
and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the former
Senior Vice President and Controller of Loral, the Lehman Partnership and
Lockheed Martin to acquire substantially all of the assets and certain
liabilities of (i) nine business units previously purchased by Lockheed
Martin as part of its acquisition of Loral in April 1996 and (ii) one
business unit, Communications Systems -- Camden, purchased by Lockheed Martin
as part of its acquisition of GE Aerospace in April 1993. The total
consideration paid to Lockheed Martin was $525 million, comprised of $480
million of cash before an estimated $20 million reduction related to a
purchase price adjustment, and $45 million of common equity being retained by
Lockheed Martin. L-3 is a wholly-owned subsidiary of Holdings. Holdings was
capitalized with $125 million of common equity, with Messrs. Lanza and
LaPenta owning 15.0%, the Lehman Partnership owning 50.1% and Lockheed Martin
owning 34.9%.
Transaction Agreement
The Transaction Agreement provides for the transfer by Lockheed Martin
to Holdings of substantially all of the assets and certain of the liabilities
primarily related to the Businesses. The assets transferred include, among
other things, real property and leases for the business units, all contracts
including government contracts, and bids for such contracts, all machinery
and equipment used primarily in connection with the Businesses and, subject
to certain limitations, all intellectual property used primarily in the
Businesses. The Transaction Agreement provides that L-3 be capitalized with
$125 million of common equity provided by Holdings and assume the liabilities
and obligations of Lockheed Martin relating to the Businesses other than
certain income and franchise tax liabilities arising prior to the closing of
the Acquisition, certain pension liabilities, certain environmental
liabilities and certain other excluded liabilities. As consideration for the
transfer of the assets by Lockheed Martin, Holdings paid Lockheed Martin
$479.8 million (subject to adjustment based on the difference between $269.1
million and the audited combined net tangible assets (as defined in the
Transaction Agreement) of the Businesses at the end of the month immediately
preceding the Closing) and Holdings issued to Lockheed Martin 6,980,000
shares of its Class A Common Stock.
The Transaction Agreement contains mutually agreed upon and customary
representations, warranties and covenants. Lockheed Martin has agreed to
indemnify Holdings, subject to certain limitations, for its breach of
(i) non-environmental representations and warranties up to $50 million
(subject to a $5 million threshold) and (ii) for the first eight years
following the Closing, to pay 50% of all costs incurred by the Company above
those reserved for on the Company's balance sheet at Closing relating to
certain Company-assumed environmental liabilities and, for the seven years
thereafter, 40% of certain reasonable operation and maintenance costs
relating to any environmental remediation projects undertaken in the first
eight years (subject to a $6 million threshold).
In connection with the Transaction Agreement, Holdings and the Company
anticipate entering into a transition services agreement with Lockheed Martin
pursuant to which Lockheed Martin will provide to Holdings and its
subsidiaries (and Holdings will provide to Lockheed Martin) certain corporate
services of a type currently provided at costs consistent with past practices
until December 31, 1997 (or, in the case of Communication Systems -- Camden,
for a period of up to 18 months after the Closing). Lockheed Martin is
currently providing L-3 the service contemplated by the proposed transition
services agreement in the absence of an executed agreement. The parties also
entered into supply agreements which reflect existing intercompany work
transfer agreements or similar support arrangements upon prices and other
terms consistent with the present arrangements. Holdings, the Company and
Lockheed Martin have entered into certain subleases of real property and
cross-licenses of intellectual property.
In addition, Holdings and Lockheed Martin have entered into a Limited
Noncompetition Agreement (the "Noncompetition Agreement") which, for up to
three years, in certain circumstances, precludes Lockheed Martin from
engaging in the sale of any products that compete with the products of the
Company that are set forth in the Noncompetition Agreement for specifically
identified application of the products. Under the Noncompetition Agreement,
Lockheed Martin is prohibited, with certain exceptions, from acquiring any
business engaged in the sale of the specified products referred to in the
preceding sentence, although Lockheed Martin may acquire such a business
under circumstances where the exceptions do not apply provided that it offers
to sell such business to L-3 within 90 days of its acquisition. The
Noncompetition Agreement does not, among other exceptions, (i) apply to
businesses operated and managed by Lockheed Martin on behalf of the United
States government, (ii) prohibit Lockheed Martin from engaging in any
existing businesses and planned businesses as of the closing of the
Transaction or businesses that are reasonably related to existing or planned
businesses or (iii) apply to selling competing products where such products
are part of a larger system sold by Lockheed Martin.
Stockholders Agreement
At Closing, Holdings, Lockheed Martin, the Lehman Partnership and
Messrs. Lanza and LaPenta entered into a stockholders agreement (the
"Stockholders Agreement") which, except for certain provisions including
those granting registration rights, terminates upon the consummation of an
initial public offering of equity securities by Holdings.
The Stockholders Agreement provides that the Board of Directors will
initially consist of 11 members including six designees of the Lehman
Partnership, three designees of Lockheed Martin, and Messrs. Lanza and
LaPenta. The number of directors which the Lehman Partnership and Lockheed
Martin have the right to designate will be reduced in proportion to any
reduction in their ownership of Common Stock, but as long as the Lehman
Partnership continues to own at least 35% of the outstanding Common Stock and
represents the largest single stockholder of Holdings, it may designate a
majority of the members of the Board of Directors.
Under the Stockholders Agreement Holdings is prohibited from commencing
an initial public offering for one year after the Closing without the consent
of each of the parties to the agreement. If an initial public offering has
not occurred five years after the Closing, the Lehman Partnership and
Lockheed Martin each have the right to require Holdings to consummate an
initial public offering, provided that they and their permitted transferees
own at least 50% of the Common Stock that they owned on the date of the
Closing.
The Stockholders Agreement restricts the transfer of shares of Common
Stock by any party to the agreement for one year and requires that any shares
transferred thereafter first be offered for sale to the other stockholders
and Holdings. As to sales of shares by the Lehman Partnership that occur one
year after the Closing and prior to the consummation of an initial public
offering and that result in the Lehman Partnership no longer owning at least
35% of the issued and outstanding Common Stock, (i) Messrs. Lanza and LaPenta
are permitted to "tag along" (as well as Lockheed Martin, if either Lanza or
LaPenta elects to "tag along") and (ii) the Lehman Partnership has the right
to "drag along" Messrs. Lanza and LaPenta (and at the option of Lockheed
Martin, Lockheed Martin may sell shares in such transaction). Under the
Stockholders Agreement Lockheed Martin is subject to a standstill arrangement
which generally prohibits any increase in its share ownership percentage over
34.9%.
The Stockholders Agreement also provides that Lehman Brothers Inc. has
the exclusive right to provide investment banking services to Holdings for
the five-year period after the Closing (except that the exclusivity period is
three years as to cash acquisitions undertaken by L-3). In the event that
Lehman Brothers Inc. agrees to provide any investment banking services to
L-3, it will be paid fees that are mutually agreed upon based on similar
transactions and practices in the investment banking industry.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Holdings and L-3 were formed by Senior Management, the Lehman
Partnership and Lockheed Martin to acquire substantially all of the assets
and liabilities of the Businesses. The total consideration paid to Lockheed
Martin was $525 million, comprising $480 million of cash before an estimated
$20 million reduction related to a purchase price adjustment, including $45
million of common equity retained by Lockheed Martin. The Transaction
Agreement provides for the transfer by Lockheed Martin to Holdings of such
assets and liabilities. Under the Transaction Agreement, Lockheed Martin has
agreed to indemnity L-3, subject to certain limitations, for Lockheed
Martin's breach of representations and warranties and L-3 has assumed certain
obligations relating to environmental matters and benefits plans. These
obligations include certain on-site and off-site environmental liabilities
related to events or activities of the Businesses occurring prior to the
consummation of the Transaction. In addition, pursuant to the terms of the
Transaction Agreement, the Company is in the process of establishing benefit
plans for employees of the Businesses, which will provide substantially
similar benefits to those provided by Lockheed Martin, including pension
plans, nonqualified supplemental retirement plans, defined contribution
plans, severance plans and death benefit plans.
In connection with the Transaction Agreement, Holdings and L-3
anticipate entering into a transition services agreement with Lockheed Martin
pursuant to which Lockheed Martin will provide to L-3 and its subsidiaries
(and L-3 will provide to Lockheed Martin) until December 31, 1997 (or, in the
case of Communications Systems -- Camden, for a period of up to 18 months
after the Closing) certain corporate services of a type previously provided
at costs consistent with past practices. These services include, among
others, management information systems, accounting and payroll services
which, pursuant to the terms of the agreement, are provided to the Company at
Lockheed Martin's fully-burdened cost but without profit. In addition,
because of the short length of the period involved, the Company's management
believes that it would be difficult to procure these services from third
parties. The parties also anticipate entering into supply agreements which
reflect existing intercompany work transfer agreements or similar support
arrangements based upon prices and other terms consistent with previously
existing arrangements. Holdings, L-3 and Lockheed Martin have entered into
certain subleases of real property and cross-licenses of intellectual
property.
In addition, at closing, Holdings, Lockheed Martin, Lehman Partnership
and Messrs. Lanza and LaPenta entered into the Stockholders Agreement. See
"Risk Factors-Dependence on Lockheed Martin," "Business - Environmental
Matters" and "-Pension Plans" and "The Transaction - Transaction Agreement"
and "-Stockholders Agreement."
In the ordinary course of business L-3 sells products to Lockheed Martin
and its affiliates. Net sales for which were $18.6 million and $21.2 million
for the three month periods ended June 30, 1997 and March 31, 1997,
respectively, and $70.7 million, $25.9 million and $10.0 million for the
years ended December 31, 1996, 1995 and 1994, respectively. See Note 3 to the
Lockheed Martin Predecessor Businesses combined financial statements as of
March 31, 1997 and for the three months ended March 31, 1997 and 1996.
Sales of products to Lockheed Martin after the closing of the
Transaction, excluding those under existing intercompany work transfer
agreements, are expected to be made on terms no less favorable than those
which would be available from non-affiliated party customers. A significant
portion of L-3's sales to Lockheed Martin are either based on competitive
bidding or catalog prices.
MANAGEMENT
Directors and Executive Officers
The following table provides information concerning the directors and
executive officers of Holdings after giving effect to the Transaction. All
directors hold office until the next annual meeting of the stockholders. All
officers serve at the discretion of the Board of Directors.
Name Age Position
----------------------- ------- --------------------------------------
Frank C. Lanza 65 Chairman, Chief Executive Officer and
Director
Robert V. LaPenta 51 President, Chief Financial Officer and
Director
Michael T. Strianese 41 Vice President--Finance and Controller
Christopher C. Cambria 39 Vice President--General Counsel and
Secretary
Robert F. Mehmel 34 Vice President--Planning and Assistant
Secretary
Jimmie V. Adams 60 Vice President--Washington D.C.
Operations
Robert RisCassi 61 Vice President--Washington D.C.
Operations
Steven J. Berger 40 Director
David J. Brand 35 Director
Alberto M. Finali 43 Director
Eliot M. Fried 63 Director
Robert B. Millard 46 Director
Alan H. Washkowitz 56 Director
Thomas A. Corcoran 53 Director
Frank H. Menaker, Jr. 56 Director
John E. Montague 42 Director
Frank C. Lanza, Chairman and CEO. Mr. Lanza was Executive Vice President
of Lockheed Martin and a member of Lockheed Martin's Executive Council and
Board of Directors. Mr. Lanza was formerly President and COO of Lockheed
Martin's C3I and Systems Integration Sector, which comprised many of the
businesses acquired by Lockheed Martin from Loral in 1996. At the time of the
Loral acquisition, 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
was a Vice President of Lockheed Martin and was Vice President and Chief
Financial Officer of Lockheed's C3I and Systems Integration Sector. Prior to
Lockheed Martin's acquisition of Loral, he was Loral's Senior Vice President
and Controller 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.
Michael T. Strianese, Vice President--Finance and Controller. Mr.
Strianese was Vice President and Controller of Lockheed Martin's C3I and
Systems Integration Sector. From 1991 to the 1996 acquisition of Loral, he
was Director of Special Projects at Loral. Prior to joining Loral, he spent
11 years with Ernst & Young. Mr. Strianese is a Certified Public Accountant.
Christopher C. Cambria, Vice President--General Counsel and Secretary.
Mr. Cambria joined Holdings in June 1997. From 1994 until joining Holdings,
Mr. Cambria was associated with Fried, Frank, Harris, Shriver & Jacobson.
From 1986 until 1993, he was associated with Cravath, Swaine & Moore.
Robert F. Mehmel, Vice President -- Planning and Assistant Secretary.
Mr. Mehmel was the Director of Financial Planning and Capital Review for
Lockheed Martin's C3I and Systems Integration Sector. From 1984 to 1996, Mr.
Mehmel held several accounting and financial analysis positions at Loral
Electronic Systems and Loral. At the time of Lockheed Martin's acquisition of
Loral, he was Corporate Manager of Business Analysis.
Jimmie V. Adams, Vice President -- Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) was Vice President of Lockheed Martin's
Washington Operations for the C3I and Systems Integration Sector. He held the
same position at Loral and was an officer of Loral, prior to its acquisition
by Lockheed Martin. 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.
Robert RisCassi, Vice President -- Washington, D.C. Operations. General
Robert W. RisCassi, Vice President, Land Systems (U.S. Army-ret.) was Vice
President of Land Systems for Lockheed Martin's C3I and Systems Integration
Sector. He held the same position for Loral, prior to its acquisition by
Lockheed Martin. 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.
Steven J. Berger, Director. Mr. Berger is a Managing Director of Lehman
Brothers, Co-Head of the Investment Banking Division and Head of the Merchant
Banking Group. Mr. Berger joined Lehman Brothers in 1983 in the Investment
Banking Division and spent the early part of his career working on principal
investment, merger-related advisory and corporate finance transactions. Mr.
Berger became a Managing Director and Head of European Investment Banking in
1991, Head of the Merchant Banking Group in 1995 and Co-Head of the
Investment Banking Division in 1996. Mr. Berger holds an M.B.A. and an A.B.
Economics, with honors, from Harvard University.
David J. Brand, Director. 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 holds an M.B.A. from Stanford
University's Graduate School of Business and a B.S. in Mechanical Engineering
from Boston University.
Alberto M. Finali, Director. Mr. Finali 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 holds an M.E. and an M.B.A.
from the University of California at Berkeley, and a Laurea Degree in Civil
Engineering from the Polytechnic School in Milan, Italy.
Eliot M. Fried, Director. Mr. Fried is a Managing Director of Lehman
Brothers. Mr. Fried joined Shearson, Hayden Stone, a predecessor firm, in
1976 and became a Managing Director in 1982. Mr. Fried has extensive
experience in portfolio management and equity research. Mr. Fried is
currently a director of Bridgeport Machines, Inc., Energy Ventures, Inc.,
SunSource L.P., Vernitron Corporation and Walter Industries, Inc. Mr. Fried
holds an M.B.A. from Columbia University and a B.A. from Hobart College.
Robert B. Millard, Director. Mr. Millard is a Managing Director of
Lehman Brothers, Head of Lehman Brothers' Principal Trading & Investments
Group and principal of the Merchant Banking Group. 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, Inc. and
Energy Ventures, Inc. Mr. Millard holds an M.B.A. from Harvard University and
a B.S. from the Massachusetts Institute of Technology.
Alan H. Washkowitz, Director. Mr. Washkowitz is a Managing Director of
Lehman Brothers and principal of the Merchant Banking Group, and is
responsible for the oversight of Lehman Brothers Merchant Banking Portfolio
Partnership L.P. Mr. Washkowitz joined Lehman Brothers in 1978 when Kuhn Loeb
& Co. was acquired by Lehman Brothers. Mr. Washkowitz is currently a director
of Illinois Central Corporation, K&F Industries, Inc., Lear Corporation and
McBride plc. Mr. Washkowitz holds an M.B.A. from Harvard University, a J.D.
from Columbia University and an A.B. from Brooklyn College.
Thomas A. Corcoran, Director. Mr. Corcoran has been the President and
Chief Operating Officer of the Electronic Systems Sector of Lockheed Martin
Corporation since March 1995. 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; he 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, the Board of Governors of the Electronic Industries Association,
a Director of the U.S. Navy Submarine League and a Director of REMEC
Corporation.
Frank H. Menaker, Jr., Director. Mr. Menaker has served as Senior Vice
President and General Counsel of Lockheed Martin since July 1996. He served
as Vice President and General Counsel of Lockheed Martin from March 1995 to
July 1996, as Vice President of Martin Marietta Corporation from 1982 until
1995 and as General Counsel of Martin Marietta Corporation from 1981 until
1995. He is a director of Martin Marietta Materials, Inc., a member of the
American Bar Association and has been admitted to practice before the United
States Supreme Court. Mr. Menaker is a graduate of Wilkes University and the
Washington College of Law at American University.
John E. Montague, Director. Mr. Montague has been Vice President,
Financial Strategies at Lockheed Martin responsible for mergers, acquisitions
and divestiture activities and shareholder value strategies since March,
1995. Previously, he was 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. Mr. Montague
received his B.S. from the Georgia Institute of Technology and a M.S. in
engineering from the University of Colorado.
Director Compensation and Arrangements
It is not currently contemplated that the directors of Holdings or the
Company will receive compensation for their services as directors. Members of
the Board of Directors will be elected pursuant to certain voting agreements
outlined in the Stockholders Agreement. See "The Transaction--Stockholders
Agreement".
Executive Compensation
Benefit Plans
Holdings and the Company intend to establish benefit plans, which will
provide substantially similar benefits to those provided by Lockheed Martin,
including a pension plan, a nonqualified supplemental retirement plan, a
defined contribution plan, a severance plan and a death benefit plan.
Management Incentive Compensation Plans
Holdings and the Company will establish an incentive compensation plan
that will provide a bonus to selected employees based on the participant's
base salary, target level, individual performance rating and organizational
performance rating and a plan that will allow key management employees with
base salaries of at least $80,000 to defer receipt of awards under the
incentive compensation plan that exceed $10,000.
Stock Option Plan
Holdings sponsors an option plan (the "Option Plan") for key employees
of Holdings and its subsidiaries, pursuant to which options to purchase an
aggregate of 14.0% of Holdings' fully-diluted Common Stock outstanding at
Closing will be granted (inclusive of the grants to Messrs. Lanza and
LaPenta, see below under "--Employment Agreements"). The compensation
committee of the Board of Directors of Holdings, in its sole discretion,
determines the terms of option agreements, including without limitation the
treatment of option grants in the event of a change of control.
Employment Agreements
Holdings entered into an employment agreement (the "Employment
Agreements") with each of Mr. Lanza, who will serve as Chairman and Chief
Executive Officer of the Company and Holdings and will receive a base salary
of $750,000 per annum and appropriate executive level benefits, and Mr.
LaPenta, who will serve as President and Chief Financial Officer of Holdings
and the Company and will receive a base salary of $500,000 per annum and
appropriate executive level benefits. The Employment Agreements provide for
an initial term of five years, which will automatically renew for one-year
periods thereafter, 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 (as defined) or resignation for good
reason (as defined), 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; provided, 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 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 Holdings pays the
severance described above.
Holdings has granted each of Messrs. Lanza and LaPenta (collectively,
the "Equity Executives") nonqualified options to purchase, at $6.47 per share
of Class A Common Stock, 5% of Holdings' initial fully-diluted common stock.
In each case, half of the options will be "Time Options" and half will be
"Performance Options" (collectively, the "Options"). The Time Options will
become exercisable with respect to 20% of the shares subject to the Time
Options on each of the first five anniversaries of the Closing if employment
continues through and including such date. The Performance Options will
become exercisable nine years after the Closing, but will become exercisable
earlier with respect to up to 20% of the shares subject to the Performance
Options on each of the first five anniversaries of the Closing, to the extent
certain EBITDA targets are achieved. The Options will become fully
exercisable under certain circumstances, including a change in control. The
Option term is ten years from the Closing; except that (i) if the Equity
Executive is fired for cause or resigns without good reason, the Options
expire upon termination of employment; (ii) if the Equity Executive is fired
without cause, resigns for good reason, dies, becomes disabled or retires,
the Options 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, Holdings may terminate the
Options, so long as the Equity Executives are cashed out or permitted to
exercise their Options prior to such change of control.
Puts/Calls. In the event that an Equity Executive (i) is terminated
without cause, (ii) resigns with good reason or (iii) retires (collectively,
a "Good Termination"), the Equity Executive will have the right to require
Holdings to, and Holdings will have the right to, purchase at the fair market
value per share a number of (A) shares purchased upon exercise of Options
("Option Shares") and (B) Class B Common Stock purchased at Closing
("Purchased Shares", and collectively with the Option Shares, the "Equity
Shares") equal to the product of (1) the total number of Equity Shares held
and (2) the Put/Call Percentage. The "Put/Call Percentage" will equal 75% at
any time prior to the first anniversary of the Closing and will be reduced by
15% on each anniversary of the Closing thereafter. In addition, in the event
of a Good Termination, the Equity Executive will have the right to require
Holdings to, and Holdings will have the right to, purchase, at the fair
market value per share less the exercise price per share, the number of
shares subject to exercisable Options in an amount equal to the product of
(i) the total number of shares subject to exercisable Options held and
(ii) the Put/Call Percentage.
Following the termination of an Equity Executive's employment due to
death or disability, the Equity Executive will have the right to require
Holdings to, and Holdings will have the right to, purchase all of (i) the
Equity Shares held by the Equity Executive at a per share price equal to the
fair market value per share and (ii) the shares subject to Options held by
the Equity Executive at the fair market value per share less the exercise
price per share. Notwithstanding the foregoing, in the event of the Equity
Executive's death, the Equity Executive's estate will have the right to
retain 20% of the Purchased Shares.
In the event that an Equity Executive is terminated with cause or quits
without good reason (a "Bad Termination"), Holdings will have the right to
purchase any (i) Option Shares at the lesser of (A) the Equity Executive's
cost and (B) fair market value and (ii) Purchased Shares at the lesser of
(A) the Equity Executive's cost plus interest and (B) fair market value. In
addition, in the event of a Bad Termination all Options will terminate
without payment. The Equity Executive will not have the right to put the
Equity Shares to Holdings in the event of a Bad Termination.
Notwithstanding the above, Holdings will not be required to purchase for
cash any Equity Shares or shares subject to Options if such purchase would be
or would result in a violation of the terms of its debt agreements or
applicable statutes. In addition, no such purchase for cash will occur if in
the reasonable opinion of the Board of Directors of Holdings (excluding the
Equity Executives) such purchase would be reasonably likely to materially
impact Holdings's available cash, require unsuitable additional debt to be
incurred or otherwise have a material adverse effect on the financial
condition of Holdings. If Holdings is unable to purchase any Equity Shares or
shares subject to Options for cash due to any of the above reasons, Holdings
will issue a subordinated note in the appropriate principal amount to the
Equity Executive or his estate, as the case may be.
OWNERSHIP OF CAPITAL STOCK
All of the outstanding capital stock of the Company is held by Holdings.
Class A Common Stock of Holdings ("Class A Common Stock") possesses full
voting rights and Class B Common Stock of Holdings ("Class B Common Stock")
and Class C Common Stock of Holdings ("Class C Common Stock" and, together
with Class A Common Stock and Class B Common Stock, "Common Stock") possess
no voting rights except as otherwise required by law. Each share of Class B
Common Stock will convert into a share of Class A Common Stock upon
consummation of an initial public offering of equity securities of Holdings
and certain other events and will convert into a share of Class C Common
Stock upon certain other events. As of the Closing, there were 17,000,000
shares of Class A Common Stock and 3,000,000 shares of Class B Common Stock
outstanding. The following table sets forth certain information regarding the
beneficial ownership of the shares of the Common Stock of Holdings, upon
consummation of the Transaction, by each person who beneficially owns more
than five percent of the outstanding shares of Common Stock of Holdings and
by the directors and certain executive officers of the Company, individually
and as a group.
Percentage
Class A Class B Ownership of
Name of Beneficial Owner Common Stock Common Stock Common Stock
------------------------------------------------------------- ------------------- ------------------- -------------------
Lehman Brothers Capital Partners III, L.P. and affiliates
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285 . . . . . . . . . . . . . . . . . 10,020,000 -- 50.1%
Lockheed Martin Corporation . . . . . . . . . . . . . . . . . 6,980,000 -- 34.9
Frank C. Lanza . . . . . . . . . . . . . . . . . . . . . . . -- 1,500,000 7.5
Robert V. LaPenta . . . . . . . . . . . . . . . . . . . . . . -- 1,500,000 7.5
All directors and executive officers as group (15 persons) . -- 3,000,000 15.0
DESCRIPTION OF SENIOR CREDIT FACILITIES
The Senior Credit Facilities have been provided by a syndicate of banks
and other financial institutions led by Lehman Commercial Paper Inc., as
Arranger and Syndication Agent. The Senior Credit Facilities provide for
$175.0 million in term loans (the "Term Loan Facilities") and for $100.0
million in revolving credit loans (the "Revolving Credit Facility"). The
Revolving Credit Facility includes borrowing capacity available for letters
of credit and for borrowings on same-day notice (the "Swingline Loans"). The
Term Loans are comprised of a Tranche A Term Loan ($100.0 million), which
have a maturity of six years, a Tranche B Term Loan ($45.0 million), which
have a maturity of eight years, and a Tranche C Term Loan ($30.0 million),
which have a maturity of nine years. The Revolving Credit Facility commitment
terminates six years after the date of initial funding of the Senior Credit
Facilities.
All borrowings under the Senior Credit Facilities bear interest, at the
Company's option, at either: (A) a "base rate" equal to, for any day, the
higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and
(b) the rate of interest in effect for such day as publicly announced from
time to time by Bank of America NT&SA, as Administrative Agent, in San
Francisco, California, as its "reference rate" plus (i) in the case of the
Tranche A Term Loan, the Revolving Credit Facility and the Swingline Loans, a
debt to EBITDA-dependent rate ranging from 0.50% to 1.25% per annum, (ii) in
the case of the Tranche B Term Loan, a rate of 1.50% per annum or (iii) in
the case of the Tranche C Term Loan, a rate of 1.75% per annum or (B) a
"LIBOR rate" equal to, for any Interest Period (as defined in the Senior
Credit Facilities), with respect to LIBOR Loans comprising part of the same
borrowing, the London interbank offered rate of interest per annum for such
Interest Period as determined by the Administrative Agent, plus (i) in the
case of the Tranche A Term Loan and the Revolving Credit Facility, a debt to
EBITDA-dependent rate ranging from 1.50% to 2.25% per annum, (ii) in the case
of the Tranche B Term Loan, a rate of 2.50% per annum or (iii) in the case of
the Tranche C Term Loan, a rate of 2.75% per annum.
The Company will pay a commitment fee calculated at a debt to
EBITDA-dependent rate ranging from 0.375% to 0.50% per annum of the available
unused commitment under the Revolving Credit Facility, in each case in effect
on each day. Such fee will be payable quarterly in arrears and upon
termination of the Revolving Credit Facility.
The Company will pay a letter of credit fee calculated at a debt to
EBITDA-dependent rate ranging from 1.50% to 2.25% per annum of the face
amount of each letter of credit and a fronting fee calculated at a rate equal
to 0.125% per annum of the face amount of each letter of credit. Such fees
will be payable quarterly in arrears and upon the termination of the
Revolving Credit Facility. In addition, the Company will pay customary
transaction charges in connection with any letters of credit.
The foregoing debt to EBITDA-dependent rates range from the low rate
specified if the ratio of debt to EBITDA is less than 3.75 to 1.0 to the high
rate specified if such ratio is at least equal to 4.75 to 1.0.
The Term Loans are subject to the following amortization schedule:
Tranche A Term Loan Tranche B Term Loan Tranche C Term Loan
------------------------- ------------------------- -------------------------
Year 1 . . . . . . . . . . . . . . . . . . $ 4,000,000 $ 500,000 $ 500,000
Year 2 . . . . . . . . . . . . . . . . . . 5,000,000 500,000 500,000
Year 3 . . . . . . . . . . . . . . . . . . 15,000,000 500,000 500,000
Year 4 . . . . . . . . . . . . . . . . . . 21,000,000 500,000 500,000
Year 5 . . . . . . . . . . . . . . . . . . 27,000,000 500,000 500,000
Year 6 . . . . . . . . . . . . . . . . . . 28,000,000 500,000 500,000
Year 7 . . . . . . . . . . . . . . . . . . -- 20,000,000 500,000
Year 8 . . . . . . . . . . . . . . . . . . -- 22,000,000 500,000
Year 9 . . . . . . . . . . . . . . . . . . -- -- 26,000,000
Borrowings under the Senior Credit Facilities is subject to mandatory
prepayment (i) with the net proceeds of any incurrence of indebtedness with
certain exceptions to be agreed, (ii) with the proceeds of certain asset
sales and (iii) on an annual basis with (A) 75% of the Company's excess cash
flow (as defined in the Senior Credit Facilities) if the ratio of the
Company's debt to EBITDA is greater than 3.5 to 1.0 or (B) 50% of such excess
cash flow if the ratio is less than 3.5 to 1.0.
The Company's obligations under the Senior Credit Facilities is secured
by a lien on substantially all of the tangible and intangible assets of
Holdings, the Company, and their direct and indirect subsidiaries, including:
(i) a pledge by Holdings of the stock of the Company and (ii) a pledge by the
Company and its direct and indirect subsidiaries of all of the stock of their
respective domestic subsidiaries and 65% of the stock of the Company's
first-tier foreign subsidiaries. In addition, indebtedness under the Senior
Credit Facilities is guaranteed by Holdings and by all of the Company's
direct and indirect domestic subsidiaries. See "Description of the Exchange
Notes--Subordination", "Risk Factors--Subordination".
The Senior Credit Facilities contain customary covenants and
restrictions on the Company's ability to engage in certain activities. In
addition, the Senior Credit Facilities provide that the Company must meet or
exceed certain interest coverage ratios and must not exceed a leverage ratio.
The Senior Credit Facilities also include customary events of default.
DESCRIPTION OF THE EXCHANGE NOTES
General
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under an indenture dated as of April 30, 1997 (the "Indenture")
between the Company, as issuer, and The Bank of New York, as trustee (the
"Trustee"). The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of the material provisions of the Indenture
describes the material terms of the Indenture but does not purport to be
complete and is subject to, and qualified in its entirety by reference to,
the provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to
the Trust Indenture Act. For definitions of certain capitalized terms used in
the following summary, see "--Certain Definitions". The Indenture is an
exhibit to the Registration Statement of which this Prospectus is a part.
On April 30, 1997, the Company issued $225.0 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain
transfer restrictions and registration and other rights relating to the
exchange of the Old Notes for Exchange Notes. The Trustee will authenticate
and deliver Exchange Notes for original issue only in exchange for a like
principal amount of Old Notes. Any Old Notes that remain outstanding after
the consummation of the Exchange Offer, together with the Exchange Notes,
will be treated as a single class of securities under the Indenture.
Accordingly, all references herein to specified percentages in aggregate
principal amount of the outstanding Exchange Notes shall be deemed to mean,
at any time after the Exchange Offer is consummated, such percentage in
aggregate principal amount of the Old Notes and Exchange Notes then
outstanding.
The Exchange Notes will be general unsecured obligations of the Company
and will be subordinated in right of payment to all current and future Senior
Debt. At December 31, 1996, on a pro forma basis giving effect to the
Acquisition and the initial borrowings under the Senior Credit Facilities,
the Company would have had Senior Debt of approximately $175.0 million
outstanding (excluding letters of credit). The Indenture will permit the
incurrence of additional Senior Debt in the future.
The Company will not have any Subsidiaries as of the Issue Date.
However, the Indenture will provide that the Company's payment obligations
under the Exchange Notes will be jointly and severally guaranteed (the
"Subsidiary Guarantees") by all of the Company's future Restricted
Subsidiaries, other than Foreign Subsidiaries (collectively, the
"Guarantors"). The Subsidiary Guarantee of each Guarantor will be
subordinated to the prior payment in full of all Senior Debt of such
Guarantor, which would include the guarantees of amounts borrowed under the
Senior Credit Facilities.
Principal, Maturity and Interest
The Exchange Notes will be limited in aggregate principal amount to
$225.0 million and will mature on May 1, 2007. Interest on the Exchange Notes
will accrue at the rate of 10 3/8% per annum and will be payable
semi-annually in arrears on May 1 and November 1, commencing on November 1,
1997, to Holders of record on the immediately preceding April 15 and October
15. Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date
of original issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Exchange Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or,
at the option of the Company, payment of interest may be made by check mailed
to the Holders of the Exchange Notes at their respective addresses set forth
in the register of Holders of Exchange Notes; provided that all payments of
principal, premium and interest with respect to Exchange Notes the Holders of
which have given wire transfer instructions to the Company will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof if such Holders shall be registered Holders
of at least $250,000 in principal amount of Exchange Notes. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. The Exchange Notes
will be issued in denominations of $1,000 and integral multiples thereof.
Optional Redemption
The Exchange Notes will not be redeemable at the Company's option prior
to May 1, 2002. Thereafter, the Exchange Notes will be subject to redemption
at any time at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest to the applicable redemption date, if redeemed during the
twelve-month period beginning on May 1 of the years indicated below:
Year Percentage
---------------------------------------- ----------------------
2002 . . . . . . . . . . . . . . . . . . 105.188%
2003 . . . . . . . . . . . . . . . . . . 103.458%
2004 . . . . . . . . . . . . . . . . . . 101.729%
2005 and thereafter . . . . . . . . . . . 100.000%
Notwithstanding the foregoing, during the first 36 months after the
Issue Date, the Company may on any one or more occasions redeem up to an
aggregate of 35% of the Exchange Notes originally issued at a redemption
price of 109.375% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date, with the net cash proceeds of one or more
Equity Offerings by the Company or the net cash proceeds of one or more
Equity Offerings by Holdings that are contributed to the Company as common
equity capital; provided that at least 65% of the Exchange Notes originally
issued remain outstanding immediately after the occurrence of each such
redemption; and provided, further, that any such redemption must occur within
120 days of the date of the closing of such Equity Offering.
Subordination
The payment of principal of, premium, if any, and interest on the
Exchange Notes will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property,
an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, the holders of Senior Debt will be entitled
to receive payment in full in cash of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Debt, whether or not an
allowable claim in any such proceeding) before the Holders of Exchange Notes
will be entitled to receive any payment with respect to the Exchange Notes,
and until all Obligations with respect to Senior Debt are paid in full, any
distribution to which the Holders of Exchange Notes would be entitled shall
be made to the holders of Senior Debt (except, in each case, that Holders of
Exchange Notes may receive Permitted Junior Securities and payments made from
the trust described under "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Exchange Notes (except from the trust described under "--Legal Defeasance and
Covenant Defeasance") if (i) a default in the payment of the principal of,
premium, if any, or interest on Designated Senior Debt occurs and is
continuing or (ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt as
to which such default relates to accelerate its maturity (or that would
permit such holders to accelerate with the giving of notice or the passage of
time or both) and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Company or the holders of any Designated Senior
Debt. Payments on the Exchange Notes may and shall be resumed (A) in the case
of a payment default, upon the date on which such default is cured or waived
and (B) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced unless and until (i) 360 days have elapsed since
the effectiveness of the immediately prior Payment Blockage Notice and
(ii) all scheduled payments of principal, premium, if any, and interest on
the Exchange Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
waived for a period of not less than 90 days.
The Indenture further requires that the Company promptly notify holders
of Senior Debt if payment of the Exchange Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the
event of a liquidation or insolvency, Holders of Exchange Notes may recover
less ratably than creditors of the Company who are holders of Senior Debt. On
a pro forma basis, after giving effect to the Acquisition and the initial
borrowing under the Senior Credit Facilities, the principal amount of Senior
Debt outstanding (excluding letters of credit) at December 31, 1996 would
have been approximately $175.0 million.
Selection and Notice
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Exchange Notes are listed, or, if the Exchange
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided that no Exchange Notes of
$1,000 or less shall be redeemed in part. Notices of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Exchange Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed.
A new Note in principal amount equal to the unredeemed portion thereof will
be issued in the name of the Holder thereof upon cancellation of the original
Note. Exchange Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Exchange Notes or portions of them called for redemption.
Mandatory Redemption
Except as set forth below under "--Repurchase at the Option of Holders",
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Exchange
Notes will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's
Exchange Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and
offering to repurchase Exchange Notes on the date specified in such notice,
which date shall be no earlier than 30 days and no later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Exchange Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Exchange Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent an amount equal to the Change of Control Payment in respect
of all Exchange Notes or portions thereof so tendered and (iii) deliver or
cause to be delivered to the Trustee the Exchange Notes so accepted together
with an Officers' Certificate stating the aggregate principal amount of
Exchange Notes or portions thereof being purchased by the Company. The Paying
Agent will promptly mail to each Holder of Exchange Notes so tendered the
Change of Control Payment for such Exchange Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion
of the Exchange Notes surrendered, if any; provided that each such new Note
will be in a principal amount of $1,000 or an integral multiple thereof.
The Indenture will provide that, prior to mailing a Change of Control
Offer, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or offer to repay all
Senior Debt and terminate all commitments thereunder of each lender who has
accepted such offer or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of
Exchange Notes required by this covenant. The Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except
as described above with respect to a Change of Control, the Indenture does
not contain provisions that permit the Holders of the Exchange Notes to
require that the Company repurchase or redeem the Exchange Notes in the event
of a takeover, recapitalization or similar transaction.
The Senior Credit Facilities will prohibit the Company from purchasing
any Exchange Notes, and also provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which the
Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Exchange Notes, the Company could seek the consent of its
lenders to the purchase of Exchange Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such
a consent or repay such borrowings, the Company will remain prohibited from
purchasing Exchange Notes. In such case, the Company's failure to purchase
tendered Exchange Notes would constitute an Event of Default under the
Indenture which would, in turn, constitute a default under the Senior Credit
Facilities. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Exchange Notes.
See "Risk Factors--Change of Control". Finally, the Company's ability to pay
cash to the holders of Notes upon a purchase may be limited by the Company's
then-existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required purchases. Even
if sufficient funds were otherwise available, the terms of the Senior Credit
Facilities will prohibit, subject to certain exceptions, the Company's
prepayment of Notes prior to their scheduled maturity. Consequently, if the
Company is not able to prepay indebtedness outstanding under the Senior
Credit Facilities and any other Senior Indebtedness containing similar
restrictions or obtain requisite consents, the Company will be unable to
fulfill its repurchase obligations if holders of Notes exercise their
purchase rights following a Change of Control, thereby resulting in a default
under the Indenture. Furthermore, the Change of Control provisions may in
certain circumstances make more difficult or discourage a takeover of the
Company.
The Company will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Exchange Notes validly tendered and not withdrawn
under such Change of Control Offer.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related transactions,
of all or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) other than the Principals or their
Related Parties (as defined below), (ii) the adoption of a plan relating to
the liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly, of more than 50% of the Voting Stock of the Company
(measured by voting power rather than number of shares) or (iv) the first day
on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Principals" means any Lehman Investor, Lockheed Martin Corporation,
Frank C. Lanza and Robert V. LaPenta.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 50% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding a more than 50% controlling
interest of which consist of such Principal and/or such other Persons
referred to in the immediately preceding clause (i).
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
With respect to the disposition of assets, the phrase "all or
substantially all" as used in the Indenture varies according to the facts and
circumstances of the subject transaction and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree
of uncertainty in ascertaining whether a particular transaction would involve
a disposition of "all or substantially all" of the assets of the Company.
Asset Sales
The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(i) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 80% of
the consideration therefor received by the Company or such Restricted
Subsidiary, as the case may be, consists of cash, Cash Equivalents and/or
Marketable Securities; provided, however, that (A) the amount of any Senior
Debt of the Company or such Restricted Subsidiary that is assumed by the
transferee in any such transaction and (B) any consideration received by the
Company or such Restricted Subsidiary, as the case may be, that consists of
(1) all or substantially all of the assets of one or more Similar Businesses,
(2) other long-term assets that are used or useful in one or more Similar
Businesses and (3) Permitted Securities shall be deemed to be cash for
purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, the Company may apply such Net Proceeds, at its option, (i) to repay
Indebtedness under a Credit Facility, or (ii) to the acquisition of Permitted
Securities, all or substantially all of the assets of one or more Similar
Businesses, or the making of a capital expenditure or the acquisition of
other long-term assets in a Similar Business. Pending the final application
of any such Net Proceeds, the Company may temporarily reduce Indebtedness
under a Credit Facility or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales
that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds". When the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will be required
to make an offer to all Holders of Exchange Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Exchange Notes that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to
100% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase, in accordance
with the procedures set forth in the Indenture. To the extent that the
aggregate amount of Exchange Notes tendered pursuant to an Asset Sale Offer
is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Exchange Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Exchange Notes to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero.
The Senior Credit Facilities will substantially limit the Company's
ability to purchase subordinated Indebtedness, including the Exchange Notes.
Any future credit agreements relating to Senior Debt may contain similar
restrictions. See "Description of Senior Credit Facilities".
Certain Covenants
Restricted Payments
The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or distribution on
account of the Company's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation involving the Company) or to the direct or indirect
holders of the Company's or any of its Restricted Subsidiaries' Equity
Interests in their capacity as such (other than (A) dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or (B) dividends or distributions by a Restricted Subsidiary so
long as, in the case of any dividend or distribution payable on or in respect
of any class or series of securities issued by a Restricted Subsidiary other
than a Wholly Owned Restricted Subsidiary, the Company or a Restricted
Subsidiary receives at least its pro rata share of such dividend or
distribution in accordance with its Equity Interests in such class or series
of securities); (ii) purchase, redeem or otherwise acquire or retire for
value (including without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company; (iii) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is subordinated to the Exchange Notes except
a payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under caption "Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (ii) through (vii) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net
Income of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the
Issue Date to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of
the aggregate net cash proceeds received by the Company from a
contribution to its common equity capital or the issue or sale since the
Issue Date of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that
have been converted into such Equity Interests (other than Equity
Interests (or Disqualified Stock or convertible debt securities) sold to
a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the amount of cash received in connection therewith (or
from the sale of Marketable Securities received in connection
therewith), plus (iv) to the extent not already included in such
Consolidated Net Income of the Company for such period and without
duplication, (A) 100% of the aggregate amount of cash received as a
dividend from an Unrestricted Subsidiary, (B) 100% of the cash received
upon the sale of Marketable Securities received as a dividend from an
Unrestricted Subsidiary, and (C) 100% of the net assets of any
Unrestricted Subsidiary on the date that it becomes a Restricted
Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the
date of declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance
or other acquisition of any subordinated Indebtedness or Equity
Interests of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of, other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c) (ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other
acquisition of subordinated Indebtedness (other than intercompany
Indebtedness) in exchange for, or with the net cash proceeds from an
incurrence of, Permitted Refinancing Indebtedness;
(iv) the repurchase, retirement or other acquisition or
retirement for value of common Equity Interests of the Company or
Holdings held by any future, present or former employee, director or
consultant of the Company or any Subsidiary or Holdings issued pursuant
to any management equity plan or stock option plan or any other
management or employee benefit plan or agreement; provided, however,
that the aggregate amount of Restricted Payments made under this clause
(iv) does not exceed $1.5 million in any calendar year and provided
further that cancellation of Indebtedness owing to the Company from
members of management of the Company or any of its Restricted
Subsidiaries in connection with a repurchase of Equity Interests of the
Company will not be deemed to constitute a Restricted Payment for
purposes of this covenant or any other provision of the Indenture;
(v) repurchases of Equity Interests deemed to occur upon
exercise of stock options upon surrender of Equity Interests to pay the
exercise price of such options;
(vi) payments to Holdings (A) in amounts equal to the
amounts required for Holdings to pay franchise taxes and other fees
required to maintain its legal existence and provide for other operating
costs of up to $500,000 per fiscal year and (B) in amounts equal to
amounts required for Holdings to pay federal, state and local income
taxes to the extent such income taxes are actually due and owing;
provided that the aggregate amount paid under this clause (B) does not
exceed the amount that the Company would be required to pay in respect
of the income of the Company and its Subsidiaries if the Company were a
stand alone entity that was not owned by Holdings; and
(vii) other Restricted Payments in an aggregate amount
since the Issue Date not to exceed $20.0 million.
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not
cause a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments
at the time of such designation. Such designation will only be permitted if
such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered
to the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which
the calculations required by the covenant "Restricted Payments" were
computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue
any Disqualified Stock and will not permit any of its Subsidiaries to issue
any shares of preferred stock; provided, however, that the Company and any
Restricted Subsidiary may incur Indebtedness (including Acquired Debt) or
issue shares of preferred stock if the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such preferred stock is issued
would have been at least 2.0 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the preferred stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The forgoing limitation will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company of term Indebtedness
under Credit Facilities (and the guarantee thereof by the Guarantors);
provided that the aggregate principal amount of all term Indebtedness
outstanding under all Credit Facilities after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (i), does not exceed an amount equal to $175.0 million less
the aggregate amount of all repayments, optional or mandatory, of the
principal of any Indebtedness under a Credit Facility (or any such
Permitted Refinancing Indebtedness) that have been made since the Issue
Date;
(ii) the incurrence by the Company of revolving credit
Indebtedness and letters of credit (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of
the Company and its Restricted Subsidiaries thereunder) under Credit
Facilities (and the guarantee thereof by the Guarantors); provided that
the aggregate principal amount of all revolving credit Indebtedness
outstanding under all Credit Facilities after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (ii), does not exceed an amount equal to $100.0 million less
the aggregate amount of all Net Proceeds of Asset Sales applied to repay
any such Indebtedness (including any such Permitted Refinancing
Indebtedness) pursuant to the covenant described above under the caption
"--Asset Sales";
(iii) the incurrence by the Company and its Restricted
Subsidiaries of the Existing Indebtedness;
(iv) the incurrence by the Company and the Guarantors of
the Exchange Notes and the Subsidiary Guarantees;
(v) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness represented by Capital Lease
Obligations, mortgage financings or purchase money obligations, in each
case incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property, plant
or equipment used in the business of the Company or such Restricted
Subsidiary, in an aggregate principal amount, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
other Indebtedness incurred pursuant to this clause (v), not to exceed
$30.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness in connection with the
acquisition of assets or a new Restricted Subsidiary; provided that such
Indebtedness was incurred by the prior owner of such assets or such
Restricted Subsidiary prior to such acquisition by the Company or one of
its Restricted Subsidiaries and was not incurred in connection with, or
in contemplation of, such acquisition by the Company or one of its
Restricted Subsidiaries; and provided further that the principal amount
(or accreted value, as applicable) of such Indebtedness, together with
any other outstanding Indebtedness incurred pursuant to this clause
(vi), does not exceed $10.0 million;
(vii) the incurrence by the Company or any of its
Restricted Subsidiaries of Permitted Refinancing Indebtedness in
exchange for, or the net proceeds of which are used to refund, refinance
or replace, Indebtedness that was permitted by the Indenture to be
incurred;
(viii) Indebtedness incurred by the Company or any of its
Restricted Subsidiaries constituting reimbursement obligations with
respect to letters of credit issued in the ordinary course of business
in respect of workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims; provided, however, that upon the drawing
of such letters of credit or the incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
incurrence;
(ix) Indebtedness arising from agreements of the Company
or a Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed
in connection with the disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary
for the purpose of financing such acquisition; provided, however, that
(A) such Indebtedness is not reflected on the balance sheet of the
Company or any Restricted Subsidiary (contingent obligations referred to
in a footnote to financial statements and not otherwise reflected on the
balance sheet will not be deemed to be reflected on such balance sheet
for purposes of this clause (A)) and (B) the maximum assumable liability
in respect of all such Indebtedness shall at no time exceed the gross
proceeds including noncash proceeds (the fair market value of such
noncash proceeds being measured at the time received and without giving
effect to any subsequent changes in value) actually received by the
Company and its Restricted Subsidiaries in connection with such
disposition;
(x) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among
the Company and any of its Restricted Subsidiaries; provided, however,
that (A) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the Exchange Notes and
(B)(1) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or one of its Restricted Subsidiaries and (2) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or one of its Restricted Subsidiaries shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or
such Restricted Subsidiary, as the case may be;
(xi) the incurrence by the Company or any of the
Guarantors of Hedging Obligations that are incurred for the purpose of
(A) fixing, hedging or capping interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding or (B) protecting the Company and its
Restricted Subsidiaries against changes in currency exchange rates;
(xii) the guarantee by the Company or any of the
Guarantors of Indebtedness of the Company or a Restricted Subsidiary of
the Company that was permitted to be incurred by another provision of
this covenant;
(xiii) the incurrence by the Company's Unrestricted
Subsidiaries of Non-Recourse Debt, provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted
Subsidiary, such event shall be deemed to constitute an incurrence of
Indebtedness by a Restricted Subsidiary of the Company that was not
permitted by this clause (xiii), and the issuance of preferred stock by
Unrestricted Subsidiaries;
(xiv) obligations in respect of performance and surety
bonds and completion guarantees provided by the Company or any
Restricted Subsidiaries in the ordinary course of business; and
(xv) the incurrence by the Company or any of its
Restricted Subsidiaries of additional Indebtedness in an aggregate
principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any other Indebtedness incurred pursuant
to this clause (xv), not to exceed $50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xv) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant. Accrual of interest, the
accretion of accreted value and the payment of interest in the form of
additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
Liens
The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien securing Indebtedness on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign
or convey any right to receive income therefrom, except Permitted Liens.
Antilayering Provision
The Indenture will provide that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that
is subordinate or junior in right of payment to any Senior Debt and senior in
any respect in right of payment to the Exchange Notes, and (ii) no Guarantor
will incur, create, issue, assume, guarantee or otherwise become liable for
any Indebtedness that is subordinate or junior in right of payment to any
Senior Debt of a Guarantor and senior in any respect in right of payment to
any of the Subsidiary Guarantees.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(A) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (B) pay
any indebtedness owed to the Company or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or (iii) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (A) the provisions of security
agreements that restrict the transfer of assets that are subject to a Lien
created by such security agreements, (B) the provisions of agreements
governing Indebtedness incurred pursuant to clause (v) of the second
paragraph of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock, (C) the Indenture and the
Exchange Notes, (D) applicable law, (E) any instrument governing Indebtedness
or Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the
extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (F) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (G) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired,
(H) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (I) contracts for the sale of assets,
including, without limitation, customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale
or disposition of all or substantially all of the Capital Stock or assets of
such Subsidiary, (J) agreements relating to secured Indebtedness otherwise
permitted to be incurred pursuant to the covenants described under
"Limitations on Incurrence of Indebtedness and Issuance of Preferred Stock"
and "Liens" that limit the right of the debtor to dispose of the assets
securing such Indebtedness, (K) restrictions on cash or other deposits or net
worth imposed by customers under contracts entered into in the ordinary
course of business, or (L) customary provisions in joint venture agreements
and other similar agreements entered into in the ordinary course of business.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Exchange Notes and
the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger
of the Company with or into a Wholly Owned Restricted Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made, after giving pro forma effect to such transaction as if such
transaction had occurred at the beginning of the most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding such transaction either (A) would be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock" or (B) would have a pro forma Fixed Charge Coverage Ratio
that is greater than the actual Fixed Charge Coverage Ratio for the same
four-quarter period without giving pro forma effect to such transaction.
Notwithstanding the foregoing clause (iv), (i) any Restricted Subsidiary
may consolidate with, merge into or transfer all or part of its properties
and assets to the Company and (ii) the Company may merge with an Affiliate
that has no significant assets or liabilities and was incorporated solely for
the purpose of reincorporating the Company in another State of the United
States so long as the amount of Indebtedness of the Company and its
Restricted Subsidiaries is not increased thereby.
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to,
or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (A) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $3.0 million, a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (B) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
The foregoing provisions will not prohibit: (i) any employment agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business; (ii) any transaction with a Lehman Investor;
(iii) any transaction between or among the Company and/or its Restricted
Subsidiaries; (iv) transactions between the Company or any of its Restricted
Subsidiaries, on the one hand, and Lockheed Martin or any of its
Subsidiaries, on the other hand, on terms that are not materially less
favorable to the Company or the applicable Restricted Subsidiary of the
Company than those that could have been obtained from an unaffiliated third
party; provided that (A) in the case of any such transaction or series of
related transactions pursuant to this clause (iv) involving aggregate
consideration in excess of $1.0 million but less than $25.0 million, such
transaction or series of transactions (or the agreement pursuant to which the
transactions were executed) was approved by the Company's Chief Executive
Officer or Chief Financial Officer and (B) in the case of any such
transaction or series of related transactions pursuant to this clause
(iv) involving aggregate consideration equal to or in excess of $25.0
million, such transaction or series of related transactions (or the agreement
pursuant to which the transactions were executed) was approved by a majority
of the disinterested members of the Board of Directors; (v) any transaction
pursuant to and in accordance with the provisions of the Transaction
Documents as the same are in effect on the Issue Date; and (vi) any
Restricted Payment that is permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments".
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Exchange Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the Exchange
Notes unless such consideration is offered to be paid or is paid to all
Holders of the Exchange Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture will provide that, whether or not required by the rules
and regulations of the Securities and Exchange Commission (the "Commission"),
so long as any Exchange Notes are outstanding, the Company will furnish to
the Holders of Exchange Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of the Company and its consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial statements
or in the footnotes thereto and in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the financial condition and
results of operations of the Company and its Restricted Subsidiaries
separately from the financial condition and results of operations of the
Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the Commission's
rules and regulations. In addition, whether or not required by the rules and
regulations of the Commission, following the consummation of the Exchange
Offer contemplated by the Registration Rights Agreement, the Company will
file a copy of all such information and reports with the Commission for
public availability within the time periods set forth in the Commission's
rules and regulations (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and the Subsidiary
Guarantors have agreed that, for so long as any Old Notes remain outstanding
and are required to bear the transfer restriction legend, they will furnish
to the Holders and to securities analysts and prospective investors, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
Future Subsidiary Guarantees
The Company will not have any Subsidiaries as of the Issue Date.
However, the Company's payment obligations under the Exchange Notes will be
jointly and severally guaranteed by all of the Company's future Restricted
Subsidiaries, other than Foreign Subsidiaries. The Indenture will provide
that if the Company or any of its Subsidiaries shall acquire or create a
Subsidiary (other than a Foreign Subsidiary or an Unrestricted Subsidiary)
after the Issue Date, then such Subsidiary shall execute a Subsidiary
Guarantee and deliver an opinion of counsel, in accordance with the terms of
the Indenture. The Subsidiary Guarantee of each Guarantor will be
subordinated to the prior payment in full of all Senior Debt of such
Guarantor, which would include the guarantees of amounts borrowed under the
Senior Credit Facilities. The obligations of each Guarantor under its
Subsidiary Guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable law.
The Indenture will provide that no Guarantor may consolidate with or
merge with or into (whether or not such Guarantor is the surviving Person)
another Person (except the Company or another Guarantor) unless (i) subject
to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Guarantor) or
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of such
Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the Exchange Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; and (iii) the Company (A) would be
permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock" or (B) would have a pro forma
Fixed Charge Coverage Ratio that is greater than the actual Fixed Charge
Coverage Ratio for the same four-quarter period without giving pro forma
effect to such transaction.
Notwithstanding the foregoing paragraph, (i) any Guarantor may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (ii) any Guarantor may merge with an Affiliate that
has no significant assets or liabilities and was incorporated solely for the
purpose of reincorporating such Guarantor in another State of the United
States so long as the amount of Indebtedness of the Company and its
Restricted Subsidiaries is not increased thereby.
The Indenture will provide that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale
or other disposition, by way of such a merger, consolidation or otherwise, of
all of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "Redemption or Repurchase at Option of Holders--Asset Sales".
Events of Default and Remedies
The Indenture will provide that each of the following constitutes an
Event of Default: (i) default for 30 days in the payment when due of interest
on, or Liquidated Damages with respect to, the Exchange Notes (whether or not
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Exchange
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (iii) failure by the Company to comply with the provisions
described under the captions "--Change of Control", "--Asset Sales" or "--
Merger, Consolidation or Sale of Assets"; (iv) failure by the Company for 60
days after notice to comply with any of its other agreements in the Indenture
or the Exchange Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the Issue Date, which default results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness the maturity of which has
been so accelerated, aggregates $10.0 million or more; (vi) failure by the
Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $10.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries; and (viii) except as permitted by the Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Exchange
Notes may declare all the Exchange Notes to be due and payable immediately;
provided, however, that so long as any Designated Senior Debt is outstanding,
such declaration shall not become effective until the earlier of (i) the day
which is five Business Days after receipt by the Representatives of
Designated Senior Debt of such notice of acceleration or (ii) the date of
acceleration of any Designated Senior Debt. Notwithstanding the foregoing, in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company or any Restricted Subsidiary, all
outstanding Exchange Notes will become due and payable without further action
or notice. Holders of the Exchange Notes may not enforce the Indenture or the
Exchange Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then
outstanding Exchange Notes may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Holders of the Exchange Notes
notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Exchange Notes
pursuant to the optional redemption provisions of the Indenture, an
equivalent premium shall also become and be immediately due and payable to
the extent permitted by law upon the acceleration of the Exchange Notes. If
an Event of Default occurs prior to May 1, 2002 by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding the prohibition on redemption of the Exchange Notes
prior to May 1, 2002, then the premium specified in the Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the Exchange Notes.
The Holders of a majority in aggregate principal amount of the Exchange
Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Exchange Notes waive any existing Default or Event of Default
and its consequences under the Indenture except a continuing Default or Event
of Default in the payment of interest on, or the principal of, the Exchange
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee
a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Exchange Notes and the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder
of Exchange Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the
Exchange Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Exchange
Notes to receive payments in respect of the principal of, premium, if any,
and interest and Liquidated Damages on such Exchange Notes when such payments
are due from the trust referred to below, (ii) the Company's obligations with
respect to the Exchange Notes concerning issuing temporary Exchange Notes,
registration of Exchange Notes, mutilated, destroyed, lost or stolen Exchange
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Exchange Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events
of Default" will no longer constitute an Event of Default with respect to the
Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Exchange Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages on the outstanding Exchange Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Exchange Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the Issue Date, there has been
a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Exchange Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Exchange Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will
not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Exchange Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Note selected for redemption. Also, the Company is not required
to transfer or exchange any Note for a period of 15 days before a selection
of Exchange Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for
all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture
or the Exchange Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Exchange Notes then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Exchange Notes),
and any existing default or compliance with any provision of the Indenture or
the Exchange Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Exchange Notes
(including consents obtained in connection with a tender offer or exchange
offer for Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Exchange Notes held by a non-consenting Holder):
(i) reduce the principal amount of Exchange Notes whose Holders must consent
to an amendment, supplement or waiver, (ii) reduce the principal of or change
the fixed maturity of any Note or alter the provisions with respect to the
redemption of the Exchange Notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of
interest on any Note, (iv) waive a Default or Event of Default in the payment
of principal of or premium, if any, or interest on the Exchange Notes (except
a rescission of acceleration of the Exchange Notes by the Holders of at least
a majority in aggregate principal amount of the Exchange Notes and a waiver
of the payment default that resulted from such acceleration), (v) make any
Note payable in money other than that stated in the Exchange Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Exchange Notes to receive payments of
principal of or premium, if any, or interest on the Exchange Notes,
(vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relates to subordination)
will require the consent of the Holders of at least 75% in aggregate
principal amount of the Exchange Notes then outstanding if such amendment
would adversely affect the rights of Holders of Exchange Notes.
Notwithstanding the foregoing, without the consent of any Holder of
Exchange Notes, the Company and the Trustee may amend or supplement the
Indenture or the Exchange Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Exchange Notes in addition to or
in place of certificated Exchange Notes, to provide for the assumption of the
Company's obligations to Holders of Exchange Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Exchange Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event
of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions,
the Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request of any Holder of Exchange Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
Book-Entry, Delivery and Form
The certificates representing the Exchange Notes will be issued in fully
registered form and will be deposited with the Trustee as custodian for The
Depository Trust Company, New York, New York (The "Depository"), and
registered in the name of a nominee of the Depository.
Depository Procedures
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its
participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of
Participants. The Participants include securities brokers and dealers
(including the Initial Purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to the Depository's
system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly (collectively, "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of the Depository only through the
Participants or Indirect Participants. The ownership interest and transfer of
ownership interest of each actual purchaser of each security held by or on
behalf of the Depository are recorded on the records of the Participants and
Indirect Participants.
The Depository has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Exchange Notes, the
Depository will credit the accounts of Participants designated by the Initial
Purchasers with portions of the principal amount of Global Exchange Notes and
(ii) ownership of such interests in the Global Exchange Notes will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depository (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Exchange Notes).
Investors in the Global Note may hold their interests therein directly
through the Depository, if they are Participants in such system, or
indirectly through organizations (including Euroclear and CEDEL) that are
Participants in such system. Investors in the Regulation S Global Note may
hold their interests therein through Euroclear or CEDEL, if they are
participants in such systems, or indirectly through organizations that are
participants in such systems or in the Depository system. Euroclear and CEDEL
will hold interests in the Regulation S Global Note on behalf of their
Participants through customers' securities accounts in their respective names
on the books of their respective depositories, which are Morgan Guaranty
Trust Company of New York, Brussels office, as operator of Euroclear, and
Citibank, N.A. as operator of CEDEL. The depositories, in turn, will hold
such interests in the Regulation S Global Note in customers' securities
accounts in the depositories' names on the books of the Depository. All
interests in a Global Note, including those held through Euroclear or CEDEL,
may be subject to the procedures and requirements of the Depository. Those
interests held by Euroclear or CEDEL may also be subject to the procedures
and requirements of such system.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interest in a Global Note to such persons may
be limited to that extent. Because the Depository can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and
certain banks, the ability of a person having a beneficial interest in a
Global Note to pledge such interest to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such interests, may be affected by the lack of physical certificate
evidencing such interests. For certain other restrictions on the
transferability of the Exchange Notes see, "--Exchange of Book-Entry Exchange
Notes for Certificated Exchange Notes".
Except as described below, owners of interests in the Global Exchange
Notes will not have Exchange Notes registered in their names, will not
receive physical delivery of Exchange Notes in certificated form and will not
be considered the registered owners or Holders thereof under the Indenture
for any purpose.
Payments in respect of the principal and premium and interest on a
Global Note registered in the name of the Depository or its nominee will be
payable by the Trustee to the Depository or its nominee in its capacity as
the registered Holder under the Indenture. Under the terms of the Indenture,
the Company and the Trustee will treat the persons in whose names the
Exchange Notes, including the Global Exchange Notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the Company, the Trustee nor
any agent of the Company or the Trustee has or will have any responsibility
or liability for (i) any aspect of the Depository's records or any
Participant's or Indirect Participant's records relating to or payments made
on account of beneficial ownership interests in the Global Exchange Notes, or
for maintaining, supervising or reviewing any of the Depository's records or
any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Exchange Notes or (ii) any other
matter relating to the actions and practices of the Depository or any of its
Participants or Indirect Participants.
The Depository has advised the Company that its current practices, upon
receipt of any payment in respect of securities such as the Exchange Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate
to their respective holdings in principal amount of beneficial interests in
the relevant security such as the Global Exchange Notes as shown on the
records of the Depository. Payments by Participants and the Indirect
Participants to the beneficial owners of Exchange Notes will be governed by
standing instructions and customary practices and will not be the
responsibility of the Depository, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by the Depository or its
Participants in identifying the beneficial owners of the Exchange Notes, and
the Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from the Depository or its nominee as the registered
owner of the Exchange Notes for all purposes.
Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Exchange Notes will trade in the Depository's
Same-Day Funds Settlement System and secondary market trading activity in
such interests will, therefore, settle in immediately available funds,
subject in all cases to the rules and procedures of the Depository and its
participants.
Transfers between Participants in the Depository will be effected in
accordance with the Depository's procedures, and will be settled in same-day
funds. Transfers between participants in Euroclear and CEDEL will be effected
in the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the
Exchange Notes described herein, crossmarket transfers between Participants
in the Depository, on the one hand, and Euroclear or CEDEL participants, on
the other hand, will be effected through the Depository in accordance with
the Depository's rules on behalf of Euroclear or CEDEL, as the case may be,
by its respective depository; however, such cross-market transactions will
require delivery of instructions to Euroclear or CEDEL, as the case may be,
by the counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time) of such
system. Euroclear or CEDEL, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in the
Depository, and making or receiving payment in accordance with normal
procedures for same-day fund settlement applicable to the Depository.
Euroclear participants and CEDEL participants may not deliver instructions
directly to the Depositaries for Euroclear or CEDEL.
Because of time zone differences, the securities accounts of a Euroclear
or CEDEL participant purchasing an interest in a Global Note from a
Participant in the Depository will be credited, and any such crediting will
be reported to the relevant Euroclear or CEDEL participant, during the
securities settlement processing day (which must be a business day for
Euroclear or CEDEL) immediately following the settlement date of the
Depository. Cash received in Euroclear or CEDEL as a result of sales of
interests in a Global Note by or through a Euroclear or CEDEL participant to
a Participant in the Depository will be received with value on the settlement
date of the Depository but will be available in the relevant Euroclear or
CEDEL cash account only as of the business day for Euroclear or CEDEL
following the Depository's settlement date.
The Depository has advised the Company that it will take any action
permitted to be taken by a Holder of Exchange Notes only at the direction of
one or more Participants to whose account the Depository interests in the
Global Exchange Notes are credited and only in respect of such portion of the
aggregate principal amount of the Exchange Notes as to which such Participant
or Participants has or have given direction. However, if there is an Event of
Default under the Exchange Notes, the Depository reserves the right to
exchange Global Exchange Notes for legended Exchange Notes in certificated
form, and to distribute such Exchange Notes to its Participants.
The information in this section concerning the Depository, Euroclear and
CEDEL and their book-entry systems has been obtained from sources that the
Company believes to be reliable, but the Company takes no responsibility for
the accuracy thereof.
Although the Depository, Euroclear and CEDEL have agreed to the
foregoing procedures to facilitate transfers of interests in the Global Note
among participants in the Depository, Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchasers or the Trustee will have any responsibility for the performance by
the Depository, Euroclear or CEDEL or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Exchange of Book-Entry Exchange Notes for Certificated Exchange Notes
A Global Note is exchangeable for definitive Exchange Notes in
registered certificated form if (i) the Depository (A) notifies the Company
that it is unwilling or unable to continue as depository for the Global Note
and the Company thereupon fails to appoint a successor depository or (B) has
ceased to be a clearing agency registered under the Exchange Act or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause issuance of the Exchange Notes in certificated form. In addition,
beneficial interests in a Global Note may be exchanged for certificated
Exchange Notes upon request but only upon at least 20 days prior written
notice given to the Trustee by or on behalf of the Depository in accordance
with customary procedures. In all cases, certificated Exchange Notes
delivered in exchange for any Global Note or beneficial interest therein will
be registered in names, and issued in any approved denominations, requested
by or on behalf of the Depository (in accordance with its customary
procedures).
Certificated Exchange Notes
Subject to certain conditions, any person having a beneficial interest
in the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Exchange Notes in the form of certificated Exchange Notes. Upon
any such issuance, the Trustee is required to register such certificated
Exchange Notes in the name of, and cause the same to be delivered to, such
person or persons (or the nominee of any thereof). In addition, if (i) the
Company notifies the Trustee in writing that the Depository is no longer
willing or able to act as a depository and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of
Exchange Notes in the form of certificated Exchange Notes under the
Indenture, then, upon surrender by the Global Note Holder of its Global Note,
Exchange Notes in such form will be issued to each person that the Global
Note Holder and the Depository identify as being the beneficial owner of the
related Exchange Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
Exchange Notes and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Note Holder or
the Depository for all purposes.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the Exchange
Notes represented by the Global Note (including principal, premium, if any,
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to certificated
Exchange Notes, the Company will make all payments of principal, premium, if
any, and interest by wire transfer of immediately available funds to the
accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address. The
Company expects that secondary trading in the certificated Exchange Notes
will also be settled in immediately available funds.
Registration Rights; Liquidated Damages
The Company and the Initial Purchasers entered into the Registration
Rights Agreement on the Issue Date. Pursuant to the Registration Rights
Agreement, the Company agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the Exchange Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for Exchange Notes. If (i) the Company is not required to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or
(C) that it is a broker-dealer and owns Old Notes acquired directly from the
Company or an affiliate of the Company, the Company will file with the
Commission a Shelf Registration Statement to cover resales of the Exchange
Notes by the Holders thereof who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
The Company will use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Old Note until (i) the date on which such Old Note has been exchanged by a
person other than a broker-dealer for an Exchange Note in the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of an
Old Note for an Exchange Note, the date on which such Exchange Note is sold
to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Old Note
is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will
file an Exchange Offer Registration Statement with the Commission on or prior
to 90 days after the Issue Date, (ii) the Company will use its best efforts
to have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 150 days after the Issue Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New
Exchange Notes in exchange for all Exchange Notes tendered prior thereto in
the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, the Company will use its best efforts to file the Shelf
Registration Statement with the Commission on or prior to 30 days after such
filing obligation arises and to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to 90 days after such
obligation arises. If (A) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the
date specified above for such filing, (B) any of such Registration Statements
is not declared effective by the Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target Date"), (C) the Company
fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (D) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (A) through (D) above a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of Old
Notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of Old Notes held by such Holder. The amount
of the Liquidated Damages will increase by an additional $.05 per week per
$1,000 principal amount of Old Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages of $.50 per week per $1,000 principal amount of
Old Notes. All accrued Liquidated Damages will be paid by the Company on each
Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
certificated Old Notes by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
of any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company
and its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (A) that have a fair market
value in excess of $1.0 million or (B) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Restricted Subsidiary or by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary, (ii) an issuance of Equity
Interests by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (iii) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments" and (iv) a
disposition of Cash Equivalents in the ordinary course of business will not
be deemed to be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance with
GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not
exceeding six months and overnight bank deposits, in each case with any
domestic financial institution to the Senior Credit Facilities or with any
domestic commercial bank having capital and surplus in excess of $500.0
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's or S&P's and in each case maturing within six months after the date
of acquisition, (vi) investment funds investing 95% of their assets in
securities of the types described in clauses (i)-(v) above, and (vii) readily
marketable direct obligations issued by any State of the United States of
America or any political subdivision thereof having maturities of not more
than one year from the date of acquisition and having one of the two highest
rating categories obtainable from either Moody's or S&P.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus
(i) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale (to the extent such losses were deducted in
computing such Consolidated Net Income), plus (ii) provision for taxes based
on income or profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of
such Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus
(iv) depreciation, amortization (including amortization of goodwill, debt
issuance costs and other intangibles but excluding amortization of other
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Restricted Subsidiaries for such period to the extent
that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof that is a Guarantor, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends
or similar distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded, (iv) the cumulative effect of a
change in accounting principles shall be excluded, (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries, and (vi) the Net Income of any
Restricted Subsidiary shall be calculated after deducting preferred stock
dividends payable by such Restricted Subsidiary to Persons other than the
Company and its other Restricted Subsidiaries.
"Consolidated Net Tangible Assets" means, as of any date of
determination, shareholders' equity of the Company and its Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP,
less goodwill and other intangibles (other than patents, trademarks,
licenses, copyrights and other intellectual property and prepaid assets).
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under
the Senior Credit Facilities and (ii) any other Senior Debt permitted under
the Indenture the principal amount of which is $25.0 million or more and that
has been designated by the Company as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the date that is 91 days after the date
on which the Exchange Notes mature; provided, however, that if such Capital
Stock is issued to any plan for the benefit of employees of the Company or
its Subsidiaries or by any such plan to such employees, such Capital Stock
shall not constitute Disqualified Stock solely because it may be required to
be repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that
is convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company or Holdings, other than any
private sales to an Affiliate of the Company or Holdings.
"Existing Indebtedness" means any Indebtedness of the Company (other
than Indebtedness under the Senior Credit Facilities and the Exchange Notes)
in existence on the Issue Date, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the
sum, without duplication, of (i) the consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, original issue discount, non-cash
interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations, but excluding amortization of debt issuance
costs) and (ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is guaranteed by such Person
or one of its Restricted Subsidiaries or secured by a Lien on assets of such
Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (A) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, other than dividend payments on Equity
Interests payable solely in Equity Interests of the Company, times (B) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, in each case, on a consolidated basis
and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person and its Restricted Subsidiaries
for such period. In the event that the Company or any of its Restricted
Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other
than revolving credit borrowings) or issues preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, Guarantee or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to
above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the
proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to
the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving rise to
such Fixed Charges will not be obligations of the referent Person or any of
its Restricted Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary of the Company that
was not organized or existing under the laws of the United States, any state
thereof, the District of Columbia or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and currency exchange or interest rate collar
agreements and (ii) other agreements or arrangements designed to protect such
Person against fluctuations in currency exchange rates or interest rates.
"Holdings" means L-3 Communications Holdings, Inc.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, as well
as all indebtedness of others secured by a Lien on any asset of such Person
(whether or not such indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any
indebtedness of any other Person. The amount of any Indebtedness outstanding
as of any date shall be (i) the accreted value thereof, in the case of any
Indebtedness that does not require current payments of interest, and (ii) the
principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, moving and
similar loans or advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells
or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided
in the last paragraph of the covenant described above under the caption "--
Restricted Payments".
"Issue Date" means the closing date for the sale and original issuance
of the Exchange Notes under the Indenture.
"Lehman Investor" means Lehman Brothers Holdings Inc. and any of its
Affiliates.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any
readily marketable equity securities that are (i) traded on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market;
and (ii) issued by a corporation having a total equity market capitalization
of not less than $250.0 million; provided that the excess of (A) the
aggregate amount of securities of any one such corporation held by the
Company and any Restricted Subsidiary over (B) ten times the average daily
trading volume of such securities during the 20 immediately preceding trading
days shall be deemed not to be Marketable Securities; as determined on the
date of the contract relating to such Asset Sale.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes thereon, realized in
connection with (A) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (B) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary gain or loss,
together with any related provision for taxes on such extraordinary gain or
loss and (iii) the cumulative effect of a change in accounting principles.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions
and any tax sharing arrangements), amounts required to be applied to the
repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (A) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (B) is directly or indirectly liable (as a
guarantor or otherwise), or (C) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than Indebtedness incurred under Credit Facilities) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity; and (iii) as to which the lenders have been notified
in writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization, whether or not a claim for post-filing interest is allowed in
such proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages (including Liquidated Damages), guarantees
and other liabilities or amounts payable under the documentation governing
any Indebtedness or in respect thereto.
"Permitted Investments" means (i) any Investment in the Company or in a
Restricted Subsidiary of the Company that is a Guarantor (ii) any Investment
in cash or Cash Equivalents; (iii) any Investment by the Company or any
Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (A) such Person becomes a Restricted Subsidiary of the Company and
a Guarantor or (B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company that
is a Guarantor; (iv) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales" or any disposition of
assets not constituting an Asset sale; (v) any acquisition of assets solely
in exchange for the issuance of Equity Interests (other than Disqualified
Stock) of the Company; (vi) advances to employees not to exceed $2.5 million
at any one time outstanding; (vii) any Investment acquired in connection with
or as a result of a workout or bankruptcy of a customer or supplier;
(viii) Hedging Obligations permitted to be incurred under the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; (ix) any Investment in a Similar Business that is not a
Restricted Subsidiary; provided that the aggregate fair market value of all
Investments made pursuant to this clause (ix) (valued on the date each such
Investment was made and without giving effect to subsequent changes in value)
may not exceed 5% of the Consolidated Net Tangible Assets of the Company; and
(x) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving effect
to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (x) that are at the time
outstanding, not to exceed $15.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same
extent as, or to a greater extent than, the Exchange Notes and the Subsidiary
Guarantees are subordinated to Senior Debt pursuant to Article 10 of the
Indenture.
"Permitted Liens" means (i) Liens securing Senior Debt of the Company or
any Guarantor that was permitted by the terms of the Indenture to be
incurred; (ii) Liens in favor of the Company or any Guarantor; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of
the Person merged into or consolidated with the Company; (iv) Liens on
property existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company, provided that such Liens were in existence prior
to the contemplation of such acquisition and do not extend to any other
assets of the Company or any of its Restricted Subsidiaries; (v) Liens to
secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (v) of the second paragraph of
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness -- ;
(vii) Liens existing on the Issue Date; (viii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are
being contested in good faith by appropriate proceedings promptly instituted
and diligently concluded, provided that any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been made
therefor; (ix) Liens incurred in the ordinary course of business of the
Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $5.0 million at any one time outstanding;
(x) Liens on assets of Guarantors to secure Senior Debt of such Guarantors
that was permitted by the Indenture to be incurred; (xi) Liens securing
Permitted Refinancing Indebtedness, provided that any such Lien does not
extend to or cover any property, shares or debt other than the property,
shares or debt securing the Indebtedness so refunded, refinanced or extended;
(xii) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance and return of money bonds and other obligations of a
like nature, in each case incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (xiii) Liens
upon specific items of inventory or other goods and proceeds of any Person
securing such Person's obligations in respect of bankers' acceptances issued
or created for the account of such Person to facilitate the purchase,
shipment or storage of such inventory or other goods in the ordinary course
of business; (xiv) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that
are within the general parameters customary in the industry, in each case
securing Indebtedness under Hedging Obligations; and (xv) Liens encumbering
deposits made in the ordinary course of business to secure nondelinquent
obligations arising from statutory or regulatory, contractual or warranty
requirements of the Company or its Subsidiaries for which a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
made.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses and prepayment premiums
incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date no earlier than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Exchange Notes, such
Permitted Refinancing Indebtedness is subordinated in right of payment to the
Exchange Notes on terms at least as favorable to the Holders of Exchange
Notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(iv) such Indebtedness is incurred either by the Company or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Permitted Securities" means, with respect to any Asset Sale, Voting
Stock of a Person primarily engaged in one or more Similar Businesses;
provided that after giving effect to the Asset Sale such Person shall become
a Restricted Subsidiary and a Guarantor.
"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, each
Subsidiary of such Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means the credit agreement, dated as of the
Issue Date among the Company and a syndicate of banks and other financial
institutions led by Lehman Commercial Paper Inc., as syndication agent, and
any related notes, collateral documents, letters of credit and guarantees,
including any appendices, exhibits or schedules to any of the foregoing (as
the same may be in effect from time to time), in each case, as such
agreements may be amended, modified, supplemented or restated from time to
time, or refunded, refinanced, restructured, replaced, renewed, repaid or
extended from time to time (whether with the original agents and lenders or
other agents and lenders or otherwise, and whether provided under the
original credit agreement or other credit agreements or otherwise).
"Senior Debt" means (i) all Indebtedness of the Company or any of its
Restricted Subsidiaries outstanding under Credit Facilities and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness permitted to be
incurred by the Company or any of its Restricted Subsidiaries under the terms
of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in
right of payment to the Exchange Notes and (iii) all Obligations with respect
to the foregoing. Notwithstanding anything to the contrary in the foregoing,
Senior Debt will not include (i) any liability for federal, state, local or
other taxes owed or owing by the Company, (ii) any Indebtedness of the
Company to any of its Subsidiaries or other Affiliates, (iii) any trade
payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Act, as such Regulation is in effect on the
date hereof.
"Similar Business" means a business, a majority of whose revenues in the
most recently ended calendar year were derived from (i) the sale of defense
products, electronics, communications systems, aerospace products, avionics
products and/or communications products, (ii) any services related thereto,
(iii) any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary thereto,
and (iv) any combination of any of the foregoing.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (A) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (B) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"S&P" means Standard and Poor's Corporation.
"Transaction Documents" means the Indenture, the Exchange Notes, the
Purchase Agreement and the Registration Rights Agreement.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company
or such Restricted Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of the Company; (iii) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (A) to subscribe for additional Equity
Interests or (B) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results;
(iv) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (v) has at least one director on its board of directors
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Restricted Payments". If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock", the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock", calculated on a pro forma
basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would
be in existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (A) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (B) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by
(ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned" means, when used with respect to any Subsidiary or
Restricted Subsidiary of a Person, a Subsidiary (or Restricted Subsidiary, as
appropriate) of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries (or Wholly Owned Restricted Subsidiaries, as appropriate) of
such Person and one or more Wholly Owned Subsidiaries (or Wholly Owned
Restricted Subsidiaries, as appropriate) of such Person.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary describes certain U.S. federal income tax
consequences of the ownership of the Exchange Notes as of the date hereof.
Except where noted, it deals only with Exchange Notes held as capital assets
and does not deal with special situations, such as those of dealers in
securities or currencies, financial institutions, life insurance companies,
persons holding Exchange Notes as a part of a hedging or conversion transaction
or a straddle or holders of Exchange Notes whose "functional currency" is not
the U.S. dollar. 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 federal
income tax consequences different from those discussed below. In addition,
except as otherwise indicated, the following does not consider the effect of
any applicable foreign, state, local or other tax laws or estate or gift tax
considerations. Persons considering the purchase, ownership or disposition of
Exchange Notes should consult their own tax advisors concerning the federal
income tax consequences in light of their particular situations, as well as
any consequences arising under the laws of any other taxing jurisdiction.
Stated Interest on Exchange Notes
Except as set forth below, interest on an Exchange Note will generally be
taxable to a U.S. Holder as ordinary income from domestic sources at the time
it is paid or accrued in accordance with the U.S. Holder's method of accounting
for tax purposes. As used herein, a "U.S. Holder" means a holder of an Exchange
Note that is a citizen or resident of the United States, a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof, an estate the income of which is subject to
U.S. federal income taxation regardless of its source, or a trust which is
subject to the supervision of a court within the United States and the control
of a U.S. fiduciary as described in Section 7701(a)(30) of the Code. A
"Non-U.S. Holder" is a holder of an Exchange Note that is not a U.S. Holder.
Market Discount
If a U.S. Holder purchases an Exchange Note for an amount that is less than
its stated redemption price at maturity, the amount of the difference will be
treated as "market discount" for federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market
discount rules, a U.S. Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, an
Exchange Note as ordinary income to the extent of the market discount which
has not previously been included in income and is treated as having accrued
on such Exchange Note at the time of such payment or disposition. In addition,
the U.S. Holder may be required to defer, until the maturity of the Exchange
Note or its earlier disposition in a taxable transaction, the deduction of all
or a portion of the interest expense on any indebtedness incurred or continued
to purchase or carry such Exchange Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Note, unless
the U.S. Holder elects to accrue on a constant interest method. A U.S. Holder
of an Exchange Note may elect to include market discount in income currently as
it accrues (on either a ratable or constant interest method), in which case the
rule described above regarding deferral of interest deductions will not apply.
This election to include market discount in income currently once made applies
to all market discount obligations acquired on or after the first taxable year
to which the election applies and may not be revoked without the consent of the
IRS.
Amortizable Bond Premium
A U.S. Holder that purchases an Exchange Note for an amount in excess of
the sum of all amounts payable on the Exchange Note after the purchase date
other than stated interest will be considered to have purchased the Exchange
Note at a "premium." A U.S. Holder generally may elect to amortize the premium
over the remaining term of the Exchange Note on a constant yield method. The
amount amortized in any year will be treated as a reduction of the U.S.
Holder's interest income from the Exchange Note. Bond premium on an Exchange
Note held by a U.S. Holder that does not make such an election will
decrease the gain or increase the loss otherwise recognized on disposition
of the Exchange Note. The election to amortize premium on a constant yield
method, once made, applies to all debt obligations held or subsequently
acquired by the electing U.S. Holder on or after the first day of the first
taxable year to which the election applies and may not be revoked without
the consent of the IRS.
Sale, Exchange and Retirement of Exchange Notes
A U.S. Holder's tax basis in an Exchange Note will, in general, be the
U.S. Holder's cost therefor, increased by market discount previously included
in income by the U.S. Holder and reduced by any amortized premium. Upon the
sale, exchange, retirement or other disposition of an Exchange Note, a U.S.
Holder will recognize gain or loss equal to the difference between the amount
realized upon the sale, exchange, retirement or other disposition and the tax
basis of the Exchange Note. Except as described above with respect to market
discount, such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if at the time of sale, exchange, retirement or other
disposition the Exchange Note has been held for more than one year. Capital
gains of individuals derived in respect of capital assets held for more than
one year are eligible for reduced rates of taxation which may vary depending
upon the holding period of such capital assets. The deductibility of capital
losses is subject to limitations.
Non-U.S. Holders
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) no withholding of U.S. federal income tax will be required with
respect to the payment by the Company or any paying agent of principal, premium,
if any, or interest on or Liquidated Damages, if any, in respect of an Exchange
Note owned by a Non-U.S. Holder (the "Portfolio Interest Exception"), provided
(i) that the beneficial owner does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote within the meaning of section 871(h)(3) of the Code and the
regulations thereunder, (ii) the beneficial owner is not a controlled foreign
corporation that is related to the Company through stock ownership, (iii) the
beneficial owner is not a bank whose receipt of interest on an Exchange Note
is described in section 881(c)(3)(A) of the Code and (iv) the beneficial owner
satisfies the statement requirement (described generally below) set forth in
section 871(h) and section 881(c) of the Code and the regulations thereunder.
(b) no withholding of U.S. federal income tax will be required with
respect to any gain or income realized by a Non-U.S. Holder upon the sale,
exchange, retirement or other disposition of an Exchange Note; and
(c) an Exchange Note beneficially owned by an individual who at the
time of death is a Non-U.S. Holder will not be subject to U.S. federal estate
tax as a result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote within the
meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such Exchange Note would not have been, if received
at the time of such individual's death, effectively connected with the conduct
of a U.S. trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Exchange Note, or a financial institution holding the Exchange
Note on behalf of such owner, must provide, in accordance with specified
procedures, a paying agent of the Company with a statement to the effect that
the beneficial owner is not a U.S. person. Currently, these requirements
will be met if (i) the beneficial owner provides his name and address, and
certifies, under penalties of perjury, that he is not a U.S. person (which
certification may be made on an Internal Revenue Service Form W-8 (or
successor form)) or (ii) a financial institution holding the Exchange Note on
behalf of the beneficial owner certifies, under penalties of perjury, that
such statement has been received by it and furnishes a paying agent with a
copy thereof. Under recently finalized Treasury regulations (the "Final
Regulations"), the statement requirement referred to in (a)(iv) above may
also be satisfied with other documentary evidence for interest paid after
December 31, 1998 with respect to an offshore account or through certain
foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the Portfolio
Interest Exception described in (a) above, payments on an Exchange Note made
to such Non-U.S. Holder will be subject to a 30% withholding tax unless the
beneficial owner of the Exchange Note provides the Company or its paying agent,
as the case may be, with a properly executed (i) Internal Revenue Service Form
1001 (or successor form) claiming an exemption from withholding under the
benefit of a tax treaty or (ii) Internal Revenue Service Form 4224 (or successor
form) stating that interest paid on the Exchange Note is not subject to with-
holding tax because it is effectively connected with the beneficial owner's
conduct of a trade or business in the United States. Under the Final
Regulations, Non-U.S. Holders will generally be required to provide IRS Form
W-8 in lieu of IRS Form 1001 and IRS Form 4224, although alternative
documentation may be applicable in certain situations.
If a Non-U.S. Holder is engaged in a trade or business in the United
States and payment on an Exchange Note is effectively connected with the conduct
of such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed above, will be subject to U.S. federal income tax on
such payment on a net income basis in the same manner as if it were a U.S.
Holder. In addition, if such holder is a foreign corporation, it may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to adjustments. For this purpose, such
payment on an Exchange Note will be included in such foreign corporation's
earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or
other disposition of an Exchange Note generally will not be subject to U.S.
federal income tax unless (i) such gain or income is effectively connected
with a trade or business in the United States of the Non-U.S. Holder, or (ii)
in the case of a Non-U.S. Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of
such sale, exchange, retirement or other disposition, and certain other
conditions are met.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to payments
on an Exchange Note and to the proceeds of sale of an Exchange Note made to
U.S. Holders other than certain exempt recipients (such as corporations). A
31% backup withholding tax will apply to such payments if the U.S. Holder
fails to provide a taxpayer identification number or certification of
foreign or other exempt status or fails to report in full dividend and
interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in (a)(iv) under "--Non U.S. Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a U.S. person.
In addition, backup withholding and information reporting will not
apply if payments on an Exchange Note are paid or collected by a foreign
office of a custodian, nominee or other foreign agent on behalf of the
beneficial owner of such Exchange Note, or if a foreign office of a broker
(as defined in applicable Treasury regulations) pays the proceeds of the
sale of an Exchange Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for U.S. federal income tax purposes, a U.S.
person, a controlled foreign corporation or a foreign person that derives 50%
or more of its gross income for certain periods from the conduct of a trade
or business in the United States, such payments will be subject to information
reporting (but not backup withholding), unless (i) such custodian, nominee,
agent or broker has documentary evidence in its records that the beneficial
owner is not a U.S. person and certain other conditions are met or (ii) the
beneficial owner otherwise establishes an exemption. Under the Final
Regulations, backup withholding will not apply to such payments absent actual
knowledge that the payee is a United States person.
Payments on an Exchange Note paid to the beneficial owner of an Exchange
Note by a U.S. office of a custodian, nominee or agent, or the payment by the
U.S. office of a broker of the proceeds of sale of an Exchange Note, will be
subject to both backup withholding and information reporting unless the
beneficial owner provides the statement referred to in (a)(iv) above and
the payor does not have actual knowledge that the beneficial owner is a U.S.
person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will 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 Internal Revenue Service.
PLAN OF DISTRIBUTION
This Prospectus is to be used by Lehman Brothers Inc. in connection with
offers and sales of the Exchange Notes in market-making transactions effected
from time to time. Lehman Brothers Inc. may act as a principal or agent in
such transactions, including as agent for the counterparty when acting as
principal or as agent for both counterparties, and may receive compensation
in the form of discounts and commissions, including from both counterparties
when it acts as agent for both. Such sales will be made at prevailing market
prices at the time of sale, at prices related thereto or at negotiated
prices.
Affiliates of Lehman Brothers Inc. currently own 50.1% of the Parent
Common Stock. See "Ownership of Capital Stock". Lehman Brothers Inc. has
informed the Company that it does not intend to confirm sales of the Exchange
Notes to any accounts over which it exercises discretionary authority without
the prior specific written approval of such transactions by the customer.
The Company has been advised by Lehman Brothers Inc. that, subject to
applicable laws and regulations, Lehman Brothers Inc. currently intends to
make a market in the Exchange Notes following completion of the Exchange
Offer. However, Lehman Brothers Inc. is not obligated to do so and any such
market-making may be interrupted or discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act. There can be no assurance
that an active trading market will develop or be sustained. See "Risk
Factors--Trading Market for the Exchange Notes."
Lehman Brothers Inc. has provided investment banking services to the
Company in the past and may provide such services and financial advisory
services to the Company in the future. Lehman Brothers Inc. acted as
purchasers in connection with the initial sale of the Notes and received an
underwriting discount of approximately $6.1 million in connection therewith.
See "Certain Transactions."
Lehman Brothers Inc. and the Company have entered into a registration
rights agreement with respect to the use by Lehman Brothers Inc. of this
Prospectus. Pursuant to such agreement, the Company agreed to bear all
registration expenses incurred under such agreement, and the Company agreed
to indemnify Lehman Brothers Inc. against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson
Thacher & Bartlett (a partnership which includes professional corporations),
New York, New York.
EXPERTS
The combined financial statements of the Lockheed Martin Predecessor
Businesses as of March 31, 1997 and for the three months then ended, as of
December 31, 1996 and for the year then ended, the Loral Acquired Businesses
for the three months ended March 31, 1996 and for the years ended December
31, 1995 and 1994 and the balance sheet of L-3 Communications Corporation as
of April 29, 1997, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent auditors,
given on the authority of that firm as experts in accounting and auditing.
The report on the combined financial statements of the Lockheed Martin
Predecessor Businesses for the year ended December 31, 1996 states that
Coopers & Lybrand L.L.P.'s opinion, insofar as it relates to the financial
statements of the Lockheed Martin Communications Systems Division included in
such combined financial statements, is based solely on the report of other
auditors.
The combined financial statements of Lockheed Martin Communications
Systems Division at December 31, 1996 (not presented separately herein) and
1995, and the combined results of its operations and its cash flows for the
year ended December 31, 1996 (not presented separately herein), and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1995, which is referred to and made a part of this
Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
L-3 COMMUNICATIONS CORPORATION
Condensed Consolidated (Combined) Financial Statements as of September 30,
1997 (unaudited) and December 31, 1996 and for the nine months ended
September 30, 1997 (unaudited) and 1996 (unaudited) . . . . . . . . . . F-3
Condensed Consolidated (Combined) Balance Sheets as of September 30,
1997 (unaudited) and December 31, 1996 . . . . . . . . . . . . . F-4
Condensed Consolidated (Combined) Statements of Operations for the Three
and Nine Months ended September 30, 1997 (unaudited) and September 30,
1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . F-6
Condensed Consolidated (Combined) Statements of Cash Flows for the Nine
Months ended September 30, 1997 (unaudited) and September 30, 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Condensed Consolidated (Combined) Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Balance Sheet as of April 29, 1997 . . . . . . . . . . . . . . . . . . F-14
Report of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . F-15
Balance Sheet of April 29, 1997 . . . . . . . . . . . . . . . . . F-16
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . F-17
Lockheed Martin Predecessor Businesses
Combined Financial Statements as of March 31, 1997 and the three months ended
March 31, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . F-19
Report of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . F-20
Balance sheet as of March 31, 1997 . . . . . . . . . . . . . . . F-21
Statements of Operations and Changes in Invested Equity for the three
months ended March 31, 1997 and March 31, 1996 (Unaudited) . . . F-22
Statements of Cash Flows for the three months ended March 31, 1997 and
March 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . F-23
Notes to Combined Financial Statements . . . . . . . . . . . . . F-24
Combined Financial Statements as of December 31, 1996, 1995 and for the three
years in the period ended December 31, 1996 . . . . . . . . . . . . . . F-32
Report of Coopers & Lybrand L.L.P. on December 31, 1996 Combined
Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-33
Report of Ernst & Young LLP on the financial statements of Lockheed
Martin Communications Systems Division as of December 31, 1996 and 1995
and for the three years ended December 31, 1996. . . . . . . . . . F-34
Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . F-35
Statements of Operations and Changes in Invested Equity for years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . F-36
Statements of Cash Flows for years ended December 31, 1996, 1995 and
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
Notes to Combined Financial Statements . . . . . . . . . . . . . F-38
Loral Acquired Businesses
Report of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . F-46
Statements of Operations for three months ended March 31, 1996 and the
years ended December 31, 1995 and 1994 . . . . . . . . . . . . . F-47
Statements of Cash Flows for three months ended March 31, 1996 and the
years ended December 31, 1995 and 1994 . . . . . . . . . . . . . F-48
Notes to Combined Financial Statements . . . . . . . . . . . . . F-49
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED)
FINANCIAL STATEMENTS
As of September 30, 1997 (unaudited) and December 31,
1996 and for the nine months ended September 30, 1997 (unaudited)
and 1996 (unaudited)
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) BALANCE SHEETS
(In thousands)
The Company Predecessor Company
----------------------- -----------------------
September 30, 1997 December 31, 1996
----------------------- -----------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 39,767 --
Contracts in process . . . . . . . . . . . . . . . . . . . . . . . . . 204,870 $198,073
Net assets held for sale . . . . . . . . . . . . . . . . . . . . . . . 16,671
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,708 3,661
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 265,016 201,734
-------- --------
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . 91,849 116,566
Less, accumulated depreciation and amortization . . . . . . . . . . . . 7,740 24,983
-------- --------
84,109 91,583
-------- --------
Intangibles, primarily cost in excess of net assets acquired, net of
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,341 282,674
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,362 17,307
-------- --------
$684,828 $593,298
======== ========
LIABILITIES AND SHAREHOLDERS' (INVESTED) EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . $ 4,500 --
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . . 34,819 $ 34,163
Accrued employment costs . . . . . . . . . . . . . . . . . . . . . . . 37,450 27,313
Customer advances and amounts in excess of costs incurred . . . . . . . 16,180 14,299
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,752
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . 18,267 27,113
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 122,968 102,888
-------- --------
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) BALANCE SHEETS
(In thousands)
The Company Predecessor Company
----------------------- -----------------------
September 30, 1997 December 31, 1996
----------------------- -----------------------
(Unaudited)
Pension and postretirement benefits . . . . . . . . . . . . . . . . . . . 27,933 --
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,560 16,801
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393,500 --
Commitment and contingencies . . . . . . . . . . . . . . . . . . . . . .
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock, $.01 par value, authorized 100 shares, issued 100 shares -- --
Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,367 --
Deemed Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . (7,500) --
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 125,867
Invested equity at December 31, 1996 . . . . . . . . . . . . . . . . . . -- 473,609
-------- --------
$684,828 $593,298
======== ========
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
The Company Predecessor Company
----------------------- -----------------------
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
----------------------- -----------------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,822 $158,594
Cost and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,968 146,397
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,854 12,197
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 9,289 7,366
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 8,565 4,831
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,289 1,776
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,276 $ 3,055
======== ========
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(In thousands)
The Company Predecessor Company
---------------------- ----------------------------------------------
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
---------------------- --------------------- ---------------------
(Unaudited) (Unaudited)
Sales . . . . . . . . . . . . . . . . . . . . . . . . $342,852 $158,873 $365,041
Cost and expenses . . . . . . . . . . . . . . . . . . 309,877 150,937 341,914
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . 32,975 7,936 23,127
Net Interest expense . . . . . . . . . . . . . . . . 19,259 8,441 16,780
-------- -------- --------
Income (loss) before income taxes . . . . . . . . . . 13,716 (505) 6,347
Income taxes . . . . . . . . . . . . . . . . . . . . 5,349 (247) 3,052
-------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 8,367 $ (258) $ 3,295
======== ======== ========
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(In thousands)
The Company Predecessor Company
---------------------- ----------------------------------------------
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
---------------------- ---------------------- ----------------------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . $ 8,367 $ (258) $ 3,295
Depreciation and amortization . . . . . . . . . . . . 14,075 7,184 17,962
Changes in operating assets and liabilities
Contracts in process . . . . . . . . . . . . . . . 11,658 (17,475) 27,555
Other current assets . . . . . . . . . . . . . . . (1,113) (481) 2,144
Other assets . . . . . . . . . . . . . . . . . . . 3,912 (159) (8,431)
Accounts payable . . . . . . . . . . . . . . . . . (4,879) (207) (5,881)
Accrued employment costs . . . . . . . . . . . . . 12,651 (625) 4,150
Customer advances and amounts in excess of costs
incurred . . . . . . . . . . . . . . . . . . . . 875 (1,891) (11,902)
Accrued interest . . . . . . . . . . . . . . . . . 11,752 --
Other current liabilities . . . . . . . . . . . . . (6,741) (1,867) (53)
Pension and postretirement benefits . . . . . . . . (567) -- --
Other liabilities . . . . . . . . . . . . . . . . . 6,388 (500) (22,835)
--------- ------- ---------
Net cash from (used in) operating activities . . . . 56,378 (16,279) 6,004
--------- ------- ---------
Investing activities:
Acquisition of business . . . . . . . . . . . . . . . (470,700) -- (287,803)
Net change in assets held for sale . . . . . . . . . 1,503
Purchases of investments . . . . . . . . . . . . . . (4,020)
Capital expenditures . . . . . . . . . . . . . . . . (6,436) (4,300) (7,995)
Disposition of property, plant and equipment . . . . 649 -- 2,931
--------- ------- ---------
Net cash used in investing activities . . . . . . . . (479,004) (4,300) (292,867)
--------- ------- ---------
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(In thousands)
The Company Predecessor Company
---------------------- -----------------------------------------------
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
---------------------- ---------------------- ----------------------
(Unaudited) (Unaudited)
Financing activities:
Advances from Lockheed Martin . . . . . . . . . . . -- 20,579 286,863
Borrowings under senior credit facility . . . . . . 175,000 -- --
Proceeds from sale of 10 3/8% subordinated notes . 225,000 -- --
Proceeds from issuance of common stock . . . . . . 80,000 -- --
Debt issuance costs . . . . . . . . . . . . . . . . (15,607) -- --
Payment of debt . . . . . . . . . . . . . . . . . . (2,000) -- --
-------- ------- --------
Net cash from financing activities . . . . . . . . 462,393 20,579 286,863
-------- ------- --------
Net change in cash . . . . . . . . . . . . . . . . 39,767 -- --
Cash and cash equivalents, beginning of the period -- -- --
-------- ------- --------
Cash and cash equivalents, end of the period . . . $ 39,767 $ -- --
======== ======= ========
Supplemental information:
Cash paid for interest during the period . . . . . $ 4,332 -- --
Cash paid for income taxes during the period . . . -- -- --
Issuance of common stock to Lockheed Martin in
connection with the acquisition of business . . . $ 45,000 -- --
See notes to condensed consolidated (combined) financial statements.
L-3 Communications Corporation
Notes to Condensed Consolidated (Combined) Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated (combined) financial statements
include the assets, liabilities and results of operations of L-3
Communications Corporation, the successor company ("L-3" or the "Company")
following the change in ownership (see Note 2) effective as of April 1, 1997
and for the period from April 1, 1997 to September 30, 1997. The statements
also include on a combined basis, substantially all of the assets and certain
liabilities of (i) nine business units previously purchased by Lockheed
Martin Corporation ("Lockheed Martin") as part of its acquisition of Loral
Corporation ("Loral") in April 1996, and (ii) one business unit,
Communications Systems--Camden purchased by Lockheed Martin as part of its
acquisition of the aerospace business of GE in April 1993, (collectively, the
"Businesses" or the "Predecessor Company"), prior to the change in ownership
and for the periods of January 1, 1996 to September 30, 1996 and January 1,
1997 to March 31, 1997, and as of December 31, 1996.
The accompanying unaudited condensed consolidated (combined) financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulations S-X of the Securities
and Exchange Commission ("SEC"); accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. All significant intercompany
balances and transactions have been eliminated. The balance sheet data as of
December 31, 1996 and the financial statement data as of March 31, 1997 and
for the three months ended March 31, 1997 have been derived from the audited
financial statements of the Predecessor Company for such periods. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for interim periods are not necessarily indicative of
results for the entire year.
2. Change in Ownership Transaction
L-3 was formed on April 8, 1997, and is a wholly-owned subsidiary of L-3
Communications Holdings, Inc. ("Holdings"). Holdings and L-3 were formed by
Mr. Frank C. Lanza, the former President and Chief Operating Officer of
Loral, Mr. Robert V. LaPenta, the former Senior Vice President and Controller
of Loral, Lehman Brothers Capital Partners III, L.P. and its affiliates (the
"Lehman Partnership") and Lockheed Martin to acquire the Businesses.
On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, Holdings, and
Lockheed Martin entered into a Transaction Agreement whereby Holdings would
acquire the Businesses from Lockheed Martin. Also included in the acquisition
is a semiconductor product line of another business and certain leasehold
improvements in New York City which were not material. Pursuant to the
Transaction Agreement on April 30, 1997 (closing date), Holdings acquired the
Businesses from Lockheed Martin for $525 million, comprised of $480 million
of cash before an estimated $20 million reduction related to a purchase price
adjustment, and $45 million of common equity, representing a 34.9% interest
in Holdings retained by Lockheed Martin, plus estimated acquisition costs of
$6.6 million. Also pursuant to the Transaction Agreement, Lockheed Martin, on
behalf and at the direction of Holdings, transferred the Businesses to the
Company. The acquisition was financed with the debt proceeds of $400 million
(see Note 5) and capital contributions of $125 million from Holdings,
including the $45 million retained by Lockheed Martin.
On November 5, 1997, the Company and Lockheed Martin amended the
Transaction Agreement to finalize the purchase price adjustment which
amounted to $21.2 million of which $15.9 million was received on the closing
date and $5.3 million was received on November 7, 1997, plus interest
thereon. The amendment to the Transaction Agreement also included the
assignment to the Company from Lockheed Martin of a contract for the
production of mission communication systems for track vehicles.
In connection with the Transaction Agreement, Holdings and the Company
anticipate entering into a transition services agreement with Lockheed Martin
pursuant to which Lockheed Martin will provide to L-3 and its subsidiaries
(and L-3 will provide to Lockheed Martin) certain corporate services of a
type previously provided at costs consistent with past practices until
December 31, 1997 (or, in the case of Communications Systems--Camden, for a
period of up to 18 months after the Closing). Lockheed Martin is currently
providing L-3 the services contemplated by the proposed transition services
agreement in the absence of an executed agreement. The parties also entered
into supply agreements which reflect existing intercompany work transfer
agreements or similar support arrangements upon prices and other terms
consistent with previously existing arrangements. Holdings, the Company and
Lockheed Martin have entered into certain subleases of real property and
cross-licenses of intellectual property.
Pursuant to the Transaction Agreement the Company also assumed certain
obligations relating to environmental liabilities and benefit plans.
In accordance with Accounting Principles Board Opinion No. 16, the
acquisition of the Businesses by Holdings and L-3 has been accounted for as a
purchase business combination effective as of April 1, 1997. The purchase
cost (including the fees and expenses related thereto) was allocated to the
tangible and intangible assets and liabilities of the Company based upon
their respective fair values. The assets and liabilities recorded in
connection with the purchase price allocation were $660.3 million and $152.1
million, respectively. The excess of the purchase price over the fair value
of net assets acquired of $306.2 million was recorded as goodwill, and is
being amortized on a straight-line basis over a period of 40 years. Also in
connection with the purchase price allocation estimated deferred tax assets
of $35 million, fully offset by a valuation allowance, that related
principally to differences between book and tax bases of assumed liabilities
were recorded. The assets and liabilities recorded in connection with the
purchase price allocation, are based on preliminary estimates of fair values;
actual adjustments will be based on final appraisals and other analyses of
fair values which are currently in progress. Changes between preliminary and
financial allocations for the valuation of contracts in process, inventories,
pension liabilities, fixed assets and deferred taxes could be material. As a
result of the 34.9% ownership interest retained by Lockheed Martin, the
provisions of EITF 88-16 were applied in connection with the purchase price
allocation, which resulted in recording net assets at approximately 34.9% of
Lockheed Martin's carrying values in the Businesses plus 65.1% at fair value,
and the recognition of a deemed distribution of $7.5 million.
Had the acquisitions of the Businesses occurred on January 1, 1996, the
unaudited pro forma sales and net income for the nine months ended September
30, 1997 and 1996 would have been $499.9 million and $7.9 million and $487.1
million and $2.5 million, respectively. The pro forma results, which are
based on various assumptions, are not necessarily indicative of what would
have occurred had the acquisition been consummated on January 1, 1996. The
1996 pro forma sales and net income have been adjusted to include the
operations of the Loral Acquired Businesses from January 1, 1996 (See Note
3).
3. Predecessor Company Acquisitions
Effective April 1, 1996, Lockheed Martin acquired substantially all the
assets and liabilities of the defense businesses of Loral, including the
Wideband Systems Division and the Products Group which are included in the
Businesses. The acquisition of the Wideband Systems Division and Products
Group businesses (the "Loral Acquired Businesses") has been accounted for as
a purchase by Lockheed Martin Communications Systems-Camden Division
("Divisions"). The acquisition has been reflected in the financial statements
based on the purchase price allocated to those acquired businesses by
Lockheed Martin. The assets and liabilities recorded in connection with the
purchase price allocation were $401.0 million and $113.2 million,
respectively. As such, the accompanying condensed combined financial
statements for periods prior to April 1, 1997 reflected the results of
operations of the Division and the Loral Acquired Businesses from the
effective date of acquisition including the effects of an allocated portion
of cost in excess of net assets acquired resulting from the acquisition.
4. Contracts and Progress
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, comprise the following:
The Company Predecessor Company
September 30, 1997 December 31, 1996
------------------------------ ------------------------------
(Unaudited)
(Dollars in thousands)
Billed contract receivables . . . . . . . . . . . . . . . . . $ 44,815 $ 45,212
Unbilled contract receivables . . . . . . . . . . . . . . . . 56,626 84,814
Other billed receivables, principally commercial and
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 30,390 41,154
Inventories costs . . . . . . . . . . . . . . . . . . . . . . 90,511 72,880
-------- ---------
222,342 244,060
Less, unliquidated progress payments . . . . . . . . . . . . (17,472) (45,987)
-------- ---------
Net contracts in progress . . . . . . . . . . . . . . . . . . $204,870 $ 198,073
======== =========
5. Net assets held for sale
The Company has accounted for the allocation of purchase price and the
net assets of its Hycor business, which it intends to sell, in accordance
with the FASB's Emerging Issues Task Force Issue 87-11 "Allocation of
Purchase Price to Assets to be Sold" ("EITF 87-11"). Accordingly, the net
assets related to the Hycor business as of April 1, 1997 are included in the
accompanying condensed consolidated balance sheet as "Net assets held for
sale". The fair value assigned to such net assets is based upon management's
estimate of the proceeds from the sale of the Hycor business less the
estimated income from operations for such business during the holding period
of April 1997 through December 1997 (the "holding period"), plus interest
expense on debt allocated to such net assets during the holding period. In
accordance with EITF 87-11, income from the operations of the Hycor business
of $112,000 and interest expense of $436,000 on the debt allocated to the
Hycor net assets have been excluded from the Company's consolidated
statements of operations for the six months ended September 30, 1997.
Also included in net assets held for sale is the Company's Sarasota,
Florida facility which was sold effective October 24, 1997.
6. Debt
In connection with the acquisition of the Businesses, the Company
entered into a $275.0 million senior secured Credit Agreement consisting of
$175.0 million of term loan facilities and a $100.0 million revolving credit
facility (collectively the "senior secured credit facility"). The senior
secured credit facility has been provided by a syndicate of banks and
financial institutions and bear interest at the option of the Company at a
rate related to (i) the higher of federal funds rate plus 0.50% per annum or
the reference rate published by Bank of America NT&SA or (ii) LIBOR. Interest
payments vary in accordance with the type of borrowing and are made at a
minimum every three months. The revolving credit facility expires in 2003 and
is available for ongoing working capital and letter of credit needs.
Substantially all of the revolving credit facility is available at September
30, 1997. The Company pays a commitment fee on the unused portion.
In April 1997, the Company also issued $225.0 million of 10 3/8% senior
subordinated notes (the "Old Notes") due May 1, 2007 with interest payable
semi-annually on May 1 and November 1 of each year, commencing November 1,
1997. The Old Notes are redeemable under certain circumstances.
In September 1997, the Company filed a registration statement to
initiate an offer to exchange an aggregate of up to $225.0 million principal
amount of 10 3/8% series B Senior Subordinated Notes due 2007 (the "Exchange
Notes") for the outstanding Old Notes. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except that the Exchange
Notes have been registered under the Securities Act of 1933. On November 5,
1997, the exchange offer was concluded; all of the $225.0 million of Old
Notes were exchanged. The Exchange Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after May 1, 2002, at various
redemption prices plus accrued and unpaid interest to the applicable
redemption date. In addition, prior to May 1, 2000, the Company may redeem up
to 35% of the aggregate principal amount of Exchange Notes at a redemption
price of 109.375% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date with the net cash proceeds of one or more
equity offerings by Holdings that are contributed to the Company as common
equity capital.
The costs related to the issuance of debt have been capitalized and are
being amortized as interest expense using a method that approximates the
effective interest method over the term of the related debt.
The aggregate principal payments for debt, excluding the revolving
credit borrowings, for the five years ending December 31, 1998 through 2002
are: $5.0 million, $11.0 million, $19.0 million, $25.0 million and $33.2
million, respectively.
7. Stock Option Plan
Holdings sponsors an option plan for key employees of Holdings and L-3,
pursuant to which options to purchase an aggregate of 14.0% of Holdings'
fully-diluted common stock outstanding at the closing date have been
authorized for grant.
On April 30, 1997, Holdings granted the Chairman and the President
(collectively, the "Equity Executives") nonqualified options, to purchase, at
$6.47 per share 2,285,714 shares of Class A common stock of Holdings. In each
case, half of the options are "Time Options" and half are "Performance
Options" (collectively, the "Options"). The Time Options become exercisable
with respect to 20% of the shares subject to the Time Options on each of the
first five anniversaries if employment continues through and including such
date. The Performance Options become exercisable nine years after the closing
date, but may become exercisable earlier with respect to up to 20% of the
shares subject to the Performance Options on each of the first five
anniversaries, to the extent certain defined targets are achieved. The
Options, which have a ten year term, become fully exercisable under certain
circumstances, including a change in control.
On July 1, 1997, Holdings adopted the 1997 Option Plan for key employees
of Holdings and L-3 and granted nonqualified options to certain officers and
other employees of L-3 to purchase at $6.47 per share 675,500 shares of Class
A common stock of Holdings (collectively, the "1997 Options"). Generally, the
1997 Options are exercisable over a three-year vesting period and expire ten
years from the date of grant.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
which provides that compensation cost for stock options is recognized based
on the excess, if any, of the fair value of the stock at the grant date of
the award or other measurement date over the stock option exercise price. The
exercise price for Holdings' stock options granted to employees equaled the
fair value of Holdings' common stock at the date of grant. Accordingly, no
compensation expense was recognized by the Company. The Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation".
8. Contingencies
Management is continually assessing 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 of the Company 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 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.
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 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.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities (including environmental matters)
incidental to its business. With respect to those investigative actions,
items of litigation, claims or assessments of which they are 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.
9. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 establishes accounting standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. In February 1997, the
FASB issued SFAS No. 129, "Disclosures of Information about Capital
Structure." SFAS No. 129 requires disclosure of for all type of securities
issued and applies to all entities that have issued securities. In June 1997,
the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosure about Segments of an Enterprise and related Information."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set general-purpose financial statements. SFAS No. 131 establishes accounting
standards for the way that public business enterprises report information
about operating segments and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 128 and SFAS No. 129 are required to be adopted for
periods ending after December 15, 1997, and SFAS No. 130 and SFAS No. 131 are
required to be adopted by 1998. The Company is currently evaluating the
impact, if any of these new FASB statements.
L-3 COMMUNICATIONS CORPORATION
Balance Sheet as of April 29, 1997
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of L-3 Communications Corporation
We have audited the accompanying balance sheet of L-3 Communications
Corporation (a Delaware company) as of April 29, 1997. This financial
statement is the responsibility of L-3 Communications Corporation's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of L-3 Communications
Corporation as of April 29, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
July 16, 1997
L-3 COMMUNICATIONS CORPORATION
BALANCE SHEET
April 29, 1997
ASSETS
Cash $1.00
----
Total Assets $1.00
=====
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholder's Equity
Common Stock, $.01 par value 100 shares authorized and outstanding
$1.00
----
Total Shareholder's Equity $1.00
=====
See notes to balance sheet.
L-3 COMMUNICATIONS CORPORATION
NOTES TO BALANCE SHEET
1. Formation of L-3 Communications Corporation
On April 8, 1997, L-3 Communications Corporation (the "Company") was
incorporated under the Delaware General Corporation Law as a wholly owned
subsidiary of L-3 Communications Holdings Inc. for the purpose of
effectuating the transactions described below.
2. Acquisition
On January 31, 1997, Lockheed Martin Corporation ("Lockheed Martin"),
Lehman Brothers Holdings Inc. ("Lehman"), Frank C. Lanza ("Lanza") and Robert
V. LaPenta ("LaPenta") entered into a Memorandum of Understanding regarding
the transfer of certain businesses of Lockheed Martin to a newly formed
corporation ("Newco") to be owned by Lockheed Martin, Lehman, Lanza and
LaPenta. The businesses included a Lockheed Martin's Wideband Systems
Division, Communications Systems Division and Products Group, comprising
eleven autonomous operations (collectively the "Lockheed Martin Predecessor
Business" or the "Businesses"). Also included in the transaction is the
acquisition of a semiconductor product line of another business and certain
leasehold improvements in New York City.
Closing of the transaction occurred on April 30, 1997. The total
consideration paid to Lockheed Martin was $525 million, comprised of $480
million of cash before an estimated $20 million reduction related to a
purchase price adjustment, and $45 million of common equity being retained by
Lockheed Martin. The Company is a wholly owned subsidiary of L-3
Communications Holdings, Inc. ("Holdings"), and Holdings is capitalized with
$125 million of common equity, with Lanza and LaPenta collectively owning
15.0%, the Lehman Partnership owning 50.1% and Lockheed Martin owning 34.9%.
In connection with the Closing the Company has received a $125 million
capital contribution from Holdings and incurred debt of $400 million.
3. Agreements
In connection with the acquisition, the Company entered into a
Transaction Agreement, senior credit facilities, and issued 10-3/8% Senior
Subordinated Notes Due 2007.
Pursuant to the Transaction Agreement, Holdings and the Company
anticipate entering into a transition services agreement with Lockheed Martin
pursuant to which Lockheed Martin will provide to Holdings and its
subsidiaries (and Holdings will provide to Lockheed Martin) certain corporate
services of the types currently provided at costs consistent with past
practices until December 31, 1997 (or, in the case of Communication Systems--
Camden, for a period of up to 18 months after the Closing). Lockheed Martin
is currently providing L-3 the service contemplated by the proposed
transition services agreement in the absence of an executed agreement. The
parties also entered into supply agreements which reflect existing
intercompany work transfer agreements or similar support arrangements upon
prices and other terms consistent with the present arrangements. Holdings,
the Company and Lockheed Martin have entered into certain subleases of real
property and cross-licenses of intellectual property.
Pursuant to the Transaction Agreement the Company assumed certain
obligations relating to environmental liabilities and benefit plans.
The 10-3/8% Senior Subordinated Notes are due in May 1, 2007 with
interest payable semi-annually beginning November 1, 1997. The Notes are
redeemable under certain circumstances.
The Term Loans and Revolving Credit Facility have been provided by a
syndicate of banks and financial institutions and bear interest at the option
of the Company at a rate related to the (i) Loan of Federal Funds Rate, or
the reference rate published by Bank of America NT&SA or (ii) LIBOR.
The Revolving Credit Facility terminates on March 31, 2003. The Term
Loans will be subject to the following Amortization schedule.
Tranche A Term Loan Tranche B Term Loan Tranche C Term Loan
----------------------- ----------------------- ------------------------
Year 1 . . . . . . . . . . . . . . . . . . . . . $ 4,000,000 $ 500,000 $ 500,000
Year 2 . . . . . . . . . . . . . . . . . . . . . 5,000,000 500,000 500,000
Year 3 . . . . . . . . . . . . . . . . . . . . . 15,000,000 500,000 500,000
Year 4 . . . . . . . . . . . . . . . . . . . . . 21,000,000 500,000 500,000
Year 5 . . . . . . . . . . . . . . . . . . . . . 27,000,000 500,000 500,000
Year 6 . . . . . . . . . . . . . . . . . . . . . 28,000,000 500,000 500,000
Year 7 . . . . . . . . . . . . . . . . . . . . . -- 20,000,000 500,000
Year 8 . . . . . . . . . . . . . . . . . . . . . -- 22,000,000 500,000
Year 9 . . . . . . . . . . . . . . . . . . . . . -- -- 26,000,000
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED FINANCIAL STATEMENTS
as of March 31, 1997
and for the three months ended March 31, 1997 and 1996 (Unaudited)
Report of Independent Auditors
To the Board of Directors of
L-3 Communications Corporation
We have audited the accompanying combined balance sheet of the Lockheed
Martin Predecessor Businesses, as defined in Note 1 to the financial
statements, (the "Businesses") as of March 31, 1997 and the related combined
statements of operations and changes in invested equity and cash flows for
the three months then ended. These financial statements are the
responsibility of the Businesses' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards required that we plan and perform our audit in
order to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Lockheed Martin Predecessor Businesses as of March 31, 1997 and their
combined results of operations and cash flows for the three months then
ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
July 11, 1997
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED BALANCE SHEET
(in thousands)
March 31,
-------------------
1997
-------------------
[S] [C]
ASSETS
Current assets:
Contracts in process . . . . . . . . . . . . $215,548
Other current assets . . . . . . . . . . . . 4,142
--------
Total current assets . . . . . . . . . . . 219,690
--------
Property, plant and equipment . . . . . . . . . 120,423
Less, accumulated depreciation and
amortization . . . . . . . . . . . . . . . . 29,069
--------
91,354
--------
Intangibles, primarily cost in excess of net
assets acquired, net of amortization . . . . . 280,145
Other assets . . . . . . . . . . . . . . . . . 17,340
--------
$608,529
========
LIABILITIES AND INVESTED EQUITY
Current liabilities:
Accounts payable, trade . . . . . . . . . . . $ 33,956
Accrued employment costs . . . . . . . . . . 26,688
Customer advances and amounts in excess
of costs incurred . . . . . . . . . . . . . . 12,408
Other current liabilities . . . . . . . . . . 25,246
--------
Total current liabilities . . . . . . . . 98,298
--------
Other liabilities . . . . . . . . . . . . . . . 16,301
Commitments and contingencies (Note 8)
Invested equity . . . . . . . . . . . . . . . . 493,930
--------
$608,529
========
See notes to combined financial statements.
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN INVESTED EQUITY
For the Three Months Ended March 31, 1997 and 1996 (unaudited)
(In thousands)
1997 1996
----------------------- ----------------------
(Unaudited)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $158,873 $ 41,153
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,937 39,477
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,936 1,676
Allocated interested expense . . . . . . . . . . . . . . . . . . . . . . 8,441 2,028
-------- --------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . (505) (352)
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . (247) 145
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (258) (497)
Invested equity-beginning of period . . . . . . . . . . . . . . . . . . . 473,609 194,663
Advances from (repayments to) Lockheed Martin . . . . . . . . . . . . . . 20,579 (9,751)
-------- --------
Invested equity-end of period . . . . . . . . . . . . . . . . . . . . . . $493,930 $184,415
======== ========
See notes to combined financial statements.
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996 (unaudited)
(In thousands)
1997 1996
----------------------- ----------------------
(Unaudited)
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (258) $ (497)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 7,184 3,062
Changes in operating assets and liabilities:
Contracts in process . . . . . . . . . . . . . . . . . . . . . . . . . (17,475) 9,071
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . (481) (326)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (159) 1,086
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (207) (4,498)
Accrued employment costs . . . . . . . . . . . . . . . . . . . . . . . (625) 2,180
Customer advances and amounts in excess of costs incurred . . . . . . . (1,891) 60
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . (1,867) (684)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (500) 710
------- --------
Net cash from (used in) operating activities . . . . . . . . . . . . . . (16,279) 10,164
------- --------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (4,300) (413)
------- --------
Financing activities:
Advances from (repayments to) Lockheed Martin . . . . . . . . . . . . . . 20,579 (9,751)
------- --------
Net change in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
======= ========
See notes to combined financial statements.
LOCKHEED MARTIN PREDECESSOR BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands)
1. Background and Description of Businesses
On January 31, 1997, Lockheed Martin Corporation ("Lockheed Martin"),
Lehman Brothers Holdings Inc. ("Lehman"), Frank C. Lanza ("Lanza") and Robert
V. LaPenta ("LaPenta") entered into a Memorandum of Understanding regarding
the transfer of certain businesses of Lockheed Martin to a newly formed
corporation ("Newco") owned by Lockheed Martin, Lehman, Lanza and LaPenta.
The businesses transferred include Lockheed Martin's Wideband Systems
Division, Communications Systems Division and Products Group, comprising
eleven autonomous operations (collectively the "Lockheed Martin Predecessor
Businesses" or the "Businesses"). Also included in the transaction is the
acquisition of a semiconductor product line of another business and certain
leasehold improvements in New York City.
Effective April 1, 1996, Lockheed Martin acquired substantially all the
assets and liabilities of the defense businesses of Loral Corporation
("Loral"), including the Wideband Systems Division and the Products Group.
The acquisition of the Wideband Systems Division and Products Group
businesses (the "Acquired Businesses") has been accounted for as a purchase
by Lockheed Martin Communications Systems Division ("Division"). The
acquisition has been reflected in these financial statements based on the
purchase price allocated to those acquired businesses by Lockheed Martin. As
such, the accompanying combined financial statements reflect the results of
operations of the Division and the Acquired Businesses from the effective
date of acquisition including the effects of an allocated portion of cost in
excess of net assets acquired resulting from the acquisition. The assets and
liabilities recorded in connection with the purchase price allocation were
$400,993 and $113,190, respectively.
Had the acquisition of Wideband Systems Division and the Products Group
occurred on January 1, 1996, the unaudited pro forma sales and net income for
the three months ended March 31, 1996 would have been $173,353 and $1,529,
respectively. The pro forma results, which are based on various assumptions,
are not necessarily indicative of what would have occurred had the
acquisition been consummated on January 1, 1996.
The Businesses are suppliers of sophisticated secure communication
systems and specialized communication products including secure, high data
rate communication systems, commercial fixed wireless communication products,
microwave components, avionic displays and recorders and instrument products.
The Company's customers included the Department of Defense, selected U.S.
government intelligence agencies, major aerospace/defense prime contractors
and commercial customers. The Businesses operate primarily in one industry
segment, electronic components and systems.
Substantially all the Businesses' products are sold to agencies of the
U.S. Government, primarily the Department of Defense, to foreign government
agencies or to prime contractors or subcontractors thereof. All domestic
government contracts and subcontracts of the Businesses are subject to audit
and various cost controls, and include standard provisions for termination
for the convenience of the U.S. Government. Multi-year 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 government.
The decline in the U.S. defense budget since the mid 1980s has resulted
in program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Businesses'
programs; however, in the event that U.S. Government expenditures for
products of the type manufactured by the Businesses 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 Businesses.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying combined financial statements reflect the Businesses'
assets, liabilities and operations included in Lockheed Martin's historical
financial statements that were transferred to Newco. Intercompany accounts
between Lockheed Martin and the Businesses have been included in invested
equity. Significant inter-business transactions and balances have been
eliminated. The assets and operations of the semiconductor product line and
certain other facilities, which are not material to the combined financial
statements, have been excluded from the combined financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Businesses' 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 revenue and expenses
during the reporting period. The most significant of these estimates and
assumptions relate to contract estimates of sales and costs, allocations from
Lockheed Martin, recoverability of recorded amounts of fixed assets and cost
in excess of net assets acquired, litigation and environmental obligations.
Actual results could differ from these estimates.
Sales and Earnings
Sales and profits on cost reimbursable contracts are recognized as costs
are incurred. Sales and estimated profits under long-term contracts 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
realization is probable. Sales under short-term production-type contracts are
recorded as units are shipped; profits applicable to such shipments are
recorded pro rata, based upon estimated total profit at completion of the
contract. Amounts representing contract change orders or claims are included
in sales only when they can be reliably estimated and realization is
probable. Losses on contracts are recognized when determined. Revisions in
profit estimates are reflected in the period in which the facts which require
the revision become known.
Contracts In Process
Costs accumulated under long-term contracts include direct costs, as
well as manufacturing overhead, and for government contracts, general and
administrative costs, independent research and development costs and bid and
proposal costs. Contracts in process contain amounts relating to contracts
and programs for which the related operating cycles are longer than one year.
In accordance with industry practice, these amounts are included in current
assets.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided primarily using an accelerated method over the estimated useful
lives (5 to 20 years) of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements.
Intangibles
Intangibles, primarily the excess of the cost of purchased businesses
over the fair value of the net assets acquired, is being amortized using a
straight-line method primarily over a 40-year period. Other intangibles are
amortized over their estimated useful lives which range from 11-15 years.
Amortization expense was $2,655 and $1,896 (unaudited) for the three months
ended March 31, 1997 and 1996, respectively. Accumulated amortization was
$29,053 at March 31, 1997.
Intangibles include costs allocated to the Businesses relating to the
Request for Funding Authorization ("RFA"), consisting of over 20
restructuring projects to reduce operating costs, initiated by General
Electric ("GE") Aerospace in 1990 and to the REC Advance Agreement ("RAA"), a
restructuring plan initiated after Lockheed Martin's acquisition of GE
Aerospace. The RAA was initiated to close two regional electronic
manufacturing centers. Restructure costs are reimbursable from the U.S.
Government if savings can be demonstrated to exceed costs. The total cost of
restructuring under the RFA and the RAA represented approximately 15% of the
estimated savings to the U. S. Government and, therefore, a deferred asset
has been recorded by Lockheed Martin. The deferred asset is being allocated
to all the former GE Aerospace sites, including the Communications Systems
Division, on a basis that includes manufacturing labor, overhead, and direct
material less non-hardware subcontracts. As of March 31, 1997 and 1996,
approximately $3,798 and $6,755, (unaudited) respectively of unamortized RFA
and RAA costs are included on the Businesses' combined balance sheet in other
current assets and other assets.
The carrying values of intangible assets are reviewed if the facts and
circumstances indicate potential impairment of their carrying value. If this
review indicates that intangible assets are not recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Division's carrying values related to the
intangible assets are reduced by the estimated shortfall of cash flows.
Research and Development and Similar Costs
Research and development costs sponsored by the Businesses include
research and development and bid and proposal effort related to government
products and services. These costs are generally allocated among all
contracts and programs in progress under U. S. Government contractual
arrangements. Customer-sponsored research and development costs incurred
pursuant to contracts are accounted for as direct contract costs.
Financial Instruments
At March 31, 1997, the carrying value of the Businesses' financial
instruments, such as receivables, accounts payable and accrued liabilities,
approximate fair value, based on the short-term maturities of these
instruments.
New Accounting Pronouncements
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes the accounting standards for the impairment of long-lived assets,
certain intangible assets and cost in excess of net assets acquired to be
held and used for long-lived assets and certain intangible assets to be
disposed of. The impact of adopting SFAS 121 was not material.
Effective January 1, 1994, the Businesses adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postretirement
Benefits" ("SFAS 112"). SFAS 112 requires that the costs of benefits provided
to employees after employment but before retirement be recognized on an
accrual basis. The adoption of SFAS 112 did not have a material impact on the
combined results of operations of the Businesses.
Unaudited Financial Statements
The financial statements for the three months ended March 31, 1996 are
unaudited but in the opinion of management include all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation.
3. Transactions with Lockheed Martin
The Businesses rely on Lockheed Martin for certain services, including
treasury, cash management, employee benefits, taxes, risk management,
internal audit, financial reporting, contract administration and general
corporate services. Although certain assets, liabilities and expenses related
to these services have been allocated to the Businesses, the combined
financial position, results of operations and cash flows presented in the
accompanying combined financial statements would not be the same as would
have occurred had the Businesses been independent entities. The following
describes the related party transactions.
Sales of Products
The Businesses sell products to Lockheed Martin and its affiliates, net
sales of which were $21,171 and $6,425 (unaudited) for the three months ended
March 31, 1997 and 1996, respectively. Included in Contracts in Process are
receivables from Lockheed Martin and its affiliates of $12,392 at March 31,
1997.
Allocation of Corporate Expenses
The amount of allocated corporate expenses reflected in these combined
financial statements has been estimated based primarily on an allocation
methodology prescribed by government regulations pertaining to government
contractors. Allocated costs to the Businesses were $5,208 and $759
(unaudited) for the three months ended March 31, 1997 and 1996, respectively.
Pensions
Certain of the Businesses participate in various Lockheed
Martin-sponsored pension plans covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
members' compensation and years of service. Lockheed Martin'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. Since the aforementioned pension arrangements are part of
certain Lockheed Martin defined benefit plans, no separate actuarial data is
available for the portion allocable to the Businesses. Therefore, no
liability or asset is reflected in the accompanying combined financial
statements. The Businesses have been allocated pension costs based upon
participant employee headcount. Pension expense included in the accompanying
financial statements was $1,848 and $1,083 (unaudited) for the three months
ended March 31, 1997 and 1996, respectively.
Postretirement Health Care and Life Insurance Benefits
In addition to participating in Lockheed Martin-sponsored pension plans,
certain of the Businesses provide varying levels of health care and life
insurance benefits for retired employees and dependents. Participants are
eligible for these benefits when they retire from active service and meet the
pension plan eligibility requirements. 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.
Since the aforementioned postretirement benefits are part of certain
Lockheed Martin postretirement arrangements, no separate actuarial data is
available for the portion allocable to the Businesses. Accordingly, no
liability is reflected in the accompanying financial statements. The
Businesses have been allocated postretirement benefits cost based on
participant employee headcount. Postretirement benefit costs included in the
accompanying financial statements was $616 and $529 (unaudited) for the three
months ended March 31, 1997 and 1996, respectively.
Employee Savings Plans
Under various employee savings plans sponsored by Lockheed Martin, the
Businesses match the contributions of participating employees up to a
designated level. The extent of the match, vesting terms and the form of the
matching contribution vary among the plans. Under these plans, the matching
contributions, in cash, common stock or both, were $1,241 and $386
(unaudited) for the three months ended March 31, 1997 and 1996, respectively.
Stock Options
Certain employees of the Businesses participate in Lockheed Martin's
stock option plans. All stock options granted have 10 year terms and vest
over a two year service period. Exercise prices of options awarded in both
years were equal to the market price of the stock on the date of grant. Pro
Forma information regarding net earnings (loss) as required by SFAS No. 123
has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1996 and 1995,
respectively: risk-free interest rates of 5.58% and 6.64%; divided yield of
1.70%; volatility factors related to the expected market price of Lockheed
Martin's common stock of .186 and .216; and weighted-average expected option
life of five years. The weighted average fair values of options granted
during 1997 was $17.24.
For the purpose of pro forma disclosures, the options' estimated fair
values are amortized to expense over the options' vesting periods. The
Businesses' pro forma net loss for the three months ended March 31, 1997 was
$386.
Interest Expense
Interest expense has been allocated to the Businesses by applying
Lockheed Martin's weighted average consolidated interest rate to the portion
of the beginning of the period invested equity account deemed to be financed
by consolidated debt, which has been determined based on Lockheed Martin's
debt to equity ratio on such date. Management of the Businesses believes that
this allocation methodology is reasonable.
Interest expense was calculated using the following balances and interest
rates:
For the Three Months Ended March 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
(unaudited)
Invested Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $473,609 $194,663
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1% 7.4%
Income Taxes
The Businesses are included in the consolidated Federal income tax
return and certain combined and separate state and local income tax returns
on Lockheed Martin. However, for purposes of these financial statements, the
provision for income taxes has been allocated to the Businesses based upon
combined income before income taxes. Income taxes, current and deferred, are
considered to have been paid or charged to Lockheed Martin and are recorded
through the invested equity account with Lockheed Martin. The principal
components of the deferred taxes are contract accounting methods, property,
plant and equipment, goodwill amortization and timing of accruals and
reserves.
Statements of Cash Flows
The Businesses participate in Lockheed Martin's cash management system,
under which all cash is received and payments are made by Lockheed Martin.
All transactions between the Businesses and Lockheed Martin have been
accounted for as settled in cash at the time such transactions were recorded
by the Businesses.
4. Contracts in Process
Billings and accumulated costs and profits on contracts, principally
with the U.S. Government, comprise the following:
March 31, 1997
------------------------------
Billed contract receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,664
Other billed receivables, principally commercial and affiliates . . . . . . . . . . . . . . . 42,693
Unbilled contract receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,494
Inventoried costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,904
--------
242,755
Less, unliquidated progress payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,207
--------
215,548
========
The U.S. Government has title to, or a security interest in, inventories
to which progress payments are applied. Unbilled contract receivables
represent accumulated costs and profits earned but not yet billed to
customers at year-end. The Businesses believe that substantially all such
amounts will be billed and collected within one year.
The following data has been used in the determination of cost of sales:
For the Three Months Ended
------------------------------------------------
1997 1996
---------------------- -----------------------
(unaudited)
General and administrative costs included in inventoried costs . . . . . $14,536 $ 857
General and administrative costs charged to inventory . . . . . . . . . . 8,680 1,529
Independent research and development and bid and proposal costs charged
to inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,024 932
5. Property, Plant and Equipment
March 31, 1997
-------------------
Land . . . . . . . . . . . . . . . . . . . . . $ 9,200
Building and Improvements . . . . . . . . . . . 27,000
Machinery, equipment, furniture and fixtures . 75,711
Leasehold improvements . . . . . . . . . . . . 8,512
--------
$120,423
========
Depreciation and amortization expense was $4,529 and $1,166 (unaudited)
for the three months ended March 31, 1997 and 1996, respectively. Included
within property, plant and equipment is approximately $15,000 of assets held
for sale which approximates fair value.
6. Income Taxes
The (benefit) provision for income taxes was calculated by applying
statutory tax rates to the reported loss before income taxes after
considering items that do not enter into the determination of taxable income
and tax credits reflected in the consolidated provision of Lockheed Martin,
which are related to the Businesses. For the three months ended March 31,
1997 and 1996, it is estimated that the (benefit) provision for deferred
taxes represent $1,315 and $7 (unaudited), respectively. Substantially all
the income of the Businesses are from domestic operations.
The effective income tax rate differs from the statutory Federal income
tax rate for the following reasons:
March 31, 1997 March 31, 1996
---------------------- -----------------------
(unaudited)
Statutory Federal income tax rate . . . . . . . . . . . . . . . . . . . . (35.0)% (34.0)%
Amortization of cost in excess of net assets acquired . . . . . . . . . . (8.1) 65.3
Research and development and other tax credits . . . . . . . . . . . . . (11.3)
State and local income taxes, net of Federal income tax benefit and
state and local income tax credits . . . . . . . . . . . . . . . . . . 4.8 6.3
Foreign sales corporation tax benefits . . . . . . . . . . . . . . . . . (8.4)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 3.6
----- -----
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . (48.9)% 41.2%
===== =====
7. Sales to Principal Customers
The Businesses operate primarily in one industry segment, electronic
components and systems. Sales to principal customers are as follows:
March 31, 1997 March 31, 1996
---------------------- -----------------------
(unaudited)
U.S. Government Agencies . . . . . . . . . . . . . . . . . . . . . . . . $128,505 $ 41,153
Foreign (principally foreign governments) . . . . . . . . . . . . . . . . 13,612
Other (principally U.S. Commercial) . . . . . . . . . . . . . . . . . . . 16,756
-------- -------
$158,873 $ 41,153
======== =======
8. Commitments and Contingencies
The Businesses lease certain facilities and equipment under agreements
expiring at various dates through 2011. At March 31, 1997, future minimum
payments for noncancellable operating leases with initial or remaining terms
in excess of one year are $10,600 (nine months) for 1997 and 1998, $10,400
for each of the years 1999 and 2000, $10,200 and 2001, and $6,800 in total
thereafter.
Leases covering major items of real estate and equipment contain renewal
and or purchase options which may be exercised by the Businesses. Rent
expense, net of sublease income from other Lockheed Martin entities, was
$2,553 and $1,150 (unaudited) for the three months ended March 31, 1997 and
1996, respectively.
Management is continually assessing the Businesses' obligations with
respect to applicable environmental protection laws. While it is difficult to
determine the timing and ultimate cost to be incurred by the Businesses in
order to comply with these laws, based upon available internal and external
assessments, with respect to those environmental loss contingencies of which
management of the Businesses is aware, the Businesses 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 the Businesses' results of operations. The Businesses
accrue for these contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
The Businesses 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, 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 government procurement regulations, an indictment of the
Businesses by a federal grand jury could result in the Businesses 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.
The Businesses are periodically subject to litigation, claims or
assessments and various contingent liabilities (including environmental
matters) incidental to their business. With respect to those investigative
actions, items of litigation, claims or assessments of which they are aware,
management of the Businesses 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 combined financial position or results of operations of
the Businesses.
LOCKHEED MARTIN PREDECESSOR BUSINESS
COMBINED FINANCIAL STATEMENTS
As of December 31, 1996, 1995 and for the
three years in the period ended December 31, 1996
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Lockheed Martin Corporation:
We have audited the accompanying combined balance sheet of the Lockheed
Martin Predecessor Businesses, as defined in Note 1 to the financial
statements, (the "Businesses") as of December 31, 1996 and the related
combined statements of operations and changes in invested equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Businesses' management. Our responsibility is to
express an opinion on these financial statements based on our audit. We did
not audit the financial statements of the Lockheed Martin Communications
Systems Division, which statements reflect total assets and sales
constituting 35 percent and 30 percent of the related combined totals. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for the
Communications Systems Division, is based solely on the report of the other
auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the combined financial position of the Lockheed Martin Predecessor
Businesses as of December 31, 1996 and their combined results of operations
and cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
March 20, 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lockheed Martin Corporation:
We have audited the combined balance sheets of Lockheed Martin
Communications Systems Division, as defined in Note 1 to the financial
statements, as of December 31, 1996 and 1995, and the related combined
statements of operations and changes in invested equity, and cash flows for
each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Division's and Lockheed
Martin Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Lockheed Martin Communications Systems Division at December 31, 1996 (not
presented separately herein) and 1995, and the combined results of its
operations and its cash flows for the year ended December 31, 1996 (not
presented separately herein), and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
March 7, 1997
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED BALANCE SHEETS
(In thousands)
Years Ended
December 31,
-----------------------------------------------
1996 1995
---------------------- ----------------------
ASSETS
Current assets:
Contracts in process . . . . . . . . . . . . . . . . . . . . . . . . . $198,073 $ 42,457
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,661 3,100
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 201,734 45,557
-------- --------
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . 116,566 31,657
Less, accumulated depreciation and amortization . . . . . . . . . . . . 24,983 15,018
-------- --------
91,583 16,639
-------- --------
Intangibles, primarily cost in excess of net assets acquired, net
of amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282,674 157,560
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,307 8,753
-------- --------
$593,298 $228,509
======== ========
LIABILITIES AND INVESTED EQUITY
Current liabilities:
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . . $ 34,163 $ 9,583
Accrued employment costs . . . . . . . . . . . . . . . . . . . . . . . 27,313 6,534
Customer advances and amounts in excess of costs incurred . . . . . . . 14,299 1,363
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . 27,113 6,983
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 102,888 24,463
-------- --------
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,801 9,383
Commitments and contingencies (Note 8)
Invested equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473,609 194,663
-------- --------
$593,298 $228,509
======== ========
See notes to combined financial statements.
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN INVESTED EQUITY
(In thousands)
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $543,081 $166,781 $218,845
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 499,390 162,132 210,466
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . 43,691 4,649 8,379
Allocated interest expense . . . . . . . . . . . . . . . . . 24,197 4,475 5,450
-------- -------- --------
Earnings before income taxes . . . . . . . . . . . . . . . . 19,494 174 2,929
Income tax expense . . . . . . . . . . . . . . . . . . . . . 7,798 1,186 2,293
-------- -------- --------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . 11,696 (1,012) 636
Invested equity--beginning of year . . . . . . . . . . . . . 194,663 199,506 216,943
Advances from (repayments to) Lockheed Martin . . . . . . . . 267,250 (3,831) (18,073)
-------- -------- --------
Invested equity -- end of year . . . . . . . . . . . . . . . $473,609 $194,663 $199,506
======== ======== ========
See notes to combined financial statements.
LOCKHEED MARTIN PREDECESSOR BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
Operating activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . $ 11,696 $(1,012) $ 636
Depreciation and amortization . . . . . . . . . . . . . . . . 25,039 11,578 11,467
Loss (gain) on disposition of property, plant and equipment . 265 26 (1,078)
Changes in operating assets and liabilities
Contracts in process . . . . . . . . . . . . . . . . . . . 26,103 (3,267) 14,002
Other current assets . . . . . . . . . . . . . . . . . . . 489 788 1,502
Other assets . . . . . . . . . . . . . . . . . . . . . . . (5,246) 1,245 2,044
Accounts payable . . . . . . . . . . . . . . . . . . . . . 3,198 (648) (3,099)
Accrued employment costs . . . . . . . . . . . . . . . . . 2,282 (611) (528)
Customer advances and amounts in excess of costs incurred . (11,586) (2,041) 917
Other current liabilities . . . . . . . . . . . . . . . . . 4,086 4,004 (3,304)
Other liabilities . . . . . . . . . . . . . . . . . . . . . (25,327) (699) (751)
-------- ------- -------
Net cash from operating activities . . . . . . . . . . . . . 30,999 9,363 21,808
-------- ------- -------
Investing activities:
Acquisition of business . . . . . . . . . . . . . . . . . . . (287,803) -- --
Capital expenditures . . . . . . . . . . . . . . . . . . . . (13,528) (5,532) (3,735)
Disposition of property, plant and equipment . . . . . . . . 3,082 -- --
-------- ------- -------
Net cash used in investing activities . . . . . . . . . . . . (298,249) (5,532) (3,735)
-------- ------- -------
Financing activities:
Advances from (repayments to) Lockheed Martin . . . . . . . . 267,250 (3,831) (18,073)
-------- ------- -------
Net change in cash . . . . . . . . . . . . . . . . . . . . . -- -- --
======== ======== =======
See notes to combined financial statements.
LOCKHEED MARTIN PREDECESSOR BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996
(Dollars in thousands)
1. Background and Description of Businesses
On January 31, 1997, Lockheed Martin Corporation ("Lockheed Martin"),
Lehman Brothers Holdings Inc. ("Lehman"), Frank C. Lanza ("Lanza") and Robert
V. LaPenta ("LaPenta") entered into a Memorandum of Understanding regarding
the transfer of certain businesses of Lockheed Martin to a newly formed
corporation ("Newco") to be owned by Lockheed Martin, Lehman, Lanza and
LaPenta. The businesses proposed to be transferred include Lockheed Martin's
Wideband Systems Division, Communications Systems Division and Products
Group, comprising eleven autonomous operations (collectively the "Lockheed
Martin Predecessor Businesses" or the "Businesses"). Also included in the
transaction is the acquisition of a semiconductor product line of another
business and certain leasehold improvements in New York City.
Effective April 1, 1996, Lockheed Martin acquired substantially all the
assets and liabilities of the defense businesses of Loral Corporation
(Loral), including the Wideband Systems Division and the Products Group. The
acquisition of the Wideband Systems Division and Products Group businesses
(the "Acquired Businesses") has been accounted for as a purchase by Lockheed
Martin Communications Systems Division ("Division"). The acquisition has been
reflected in these financial statements based on the purchase price allocated
to those acquired businesses by Lockheed Martin. As such, the accompanying
combined financial statements reflect the results of operations of the
Division and the Acquired Businesses from the effective date of acquisition
including the effects of an allocated portion of cost in excess of net assets
acquired resulting from the acquisition. The assets and liabilities recorded
in connection with the purchase price allocation were $400,993 and $113,190,
respectively.
Had the acquisition of Wideband Systems Division and the Products Group
occurred on January 1, 1995, the unaudited pro forma sales and net income for
the years ending December 31, 1996 and 1995 would have been $675,281 and
$12,638, and $691,136 and $4,790, respectively. The pro forma results, which
are based on various assumptions, are not necessarily indicative of what
would have occurred had the acquisition been consummated on January 1, 1995.
The Businesses are suppliers of sophisticated secure communication
systems and specialized communication products including secure, high data
rate communication systems, commercial fixed wireless communication products,
microwave components, avionic displays and recorders and instrument products.
The Company's customers included the Department of Defense, selected U.S.
government intelligence agencies, major aerospace/defense prime contractors
and commercial customers. The Businesses operate primarily in one industry
segment, electronic components and systems.
Substantially all the Businesses' products are sold to agencies of the
U.S. Government, primarily the Department of Defense, to foreign government
agencies or to prime contractors or subcontractors thereof. All domestic
government contracts and subcontracts of the Businesses are subject to audit
and various cost controls, and include standard provisions for termination
for the convenience of the U.S. Government. Multi-year 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 government.
The decline in the U.S. defense budget since the mid 1980s has resulted
in program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Businesses'
programs; however, in the event that U.S. Government expenditures for
products of the type manufactured by the Businesses 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 Businesses.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying combined financial statements reflect the Businesses'
assets, liabilities and operations included in Lockheed Martin's historical
financial statements that will be transferred to Newco. Intercompany accounts
between Lockheed Martin and the Businesses have been included in invested
equity. Significant inter-business transactions and balances have been
eliminated. The assets and operations of the semiconductor product line and
certain other facilities, which are not material to the combined financial
statements, have been excluded from the combined financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Businesses' 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 revenue and expenses
during the reporting period. The most significant of these estimates and
assumptions relate to contract estimates of sales and costs, allocations from
Lockheed Martin, recoverability of recorded amounts of fixed assets and cost
in excess of net assets acquired, litigation and environmental obligations.
Actual results could differ from these estimates.
Sales and Earnings
Sales and profits on cost reimbursable contracts are recognized as costs
are incurred. Sales and estimated profits under long-term contracts 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
realization is probable. Sales under short-term production-type contracts are
recorded as units are shipped; profits applicable to such shipments are
recorded pro rata, based upon estimated total profit at completion of the
contract. Amounts representing contract change orders or claims are included
in sales only when they can be reliably estimated and realization is
probable. Losses on contracts are recognized when determined. Revisions in
profit estimates are reflected in the period in which the facts which require
the revision become known.
Contracts In Process
Costs accumulated under long-term contracts include direct costs, as
well as manufacturing overhead, and for government contracts, general and
administrative costs, independent research and development costs and bid and
proposal costs. Contracts in process contain amounts relating to contracts
and programs for which the related operating cycles are longer that one year.
In accordance with industry practice, these amounts are included in current
assets.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided primarily using an accelerated method over the estimated useful
lives (5 to 20 years) of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements.
Intangibles
Intangibles, primarily the excess of the cost of purchased businesses
over the fair value of the net assets acquired, is being amortized using a
straight-line method primarily over a 40-year period. Other intangibles are
amortized over their estimated useful lives which range from 11-15 years.
Amortization expense was $10,115, $6,086 and $6,086 for 1996, 1995 and 1994,
respectively. Accumulated amortization was $26,524 and $16,738 at December
31, 1996 and 1995, respectively.
Intangibles include costs allocated to the Businesses relating to the
Request for Funding Authorization ("RFA"), consisting of over 20
restructuring projects to reduce operating costs, initiated by General
Electric ("GE") Aerospace in 1990 and to the REC Advance Agreement ("RAA"), a
restructuring plan initiated after Lockheed Martin's acquisition of GE
Aerospace. The RAA was initiated to close two regional electronic
manufacturing centers. Restructure costs are reimbursable from the U.S.
Government if savings can be demonstrated to exceed costs. The total cost of
restructuring under the RFA and the RAA represented approximately 15% of the
estimated savings to the U.S. Government and, therefore, a deferred asset has
been recorded by Lockheed Martin. The deferred asset is being allocated to
all the former GE Aerospace sites, including the Communications Systems
Division, on a basis that includes manufacturing labor, overhead, and direct
material less non-hardware subcontracts. As of December 31, 1996 and 1995,
approximately $4,400 and $7,500, respectively of unamortized RFA and RAA
costs are incurred on the Businesses' combined balance sheet in other current
assets and other assets.
The carrying values of intangible assets are reviewed if the facts and
circumstances indicate potential impairment of their carrying value. If this
review indicates that intangible assets are not recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Division's carrying values related to the
intangible assets are reduced by the estimated shortfall of cash flows.
Research and Development and Similar Costs
Research and development costs sponsored by the Businesses include
research and development and bid and proposal effort related to government
products and services. These costs generally are allocated among all
contracts and programs in progress under U.S. Government contractual
arrangements. Customer-sponsored research and development costs incurred
pursuant to contracts are accounted for as direct contract costs.
Financial Instruments
At December 31, 1996, the carrying value of the Businesses' financial
instruments, such as receivables, accounts payable and accrued liabilities,
approximate fair value, based on the short-term maturities of these
instruments.
New Accounting Pronouncements
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes the accounting standards for the impairment of long-lived assets,
certain intangible assets and cost in excess of net assets acquired to be
held and used for long-lived assets and certain intangible assets to be
disposed of. The impact of adopting SFAS 121 was not material.
Effective January 1, 1994, the Businesses adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postretirement
Benefits" ("SFAS 112"). SFAS 112 requires that the costs of benefits provided
to employees after employment but before retirement be recognized on an
accrual basis. The adoption of SFAS 112 did not have a material impact on the
combined results of operations of the Businesses.
3. Transactions with Lockheed Martin
The Businesses rely on Lockheed Martin for certain services, including
treasury, cash management, employee benefits, taxes, risk management,
internal audit, financial reporting, contract administration and general
corporate services. Although certain assets, liabilities and expenses related
to these services have been allocated to the Businesses, the combined
financial position, results of operations and cash flows presented in the
accompanying combined financial statements would not be the same as would
have occurred had the Businesses been independent entities. The following
describes the related party transactions.
Sales of Products
The Businesses sell products to Lockheed Martin and its affiliates, net
sales for which were $70,658, $25,874, and $9,983 in 1996, 1995 and 1994,
respectively. Included in Contracts in Process are receivables from Lockheed
Martin and its affiliates of $10,924 and $30 at December 31, 1996 and 1995,
respectively.
Allocation of Corporate Expenses
The amount of allocated corporate expenses reflected in these combined
financial statements has been estimated based primarily on an allocation
methodology prescribed by government regulations pertaining to government
contractors. Allocated costs to the Businesses were $10,057, $2,964 and
$4,141 in 1996, 1995 and 1994, respectively.
Pensions
Certain of the Businesses participate in various Lockheed
Martin-sponsored pension plans covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
members' compensation and years of service. Lockheed Martin'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. Since the aforementioned pension arrangements are part of
certain Lockheed Martin defined benefit plans, no separate actuarial data is
available for the portion allocable to the Businesses. Therefore, no
liability or asset is reflected in the accompanying combined financial
statements. The Businesses have been allocated pension costs based upon
participant employee headcount. Net pension expense included in the
accompanying financial statements was $7,027, $4,134 and $3,675 in 1996, 1995
and 1994, respectively.
Postretirement Health Care and Life Insurance Benefits
In addition to participating in Lockheed Martin-sponsored pension plans,
certain of the Businesses provide varying levels of health care and life
insurance benefits for retired employees and dependents. Participants are
eligible for these benefits when they retire from active service and meet the
pension plan eligibility requirements. 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. Since the
aforementioned postretirement benefits are part of certain Lockheed Martin
postretirement arrangements, no separate actuarial data is available for the
portion allocable to the Businesses. Accordingly, no liability is reflected
in the accompanying financial statements. The Businesses have been allocated
postretirement benefits cost based on participant employee headcount.
Postretirement benefit costs included in the accompanying financial
statements were $2,787, $2,124 and $1,694 in 1996, 1995 and 1994,
respectively.
Employee Savings Plan
Under various employee savings plans sponsored by Lockheed Martin, the
Businesses match the contributions of participating employees up to a
designated level. The extent of the match, vesting terms and the form of the
matching contribution vary among the plans. Under these plans, the matching
contributions, in cash, common stock or both, for 1996, 1995 and 1994 were
$3,940, $1,478 and $1,842, respectively.
Stock Options
During 1996 and 1995, certain employees of the Businesses participated
in Lockheed Martin's stock option plans. All stock options granted in 1996
and 1995 have 10 year terms and vest over a two year service period. Exercise
prices of options awarded in both years were equal to the market price of the
stock on the date of grant. Pro forma information regarding net earnings
(loss) as required by SFAS No. 123 has been determined as if the Company had
accounted for its employee stock options under the fair value method. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of
5.58% and 6.64%; dividend yield of 1.70%; volatility factors related to the
expected market price of the Lockheed Martin's common stock of .186 and .216;
and weighted-average expected option life of five years. The weighted average
fair values of options granted during 1996 and 1995 were $17.24 and $16.09,
respectively.
For the purposes of pro forma disclosures, the options' estimated fair
values are amortized to expense over the options' vesting periods. The
Businesses' pro forma net earnings (loss) for 1996 and 1995 were $11,531 and
$(1,040), respectively.
Interest Expense
Interest expense has been allocated to the Businesses by applying
Lockheed Martin's weighted average consolidated interest rate to the portion
of the beginning of the period invested equity account deemed to be financed
by consolidated debt, which has been determined based on Lockheed Martin's
debt to equity ratio on such date, except that the acquisition of the defense
business of Loral Corporation ("Loral") has been assumed to be fully financed
by debt.
Interest expense was calculated using the following balances and
interest rates:
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
Invested Equity:
Communications Systems Division . . . . . . . . . . . . . . $194,663 $199,506 $216,943
Wideband Systems Division and Products Group . . . . . . . $287,803 -- --
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . 7.20% 7.40% 7.23%
Income Taxes
The Businesses are included in the consolidated Federal income tax
return and certain combined and separate state and local income tax returns
of Lockheed Martin. However, for purposes of these financial statements, the
provision for income taxes has been allocated to the Businesses based upon
reported combined income before income taxes. Income taxes, current and
deferred, are considered to have been paid or charged to Lockheed Martin and
are recorded through the invested equity account with Lockheed Martin. The
principal components of the deferred taxes are contract accounting methods,
property, plant and equipment, goodwill amortization and timing of actuals.
Statements of Cash Flows
The Businesses participate in Lockheed Martin's cash management system,
under which all cash is received and payments are made by Lockheed Martin.
All transactions between the Businesses and Lockheed Martin have been
accounted for as settled in cash at the time such transactions were recorded
by the Businesses.
4. Contracts in Process
Billings and accumulated costs and profits on contracts, principally
with the U.S. Government, comprise the following:
Years Ended
December 31,
------------------------------------------------
1996 1995
----------------------- ----------------------
Billed contract receivables . . . . . . . . . . . . . . . . . . . . . . . $ 40,299 $10,237
Other billed receivables, principally commercial . . . . . . . . . . . . 41,154 --
Unbilled contract receivables . . . . . . . . . . . . . . . . . . . . . . 91,053 23,643
Inventoried costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,380 10,830
-------- -------
233,886 44,710
Less, unliquidated progress payments . . . . . . . . . . . . . . . . . . (35,813) (2,253)
-------- -------
$198,073 $42,457
======== =======
The U.S. Government has title to, or a security interest in, inventories
to which progress payments are applied. Unbilled contract receivables
represent accumulated costs and profits earned but not yet billed to
customers at year-end. The Businesses believe that substantially all such
amounts will be billed and collected within one year.
The following data has been used in the determination of cost of sales:
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
General and administrative costs included in inventoried
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,700 $1,156 $ 493
General and administrative costs charged to inventory . . . . $25,400 $3,967 $ 3,640
Independent research and development and bid and proposal
costs incurred . . . . . . . . . . . . . . . . . . . . . . $36,500 $9,800 $10,640
5. Property, Plant and Equipment
December 31,
------------------------------------------------
1996 1995
---------------------- ----------------------
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,200 --
Buildings and Improvements . . . . . . . . . . . . . . . . . . . . . . . 27,000 --
Machinery, equipment, furniture and fixtures . . . . . . . . . . . . . . 73,137 $29,216
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . 7,229 2,441
-------- -------
$116,566 $31,657
======== =======
Depreciation and amortization expense in 1996, 1995 and 1994 was
$14,924, $5,492 and $5,381, respectively.
6. Income Taxes
The provision for income taxes was calculated by applying statutory tax
rates to the reported pretax income after considering items that do not enter
into the determination of taxable income and tax credits reflected in the
consolidated provision of Lockheed Martin, which are related to the
Businesses. For the years ended December 31, 1996, 1995 and 1994, it is
estimated that the provision for deferred taxes represent ($2,143), $3,994
and $1,252, respectively. Substantially all the income of the Businesses are
from domestic operations.
The effective income tax rate differs from the statutory Federal income
tax rate for the following reasons:
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
Statutory Federal income tax rate . . . . . . . . . . . . . . 35% 34% 34%
Amortization of cost in excess of net assets acquired . . . . 2 529 31
Research and development and other tax credits . . . . . . . (2) -- --
State and local income taxes, net of Federal income tax
benefit and state and local income tax credits . . . . . . 6 101 12
Foreign sales corporation tax benefit . . . . . . . . . . . . (1) -- --
Other, net -- 17 1
--- ---- ---
Effective income tax rate . . . . . . . . . . . . . . . . . . 40% 681% 78%
=== ==== ===
7. Sales to Principal Customers
The Businesses operate primarily in one industry segment, communication
systems and products. Sales to principal customers are as follows:
Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- --------------------- ---------------------
U.S. Government Agencies . . . . . . . . . . . . . $425,033 $161,617 $216,084
Foreign (principally foreign governments) . . . . . 33,475 4,945 1,623
Other (principally commercial) . . . . . . . . . . 84,573 219 1,138
-------- -------- --------
$543,081 $166,781 $218,845
======== ======== ========
8. Commitments and Contingencies
The Businesses lease certain facilities and equipment under agreements
expiring at various dates through 2011. At December 31, 1996, future minimum
payments for noncancellable operating leases with initial or remaining terms
in excess of one year are $11,400 for each of the years 1997 through 2001,
and $12,300 in total thereafter.
Leases covering major items of real estate and equipment contain renewal
and/or purchase options which may be exercised by the Businesses. Rent
expense, net of sublease income from other Lockheed Martin entities, was
$8,495, $4,772 and $5,597 in 1996, 1995 and 1994, respectively.
Management is continually assessing the Businesses' obligations with
respect to applicable environmental protection laws. While it is difficult to
determine the timing and ultimate cost to be incurred by the Businesses in
order to comply with these laws, based upon available internal and external
assessments, with respect to those environmental loss contingencies of which
management of the Businesses is aware, the Businesses 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 the Businesses' results of operations. The Businesses
accrue for these contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
The Businesses 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, 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 government procurement regulations, an indictment of the
Businesses by a federal grand jury could result in the Businesses 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.
The Businesses are periodically subject to litigation, claims or
assessments and various contingent liabilities (including environmental
matters) incidental to its business. With respect to those investigative
actions, items of litigation, claims or assessments of which they are aware,
management of the Businesses 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
Businesses.
REPORT OF INDEPENDENT AUDITORS
Board of Directors of
Lockheed Martin Corporation:
We have audited the accompanying combined statements of operations and
cash flows for the Loral Acquired Businesses as defined in Note 1, (the
"Businesses") for the three months ended March 31, 1996 and the years ended
December 31, 1995 and 1994. These financial statements are the responsibility
of the Businesses' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined results of the operations and
cash flows of the Businesses for the three months ended March 31, 1996 and
the years ended December 31, 1995 and 1994, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
March 20, 1997
LORAL ACQUIRED BUSINESSES
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
Years Ended December 31,
----------------------------------------
Three
Months Ended
March 31, 1996 1995 1994
------------------- ------------------- -------------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,200 $448,165 $283,129
Cost and expenses . . . . . . . . . . . . . . . . . . . . . . 124,426 424,899 273,181
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . 7,774 23,266 9,948
Allocated interest expense . . . . . . . . . . . . . . . . . 4,365 20,799 8,375
-------- -------- --------
Income before income taxes . . . . . . . . . . . . . . . . . 3,409 2,467 1,573
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 1,292 854 560
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,117 $ 1,613 $ 1,013
======== ======== ========
See notes to combined financial statements.
LORAL ACQUIRED BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
---------------------------------------
Three
Months Ended
March 31, 1996 1995 1994
------------------- ------------------ -------------------
Operating Activities:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,117 $ 1,613 $ 1,013
Depreciation and amortization . . . . . . . . . . . . . . . . 5,011 20,625 15,952
Changes in operating assets and liabilities
Contracts in process . . . . . . . . . . . . . . . . . . . (11,382) 7,327 4,499
Other current assets . . . . . . . . . . . . . . . . . . . (3,436) 890 (156)
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,437 6,736 (3,633)
Accounts payable and accrued liabilities . . . . . . . . . 4,525 (4,533) (3,944)
Other current liabilities . . . . . . . . . . . . . . . . . 3,348 4,428 (3,150)
Other liabilities . . . . . . . . . . . . . . . . . . . . . (452) 117 (415)
-------- -------- ------
Net cash from operating activities . . . . . . . . . . . . . 2,168 37,203 10,166
-------- -------- ------
Investing activities:
Acquisition of business . . . . . . . . . . . . . . . . . . . -- (214,927) --
Capital expenditures . . . . . . . . . . . . . . . . . . . . (3,962) (12,683) (7,390)
Disposition of property, plant and equipment . . . . . . . . 187 4,342 144
-------- --------- ------
(3,775) (223,268) (7,246)
-------- --------- ------
Financing activities:
Advances from (repayments to) Loral . . . . . . . . . . . . . 1,607 186,065 (2,920)
--------- --------- -------
Net change in cash . . . . . . . . . . . . . . . . . . . . . -- -- --
========= ========= =======
See notes to combined financial statements.
LORAL ACQUIRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Background and Description of Business
On January 31, 1997, Lockheed Martin Corporation ("Lockheed Martin"),
Lehman Brothers Holdings Inc. ("Lehman"), Frank C. Lanza ("Lanza") and Robert
V. LaPenta ("LaPenta") entered into a Memorandum of Understanding ("MOU")
regarding the transfer of certain businesses of Lockheed Martin to a newly
formed corporation ("Newco") to be owned by Lockheed Martin, Lehman, Lanza
and LaPenta. The businesses proposed to be transferred (the "Loral Acquired
Businesses" or "Businesses") include Lockheed Martin's Wideband Systems
Division and the Products Group, comprised of ten autonomous operations, all
of which were acquired by Lockheed Martin effective April 1, 1996 as part of
the acquisition by Lockheed Martin of the defense electronics business of
Loral Corporation ("Loral"). Also included in the transaction is the
acquisition of a semiconductor product line of another business and certain
leasehold improvements in New York City.
The Businesses are leading suppliers of sophisticated secure
communication systems, microwave communication components, avionic and
instrumentation products and other products and services to major aerospace
and defense contractors as well as the U.S. Government. The Businesses
operate primarily in one industry segment, communication systems and
products.
Substantially all the Business' products are sold to agencies of the
United States Government, primarily the Department of Defense, to foreign
government agencies or to prime contractors or subcontractors thereof. All
domestic government contracts and subcontracts of the Businesses are subject
to audit, various cost controls and include standard provisions for
termination for the convenience of the government. Multi-year 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 government.
The decline in the U.S. defense budget since the mid 1980s has resulted
in program delays, cancellations and scope reductions for defense contractors
in general. These events may or may not have an effect on the Businesses'
programs; however, in the event that expenditures for products of the type
manufactured by the Businesses are reduced, and not offset by greater foreign
sales or other new programs or products, or acquisitions, there may be a
reduction in the volume of contracts or subcontracts awarded to the
Businesses.
The Businesses' operations, as presented herein, include allocations and
estimates of certain expenses of Loral based upon estimates of services
performed by Loral that management of the Businesses believe are reasonable.
Such services include treasury, cash management, employee benefits, taxes,
risk management, internal audit and general corporate services. Accordingly,
the results of operations and cash flows as presented herein may not be the
same as would have occurred had the Businesses been independent entities.
2. Basis of Presentation
Basis of Combination
The accompanying combined financial statements reflect the Businesses'
assets, liabilities and operations included in Loral Corporation's historical
financial statements that will be transferred to Newco. All significant
intercompany transactions and amounts have been eliminated. The combined
financial statements do not include the operations of telecommunications
switch product line which will not be transferred and was exited in 1995.
Also, the assets and operations of the semiconductor product line and certain
other facilities which are not material to the Businesses have been excluded
from the financial statements.
Allocation of Corporate Expenses
The amount of corporate office expenses reflected in these financial
statements has been estimated based primarily on the allocation methodology
prescribed by government regulations pertaining to government contractors,
which management of the Businesses believes to be a reasonable allocation
method.
Income Taxes
The Businesses were included in the consolidated Federal income tax
return and certain combined and separate state and local income tax returns
of Loral. However, for the purposes of these financial statements, the
provision for income taxes was allocated based upon reported income before
income taxes. Such provision was recorded through the advances from
(repayments to) Loral account.
Interest Expense
Interest expense has been allocated to the Businesses by applying
Loral's weighted average consolidated interest rate to the portion of the
beginning of the period invested equity account deemed to be financed by
consolidated debt, which amount has been determined based on the Loral's debt
to equity ratio on such date, except that the acquisition of Wideband Systems
has been assumed to be fully financed by debt.
Statements of Cash Flows
The Businesses participated in Loral's cash management system, under
which all cash was received and payments made by Loral. All transactions
between the Businesses and Loral have been accounted for as settled in cash
on the date such transactions were recorded by the Businesses.
3. Summary of Significant Accounting Policies
Contracts In Process
Sales on long-term production-type contracts are recorded as units are
shipped; 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 are recognized as costs are incurred. Sales
and estimated profits under other long-term contracts 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 realization is probable.
Incentive fees and award fees enter into the determination of contract
profits when they can be reliably estimated.
Costs accumulated under long-term contracts include direct costs as well
as manufacturing, overhead, and for government contracts, general and
administrative, independent research and development and bid and proposal
costs. Losses on contracts are recognized when determined. Revisions in
profit estimates are reflected in the period in which the facts which require
the revision become known.
Depreciation and Amortization
Depreciation is provided primarily on the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of
the improvements. The excess of the cost of purchased businesses over the
fair value of the net assets acquired is being amortized using a
straight-line method generally over a 40-year period.
The carrying amount of cost in excess of net assets acquired is
evaluated on a recurring basis. Current and future profitability as well as
current and future undiscounted cash flows, excluding financing costs, of the
underlying businesses are primary indicators of recoverability. There were no
adjustments to the carrying amount of cost in excess of net assets acquired
resulting from these evaluations during the periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Businesses' 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 revenue and expenses
during the reporting period. The most significant of these estimates and
assumptions relate to contract estimates of sales and costs, cost allocations
from Loral, including interest and income taxes, recoverability of recorded
amounts of fixed assets and cost in excess of net assets acquired, litigation
and environmental obligations. Actual results could differ from these
estimates.
New Accounting Pronouncements
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes the accounting
standards for the impairment of long-lived assets, certain intangible assets
and cost in excess of net assets and certain intangible assets to be disposed
of. The impact of adopting SFAS 121 was not material.
Effective January 1, 1994, the Businesses adopted Statement of Financial
Accounting Standards No.112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"). SFAS 112 requires that the costs of benefits provided
to employees after employment but before retirement be recognized on an
accrual basis. The adoption of SFAS 112 did not have a material impact on the
results of operations of the Businesses.
4. Acquisitions
Effective May 1, 1995, Loral acquired substantially all the assets and
liabilities of the Defense Systems operations of Unisys Corporation, which
included the Wideband Systems Division. The acquisition has been accounted
for as a purchase. As such, the accompanying combined financial statements
reflect the results of operations of the Wideband Systems Division from the
effective date of acquisition, including the amortization of an allocated
portion of cost in excess of net assets acquired resulting from the
acquisition. Such allocation was based on the sales and profitability of the
Wideband Systems Divisions relative to the aggregate sales and profitability
of the defense systems operations acquired by Loral. The assets and
liabilities recorded in connection with the purchase price allocation were
$240,525 and $25,598, respectively.
Had the acquisition of the Wideband Systems Division occurred on January
1, 1994, the unaudited pro forma sales and net income (loss) for the years
ending December 31, 1995 and 1994 would have been $524,355 and $700, and
$504,780 and ($963), respectively. The results, which are based on various
assumptions, are not necessarily indicative of what would have occurred had
the acquisition been consummated as of January 1, 1994.
5. Operating Expenses
The following expenses have been included in the statements of
operations:
Years Ended December 31,
----------------------------------------
Three
Months Ended
March 31, 1996 1995 1994
------------------- ------------------- -------------------
General and administrative expenses . . . . . . . . . . . . . $23,558 $ 90,757 $74,205
Independent research and development, and bid and proposal
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,587 $ 21,370 $19,491
6. Income Taxes
The provision for income taxes was calculated by applying Loral's
statutory tax rates to the reported pre-tax book income after considering
items that do not enter into the determination of taxable income and tax
credits reflected in the consolidated provision which are related to the
Businesses. It is estimated that deferred income taxes represent
approximately $714,000, $2,857,000 and $4,060,000 of the provisions for
income taxes reflected in these financial statements for the three months
ended March 31, 1996 and the years ended December 31, 1995 and 1994. The
principal components of deferred income taxes are contract accounting
methods, property plant and equipment, goodwill amortization, and timing of
accruals. Substantially all of the Businesses' income is from domestic
operations.
The following is a reconciliation of the statutory rate to the effective
tax rates reflected in the financial statements:
Years Ended December 31,
-------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Statutory Federal income tax rate . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Research and development and other tax credits . . . . . . . -- (18.6) (43.4)
State and local income taxes, net of Federal income tax
benefit and state and local income tax credits . . . . . . 3.9 (.3) (15.5)
Foreign sales corporation tax benefit . . . . . . . . . . . . (2.2) (3.0) (13.6)
Amortization of goodwill . . . . . . . . . . . . . . . . . . 6.3 35.1 55.0
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (5.1) (13.6) 18.1
---- ----- -----
Effective income tax rate . . . . . . . . . . . . . . . . . . 37.9% 34.6% 35.6%
===== ===== =====
7. Interest Expense
Interest expense was calculated using the following balances and
interest rates:
Years Ended December 31,
----------------------------------------
Three
Months Ended
March 31, 1996 1995 1994
------------------- ------------------- -------------------
Invested Equity . . . . . . . . . . . . . . . . . . . . . . . $453,062 $265,384 $267,291
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . 7.40% 7.87% 6.56%
Wideband Systems Allocated Purchase Price . . . . . . . . . . -- $214,927 --
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . -- 7.40% --
8. Commitments and Contingencies
The Businesses lease certain facilities and equipment under agreements
expiring at various dates through 2011. Leases covering major items of real
estate and equipment contain renewal and/or purchase options which may be
exercised by the Businesses. Rent expense for the three months ended March
31, 1996 was $1,063. Rent expense for the years ended December 31, 1995 and
1994 was $4,276 and $4,027, respectively.
Management is continually assessing its obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Businesses in order to
comply with these laws, based upon available internal and external
assessments, the Businesses 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 the Businesses'
operations. The Businesses accrue for these contingencies when it is probable
that a liability has been incurred and the amount of the loss can be
reasonably estimated. The Businesses believe that it has adequately accrued
for future expenditures in connection with environmental matters and that
such expenditures will not have a material adverse effect on its financial
position or results of operations.
There are a number of lawsuits or claims pending against the Businesses
and incidental to its business. However, in the opinion of management, the
ultimate liability on these matters, if any, will not have a material adverse
effect on the financial position or results of operations of the Businesses.
9. Pensions and Other Employee Benefits
Pensions
The Businesses participate in various Loral-sponsored pension plans both
contributory and non-contributory covering certain employees. Eligibility for
participation in these plans varies, and benefits are generally based on
members' compensation and years of service. Loral's funding policy was
generally to contribute in accordance with cost accounting standards that
affect government contractors, subject to the Internal Revenue code and
regulations thereon. Since the aforementioned pension arrangements were part
of certain Loral defined benefit or defined contribution plans, no separate
actuarial data was available for the Businesses. The Businesses have been
allocated their share of pension costs based upon participation employee
headcount. Net pension expense, which approximates the amount funded,
included in the accompanying financial statements was $1,234, $4,391 and
$3,150 for the three months ended March 31, 1996 and the years ended December
31, 1995 and 1994, respectively.
Postretirement Health Care and Life Insurance Benefits
In addition to participating in Loral-sponsored pension plans, the
Businesses provide certain health care 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
pension plan eligibility requirements. 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. Since the
aforementioned postretirement benefits were part of certain Loral
postretirement arrangements, no separate actuarial data is available for the
Businesses. The Businesses have been allocated postretirement benefit costs
based upon participant employee headcount. Postretirement benefit costs
included in the accompanying financial statements were $402, $1,646 and
$1,682 for the three months ended March 31, 1996 and the years ended December
31, 1995 and 1994, respectively.
Employee Savings Plans
Under various employee savings plans sponsored by Loral, the Businesses
matched the contributions of participating employees up to a designated
level. The extent of the match, vesting terms and the form of the matching
contribution vary among the plans. Under these plans, the matching
contributions, in cash, common stock or both, for the three months ended
March 31, 1996 and the years ended December 31, 1995 and 1994 were $634,
$1,879 and $1,844, respectively.
10. Sales to Principal Customers
The Businesses operate primarily in one industry segment, electronic
components and systems. Sales to principal customers are as follows:
Years Ended
December 31,
----------------------------------------
Three
Months Ended
March 31, 1996 1995 1994
------------------- ------------------- -------------------
U.S. Government Agencies . . . . . . . . . . . . . . . . . $ 94,993 $328,476 $160,068
Foreign (principally foreign governments) . . . . . . . . . 16,838 62,549 65,883
Other (principally commercial) . . . . . . . . . . . . . . 20,369 57,140 57,178
-------- --------- ---------
$132,200 $448,165 $283,129
======== ========= =========
Foreign sales comprise the following:
Years Ended
December 31,
----------------------------------------
Three
Months Ended
March 31, 1996 1995 1994
------------------- ------------------- -------------------
Export sales
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,056 $ 19,248 $30,790
Middle East . . . . . . . . . . . . . . . . . . . . . . . . 3,648 4,147 6,035
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . 6,275 26,283 18,368
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,859 12,871 10,690
------- -------- -------
Total foreign sales . . . . . . . . . . . . . . . . . . . . $16,838 $ 62,549 $65,883
======= ======== =======
11. Related Party Transactions
The Businesses had a number of transactions with Loral and its
affiliates. Management believes that the arrangements are as favorable to the
Businesses as could be obtained from unaffiliated parties. The following
describe the related party transactions.
Loral allocated certain operational, administrative, legal and other
services to the Businesses. Costs allocated to the Businesses were $1,827,
$6,535 and $5,123 for the three months ended March 31, 1996 and the years
ended December 31, 1995 and 1994, respectively. The Businesses sold products
to Loral and its affiliates. Net sales to Loral were $14,840 for the three
months ended March 31, 1996 and were $54,600 and $28,542 in 1995 and 1994,
respectively. Net sales to Space Systems/Loral were $2,471 for the three
months ended March 31, 1996 and were $4,596 and $1,678 in 1995 and 1994,
respectively. Net sales to K&F Industries were $1,173 for the three months
ended March 31, 1996 and were $2,415 and $3,962 in 1995 and 1994,
respectively.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if
given or made, such information or representations must not be relied upon
as having been authorized. This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any securities other than the
securities to which it relates or any offer to sell or the solicitation of
an offer to buy such securities in any circumstances in which such offer
or solicitation is unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct
as of any time subsequent to its date.
_________________________
Table of Contents
Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Ractors . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 34
Unaudited Pro Forma Condensed Consolidated (Combined)
Financial Statements . . . . . . . . . . . . . . . . . . . 35
Selected Financial Information . . . . . . . . . . . . . . . . . 40
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 44
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
The Transaction . . . . . . . . . . . . . . . . . . . . . . . . . 80
Certain Relationships and Related Transactions . . . . . . . . . 82
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Ownership of Capital Stock . . . . . . . . . . . . . . . . . . . 91
Description of Senior Credit Facilities . . . . . . . . . . . . . 91
Description of the Exchange Notes . . . . . . . . . . . . . . . . 94
Certain United States Federal Tax Considerations . . . . . . . . 136
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . 136
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Index to Financial Statements . . . . . . . . . . . . . . . . . . 139
Prospectus
L-3 Communications Corporation
10 3/8% Series B Senior Subordinated
Notes Due 2007
LEHMAN BROTHERS
