Filed Pursuant to Rule 424(B)(3)
Registration File No.: 333-106106
PROSPECTUS
$400,000,000
[L-3 COMMUNICATIONS LOGO OMITTED]
L-3 COMMUNICATIONS CORPORATION
Offer to Exchange All Outstanding 6 1/8% Senior Subordinated Notes due 2013 for
an equal amount of 6 1/8% Series B Senior Subordinated Notes due 2013, which
have been registered under the Securities Act of 1933.
THE EXCHANGE OFFER
o We will exchange all outstanding notes that are validly tendered and not
validly withdrawn for an equal principal amount of exchange notes that
are freely tradeable.
o You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
o The exchange offer expires at 5:00 p.m., New York City time, on July 23,
2003, unless extended. We do not currently intend to extend the
expiration date.
o The exchange of outstanding notes for exchange notes in the exchange
offer will not be a taxable event for U.S. federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
o The exchange notes are being offered in order to satisfy certain of our
obligations under the registration rights agreement entered into in
connection with the placement of the outstanding notes.
o The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the outstanding notes, except that the exchange
notes will be freely tradeable.
RESALES OF EXCHANGE NOTES
o The exchange notes may be sold in the over-the-counter market, in
negotiated transactions or through a combination of such methods. We do
not plan to list the exchange notes on a national market.
If you are a broker-dealer and you receive exchange notes for your own account,
you must acknowledge that you will deliver a prospectus in connection with any
resale of such exchange notes. By making such acknowledgment, you will not be
deemed to admit that you are an "underwriter" under the Securities Act of 1933.
Broker-dealers may use this prospectus in connection with any resale of
exchange notes received in exchange for outstanding notes where such
outstanding notes were acquired by the broker-dealer as a result of
market-making activities or trading activities. We have agreed that, for a
period of 180 days after the expiration of the exchange offer or until any
broker-dealer has sold all registered notes held by it, we will make this
prospectus available to such broker-dealer for use in connection with any such
resale. A broker-dealer may not participate in the exchange offer with respect
to outstanding notes acquired other than as a result of market-making
activities or trading activities. See "Plan of Distribution."
If you are an affiliate of L-3 Communications Corporation or are engaged in, or
intend to engage in, or have an agreement or understanding to participate in, a
distribution of the exchange notes, you cannot rely on the applicable
interpretations of the Securities and Exchange Commission and you must comply
with the registration requirements of the Securities Act of 1933 in connection
with any resale transaction.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 15 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is June 24, 2003
TABLE OF CONTENTS
PAGE
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Where You Can Find More Information ......... i
Prospectus Summary .......................... 1
Risk Factors ................................ 15
Forward-Looking Statements .................. 24
Use of Proceeds ............................. 26
Capitalization .............................. 27
Selected Financial Data ..................... 28
Management's Discussion and Analysis of
Results of Operations and Financial
Condition ................................ 29
Business .................................... 60
Certain Relationships and Related
Transactions ............................. 88
PAGE
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Management .................................. 89
Ownership of Capital Stock .................. 97
Description of Other Indebtedness ........... 100
The Exchange Offer .......................... 111
Description of the Notes .................... 121
Certain United States Federal Income Tax
Considerations ........................... 160
Plan of Distribution ........................ 162
Legal Matters ............................... 163
Experts ..................................... 163
Index to Financial Statements ............... F-1
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, file reports and other
information with the SEC. Such reports and other information can be inspected
and copied at the Public Reference Section of the SEC located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at a
regional public reference facility maintained by the SEC located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the SEC at
prescribed rates. Such material may also be accessed electronically by means of
the SEC's home page on the Internet (http://www.sec.gov).
So long as we are subject to the periodic reporting requirements of the
Securities Exchange Act, we are required to furnish the information required to
be filed with the SEC to the trustee and the holders of the exchange notes. We
have agreed that, even if we are not required under the Securities Exchange Act
to furnish such information to the SEC, we will nonetheless continue to furnish
information that would be required to be furnished by us by Section 13 of the
Securities Exchange Act to the trustee and the holders of the exchange notes as
if we were subject to such periodic reporting requirements.
----------------
ABOUT THIS PROSPECTUS
As used in this prospectus, (1) "L-3 Holdings" refers to L-3
Communications Holdings, Inc., (2) "L-3 Communications" refers to L-3
Communications Corporation, a wholly-owned operating subsidiary of L-3 Holdings
and the issuer of the outstanding notes and the exchange notes, and (3)
"Guarantors" refers to the current and future domestic restricted subsidiaries,
that are or will guarantee the obligations of L-3 Communications under the
outstanding notes and the exchange notes. The obligations of the guarantors are
referred to herein as the "guarantees." "L-3," the "Company," "we," "us" and
"our" refer to L-3 Communications and its subsidiaries. "Senior credit
facilities" refers to our 364-day revolving credit facility together with our
five-year revolving credit facility. Unless the context otherwise requires,
"notes" refers to the outstanding notes and the exchange notes.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus and does not contain all of the information you need to consider in
making your investment decision. You should read carefully this entire
prospectus.
L-3
We are a leading merchant supplier of secure communications and
intelligence, surveillance and reconnaissance (ISR) systems, training,
simulation and support services, aviation products and aircraft modernization,
as well as specialized products. Our businesses employ proprietary technologies
and capabilities, and we believe our businesses have leading positions in their
respective primary markets. Our customers include the U.S. Department of
Defense and prime contractors thereof, certain U.S. Government intelligence
agencies, major aerospace and defense contractors, foreign governments,
commercial customers and certain other U.S. federal, state and local government
agencies. For the year ended December 31, 2002, direct and indirect sales to
the U.S. Department of Defense provided 65.5% of our sales, and sales to
commercial customers, foreign governments and U.S. federal, state and local
government agencies other than the U.S. Department of Defense provided the
remaining 34.5% of our sales. For the year ended December 31, 2002, we had
sales of $4,011.2 million, of which U.S. customers accounted for approximately
85.7% and foreign customers accounted for approximately 14.3%, operating income
of $454.0 million, net cash from operating activities of $318.5 million and
EBITDA (as defined) of $529.9 million. (For a reconciliation of EBITDA to its
most directly comparable GAAP financial measure see page 13.) For the three
months ended March 31, 2003, we had sales of $1,089.0 million, operating income
of $108.8 million, net cash from operating activities of $106.1 million and
EBITDA of $131.6 million.
For the twelve months ended March 31, 2003, we had sales of $4,403.4
million, operating income of $491.5 million, net cash from operating activities
of $383.2 million and EBITDA of $575.0 million.
We have four reportable segments: (1) Secure Communications & ISR; (2)
Training, Simulation & Support Services; (3) Aviation Products & Aircraft
Modernization; and (4) Specialized Products.
Secure Communications & ISR. The businesses in this segment provide
products and services for the global ISR market, specializing in signals
intelligence (SIGINT) and communications intelligence (COMINT) systems. These
products and services provide to the warfighter in real-time the unique ability
to collect and analyze unknown electronic signals from command centers,
communication nodes and air defense systems for real-time situation awareness
and response. This segment also provides secure, high data rate communications
systems for military and other U.S. Government and foreign government
reconnaissance and surveillance applications. These systems and products are
critical elements of virtually all major communication, command and control,
intelligence gathering and space systems. Our systems and products are used to
connect a variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording, monitoring and
dissemination functions of these communication systems. The major secure
communications programs and systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real-time information collection and dissemination to users;
o highly specialized fleet management and support, including procurement,
systems integration, sensor development, modifications and maintenance for
signals intelligence and ISR special mission aircraft and airborne
surveillance systems;
o strategic and tactical signals intelligence systems that detect,
collect, identify, analyze and disseminate information;
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o secure telephone and network equipment and encryption management; and
o communication systems for surface and undersea vessels and manned space
flights.
Training, Simulation & Support Services. The businesses in this segment
provide a full range of training, simulation and support services, including:
o services designed to meet customer training requirements for aircrews,
navigators, mission operators, gunners and maintenance technicians for
virtually any platform, including military fixed and rotary wing aircraft,
air vehicles and various ground vehicles;
o communication software support, information services and a wide range of
engineering development services and integration support;
o high-end engineering and information support services used for command,
control, communications and ISR architectures, as well as for air warfare
modeling and simulation tools for applications used by the U.S. Department
of Defense, Department of Homeland Security and U.S. Government
intelligence agencies, including missile and space systems, Unmanned
Aerial Vehicles and military aircraft;
o developing and managing extensive programs in the United States and
internationally that focus on teaching, training and education, logistics,
strategic planning, organizational design, democracy transition and
leadership development;
o producing crisis management software and providing command and control
for homeland security applications; and
o design, prototype development and production of ballistic missile
targets for missile defense applications, including present and future
threat scenarios.
Aviation Products & Aircraft Modernization. The businesses in this segment
provide aviation products and aircraft modernization services, including:
o airborne traffic and collision avoidance systems for commercial and
military applications;
o commercial, solid-state, crash-protected cockpit voice recorders, flight
data recorders and maritime hardened voyage recorders;
o ruggedized custom displays for military and high-end commercial
applications;
o turnkey aviation life cycle management services that integrate custom
developed and commercial off-the-shelf products for various military and
commercial wide-body and rotary wing aircraft, including heavy maintenance
and structural modifications and Head-of-State and commercial interior
completions; and
o engineering, modification, maintenance, logistics and upgrades for U.S.
Special Operations Command aircraft, vehicles and personnel equipment.
Specialized Products. The businesses in this segment supply products,
including components, subsystems and systems, to military and commercial
customers in several niche markets. These products include:
o ocean products, including acoustic undersea warfare products for mine
hunting, dipping and anti-submarine sonars and naval power distribution,
conditioning, switching and protection equipment for surface and undersea
platforms;
o ruggedization and integration of commercial off-the-shelf technology for
displays, computers and electronic systems for military and commercial
applications;
o integrated video security and surveillance systems that provide
perimeter security used by the U.S. Immigration and Naturalization Service
and U.S. Border Patrol to monitor and protect U.S. borders;
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o security systems for aviation, port and border applications to detect
explosives, concealed weapons, contraband and illegal narcotics, to
inspect agricultural products and to examine cargo;
o telemetry, instrumentation, space and navigation products, including
tracking and flight termination;
o premium fuzing products;
o microwave components used in radar communication satellites, wireless
communication equipment, electronic surveillance, communication and
electronic warfare applications and countermeasure systems;
o high performance antennas and ground based radomes;
o training devices and motion simulators which produce advanced virtual
reality simulation and high-fidelity representations of cockpits and
mission stations for fixed and rotary wing aircraft and land vehicles; and
o precision stabilized electro-optic surveillance systems, including high
magnification lowlight, daylight and forward looking infrared sensors,
laser range finders, illuminators and designators, and digital and
wireless communication systems.
DEVELOPING COMMERCIAL AND CIVIL OPPORTUNITIES
Part of our growth strategy is to identify commercial and non-U.S.
Department of Defense applications from select products and technologies that
we currently sell to our defense customers. We have initially identified two
vertical markets where we believe there are significant opportunities to expand
our product sales: transportation and broadband wireless communications
products.
Within the transportation market, we are offering (1) an explosives
detection system for screening checked baggage at airports, X-ray screening
products for cargo, air freight, port and border security applications, display
and power propulsion systems for rail transportation and power switches for
internet service providers, and (2) maritime voyage recorders and an enhanced
aviation collision avoidance product that incorporates ground proximity
warning. Within the communications product market, we are offering local fixed
wireless access equipment for voice and data communications.
We have developed the majority of our commercial and civil products
employing technology used in our defense businesses. Except for our explosives
detection systems, sales generated from our developing commercial and civil
opportunities have not been material to us.
OUR STRATEGY
We intend to grow our sales, improve our profitability and build on our
position as a leading merchant supplier of systems, products and services to
the major contractors in the aerospace and defense industry as well as the U.S.
Government. We also intend to continue to leverage our expertise and products
into selected new commercial and civil business areas where we can adapt our
existing products and technologies. Our strategy to achieve our objectives
includes:
EXPAND MERCHANT SUPPLIER RELATIONSHIPS. As an independent merchant
supplier, we anticipate that our growth will be driven by expanding our share
of existing programs and by participating in new programs. We identify
opportunities where we are able to use our strong relationships to increase our
business presence and allow customers to reduce their costs. We also expect to
benefit from continued outsourcing of subsystems, components and products by
prime contractors, which positions us to be a merchant supplier to multiple
bidders on prime contract bids.
SUPPORT CUSTOMER REQUIREMENTS. We intend to continue to align our
research and development, manufacturing and new business efforts to complement
our customers' requirements and provide state-of-the-art products.
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IMPROVE OPERATING MARGINS. We intend to continue to improve our operating
performance by continuing to reduce overhead expenses, consolidating certain of
our businesses and business processes and increasing the productivity of our
businesses.
LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. We are applying our
technical expertise and capabilities to several closely aligned commercial
business markets and applications such as transportation and broadband wireless
communications and we expect to continue to explore other similar commercial
opportunities.
MAINTAIN DIVERSIFIED BUSINESS MIX. We have a diverse and broad business
mix with limited reliance on any single program, a favorable balance of
cost-reimbursable and fixed-price contracts, a significant follow-on business
and an attractive customer profile.
CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. We intend to enhance
our existing product base through internal research and development efforts and
selective acquisitions of businesses that will add new products in areas that
complement our present technologies. Since January 1, 2003, we acquired two
businesses for an aggregate purchase price of $206.0 million. We regularly
evaluate opportunities to acquire businesses. See "Risk Factors -- Our
acquisition strategy involves risks, and we may not successfully implement our
strategy."
REDEMPTION
We initiated full redemption of all of our $180.0 million aggregate
principal amount of 8 1/2% Senior Subordinated Notes due 2008 on Wednesday, May
21, 2003. All such notes were redeemed on June 20, 2003 at a redemption
price of 104.250% of the principal amount thereof, plus accrued and unpaid
interest to June 20, 2003.
A portion of the net proceeds from the offering of the outstanding notes
were used to finance the redemption.
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We are incorporated in Delaware, and the address of our principal executive
offices is 600 Third Avenue, New York, New York 10016. Our telephone number is
(212) 697-1111.
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SUMMARY OF TERMS OF THE EXCHANGE OFFER
On May 21, 2003, we completed the private offering of the outstanding
notes. References to the "notes" in this prospectus are references to both the
outstanding notes and the exchange notes. This prospectus is part of a
registration statement covering the exchange of the outstanding notes for the
exchange notes.
We and the guarantors entered into a registration rights agreement with
the initial purchasers in the private offering in which we and the guarantors
agreed to deliver to you this prospectus as part of the exchange offer and we
agreed to complete the exchange offer within 210 days after the date of
original issuance of the outstanding notes. You are entitled to exchange in the
exchange offer your outstanding notes for exchange notes which are identical in
all material respects to the outstanding notes except:
o the exchange notes have been registered under the Securities Act;
o the exchange notes are not entitled to certain registration rights which
are applicable to the outstanding notes under the registration rights
agreement; and
o certain contingent interest rate provisions are no longer applicable.
The Exchange Offer............ We are offering to exchange up to
$400,000,000 aggregate principal amount of our
6 1/8% Series B Senior Subordinated Notes due
2013, which we refer to in this prospectus as
the exchange notes, for up to $400,000,000
million aggregate principal amount of our
6 1/8% Senior Subordinated Notes due 2013,
which we refer to in this prospectus as the
outstanding notes. Outstanding notes may be
exchanged only in integral multiples of $1,000.
Resale........................ Based on an interpretation by the staff of
the SEC set forth in no-action letters issued
to third parties, we believe that the exchange
notes issued pursuant to the exchange offer in
exchange for outstanding notes may be offered
for resale, resold and otherwise transferred by
you (unless you are an "affiliate" of L-3
Communications Corporation, within the meaning
of Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that you are acquiring the exchange
notes in the ordinary course of your business
and that you have not engaged in, do not intend
to engage in, and have no arrangement or
understanding with any person to participate
in, a distribution of the exchange notes.
Each participating broker-dealer that receives
exchange notes for its own account pursuant to
the exchange offer in exchange for outstanding
notes that were acquired as a result of
market-making or other trading activity must
acknowledge that it will deliver a prospectus
in connection with any resale of the exchange
notes. See "Plan of Distribution."
Any holder of outstanding notes who:
o is an affiliate of L-3 Communications
Corporation;
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o does not acquire exchange notes in the
ordinary course of its business; or
o tenders in the exchange offer with the
intention to participate, or for the purpose
of participating, in a distribution of
exchange notes;
cannot rely on the position of the staff of
the SEC enunciated in Exxon Capital Holdings
Corporation, Morgan Stanley & Co.
Incorporated or similar no-action letters
and, in the absence of an exemption
therefrom, must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with the resale
of the exchange notes.
Expiration Date; Withdrawal of
Tender....................... The exchange offer will expire at 5:00 p.m.,
New York City time, on July 23, 2003, or such later
date and time to which we extend it (the
"expiration date"). We do not currently intend
to extend the expiration date. A tender of
outstanding notes pursuant to the exchange
offer may be withdrawn at any time prior to the
expiration date. Any outstanding notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder promptly after the expiration or
termination of the exchange offer.
Certain Conditions to the Exchange
Offer........................ The exchange offer is subject to customary
conditions, which we may waive. Please read the
section captioned "The Exchange Offer --
Certain Conditions to the Exchange Offer" of
this prospectus for more information regarding
the conditions to the exchange offer.
Procedures for Tendering Outstanding
Notes........................ If you wish to accept the exchange offer, you
must complete, sign and date the accompanying
letter of transmittal, or a facsimile of the
letter of transmittal according to the
instructions contained in this prospectus and
the letter of transmittal. You must also mail
or otherwise deliver the letter of transmittal,
or a facsimile of the letter of transmittal,
together with the outstanding notes and any
other required documents, to the exchange agent
at the address set forth on the cover page of
the letter of transmittal. If you hold
outstanding notes through The Depository Trust
Company, or DTC, and wish to participate in the
exchange offer, you must comply with the
Automated Tender Offer Program procedures of
DTC, by which you will agree to be bound by the
letter of transmittal. By signing, or agreeing
to be bound by the letter of transmittal, you
will represent to us that, among other things:
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o any exchange notes that you receive will be
acquired in the ordinary course of your
business;
o you have no arrangement or understanding
with any person or entity to participate in
a distribution of the exchange notes;
o if you are a broker-dealer that will
receive exchange notes for your own account
in exchange for outstanding notes that were
acquired as a result of market-making
activities, that you will deliver a
prospectus, as required by law, in
connection with any resale of such exchange
notes; and
o you are not an "affiliate," as defined in
Rule 405 of the Securities Act, of L-3 or,
if you are an affiliate, you will comply
with any applicable registration and
prospectus delivery requirements of the
Securities Act.
Special Procedures for Beneficial
Owners....................... If you are a beneficial owner of outstanding
notes which are registered in the name of a
broker, dealer, commercial bank, trust company
or other nominee, and you wish to tender such
outstanding notes in the exchange offer, you
should contact such registered holder promptly
and instruct such registered holder to tender
on your behalf. If you wish to tender on your
own behalf, you must, prior to completing and
executing the letter of transmittal and
delivering your outstanding notes, either make
appropriate arrangements to register ownership
of the outstanding notes in your name or obtain
a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may
not be able to be completed prior to the
expiration date.
Guaranteed Delivery
Procedures.................... If you wish to tender your outstanding notes
and your outstanding notes are not immediately
available or you cannot deliver your
outstanding notes, the letter of transmittal or
any other documents required by the letter of
transmittal or comply with the applicable
procedures under DTC's Automated Tender Offer
Program prior to the expiration date, you must
tender your outstanding notes according to the
guaranteed delivery procedures set forth in
this prospectus under "The Exchange Offer --
Guaranteed Delivery Procedures."
Effect on Holders of Outstanding
Notes........................ As a result of the making of, and upon
acceptance for exchange of all validly tendered
outstanding notes pursuant to the terms of the
exchange offer, we will have fulfilled a
covenant contained in the registration rights
agreement and, accordingly, there will be no
increase in the interest rate on the
outstanding notes under the circumstances
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described in the registration rights
agreement. If you are a holder of outstanding
notes and you do not tender your outstanding
notes in the exchange offer, you will continue
to hold such outstanding notes and you will be
entitled to all the rights and limitations
applicable to the outstanding notes in the
indenture, except for any rights under the
registration rights agreement that by their
terms terminate upon the consummation of the
exchange offer.
To the extent that outstanding notes are
tendered and accepted in the exchange offer,
the trading market for outstanding notes could
be adversely affected.
Consequences of Failure to
Exchange..................... All untendered outstanding notes will
continue to be subject to the restrictions on
transfer provided for in the outstanding notes
and in the indenture. In general, the
outstanding notes may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. Other
than in connection with the exchange offer, we
do not currently anticipate that we will
register the outstanding notes under the
Securities Act.
Certain Income
Tax Considerations............ The exchange of outstanding notes for exchange
notes in the exchange offer will not be a
taxable event for United States federal income
tax purposes. See "Certain United States
Federal Income Tax Considerations."
Use of Proceeds............... We will not receive any cash proceeds from
the issuance of exchange notes pursuant to the
exchange offer.
Exchange Agent................ The Bank of New York is the exchange agent
for the exchange offer. The address and
telephone number of the exchange agent are set
forth in the section captioned "The Exchange
Offer -- Exchange Agent" of this prospectus.
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SUMMARY OF TERMS OF THE EXCHANGE NOTES
Issuer........................ L-3 Communications Corporation
Securities Offered............ $400,000,000 in aggregate principal amount of
6 1/8% Series B Senior Subordinated Notes due
2013
Maturity...................... July 15, 2013
Interest Payment Dates........ July 15 and January 15, beginning July 15,
2003. The initial interest payment will include
accrued interest from May 21, 2003.
Interest Rate................. 6 1/8% per year
Ranking....................... The outstanding notes are, and the exchange
notes will be, unsecured senior subordinated
obligations of L-3 Communications Corporation.
They rank behind all of our and the guarantors'
current and future indebtedness (other than
trade payables), except indebtedness that
expressly provides that it is on parity with or
subordinated in right of payment to these notes
and the guarantees. As of March 31, 2003, on a
pro forma basis giving effect to the offering
of the outstanding notes and the application of
the proceeds as intended, the exchange notes
and the related guarantees would:
o not have been subordinated to any senior
debt (excluding outstanding letters of
credit); and
o have ranked equally with $1,670.0 million
of other senior subordinated debt.
As of March 31, 2003, L-3 Communications
Corporation had the ability to borrow up to
$676.4 million (after reductions for
outstanding letters of credit of $73.6
million) under its senior credit facilities,
all of which if borrowed or drawn upon would
be senior debt. See "Description of the Notes
-- Subordination."
Subsidiary Guarantees......... The outstanding notes are, and the exchange
notes will be, jointly and severally guaranteed
on a senior subordinated basis by certain of
our current and future domestic restricted
subsidiaries as described under "Description of
the Notes -- Subsidiary Guarantees."
The guarantees of the outstanding notes are,
and the guarantees of the exchange notes will
be, subordinated in right of payment to all
existing and future senior debt of the
guarantors. The guarantees of the outstanding
notes are, and the guarantees of the exchange
notes will be, pari passu with other senior
subordinated indebtedness of the guarantors,
including (1) the 8% Senior Subordinated Notes
due 2008 and the 7 5/8% Senior Subordinated
Notes
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due 2012, in each case issued by L-3
Communications Corporation and guaranteed by
the guarantors and (2) the 5 1/4% Convertible
Senior Subordinated Notes due 2009 and the 4%
Senior Subordinated Convertible Contingent
Debt Securities (CODES) due 2011, in each case
issued by L-3 Communications Holdings and
guaranteed by L-3 Communications Corporation
and the other guarantors. Information
regarding the guarantors is included in the
notes to the financial statements included
elsewhere herein.
As of March 31, 2003, we had $1,850.0 million
of indebtedness outstanding, none of which was
senior debt. In addition, as of March 31,
2003, we had the ability to borrow up to
$676.4 million (after reductions for
outstanding letters of credit of $73.6
million) under our senior credit facilities,
all of which if borrowed or drawn upon would
be senior debt and would be guaranteed on a
senior basis by the guarantors.
See "Description of the Notes -- Subsidiary
Guarantees" and "-- Subordination."
Sinking Fund.................. None
Optional Redemption........... On or after July 15, 2008, we may redeem some
or all of the notes at the redemption prices
set forth under "Description of the Notes --
Optional Redemption."
Before July 15, 2006, we may redeem up to 35%
of the outstanding notes and the exchange
notes with the proceeds of certain equity
offerings by L-3 Communications Corporation or
L-3 Communications Holdings at the redemption
prices set forth under "Description of the
Notes -- Optional Redemption."
Mandatory Offer
to Repurchase................. If we experience specific kinds of changes in
control, we must offer to repurchase the
outstanding notes and the exchange notes at the
prices set forth under "Description of the
Notes -- Repurchase at Option of Holders."
Use of Proceeds............... There will be no cash proceeds to us from the
exchange offer.
Basic Covenants of Indenture... The indenture governing the outstanding notes
and the exchange notes, among other things,
restricts our ability and the ability of our
restricted subsidiaries to:
o borrow money;
o pay dividends on or purchase our stock or
our restricted subsidiaries' stock;
o make investments;
o use assets as security in other transactions;
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o sell certain assets or merge with or into
other companies; and
o enter into transactions with affiliates.
Certain of our subsidiaries are not subject
to the covenants in the indenture. In the
event that the notes are assigned a rating of
Baa3 or better by Moody's and BBB-- or better
by S&P and no event of default has occurred
and is continuing, certain convenants in the
indenture will be suspended. If the ratings
should subsequently decline to below Baa3 or
BBB--, the suspended covenants will be
reinstituted. For more details, see the
section "Description of the Notes -- Certain
Covenants."
Absence of a Public Market for the
Exchange Notes............... The exchange notes generally will be freely
transferable but will also be new securities
for which there will not initially be a market.
Accordingly, we cannot assure you whether a
market for the exchange notes will develop or
as to the liquidity of any market. We do not
intend to apply for a listing of the exchange
notes on any securities exchange or automated
dealer quotation system. The initial purchasers
in the private offering of the outstanding
notes have advised us that they currently
intend to make a market in the exchange notes.
However, they are not obligated to do so, and
any market making with respect to the exchange
notes may be discontinued without notice.
---------------------
Unless otherwise stated, all share and per share data with respect to L-3
Communications Holdings' common stock contained in this prospectus reflect a
two-for-one stock split declared by L-3 Communications Holdings' board of
directors on April 23, 2002.
11
SUMMARY FINANCIAL DATA
We derived the summary financial data presented below from our financial
statements. The statement of operations and other data presented below for the
years ended December 31, 2002, 2001 and 2000 and the balance sheet data
presented below at December 31, 2002 and 2001, are derived from our audited
consolidated financial statements included elsewhere in this prospectus. We
derived the balance sheet data presented below at December 31, 2000 from our
audited consolidated financial statements not included elsewhere in this
prospectus. We derived the statement of operations and other data presented
below for the twelve months ended March 31, 2003 from our audited consolidated
financial statements and our unaudited condensed consolidated financial
statements included elsewhere in this prospectus. The financial data for the
twelve months ended March 31, 2003 is presented because we calculate the
financial covenants for our debt based on our most recently completed four
fiscal quarters. We derived the statement of operations and other data
presented below for the three months ended March 31, 2003 and March 31, 2002
and the balance sheet data presented below at March 31, 2003 from our unaudited
condensed consolidated financial statements included elsewhere in this
prospectus. We derived the balance sheet data presented below at March 31, 2002
from our unaudited condensed consolidated financial statements not included
elsewhere in this prospectus. Our unaudited condensed consolidated financial
statements for the three months ended March 31, 2003 and March 31, 2002
include, in our opinion, all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the period.
The results of interim periods are not indicative of our results for the full
year. Our results of operations are impacted significantly by our acquisitions,
some of which are described elsewhere in this prospectus.
HISTORICAL
TWELVE ---------------------------
MONTHS THREE MONTHS ENDED
ENDED MARCH 31,
MARCH 31, ---------------------------
2003 2003 2002
-------------- ------------- -------------
(in millions)
STATEMENT OF OPERATIONS DATA:
Sales ........................................... $ 4,403.4 $ 1,089.0 $ 696.8
Operating income ................................ 491.5 108.8 71.3
Interest and other income ....................... 5.4 1.4 1.0
Interest expense ................................ 128.6 32.2 26.1
Minority interest ............................... 5.6 0.3 0.9
Loss on retirement of debt(1) ................... 16.2 -- --
Provision for income taxes ...................... 123.6 28.0 16.0
Income before cumulative effect of a
change in accounting principle ................. 222.9 49.7 29.3
Income before cumulative effect of a
change in accounting principle, as
adjusted(2) .................................... 222.9 49.7 29.3
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ....................... $ 34.4 $ 34.4 $ 46.0
Working capital ................................. 853.9 807.3
Total assets .................................... 5,320.8 4,357.8
Total debt ...................................... 1,843.7 1,843.7 2,161.3
Minority interest ............................... 73.5 70.6
Shareholders' equity ............................ 2,270.0 1,266.5
OTHER DATA:
Net cash from operating activities .............. $ 383.2 $ 106.1 $ 41.4
Net cash (used in) investing activities ......... (811.7) (213.4) (1,212.2)
Net cash from financing activities .............. 416.9 6.8 855.8
EBITDA(3) ....................................... 575.0 131.6 86.5
Depreciation .................................... 71.7 18.4 12.9
Goodwill amortization ........................... -- -- --
Amortization of intangibles and other
assets ......................................... 11.8 4.4 2.3
Amortization of deferred debt issue costs
(included in interest expense) ................. 7.7 2.0 1.7
Capital expenditures ............................ 68.2 16.5 10.4
BALANCE SHEET DATA, AS ADJUSTED FOR THE
OFFERING OF THE OUTSTANDING NOTES
(AT PERIOD END):(4)
Cash and cash equivalents ....................... $ 237.8
Total debt ...................................... 2,061.9
HISTORICAL
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------- ------------- -------------
(in millions)
STATEMENT OF OPERATIONS DATA:
Sales ........................................... $ 4,011.2 $ 2,347.4 $ 1,910.1
Operating income ................................ 454.0 275.3 222.7
Interest and other income ....................... 5.0 1.8 4.4
Interest expense ................................ 122.5 86.4 93.0
Minority interest ............................... 6.2 4.4 --
Loss on retirement of debt(1) ................... 16.2 -- --
Provision for income taxes ...................... 111.6 70.8 51.4
Income before cumulative effect of a
change in accounting principle ................. 202.5 115.5 82.7
Income before cumulative effect of a
change in accounting principle, as
adjusted(2) .................................... 202.5 149.4 112.3
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ....................... $ 134.9 $ 361.0 $ 32.7
Working capital ................................. 942.7 717.8 360.9
Total assets .................................... 5,242.3 3,339.2 2,463.5
Total debt ...................................... 1,847.8 1,315.3 1,095.0
Minority interest ............................... 73.2 69.9 --
Shareholders' equity ............................ 2,202.2 1,213.9 692.6
OTHER DATA:
Net cash from operating activities .............. $ 318.5 $ 173.0 $ 113.8
Net cash (used in) investing activities ......... (1,810.5) (424.9) (608.2)
Net cash from financing activities .............. 1,265.9 580.3 484.3
EBITDA(3) ....................................... 529.9 362.3 297.0
Depreciation .................................... 66.2 40.4 36.2
Goodwill amortization ........................... -- 42.4 35.0
Amortization of intangibles and other
assets ......................................... 9.7 4.2 3.1
Amortization of deferred debt issue costs
(included in interest expense) ................. 7.4 6.4 5.7
Capital expenditures ............................ 62.1 48.1 33.6
BALANCE SHEET DATA, AS ADJUSTED FOR THE
OFFERING OF THE OUTSTANDING NOTES
(AT PERIOD END):(4)
Cash and cash equivalents .......................
Total debt ......................................
- ----------
(1) In accordance with the provisions of SFAS No. 145, we have reclassified
our loss on retirement of debt incurred in June 2002; such loss is now
reflected as a component of income from continuing operations.
12
(2) Income before cumulative effect of a change in accounting principle, as
adjusted, excludes goodwill amortization expense, net of any income tax
effects, recognized for the years ended December 31, 2001 and 2000.
(3) We define EBITDA as operating income plus depreciation expense and
amortization expense. We believe that the most directly comparable GAAP
financial measure to EBITDA is net cash from operating activities. The
table below presents a reconciliation of net cash from operating
activities to EBITDA.
TWELVE MONTHS THREE MONTHS
ENDED ENDED MARCH 31,
MARCH 31, ----------------------
2003 2003 2002
-------------- ----------- ----------
(in millions)
Net cash from operating activities ................. $ 383.2 $ 106.1 $ 41.4
Less: Adjustments to reconcile net income to net
cash from operating activities .......... (160.3) (56.4) (36.5)
Add: Cumulative effect of a change in
accounting principle, net of income -- -- 24.4
taxes ................................... -------- -------- -------
Income before cumulative effect of a change in
accounting principle .............................. 222.9 49.7 29.3
Less: Interest and other income ................... (5.4) (1.4) (1.0)
Add: Loss on retirement of debt .................. 16.2 -- --
Provision for income taxes .................. 123.6 28.0 16.0
Interest expense ............................ 128.6 32.2 26.1
Minority interest ........................... 5.6 0.3 0.9
Depreciation and amortization ............... 83.5 22.8 15.2
-------- -------- -------
EBITDA ............................................. $ 575.0 $ 131.6 $ 86.5
======== ======== =======
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
----------- ----------- -----------
(in millions)
Net cash from operating activities ................. $ 318.5 $ 173.0 $ 113.8
Less: Adjustments to reconcile net income to net
cash from operating activities .......... (140.4) ( 57.5) ( 31.1)
Add: Cumulative effect of a change in
accounting principle, net of income 24.4 -- --
taxes.................................... -------- -------- --------
Income before cumulative effect of a change in
accounting principle .............................. 202.5 115.5 82.7
Less: Interest and other income ................... (5.0) (1.8) ( 4.4)
Add: Loss on retirement of debt .................. 16.2 -- --
Provision for income taxes .................. 111.6 70.8 51.4
Interest expense ............................ 122.5 86.4 93.0
Minority interest ........................... 6.2 4.4 --
Depreciation and amortization ............... 75.9 87.0 74.3
-------- -------- --------
EBITDA ............................................. $ 529.9 $ 362.3 $ 297.0
======== ======== ========
Other than our amount of debt and interest expense, EBITDA is the major
component in the calculation of the debt ratio and interest coverage ratio
which are part of the financial covenants for our debt. The debt ratio is
defined as the ratio of consolidated total debt to consolidated EBITDA.
The interest coverage ratio is equal to the ratio of consolidated EBITDA
to consolidated cash interest expense. The higher our EBITDA is on a
relative basis to our outstanding debt, the lower our debt ratio will be.
A lower debt ratio indicates a higher borrowing capacity. Similarly, an
increase in our EBITDA on a relative basis to consolidated cash interest
expense results in a higher interest coverage ratio, which indicates a
greater capacity to service debt.
EBITDA is presented as additional information because we believe it to be a
useful indicator of an entity's debt capacity and its ability to service
its debt. EBITDA is not a substitute for operating income, net income or
net cash from operating activities as determined in accordance with
generally accepted accounting principles in the United States of America.
EBITDA is not a complete net cash flow measure because EBITDA is a
financial measure that does not include reductions for cash payments for
an entity's obligation to service its debt, fund its working capital and
capital expenditures and pay its income taxes. Rather, EBITDA is one
potential indicator of an entity's ability to fund these cash
requirements. EBITDA as we define it may differ from similarly named
measures used by other entities and, consequently could be misleading
unless all entities calculate and define EBITDA in the same manner. EBITDA
is also not a complete measure of an entity's profitability because it
does not include costs and expenses for depreciation and amortization,
interest and income taxes.
(4) The balance sheet data has been adjusted to reflect the issuance of our
6 1/8% Senior Subordinated Notes due 2013 and the related net proceeds
received, reduced for the redemption of our 8 1/2% Senior Subordinated Notes
due 2008.
13
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges presented below should be read
together with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere herein. In calculating the ratio of earnings to
fixed charges, earnings consist of income before income taxes and extraordinary
items plus fixed charges. Fixed charges consist of interest on indebtedness
plus the amortization of deferred debt issuance costs and that portion of lease
rental expense representative of the interest element.
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ---------------------------------------------------------
MARCH 31, 2003 2002 2001 2000 1999 1998
--------------- --------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges: 3.0x 3.3x 2.8x 2.3x 2.4x 2.0x
14
RISK FACTORS
You should carefully consider the following factors and other information
contained in this prospectus before deciding to tender outstanding notes in the
exchange offer. The risk factors set forth below are generally applicable to
the outstanding notes as well as the exchange notes. Any of these risks could
materially adversely affect our business, financial condition and results of
operations, which could in turn materially adversely affect the price of the
notes.
RISKS RELATED TO THE EXCHANGE OFFER
IF YOU CHOOSE NOT TO EXCHANGE YOUR OUTSTANDING NOTES, THE PRESENT TRANSFER
RESTRICTIONS WILL REMAIN IN FORCE AND THE MARKET PRICE OF YOUR OUTSTANDING
NOTES COULD DECLINE.
If you do not exchange your outstanding notes for exchange notes under the
exchange offer, then you will continue to be subject to the transfer
restrictions on the outstanding notes as set forth in the offering memorandum
distributed in connection with the private offering of the outstanding notes.
In general, the outstanding notes may not be offered or sold unless they are
registered or exempt from registration under the Securities Act and applicable
state securities laws. Except as required by the registration rights agreement,
we do not intend to register resales of the outstanding notes under the
Securities Act. You should refer to "Prospectus Summary -- Summary of Terms of
the Exchange Offer" and "The Exchange Offer" for information about how to
tender your outstanding notes.
The tender of outstanding notes under the exchange offer will reduce the
principal amount of the outstanding notes outstanding, which may have an
adverse effect upon, and increase the volatility of, the market price of the
outstanding notes due to reduction in liquidity.
RISKS RELATED TO L-3
OUR SIGNIFICANT LEVEL OF DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING
ACTIVITY.
We have incurred substantial indebtedness to finance our acquisitions. As
of March 31, 2003, we had $1,850.0 million of outstanding debt, excluding
outstanding letters of credit (which aggregated approximately $73.6 million)
under our 364-day and five-year revolving credit facilities. In addition,
available borrowings under our senior credit facilities, after reductions for
outstanding letters of credit, were $676.4 million as of March 31, 2003. For
the three months ended March 31, 2003, our ratio of earnings to fixed charges,
adjusted on a pro forma basis to give effect to the offering of the outstanding
notes and the use of the proceeds therefrom, would have been 2.9 to 1.0. In the
future we may borrow more money, subject to limitations imposed on us by our
debt agreements.
Our ability to make scheduled payments of principal and interest on our
indebtedness and to refinance our indebtedness depends on our future
performance. We do not have complete control over our future performance
because it is subject to economic, political, financial, competitive,
regulatory and other factors affecting the aerospace and defense industry. It
is possible that in the future our business may not generate sufficient cash
flow from operations to allow us to service our debt and make necessary capital
expenditures. If this situation occurs, we may have to sell assets, restructure
debt or obtain additional equity capital. We may not be able to do so or do so
without additional expense.
Our level of indebtedness has important consequences to you and your
investment in the notes. These consequences may include:
o requiring a substantial portion of our net cash flow from operations to
be used to pay interest and principal on our debt and therefore be
unavailable for other purposes, including capital expenditures, research
and development and other investments;
o limiting our ability to obtain additional financing for acquisitions or
working capital to make investments or other expenditures, which may
limit our ability to carry out our acquisition strategy;
15
o higher interest expenses due to increases in interest rates on our
borrowings that have variable interest rates;
o heightening our vulnerability to downturns in our business or in the
general economy and restricting us from making acquisitions, introducing
new technologies and products or exploiting business opportunities; and
o covenants that limit our ability to borrow additional funds, dispose of
assets or pay cash dividends. Failure to comply with such covenants could
result in an event of default which, if not cured or waived, could result
in the acceleration of our outstanding indebtedness.
Additionally, on December 31, 2002, we had $2,417.3 million of contractual
obligations, including outstanding indebtedness, and $200.8 million of
contingent commitments, including outstanding letters of credit under our
senior credit facilities. These contractual obligations and contingent
commitments are described elsewhere herein.
OUR ACQUISITION STRATEGY INVOLVES RISKS, AND WE MAY NOT SUCCESSFULLY IMPLEMENT
OUR STRATEGY.
We seek to acquire companies that complement our businesses. We may not be
able to continue to identify acquisition candidates on commercially reasonable
terms or at all. If we make additional acquisitions, we may not realize the
benefits anticipated from the acquisitions. Likewise, we may not be able to
obtain additional financing for acquisitions. Such additional financing could
be restricted by the terms of our debt agreements.
The process of integrating acquired operations, including our recent
acquisitions, into our existing operations may result in unforeseen operating
difficulties and may require significant financial and managerial resources
that would otherwise be available for the ongoing development or expansion of
our existing operations. Possible future acquisitions could result in the
incurrence of additional debt and related interest expense and contingent
liabilities, each of which could result in an increase to our already
significant level of outstanding debt. We consider and execute strategic
acquisitions on an ongoing basis and may be evaluating acquisitions or engaged
in acquisition negotiations at any given time. We regularly evaluate potential
acquisitions and joint venture transactions, and, except as disclosed elsewhere
herein, we have not entered into any agreements with respect to any material
transactions.
WE RELY ON SALES TO U.S. GOVERNMENT ENTITIES, AND THE LOSS OF SUCH CONTRACTS
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND CASH
FLOWS.
Our government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Approximately
78.0%, or $3,128.8 million, of our sales for the year ended December 31, 2002
were made directly or indirectly to U.S. Government agencies, including the
Department of Defense. At December 31, 2002, we had approximately 800 contracts
with a value exceeding $1.0 million. Our largest program represented 8.2% of
our sales for the year ended December 31, 2002 and is a firm fixed-price
contract with the U.S. Transportation Security Administration (TSA) for
explosives detection systems (EDS) used at airports. No other program
represented more than 3.7% of sales for the year ended December 31, 2002. For
the year ended December 31, 2002, sales from our five largest programs amounted
to $815.7 million, or 20.3% of our sales. We expect our full-year 2003 sales
for EDS systems, including those to the TSA, to decline to about $175 million
from $339 million for 2002 because the initial installation of EDS systems by
the TSA for major U.S. airports was substantially completed in 2002. The loss
of all or a substantial portion of our sales to the U.S. Government would have
a material adverse effect on our results of operations and cash flows.
OUR RESULTS OF OPERATIONS AND CASH FLOWS, AS WELL AS OUR VALUATION OF CONTRACTS
IN PROCESS ARE SUBSTANTIALLY AFFECTED BY OUR FIXED-PRICE AND COST REIMBURSABLE
CONTRACTS.
The substantial majority of our sales require us to design, develop,
manufacture and/or modify complex products, and/or to perform services
according to specifications provided by our customers.
16
These sales are made pursuant to written contractual arrangements or contracts,
which are generally either fixed-price or cost-reimbursable. These contracts
are within the scope of the American Institute of Certified Public Accountants
Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1). In addition, cost-reimbursable
contracts are also specifically within the scope of Accounting Research
Bulletin No. 43, Chapter 11, Section A, Government Contracts, Cost-Plus-Fixed
Fee Contracts (ARB 43). For the year ended December 31, 2002, approximately
65.8% of our sales were generated from fixed-price contracts and approximately
34.2% of our sales were generated from cost-reimbursable contracts.
Substantially all of our cost-reimbursable contracts are with the U.S.
Government, including the DoD. Substantially all of our sales to commercial
customers are transacted under fixed-price sales arrangements, and are included
in our fixed-price contract sales.
Under a fixed-price contract, we agree to perform the scope of work
required by the contract for a predetermined contract price. Although a
fixed-price contract generally permits us to retain profits if the total actual
contract costs are less than the estimated contract costs, we bear the risk
that increased or unexpected costs may reduce our profit or cause us to sustain
losses on the contract. Accounting for the sales and profit on a fixed-price
contract requires estimates of (1) the total contract revenue, (2) the total
costs at completion, which is equal to the sum of the actual incurred costs to
date on the contract and the estimated costs to complete the contract's scope
of work, and (3) the measurement of progress towards completion. Adjustments to
original estimates for a contract's revenue, estimated costs at completion and
estimated total profit are often required as work progresses under a contract,
as experience is gained and as more information is obtained, even though the
scope of work required under the contract may not change, or if contract
modifications occur.
Under a cost-reimbursable contract we are paid our allowable incurred
costs plus a profit which can be fixed or variable depending on the contract's
fee arrangement up to predetermined funding levels determined by our customers.
Therefore, on a cost-reimbursable contract we do not bear the risks of
unexpected cost overruns, provided that we do not incur costs that exceed the
predetermined funded amounts.
The impact of revisions in profit estimates in both fixed-price and
cost-reimbursable contracts are recognized on a cumulative catch-up basis in
the period in which the revisions are made and could be material. Provisions
for anticipated losses on contracts are recorded in the period in which they
become evident. Amounts representing contract change orders or claims are
included in sales only when they can be reliably estimated and their
realization is reasonably assured. The revisions in contract estimates, if
significant, can materially affect our results of operations and cash flows, as
well as our valuations of contracts in process.
OUR GOVERNMENT CONTRACTS ENTAIL CERTAIN RISKS.
o Government contracts are dependent upon the U.S. defense budget.
The reduction in the U.S. defense budget in the early 1990s caused most
defense-related government contractors to experience decreased sales, increased
downward pressure on operating margins and, in certain cases, net losses. Our
predecessor company experienced a substantial decline in sales during that
period. A significant decline in U.S. military expenditures in the future could
result in a material decrease to our sales, earnings and cash flow. The loss or
significant reduction in government funding of a large program in which we
participate could also result in a material decrease to our future sales,
earnings and cash flows and thus limit our ability to satisfy our financial
obligations, including those relating to the notes. U.S. Government contracts
are also conditioned upon the continuing approval by Congress of the amount of
necessary spending. Congress usually appropriates funds for a given program
each fiscal year even though contract periods of performance may exceed one
year. Consequently, at the beginning of a major program, the contract is
usually partially funded, and additional monies are normally committed to the
contract only if appropriations are made by Congress for future fiscal years.
17
o Government contracts contain unfavorable termination provisions and are
subject to audit and modification.
Companies engaged primarily in supplying defense-related equipment and
services to U.S. Government agencies are subject to certain business risks
peculiar to the defense industry. These risks include the ability of the U.S.
Government to unilaterally:
o suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
o terminate existing contracts;
o reduce the value of existing contracts;
o audit our contract-related costs and fees, including allocated indirect
costs; and
o control and potentially prohibit the export of our products.
All of our U.S. Government contracts can be terminated by the U.S.
Government either for its convenience or if we default by failing to perform
under the contract. Termination for convenience provisions provide only for our
recovery of costs incurred or committed, settlement expenses and profit on the
work completed prior to termination. Termination for default provisions provide
for the contractor to be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from another source. Our contracts
with foreign governments generally contain similar provisions relating to
termination at the convenience of the customer.
The U.S. Government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Based on
the results of such audits, the U.S. Government may adjust our contract-related
costs and fees, including allocated indirect costs. In addition, under U.S.
Government purchasing regulations, some of our costs, including most financing
costs, amortization of goodwill, portions of research and development costs,
and certain marketing expenses may not be reimbursable under U.S. Government
contracts. Further, as a U.S. Government contractor, we are subject to
investigation, legal action and/or liability that would not apply to a
commercial company.
o Government contracts are subject to competitive bidding and we are
required to obtain licenses for non-U.S. sales.
We obtain many of our U.S. Government contracts through a competitive
bidding process. We may not be able to continue to win competitively awarded
contracts. In addition, awarded contracts may not generate sales sufficient to
result in our profitability. We are also subject to risks associated with the
following:
o the frequent need to bid on programs in advance of the completion of
their design, which may result in unforeseen technological difficulties
and/or cost overruns;
o the substantial time and effort including the relatively unproductive
design and development required to prepare bids and proposals for
competitively awarded contracts that may not be awarded to us;
o design complexity and rapid technological obsolescence; and
o the constant need for design improvement.
In addition to these U.S. Government contract risks, we are required to
obtain licenses from U.S. Government agencies to export many of our products
and systems. Additionally, we are not permitted to export some of our products.
Failure to receive required licenses would eliminate our ability to sell our
products outside the United States.
OUR OPERATIONS INVOLVE RAPIDLY EVOLVING PRODUCTS AND TECHNOLOGICAL CHANGE.
The rapid change of technology is a key feature of all of the industries
in which our businesses operate, including commercial communications in
particular. To succeed in the future, we will need to
18
continue to design, develop, manufacture, assemble, test, market and support
new products and enhancements on a timely and cost-effective basis.
Historically, our technology has been developed through both customer-funded
and internally funded research and development. We may not be able to continue
to maintain comparable levels of research and development. In the past we have
allocated substantial funds to capital expenditures, programs and other
investments. This practice will continue to be required in the future. Even so,
we may not be able to successfully identify new opportunities and may not have
the needed financial resources to develop new products in a timely or
cost-effective manner. At the same time, products and technologies developed by
others may render our products and systems obsolete or non-competitive.
WE MAY NOT SUCCESSFULLY IMPLEMENT OUR PLAN TO INCREASE OUR COMMERCIAL SALES.
Our revenues have primarily come from business with the U.S. Department of
Defense and other U.S. Government agencies. In addition to continuing to pursue
these market areas, we will continue applying our technical capabilities and
expertise to certain commercial markets. Some of our commercial products, such
as airport security equipment, voyage recorders and PrimeWave communication
products, have been recently introduced.
These new commercial products are subject to certain risks and may require
us to:
o develop and maintain marketing and distribution, sales and customer
support capabilities;
o spend additional research and development costs to sustain and enhance
our existing products and to develop new products;
o obtain customer and/or regulatory certification;
o respond to rapidly changing technologies including those developed by
others that may render our products and systems obsolete or
non-competitive; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in commercial markets require
significant resources, including additional working capital and capital
expenditures, as well as the use of our management's time. Our ability to sell
certain commercial products, particularly our broadband wireless communications
products, depends to a significant degree on the efforts of independent
distributors or communications service providers and on the financial viability
of our existing and target customers, including their ability to obtain
financing. Certain of our existing and target customers are agencies or
affiliates of governments of emerging and under-developed countries or private
business enterprises operating in those countries. In addition, we have made
equity investments in entities that plan to commence operations as
communications service providers using some of our commercial products. We can
give no assurance that these distributors and service providers will be able to
market our products or their services successfully or that we will be able to
realize a return on our investment in them. We also cannot assure you that we
will be successful in addressing these risks or in developing these commercial
and civil business opportunities.
CONSOLIDATION AND INTENSE COMPETITION IN THE INDUSTRIES IN WHICH OUR BUSINESSES
OPERATE COULD LIMIT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
The communications equipment industry and the other industries in which
our businesses operate, and the market for defense applications, is highly
competitive. We expect that the U.S. Department of Defense's increased use of
commercial off-the-shelf products and components in military equipment will
continue to encourage new competitors to enter the market. We also expect that
competition for original equipment manufacturing business will increase due to
the continued emergence of merchant suppliers. Our ability to compete for
defense contracts largely depends on the following factors:
o the effectiveness and innovation of our technologies and research and
development programs;
o our ability to offer better program performance than our competitors at
a lower cost; and
o the capabilities of our facilities, equipment and personnel to undertake
the programs for which we compete.
19
We are the incumbent supplier or have been the sole provider for many
years for certain programs. We refer to such contracts as "sole-source"
contracts. In such cases, there may be other suppliers who have the capability
to compete for the programs involved, but they can only enter or reenter the
market if the customer chooses to reopen or recompete the particular program to
competition. The majority of our sales are derived from contracts with the U.S.
Government and its prime contractors, which are principally awarded on the
basis of negotiations or competitive bids. Additionally, many of our
competitors are larger than us and have substantially greater financial and
other resources than we have.
OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO FINANCE OUR FUTURE OPERATIONS AND,
IF WE ARE UNABLE TO MEET OUR FINANCIAL RATIOS, COULD CAUSE OUR EXISTING DEBT TO
BE ACCELERATED.
Our debt agreements contain a number of significant provisions that, among
other things, restrict our ability to:
o sell assets;
o incur more indebtedness;
o repay certain indebtedness;
o pay dividends;
o make certain investments or acquisitions;
o repurchase or redeem capital stock;
o engage in mergers or consolidations; and
o engage in certain transactions with subsidiaries and affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or engage in other business activities that may be in our
interest. In addition, some of our debt agreements also require us to maintain
compliance with certain financial ratios, including total consolidated earnings
before interest, taxes, depreciation and amortization to total consolidated
cash interest expense and total consolidated debt to total consolidated
earnings before interest, taxes, depreciation and amortization, and to limit
our capital expenditures. Our ability to comply with these ratios and limits
may be affected by events beyond our control. A breach of any of these
agreements or our inability to comply with the required financial ratios or
limits could result in a default under those debt agreements. In the event of
any such default, the lenders under those debt agreements could elect to:
o declare all outstanding debt, accrued interest and fees to be due and
immediately payable;
o require us to apply all of our available cash to repay our outstanding
senior debt; and
o prevent us from making debt service payments on our other debt.
If we were unable to repay any of these borrowings when due, the lenders
under our senior credit facilities could proceed against their collateral,
which consists of a first priority security interest in our outstanding shares
of common stock and the capital stock of our material subsidiaries. If the
indebtedness under the existing debt agreements were to be accelerated, our
assets may not be sufficient to repay such indebtedness in full.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY
BECOME UNABLE TO OPERATE OUR BUSINESS EFFECTIVELY.
Our future success depends to a significant degree upon the continued
contributions of our management, including Messrs. Lanza and LaPenta, and our
ability to attract and retain other highly qualified management and technical
personnel. We do not maintain any key person life insurance policies for
members of our management. As of May 31, 2003, Messrs. Lanza and LaPenta
beneficially owned, in the aggregate, 10.3% of the outstanding common stock of
L-3 Communications Holdings.
20
We have an employment agreement with Mr. Lanza. We face competition for
management and technical personnel from other companies and organizations.
Failure to attract and retain such personnel would damage our prospects.
ENVIRONMENTAL LAWS AND REGULATION MAY SUBJECT US TO SIGNIFICANT LIABILITY.
Our operations are subject to various U.S. federal, state and local as
well as certain foreign environmental laws and regulations within the countries
in which we operate relating to the discharge, storage, treatment, handling,
disposal and remediation of certain materials, substances and wastes used in
our operations.
New laws and regulations, stricter enforcement of existing laws and
regulations, the discovery of previously unknown contamination or the
imposition of new clean-up requirements may require us to incur a significant
amount of additional costs in the future and could decrease the amount of free
cash flow available to us for other purposes, including capital expenditures,
research and development and other investments.
TERMINATION OF OUR BACKLOG OF ORDERS COULD NEGATIVELY IMPACT OUR SALES.
We currently have a backlog of orders, primarily under contracts with the
U.S. Government. Our total funded backlog was $3,395.3 million at March 31,
2003. The U.S. Government may unilaterally modify or terminate its contracts.
Accordingly, most of our backlog could be modified or terminated by the U.S.
Government and, therefore, may not result in sales.
RISKS RELATED TO THE NOTES
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
EXCHANGE NOTES, WHICH MAY REDUCE THEIR MARKET PRICE.
We are offering the exchange notes to the holders of the outstanding
notes. The outstanding notes were offered and sold in May 2003 to a small
number of institutional investors and are eligible for trading in the Private
Offerings, Resale and Trading through Automatic Linkages (PORTAL) Market.
We do not intend to apply for a listing of the exchange notes on a
securities exchange or on any automated dealer quotation system. There is
currently no established market for the exchange notes and we cannot assure you
as to the liquidity of markets that may develop for the exchange notes, your
ability to sell the exchange notes or the price at which you would be able to
sell the exchange notes. If such markets were to exist, the exchange notes
could trade at prices that may be lower than their principal amount or purchase
price depending on many factors, including prevailing interest rates and the
markets for similar securities. The initial purchasers have advised us that
they currently intend to make a market with respect to the exchange notes.
However, the initial purchasers are not obligated to do so, and any market
making with respect to the exchange notes may be discontinued at any time
without notice. In addition, such market making activity may be limited during
the pendency of the exchange offer or the effectiveness of a shelf registration
statement in lieu thereof.
The liquidity of, and trading market for, the exchange notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of our financial performance and prospects.
THE NOTES ARE SUBORDINATED TO ALL OUR EXISTING AND FUTURE SENIOR INDEBTEDNESS,
WHICH MAY INHIBIT OUR ABILITY TO REPAY YOU.
The notes are contractually subordinated in right of payment to our
existing and future senior indebtedness. As of March 31, 2003, we had no
outstanding senior debt, and had the ability to borrow up to $676.4 million
(after reductions for outstanding letters of credit of $73.6 million) under our
senior credit facilities, all of which, if borrowed or drawn upon, would be
senior debt.
21
Any incurrence of additional indebtedness may materially adversely impact
our ability to service our debt, including the notes. Due to the subordination
provisions of our senior subordinated indebtedness, including the notes, in the
event of our insolvency, funds that would otherwise be used to pay the holders
of the notes and other senior subordinated indebtedness will be used to pay the
holders of senior indebtedness to the extent necessary to pay the senior
indebtedness in full. As a result of these payments, general creditors may
recover less, ratably, than the holders of senior indebtedness and the general
creditors may recover more, ratably, than the holders of the notes or other
subordinated indebtedness. In addition, the holders of senior indebtedness may,
under certain circumstances, restrict or prohibit us from making payments on
the notes.
THE TERMS OF OUR INDEBTEDNESS COULD RESTRICT OUR FLEXIBILITY AND LIMIT OUR
ABILITY TO SATISFY OBLIGATIONS UNDER THE NOTES.
We are subject to operational and financial covenants and other
restrictions contained in the bank loan documents evidencing our senior
indebtedness and the indentures evidencing our senior subordinated notes. These
covenants could limit our operational flexibility and restrict our ability to
borrow additional funds, if necessary, to finance operations and to make
principal and interest payments on the notes. Additionally, failure to comply
with these operational and financial covenants could result in an event of
default under the terms of this indebtedness which, if not cured or waived,
could result in this indebtedness becoming due and payable. The effect of these
covenants, or our failure to comply with them, could have a material adverse
effect on our business, financial condition and results of operations.
OUR ABILITY TO REPURCHASE NOTES WITH CASH UPON A CHANGE OF CONTROL MAY BE
LIMITED.
In specific circumstances involving a change of control, you may require
us to repurchase some or all of your notes. We cannot assure you that we will
have sufficient financial resources at such time or would be able to arrange
financing to pay the repurchase price of the notes in cash. Our ability to
repurchase the notes in such event may be limited by law, by our indentures, by
the terms of other agreements relating to our senior indebtedness and by such
indebtedness and agreements as may be entered into, replaced, supplemented or
amended from time to time. We may be required to refinance our senior
indebtedness in order to make such payments. We may not have the financial
ability to repurchase the notes in cash if payment for our senior indebtedness
is accelerated.
THE GUARANTEES MAY BE UNENFORCEABLE DUE TO FRAUDULENT CONVEYANCE STATUTES, AND
ACCORDINGLY, YOU COULD HAVE NO CLAIM AGAINST THE GUARANTORS.
Although laws differ among various jurisdictions, a court could, under
fraudulent conveyance laws, further subordinate or avoid the guarantees if it
found that the guarantees were incurred with actual intent to hinder, delay or
defraud creditors, or the guarantor did not receive fair consideration or
reasonably equivalent value for the guarantees and that the guarantor was any
of the following:
o insolvent or rendered insolvent because of the guarantees;
o engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay at maturity.
If a court voided a guaranty by one or more of our subsidiaries as the
result of a fraudulent conveyance, or held it unenforceable for any other
reason, holders of the notes would cease to have a claim against the subsidiary
based on the guaranty and would solely be creditors of L-3 Communications
Corporation and any guarantor whose guarantee was not similarly held
unenforceable.
NOT ALL OF OUR SUBSIDIARIES ARE GUARANTORS, AND YOUR CLAIMS WILL BE
SUBORDINATED TO ALL OF THE CREDITORS OF THE NON-GUARANTOR SUBSIDIARIES.
Many, but not all, of our direct and indirect subsidiaries will guarantee
the notes. In the event of a bankruptcy, liquidation or reorganization of any
of the non-guarantor subsidiaries, holders of their
22
indebtedness and their trade creditors will generally be entitled to payment of
their claims from the assets of those non-guarantor subsidiaries before any
assets of the non-guarantor subsidiaries are made available for distribution to
us. Assuming the exchange of the outstanding notes for the exchange notes was
completed on March 31, 2003, the exchange notes would have been effectively
junior to $99.9 million of indebtedness and other liabilities (including trade
payables) of these non-guarantor subsidiaries. The non-guarantor subsidiaries
generated 8.5% of our sales, generated earnings of $2.4 million and used cash
in operating activities of $5.5 million for the three months ended March 31,
2003. The non-guarantor subsidiaries held 11.9% of our consolidated assets as
of March 31, 2003.
THE GUARANTEES WILL BE SUBORDINATED TO THE SENIOR DEBT OF THE GUARANTORS.
The guarantees are subordinated to all existing and future senior debt of
the guarantors, which shall consist of all of the indebtedness and other
liabilities of the guarantors designated as senior, including guarantees of
borrowings under the senior credit facilities. The guarantees issued in
connection with the offering of the outstanding notes and the exchange of the
exchange notes will be pari passu with the guarantees of the senior
subordinated notes sold by L-3 Communications Corporation in December 1998 and
June 2002, and with the guarantees, including the guarantee by L-3
Communications Corporation, of the 5 1/4% Convertible Senior Subordinated Notes
due 2009 sold by L-3 Communications Holdings in November 2000 and of the 4%
Senior Subordinated Convertible Contingent Notes due 2011 sold by L-3
Communications Holdings in October 2001. As of March 31, 2003, we had no senior
debt outstanding under our senior credit facilities, but any future amounts
outstanding under those facilities would be guaranteed by our subsidiaries on a
senior basis. As of March 31, 2003, L-3 Communications Corporation had
availability of $676.4 million (after reduction for outstanding letters of
credit of $73.6 million) under its senior credit facilities, all of which, if
borrowed or drawn upon, would be senior debt. Any right of L-3 Communications
Corporation to receive the assets of any of its subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
notes to participate in those assets) will be subject to the claims of that
subsidiary's creditors, including trade creditors. To the extent that L-3
Communications Corporation is recognized as a creditor of that subsidiary, L-3
Communications Corporation may have such claim, but it would still be
subordinate to any security interests in the assets of that subsidiary and any
indebtedness and other liabilities of that subsidiary senior to that held by
L-3 Communications Corporation.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH MAY NOT BE CORRECT.
Certain of the matters discussed concerning our operations, economic
performance and financial condition, including in particular, the likelihood of
our success in developing and expanding our business and the realization of
sales from backlog, include forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" and similar expressions are
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, we can give no assurance that their goals will be
achieved.
23
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance, and financial
condition, including in particular, the likelihood of our success in developing
and expanding our business and the realization of sales from backlog, include
forward-looking statements within the meaning of section 27A of the Securities
Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" and similar expressions are
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, including projections of orders, sales, operating
margins, earnings, cash flow, research and development costs, working capital,
capital expenditures and other projections, they are subject to several risks
and uncertainties, and therefore, we can give no assurance that these
statements will be achieved. Such statements will also be influenced by factors
such as:
o our dependence on the defense industry and the business risks peculiar
to that industry, including changing priorities or reductions in the U.S.
Government defense budget;
o our reliance on contracts with a limited number of agencies of, or
contractors to, the U.S. Government and the possibility of termination of
government contracts by unilateral government action or for failure to
perform;
o our ability to obtain future government contracts on a timely basis;
o the availability of government funding and changes in customer
requirements for our products and services;
o our significant amount of debt and the restrictions contained in our
debt agreements;
o collective bargaining agreements and labor disputes;
o the business and economic conditions in the markets we operate in,
including those for the commercial aviation and communications markets;
o economic conditions, competitive environment, international business and
political conditions, timing of international awards and contracts;
o our extensive use of fixed-price contracts as compared to
cost-reimbursable contracts;
o our ability to identify future acquisition candidates or to integrate
acquired operations;
o the rapid change of technology and high level of competition in the
communication equipment industry;
o our introduction of new products into commercial markets or our
investments in commercial products or companies;
o pension, environmental or legal matters or proceedings and various other
market, competition and industry factors, many of which are beyond our
control; and
o the fair values of our assets, including identifiable intangible assets
and the estimated fair value of the goodwill balances for our reporting
units, which can be impaired or reduced by the other factors discussed
above.
Readers of this prospectus are cautioned that our forward-looking
statements are not guarantees of future performance and the actual results or
developments may differ materially from the expectations expressed in the
forward-looking statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainties of estimates, forecasts and projections and may be
better or worse than projected. Given these uncertainties, you should not place
any reliance on these forward-looking statements. These forward-looking
statements also represent our
24
estimates and assumptions only as of the date that they were made. We expressly
disclaim a duty to provide updates to these forward-looking statements, and the
estimates and assumptions associated with them, after the date of this
prospectus to reflect events or changes or circumstances or changes in
expectations or the occurrence of anticipated events.
25
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive in exchange a like principal amount of outstanding
notes, the terms of which are identical in all material respects to the
exchange notes. The outstanding notes surrendered in exchange for the exchange
notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the exchange notes will not result in any change in our
capitalization.
We received net proceeds of approximately $391.0 million from the offering
of the outstanding notes, after deducting the discounts, commissions and
estimated expenses payable by us.
The net proceeds from the offering of the outstanding notes were used
to: (1) redeem the $180.0 million 8 1/2% Senior Subordinated Notes due 2008 for
approximately $187.7 million, including the 4.25% redemption premium, but
excluding accrued and unpaid interest from May 15, 2003 to the date of
redemption (June 20, 2003) and (2) increase our cash and cash equivalents by
approximately $203.4 million, which will be used for general corporate
purposes, including the acquisitions of businesses.
26
CAPITALIZATION
The following table sets forth our capitalization: (1) on an actual basis
as of March 31, 2003 and (2) as adjusted for the offering of the outstanding
notes and the application of the net proceeds therefrom discussed above.
AS OF MARCH 31, 2003
---------------------------------
AS ADJUSTED
FOR
THE OFFERING
OF THE
ACTUAL OUTSTANDING NOTES
------------ ------------------
(in millions)
Cash and cash equivalents ........................................ $ 34.4 $ 237.8
-------- --------
Long-term debt: ..................................................
Senior credit facilities(1) ..................................... $ -- $ --
8 1/2% Senior Subordinated Notes due 2008 ....................... 180.0 --
8% Senior Subordinated Notes due 2008 ........................... 200.0 200.0
7 5/8% Senior Subordinated Notes due 2012 ....................... 750.0 750.0
6 1/8% Senior Subordinated Notes due 2013 ....................... -- 400.0
5 1/4% Convertible Senior Subordinated Notes due 2009(2) ........ 300.0 300.0
4% Senior Subordinated Convertible Contingent Debt
Securities due 2011(3) ........................................ 420.0 420.0
-------- --------
Principal amount of long-term debt ............................ 1,850.0 2,070.0
Less: Unamortized discounts ................................... (2.2) (4.0)
Fair value of interest rate swaps ......................... (4.1) (4.1)
-------- --------
Total debt .................................................... $1,843.7 $2,061.9
-------- --------
Minority interest ................................................ 73.5 73.5
-------- --------
Shareholders' equity:
Common stock .................................................... 1,815.5 1,815.5
Retained earnings ............................................... 529.6 522.8 (4)
Unearned compensation ........................................... (6.4) (6.4)
Accumulated other comprehensive loss ............................ (68.7) (68.7)
-------- --------
Total shareholders' equity .................................... 2,270.0 2,263.2
-------- --------
Total capitalization .......................................... $4,187.2 $4,398.6
======== ========
- ----------
(1) As of March 31, 2003, our availability under the senior credit facilities
at any given time was $750.0 million (subject to compliance with
covenants), less the amount of outstanding borrowings and outstanding
letters of credit (which amounted to zero for outstanding borrowings and
$73.6 million for outstanding letters of credit at March 31, 2003).
(2) The 5 1/4% Convertible Senior Subordinated Notes due June 1, 2009 were
issued by L-3 Communications Holdings in November 2000. The 5 1/4%
Convertible Senior Subordinated Notes are, subject to adjustment,
convertible into 7,361,964 shares of common stock of L-3 Communications
Holdings and are unconditionally guaranteed, on an unsecured senior
subordinated basis, jointly and severally by L-3 Communications
Corporation and substantially all of L-3 Communications Corporation's
domestic restricted subsidiaries.
(3) The 4% Senior Subordinated Convertible Contingent Debt Securities (CODES)
due September 15, 2011 were issued by L-3 Communications Holdings in
October 2001. The CODES are, subject to adjustment, convertible into
7,804,878 shares of common stock of L-3 Communications Holdings and are
unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally by L-3 Communications Corporation and substantially
all of L-3 Communications Corporation's domestic restricted subsidiaries.
(4) In connection with the redemption of our 8 1/2% Senior Subordinated Notes
due 2008, we estimate that we will incur a pre-tax loss of approximately
$11.2 million, or $6.8 million after-tax.
27
SELECTED FINANCIAL DATA
We derived the selected financial data presented below at December 31,
2002 and 2001 and for each of the three years in the period ended December 31,
2002 from our audited consolidated financial statements included elsewhere
herein. We derived the selected financial data presented below at March 31,
2003 and for the three months ended March 31, 2003 and 2002 from our unaudited
condensed consolidated financial statements included elsewhere herein. We
derived the selected financial data presented below at March 31, 2002 from our
unaudited condensed consolidated financial statements not included elsewhere
herein. We derived the selected financial data presented below at December 31,
2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 from our
audited consolidated financial statements not included elsewhere herein. You
should read the selected financial data together with our "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
our consolidated financial statements and condensed consolidated financial
statements both included elsewhere herein. The results of operations are
impacted significantly by our acquisitions, some of which are described
elsewhere herein.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
------------- -----------
(in millions)
STATEMENT OF OPERATIONS DATA:
Sales ............................. $ 1,089.0 $ 696.8
Operating income .................. 108.8 71.3
Interest and other income ......... 1.4 1.0
Interest expense .................. 32.2 26.1
Minority interest ................. 0.3 0.9
Loss on retirement of debt(1) ..... -- --
Provision for income taxes ........ 28.0 16.0
Income before cumulative
effect of a change in
accounting principle ............. 49.7 29.3
Income before cumulative
effect of a change in
accounting principle, as
adjusted(2) ...................... 49.7 29.3
BALANCE SHEET DATA (AT PERIOD
END):
Working capital ................... $ 853.9 $ 807.3
Total assets ...................... 5,320.8 4,357.8
Total debt ........................ 1,843.7 2,161.3
Minority interest ................. 73.5 70.6
Shareholders' equity .............. 2,270.0 1,266.5
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(in millions)
STATEMENT OF OPERATIONS DATA:
Sales ............................. $ 4,011.2 $ 2,347.4 $ 1,910.1 $ 1,405.5 $ 1,037.0
Operating income .................. 454.0 275.3 222.7 150.5 100.3
Interest and other income ......... 5.0 1.8 4.4 5.5 2.7
Interest expense .................. 122.5 86.4 93.0 60.6 49.5
Minority interest ................. 6.2 4.4 -- -- --
Loss on retirement of debt(1) ..... 16.2 -- -- -- --
Provision for income taxes ........ 111.6 70.8 51.4 36.7 20.9
Income before cumulative
effect of a change in
accounting principle ............. 202.5 115.5 82.7 58.7 32.6
Income before cumulative
effect of a change in
accounting principle, as
adjusted(2) ...................... 202.5 149.4 112.3 76.2 43.7
BALANCE SHEET DATA (AT PERIOD
END):
Working capital ................... $ 942.7 $ 717.8 $ 360.9 $ 255.5 $ 157.8
Total assets ...................... 5,242.3 3,339.2 2,463.5 1,628.7 1,285.4
Total debt ........................ 1,847.8 1,315.3 1,095.0 605.0 605.0
Minority interest ................. 73.2 69.9 -- -- --
Shareholders' equity .............. 2,202.2 1,213.9 692.6 583.2 300.0
- ----------
(1) In accordance with the provisions of SFAS No. 145, we have reclassified
our loss on retirement of debt incurred in June 2002; such loss is now
reflected as a component of income from continuing operations.
(2) Income before cumulative effect of a change in accounting principle, as
adjusted, excludes goodwill amortization expense, net of any income tax
effects, recognized for the years ended December 31, 2001, 2000, 1999 and
1998.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are a leading merchant supplier of secure communications and
intelligence, surveillance and reconnaissance (ISR) systems, training,
simulation and support services, aviation products and aircraft modernization,
as well as specialized products. Our customers include the DoD and prime
contractors thereof, certain U.S. Government intelligence agencies, major
aerospace and defense contractors, foreign governments, commercial customers
and certain other U.S. federal, state and local government agencies. We have
the following four reportable segments: (1) Secure Communications & ISR; (2)
Training, Simulation & Support Services; (3) Aviation Products & Aircraft
Modernization; and (4) Specialized Products.
Our Secure Communications & ISR segment provides products and services for
the global ISR market as well as secure, high data rate communications systems
and equipment primarily for military and other U.S. Government reconnaissance
and surveillance applications. We believe our systems and products are critical
elements of virtually all major communication, command and control,
intelligence gathering and space systems. Our systems and products are used to
connect a variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording, monitoring and
dissemination functions of these communication systems. Our Training,
Simulation & Support Services segment produces training systems and related
support services, and provides a wide range of engineering development and
integration support, a full range of teaching, training, logistics and
communication software support services, crisis management software and custom
ballistic targets. Our Aviation Products & Aircraft Modernization segment
provides our TCAS products, cockpit voice, flight data and cruise ship hardened
voyage recorders, ruggedized custom displays and specialized aircraft
modernization, upgrade and maintenance services. Our Specialized Products
segment provides ocean products, telemetry, instrumentation, space and
navigation products, premium fuzing products, security systems, training
devices and motion simulators, video security and surveillance and
electro-optic surveillance systems, ruggedized commercial off-the-shelf
technology and microwave components.
In recent years, domestic and worldwide political and economic
developments have significantly affected the markets for defense systems,
products and services. Two events in 2001 had a dramatic impact on the domestic
and international political and economic landscape. They impacted L-3 and the
defense industry generally. First, the events of September 11 created
uncertainty and exposed vulnerabilities in the security and the overall defense
of the U.S. homeland. Second, in the conclusions of the U.S. Quadrennial
Defense Review (QDR) completed during 2001 there was a fundamental and
philosophical shift in focus from a "threat-based" model to one that emphasizes
the capabilities needed to defeat a full spectrum of adversaries. Transforming
the nation's defense posture to a capabilities-based approach involves creating
the ability for a more flexible response, with greater force mobility, stronger
space capabilities, missile defense, improved and network-centric
communications and information systems security and an increased emphasis on
homeland defense.
The actual fiscal 2003 DoD budget authority was $365 billion and the DoD
budget request for fiscal years 2004 through 2009 indicate a compounded annual
growth rate from fiscal year 2002 to 2009 of 5.8% with $484 billion for fiscal
2009. More important to L-3 are the trends for the "investment account" which
is comprised of the procurement and research, development, test and evaluation
(RDT&E) components of the DoD budget. We believe the investment account is a
better indicator of the portion of the DoD budget that is applicable to defense
contractors. The investment account increased 15% in fiscal year 2003 to $127
billion and the DoD budget investment account requests for fiscal years 2004 to
2009 indicate a compounded annual growth rate from fiscal year 2002 to 2009 of
7.5% with $182 billion in fiscal year 2009. Additionally, the DoD budgets have
experienced increased focus on command, control, communications, intelligence,
surveillance and reconnaissance (C(3)ISR), precision-guided weapons, unmanned
aerial vehicles (UAVs), network-centric communications, Special Operations
Forces (SOF) and missile defense. We believe L-3 is well positioned to benefit
from increased spending in those areas. In addition, increased emphasis on
homeland defense may increase demand for our capabilities in areas such as
security systems, information security, crisis management, preparedness and
prevention services, and civilian security
29
operations. While there is no assurance that the requested DoD budget increases
will be approved by Congress, after over a decade of downward trends, the
current outlook is one of continued increased DoD spending, which we believe
would positively affect our future orders and sales and favorably affect our
future operating profits because of increased sale volumes.
All of our domestic government contracts and subcontracts are subject to
audit and various cost controls, and include standard provisions for
termination for the convenience of the U.S. Government. Multiyear U.S.
Government contracts and related orders are subject to cancellation if funds
for contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the relevant foreign government.
ACQUISITIONS
The table below summarizes the more significant acquisitions that we have
completed during the year ended December 31, 2002 and the three-month period
ended March 31, 2003.
ACQUIRED BUSINESS DATE ACQUIRED PURCHASE PRICE(1)
- ----------------- -------------------- -------------------
(IN MILLIONS)
Aircraft Integration Systems (AIS) business of Raytheon
Company March 8, 2002 $1,148.7 (2)
Detection Systems June 14, 2002 $ 110.0 (3)
Telos Corporation (a California Corporation) July 19, 2002 $ 22.3
ComCept, Inc. July 31, 2002 $ 25.1 (4)
Technology, Management and Analysis Corporation (TMA) September 23, 2002 $ 51.4 (5)(6)
Electron Devices and Displays-Navigation Systems -- San Diego
businesses of Northrop Grumman October 25, 2002 $ 135.6 (7)
Wolf Coach, Inc. October 31, 2002 $ 4.2 (8)
International Microwave Corporation (IMC) November 8, 2002 $ 40.9 (9)
Westwood Corporation November 13, 2002 $ 22.1
Wescam Inc. November 21, 2002 $ 124.3
Ship Analytics, Inc. December 19, 2002 $ 12.5 (5)(10)
Avionics Systems business of Goodrich Corporation March 28, 2003 $ 188.5 (5)
- ----------
(1) The purchase price represents the contractual consideration for the
acquired business excluding adjustments for net cash acquired and
acquisition costs.
(2) Includes $18.7 million related to additional assets contributed by
Raytheon Company (Raytheon) to AIS. Following the acquisition, we changed
AIS's name to L-3 Communications Integrated Systems (IS). The purchase
price is subject to adjustment based on actual closing date tangible net
assets.
(3) Includes a $10.0 million preliminary purchase price adjustment. The
purchase price is subject to further adjustment based on actual closing
date net working capital.
(4) The purchase price consists of $14.9 million of cash and 229,494 shares
of L-3 Holdings common stock valued at $10.6 million. Excludes additional
purchase price in the form of L-3 Holdings common stock, which is
contingent upon the financial performance of ComCept for the fiscal years
ending June 30, 2003 and 2004. The maximum additional L-3 Holdings common
stock payable is 219,088 shares.
(5) The purchase price is subject to adjustment based on actual closing date
net assets or net working capital of the acquired business.
(6) Excludes additional purchase price, not to exceed $7.0 million, which is
contingent upon the financial performance of TMA for the twelve months
ending September 30, 2003. Following the acquisition, we changed TMA's
name to L-3 Communications TMA Corporation.
(7) Following the acquisition, we changed the name of the Displays-Navigation
Systems -- San Diego business to L-3 Ruggedized Command & Control.
(8) Excludes additional purchase price, not to exceed $4.1 million, which is
contingent upon the financial performance of Wolf Coach for the years
ending December 31, 2003, 2004 and 2005.
30
(9) Excludes additional purchase price, not to exceed $5.0 million, which is
contingent upon the financial performance of IMC for the year ending
December 31, 2003.
(10) Excludes additional purchase price, not to exceed $13.5 million, which is
contingent upon the financial performance of Ship Analytics for the years
ending December 31, 2003, 2004 and 2005.
- ----------
Additionally, we purchased other businesses during the three months ended
March 31, 2003 and during the year ended December 31, 2002, which individually
and in the aggregate were not material to our consolidated results of
operations, financial position or cash flows for the period acquired. All of
our acquisitions have been accounted for as purchase business combinations and
are included in our consolidated results of operations from their respective
effective dates.
On May 30, 2003, we acquired all of the outstanding stock of Aeromet Inc.
for $17.5 million in cash.
We regularly evaluate potential acquisitions and joint venture
transactions, but we have not entered into any agreements with respect to any
material transactions at this time except for a purchase agreement with respect
to the acquisition of the Military Aviation Services business of Bombardier
Inc.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the
consolidated financial statements. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of sales and costs and expenses during the reporting period. The most
significant of these estimates and assumptions relate to contract estimates of
sales and estimated costs to complete contracts in process, estimates of market
values for inventories reported at lower of cost or market, estimates of
pension and postretirement benefit obligations, recoverability of recorded
amounts of fixed assets, identifiable intangible assets and goodwill, income
taxes, including the valuations of deferred tax assets, litigation and
environmental obligations. Actual amounts will differ from these estimates. We
believe that critical accounting estimates have the following attributes: (1)
we are required to make assumptions about matters that are highly uncertain at
the time of the estimate; and (2) different estimates we could reasonably have
used, or changes in the estimate that are reasonably likely to occur, would
have a material effect on our financial condition or results of operations. We
believe the following critical accounting policies contain the more significant
judgements and estimates used in the preparation of our financial statements.
Contract Revenue Recognition and Contract Estimates. The substantial
majority of our sales require us to design, develop, manufacture and/or modify
complex products, and/or to perform related services according to
specifications provided by our customers. These sales are made pursuant to
written contractual arrangements or contracts, which are generally either
fixed-price or cost-reimbursable. These contracts are within the scope of the
American Institute of Certified Public Accountants Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts (SOP 81-1). In addition, cost-reimbursable contracts with the U.S.
Government are also specifically within the scope of Accounting Research
Bulletin No. 43, Chapter 11, Section A, Government Contracts, Cost-Plus-Fixed
Fee Contracts (ARB 43). Certain of our contracts with the U.S. Government are
multi-year contracts that are funded annually by the customer, and sales on
these multi-year contracts are based on amounts appropriated (funded) by the
U.S. Government.
Sales and profits on fixed-price contracts are recognized using
percentage-of-completion methods of accounting. Sales and profits on
fixed-price production contracts whose units are produced and delivered in a
continuous or sequential process are recorded as units are delivered based on
their selling prices (the "units-of-delivery" method). Sales and profits on
other fixed-price contracts are recorded based on the ratio of total actual
incurred costs to date to the total estimated costs at completion of the
contract for each contract (the "cost-to-cost method"). Under the
percentage-of-completion methods of accounting, a single estimated total profit
margin is used to recognize profit for each contract over its entire period of
performance which can exceed one year.
Accounting for the sales and profit on a fixed-price contract requires
estimates of (1) the contract value or total contract revenue, (2) the total
costs at completion, which is equal to the sum of the actual
31
incurred costs to date on the contract and the estimated costs to complete the
contract's scope of work and (3) the measurement of progress towards
completion. The estimated profit or loss on a contract is equal to the
difference between the total contract value and the estimated total cost at
completion. Under the units-of-delivery percentage-of-completion method, sales
on a fixed-price contract are recorded as the units are delivered during the
period at an amount equal to the contractual selling price of those units.
Under the cost-to-cost percentage-of-completion method, sales on a fixed-price
contract are recorded at amounts equal to the ratio of cumulative costs
incurred to date to total estimated costs at completion multiplied by the
contract value, less the cumulative sales recognized in prior periods. The
profit recorded on a contract in any period under both the units-of-delivery
method and cost-to-cost method is equal to the current estimated total profit
margin for the contract stated as a percentage of contract revenue multiplied
by the cumulative sales recorded less the cumulative profit previously
recorded. Adjustments to original estimates for a contract's revenues,
estimated costs at completion and estimated total profit are often required as
work progresses under a contract, as experience is gained and as more
information is obtained, even though the scope of work required under the
contract may not change, or if contract modifications occur. These changes are
recorded on a cumulative catch-up basis in the period they are determined to be
necessary.
Sales and profits on a cost-reimbursable contract are recognized as
allowable costs are incurred on the contract and become billable to the
customer, in an amount equal to the allowable costs plus the profit on those
cost which is generally fixed or variable based on the contract fee
arrangement. Thus, cost- reimbursable contracts are generally not subject to
the same estimation risks that affect fixed price contracts.
The impact of revisions in profit estimates on both fixed-price and
cost-reimbursable contracts are recognized on a cumulative catch-up basis in
the period in which the revisions are made. Provisions for anticipated losses
on contracts are recorded in the period in which they become evident. Amounts
representing contract change orders or claims are included in sales only when
they can be reliably estimated and their realization is reasonably assured. The
revisions in contract estimates, if significant, can materially affect our
results of operations and cash flows, as well as our valuations of contracts in
process.
For the year ended December 31, 2002: (1) sales on fixed-price contracts
recognized using the units-of-delivery percentage-of-completion method
accounted for approximately 22.4% of total sales, (2) sales on fixed-price
contracts recognized using the cost-to-cost percentage of completion method
accounted for approximately 32.7% of total sales, and (3) sales on
cost-reimbursable contracts, which are recognized as costs are incurred,
accounted for approximately 34.2% of total sales. The remaining 10.7% of sales
for the year ended December 31, 2002 pertain to fixed-price sales arrangements
principally with commercial customers, which were not within the scope of SOP
81-1 or ARB 43 and were recorded as products are delivered and services are
performed.
Goodwill and Intangible Assets. L-3 reviews goodwill and intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable, and also reviews
goodwill annually in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. In accordance with SFAS No. 141, Business Combinations, L-3
recorded identifiable intangible assets, such as customer relationships, that
are acquired in connection with a business acquisition. The value assigned to
identifiable intangible assets are determined based on estimates and judgements
regarding expectations for future contract renewals and their related cash
flows and the life cycle of acquired products and their related cash flows. If
actual future contract renewals, differ significantly from the estimates, we
may be required to record an impairment charge to write down the identifiable
intangible asset to its realizable value. In addition, SFAS No. 142 requires
that goodwill be tested annually using a two-step process. The first step is to
identify any potential impairment by comparing the carrying value of the
reporting unit to its fair value. If a potential impairment is identified, the
second step is to compare the implied fair value of goodwill with its carrying
amount to measure the impairment loss. The fair value of a reporting unit is
estimated using a discounted cash flow valuation approach, and is dependent on
estimates for future sales, operating income, depreciation and amortization,
income tax payments, working capital changes, and capital expenditures, as well
as, expected growth rates for cash flows and long-term interest rates, all of
which are impacted by economic conditions related to the industries in which we
operate as well as conditions in the U.S. capital markets. A decline in
32
estimated fair value of a reporting unit could result in an unexpected
impairment charge to goodwill, which could have a material adverse effect on
our business, financial condition and results of operations.
Pension Plan and Postretirement Benefit Plan Obligations. The obligations
for our pension plans and postretirement benefit plans and the related annual
costs of employee benefits are calculated based on several long-term
assumptions, including discount rates, rates of return on plan assets, expected
annual rates for salary increases for employee participants in the case of
pension plans, and expected annual increases in the costs of medical and other
health care benefits in the case of postretirement benefit obligations. These
long-term assumptions are subject to revision based on changes in interest
rates, financial market conditions, expected versus actual returns on plan
assets, participant mortality rates and other actuarial assumptions, future
rates of salary increases, benefit formulas and levels, and rates of increase
in the costs of benefits. Such changes, if significant, can materially affect
the amount of annual net periodic benefit costs recognized in results of
operations, our liabilities for the pension plans and postretirement benefit
plans, and our annual cash requirements to fund these plans.
Valuation of Deferred Income Tax Assets and Liabilities. At December 31,
2002, we had net deferred tax assets of $290.8 million, including $6.6 million
for net operating loss carryforwards and $38.4 million for tax credit
carryforwards which are subject to various limitations and will expire if
unused within their respective carryforward periods. Deferred income taxes are
determined separately for each of our tax-paying entities in each tax
jurisdiction. The future realization of our deferred income tax assets
ultimately depends on our ability to generate sufficient taxable income of the
appropriate character (for example, ordinary income or capital gain) within the
carryback and carryforward periods available under the tax law, and to a lesser
extent, our ability to execute successful tax planning strategies. Based on our
estimates of the amounts and timing of future taxable income and tax planning
strategies, we believe that we will realize our recorded deferred tax assets. A
change in the ability of our operations to continue to generate future taxable
income, or our ability to implement desired tax planning strategies, could
affect our ability to realize the future tax deductions underlying our net
deferred tax assets, and require us to provide a valuation allowance against
our net deferred tax assets. Such changes, if significant, could have a
material impact in our effective tax rate, results of operations and financial
position in any given period.
RESULTS OF OPERATIONS
The following information should be read in conjunction with our audited
consolidated financial statements and unaudited condensed consolidated
financial statements included elsewhere herein. Our results of operations for
the periods presented are impacted significantly by our acquisitions. See Note
4 to the unaudited condensed consolidated financial statements for a discussion
of our acquisitions, including pro forma sales, net income and diluted earnings
per share data for the three months ended March 31, 2003 (2003 First Quarter)
and March 31, 2002 (2002 First Quarter). See Note 3 to our audited consolidated
financial statements for the same discussion of our acquisitions for the years
ended December 31, 2002 and 2001.
We present our sales and costs and expenses in two categories on the
statement of operations, "Contracts, primarily U.S. Government" and
"Commercial, primarily products," which are based on how we recognize revenue.
Sales and costs and expenses for L-3's businesses that are primarily U.S.
Government contractors are presented as "Contracts, primarily U.S. Government."
The sales for L-3's U.S. Government contractor businesses are transacted using
written contractual arrangements or contracts for products and services
according to the specifications provided by the customer and are within the
scope of SOP 81-1 and ARB 43. Sales reported under "Contracts, primarily U.S.
Government" also include certain sales by L-3's U.S. Government contractor
businesses transacted using contracts for domestic and foreign commercial
customers which also are within the scope of SOP 81-1. Sales and costs and
expenses for L-3's businesses whose customers are primarily commercial
customers are presented as "Commercial, primarily products". These sales to
commercial customers are not within the scope of SOP 81-1 or ARB 43, and are
recognized in accordance with SEC SAB No. 101. L-3's commercial businesses are
substantially comprised of Aviation Communication & Surveillance Systems
(ACSS), Aviation Recorders, Microwave components, the Detection Systems
business acquired from PerkinElmer, Inc., Satellite Networks, and PrimeWave
Communications.
33
STATEMENT OF OPERATIONS DATA FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
The tables below provide two presentations of L-3's selected statement of
operations data for the 2003 and 2002 First Quarter. The first table presents
the sales and operating income data segregated between L-3's U.S. Government
contractor businesses and L-3's commercial businesses. See Note 2 to the
unaudited condensed consolidated financial statements. The second table
presents the sales and operating income data on a reportable segments basis.
See Note 12 to the unaudited condensed consolidated financial statements.
THREE MONTHS ENDED MARCH
31,
--------------------------
2003 2002
------------ -----------
(in millions)
U.S. GOVERNMENT CONTRACTORS AND COMMERCIAL BUSINESSES DATA
----------------------------------------------------------
Sales:
Contracts, primarily U.S. Government ............... $ 964.8 $618.6
Commercial, primarily products ..................... 124.2 78.2
-------- ------
Consolidated ..................................... $1,089.0 $696.8
======== ======
Operating income:
Contracts, primarily U.S. Government ............... $ 106.2 $ 72.0
Commercial, primarily products ..................... 2.6 (0.7)
-------- ------
Consolidated ..................................... $ 108.8 $ 71.3
======== ======
REPORTABLE SEGMENT DATA(1)
--------------------------
Sales:
Secure Communications & ISR ........................ $ 321.3 $157.4
Training, Simulation & Support Services ............ 231.4 194.8
Aviation Products & Aircraft Modernization ......... 158.9 107.3
Specialized Products ............................... 377.4 237.3
-------- ------
Consolidated ..................................... $1,089.0 $696.8
======== ======
Operating income:
Secure Communications & ISR ........................ $ 33.3 $ 16.4
Training, Simulation & Support Services ............ 28.5 21.5
Aviation Products & Aircraft Modernization ......... 19.9 17.5
Specialized Products ............................... 27.1 15.9
-------- ------
Consolidated ..................................... $ 108.8 $ 71.3
======== ======
- ----------
(1) Sales are after intersegment eliminations. See Note 12 to the unaudited
condensed consolidated financial statements.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2002
Consolidated sales increased $392.2 million to $1,089.0 million for the
2003 First Quarter from sales of $696.8 million for the 2002 First Quarter.
Sales grew $69.4 million, or 10.0%, excluding the increase in sales from
acquired businesses of $322.8 million discussed below. We expect our
consolidated sales growth excluding acquisitions for the full year 2003 to be
between 8% and 10%, after adjusting for the expected decline in sales of
explosive detection systems (EDS) for 2003 to $175 million from $339 million
for 2002 as discussed below. We expect our Secure Communications & ISR
businesses to be the largest contributor to L-3's sales growth for 2003.
Sales from "Contracts, primarily U.S. Government" increased $346.2 million
to $964.8 million for the 2003 First Quarter from $618.6 million for the 2002
First Quarter. The IS, Telos, ComCept, TMA,
34
Electron Devices, Ruggedized Command & Control, Westwood, Wescam and Ship
Analytics acquired businesses contributed $270.5 million of the increase in
sales. Excluding these acquisitions, sales grew $75.7 million, or 12.2%,
primarily because of volume increases of $55.6 million from secure
communications systems, $25.2 million from security products, $11.2 million
from aircraft modifications, $7.0 million from naval power equipment, and $5.6
million from communications software and engineering support services. These
increases were partially offset by volume declines of $18.5 million from fuzing
products, $4.6 million from acoustic undersea warfare products, and $5.8
million primarily from telemetry, space and navigation products.
Sales from "Commercial, primarily products" increased $46.0 million to
$124.2 million for the 2003 First Quarter from $78.2 million for the 2002 First
Quarter. The Detection Systems, IMC and Wolf Coach acquired businesses
contributed $52.3 million of the increase in sales. Excluding these
acquisitions, sales declined $6.3 million or 8.1%. This decrease in sales was
due to volume declines of $4.5 million for commercial aviation products and
$5.0 million for microwave components. These declines were partially offset by
increases of $3.2 million primarily for maritime voyage recorders.
Consolidated costs and expenses increased $354.7 million to $980.2 million
for the 2003 First Quarter from $625.5 million for the 2002 First Quarter,
primarily as a result of the increase in sales.
Costs and expenses for "Contracts, primarily U.S. Government" increased
$312.0 million to $858.6 million for the 2003 First Quarter from $546.6 million
for the 2002 First Quarter. Approximately 77% of the increase is attributable
to our acquired businesses. The remaining increase is primarily attributed to
internal sales growth from security products and secure communications systems
partially offset by declines from fuzing products and acoustic undersea warfare
products due to lower volume. Costs and expenses from sales on our direct and
indirect contracts with the U.S. Government include selling, general and
administrative (SG&A) costs, including independent research and development and
bid and proposal costs, because SG&A costs are allowable, indirect contract
costs that we allocate to our U.S. Government contracts in accordance with U.S.
Government regulations. Accordingly, we do not report SG&A costs on U.S.
Government contracts as period expenses. SG&A costs allocated to our U.S.
Government contracts were $116.4 million for the 2003 First Quarter and $84.1
million for the 2002 First Quarter (see Note 5 to our unaudited condensed
consolidated financial statements).
Costs and expenses for "Commercial, primarily products" increased $42.7
million to $121.6 million for the 2003 First Quarter from $78.9 million for the
2002 First Quarter. The increase was primarily due to increased sales
attributable to our acquired businesses, which was partially offset by lower
expenses for microwave components products due to lower sales volume. SG&A
expenses, increased $6.3 million to $31.8 million for the 2003 First Quarter
from $25.5 million for the 2002 First Quarter, primarily because of expenses
incurred by our acquired businesses, which were partially offset by lower SG&A
expenses for our PrimeWave, microwave components and commercial aviation
products businesses arising from cost reductions. As expected, research and
development (R&D) expenses decreased by $1.1 million to $8.8 million for the
2003 First Quarter from $9.9 million for the 2002 First Quarter primarily
because of lower R&D expenses incurred by ACSS, because the development of our
new T(2)CAS product was substantially completed in 2002, and by PrimeWave
because of cost reductions. These declines in R&D expenses were partially offset
by expenses incurred by our acquired businesses.
Consolidated operating income increased by $37.5 million to $108.8 million
for the 2003 First Quarter from $71.3 million for the 2002 First Quarter. The
increase was primarily due to higher sales from all of our segments.
Consolidated operating income as a percentage of sales (operating margin)
declined slightly by 0.2 percentage points to 10.0% for the 2003 First Quarter
from 10.2% for the 2002 First Quarter. The changes in the operating margins for
our segments are discussed below.
Operating income for "Contracts, primarily U.S Government" increased $34.2
million to $106.2 million for the 2003 First Quarter from $72.0 million for the
2002 First Quarter. Operating margin declined 0.6 percentage points to 11.0%
for the 2003 First Quarter from 11.6% for the 2002 First Quarter. The decline
was primarily because of lower margins for secure communications systems due to
changes in sales mix between fixed-price and cost-reimbursable contracts and
lower margins for telemetry and space products due to volume declines, as well
as continued losses from naval power equipment.
35
Operating income for "Commercial, primarily products" increased $3.3
million to $2.6 million for the 2003 First Quarter from a loss of $0.7 million
for the 2002 First Quarter. Operating margin improved 3.0 percentage points to
2.1% for the 2003 First Quarter from a negative margin of 0.9% for the 2002
First Quarter. The improvement was primarily related to the Detection Systems
acquired business, which was partially offset by lower margins on commercial
aviation products and commercial communication products because of lower volume
as well as continued losses for the PrimeWave Communications business.
Interest expense increased $6.1 million to $32.2 million for the 2003
First Quarter from $26.1 million for the 2002 First Quarter because of the
higher average outstanding debt principally related to the borrowings incurred
during March 2002 to finance the IS acquisition. The 2003 First Quarter also
included $0.4 million of accrued contingent interest expense on the CODES.
Interest and other income increased $0.4 million to $1.4 million in the
2003 First Quarter from $1.0 million in the 2002 First Quarter. The increase is
due to the reduction in the liability that represents the fair value assigned
to the embedded derivatives related to the CODES, partially offset by lower
interest income because of higher average cash and cash equivalents balances
during the 2002 First Quarter compared with the 2003 First Quarter.
The income tax provision for the 2003 First Quarter is based on the
estimated effective income tax rate for 2003 of 36.0%, compared with the
effective income tax rate of 35.3% for the 2002 First Quarter.
Basic earnings per share of L-3 Holdings (EPS) before cumulative effect of
a change in accounting principle increased $0.15 to $0.52 for the 2003 First
Quarter from $0.37 for the 2002 First Quarter. Diluted EPS before cumulative
effect of a change in accounting principle increased $0.14 to $0.50 for the
2003 First Quarter from $0.36 for the 2002 First Quarter. Net income for the
2002 First Quarter includes a charge, net of income taxes, of $24.4 million
($0.31 per basic share and $0.30 per diluted share) for the cumulative effect
of a change in accounting principle for goodwill impairment in connection with
the adoption of SFAS No. 142. Including the effect of a change in accounting
principle, basic and diluted EPS for the 2002 First Quarter was $0.06.
Diluted weighted-average common shares outstanding of L-3 Holdings
increased 27.4% to 105.0 million for the 2003 First Quarter from 82.4 million
for the 2002 First Quarter. The increase principally reflects the additional
shares outstanding from the sale by L-3 Holdings of 14.0 million shares of its
common stock on June 28, 2002, as well as the dilutive effect of L-3 Holdings'
convertible notes.
The 2003 and 2002 First Quarters diluted EPS computation did not include
the effect of the 7.8 million shares of L-3 Holdings common stock that are
issuable upon conversion of the CODES because the conditions required for the
CODES to become convertible were not satisfied. However, if the CODES had been
convertible, reported diluted EPS would have decreased by approximately $0.01
for the 2003 First Quarter and reported diluted EPS before cumulative effect of
a change in accounting principle for the 2002 First Quarter would have remained
unchanged.
Pro Forma Sales Data. Had we completed the acquisitions discussed above on
January 1, 2002, using various assumptions, L-3's pro forma consolidated sales
for the 2003 First Quarter would have been $1,113.3 million, an increase of
1.5% over pro forma consolidated sales for the 2002 First Quarter of $1,096.8
million (see Note 4 to the unaudited condensed consolidated financial
statements). As we expected, L-3's pro forma consolidated sales growth would
have been less than L-3's actual consolidated sales growth excluding
acquisitions of 10.0% (discussed above), primarily because the AIS
pre-acquisition sales for the two months ended February 2002 included sales
that we do not expect to recur. Such sales related to the procurement of
commercial aircraft which were modified for a certain customer. Historically
customers have provided AIS with the aircraft to be modified as
"customer-furnished" equipment, and AIS has not had revenues related to the
procurement of aircraft. We do not believe that pro forma sales growth is the
best operating measure of L-3's sales growth because it includes sales for our
acquired businesses for periods prior to their dates of acquisition, before the
acquired businesses were managed by L-3. We believe that L-3's sales growth
excluding acquisitions (discussed above) is the appropriate operating measure
of sales growth for L-3's businesses.
36
SECURE COMMUNICATIONS & ISR
Sales within our Secure Communications & ISR (SC&ISR) segment increased
$163.9 million, or 104.1%, to $321.3 million for the 2003 First Quarter from
$157.4 million for the 2002 First Quarter. The increase in sales was
principally attributable to $105.2 million from the IS and ComCept acquired
businesses. Excluding these acquisitions, sales increased $58.7 million, or
37.3%. This increase was primarily due to continued strong demand from the DoD
and other U.S. Government agencies for the Company's secure communications
systems, including Secure Terminal Equipment (STE) and secure communications
data links and related equipment for both manned aircraft and unmanned aerial
vehicles (UAVs).
Operating income increased by $16.9 million to $33.3 million for the 2003
First Quarter from $16.4 million for the 2002 First Quarter because of higher
sales. Operating margin was unchanged at 10.4% despite the increase in sales
primarily because of the changes in sales mix between fixed-price and
cost-reimbursable contracts.
TRAINING, SIMULATION & SUPPORT SERVICES
Sales within our Training, Simulation & Support Services (TS&SS) segment
increased $36.6 million, or 18.8%, to $231.4 million for the 2003 First Quarter
from $194.8 million for the 2002 First Quarter. The increase in sales was
principally attributable to $36.2 million from the Telos, TMA and Ship
Analytics acquired businesses. Excluding these acquisitions, sales increased
$0.4 million, or 0.2%. This increase was due to increases in sales for
communications software and engineering support services which were offset by
timing differences between contracts approaching their scheduled completion and
new contracts, which caused sales declines for training services. Sales for
ballistic missile targets and services were unchanged from year ago levels.
Operating income increased by $7.0 million to $28.5 million for the 2003
First Quarter from $21.5 million for the 2002 First Quarter because of higher
sales and operating margin. Operating margin increased 1.3 percentage points to
12.3% for the 2003 First Quarter from 11.0% for the 2002 First Quarter
principally due to higher volumes and operating margin from military
communications software and engineering support services.
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
Sales within our Aviation Products & Aircraft Modernization (AP&AM)
segment increased $51.6 million, or 48.1%, to $158.9 million for the 2003 First
Quarter from $107.3 million for the 2002 First Quarter. The increase in sales
was principally attributable to $42.8 million from the IS acquired business.
Excluding this acquisition, sales increased $8.8 million, or 8.2%. Sales on
contracts awarded in 2002 to upgrade C-130 aircraft for Greece and Malaysia and
higher volume for maritime voyage recorders contributed $13.3 million. Sales
volume for commercial aviation products declined by $4.5 million due to
continued weakness in the commercial aviation markets.
Operating income increased by $2.4 million to $19.9 million for the 2003
First Quarter from $17.5 million for the 2002 First Quarter because of higher
sales, which were partially offset by lower operating margin. Operating margin
declined 3.8 percentage points to 12.5% for the 2003 First Quarter from 16.3%
for the 2002 First Quarter. Volume declines for commercial aviation products
that were caused by continued weakness in the commercial aviation market
decreased operating margin by 2.7 percentage points. The remaining decrease in
operating margin was primarily attributable to the IS acquired business, which
has lower margins than the other businesses in the segment and was included in
our results for the entire 2003 First Quarter compared to only March during the
2002 First Quarter.
SPECIALIZED PRODUCTS
Sales within our Specialized Products segment increased $140.1 million, or
59.0%, to $377.4 million for the 2003 First Quarter from $237.3 million for the
2002 First Quarter. The increase in sales was principally attributable to
$138.6 million from the Detection Systems, Ruggedized Command & Control,
Electron Devices, Wolf Coach, IMC, Westwood and Wescam acquired businesses.
Excluding these
37
acquisitions, sales increased $1.5 million, or 0.6%. Increases in sales from
security products and naval power equipment contributed $32.2 million in sales.
These increases were largely offset by $28.3 million of volume declines for
fuzing products, navigation products and acoustic undersea warfare products
arising from timing differences between orders and product deliveries, as well
as certain contracts approaching their scheduled completion. The remaining
decrease is primarily due to lower volumes from microwave components and
telemetry and space products due to continued weakness in those commercial
markets. Although our EDS Systems sales increased by $25.2 million for the 2003
First Quarter compared to the 2002 First Quarter, we expect our full-year 2003
sales for EDS systems to decline to about $175 million from $339 million for
2002 because the initial installation of EDS systems by the U.S. Transportation
Security Administration (TSA) for major U.S. airports was substantially
completed in 2002.
Operating income increased by $11.2 million to $27.1 million for the 2003
First Quarter from $15.9 million for the 2002 First Quarter because of higher
sales and operating margin. Operating margin increased 0.5 percentage points to
7.2% for the 2003 First Quarter from 6.7% for the 2002 First Quarter. Higher
volumes and operating margins from security products increased operating margin
by 0.9 percentage points. Acquired businesses increased operating margin by 1.4
percentage points. Operating margin declined by 1.8 percentage points because
of sales declines for telemetry and space products, fuzing products and
microwave components.
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED DECEMBER 31, 2002, 2001
AND 2000
The tables below provide two presentations of L-3's selected statement of
operations data for the years ended December 31, 2002, 2001 and 2000. The first
table presents sales and operating income data segregated between L-3's U.S.
Government contractor businesses and L-3's commercial businesses. See Note 2 to
the audited consolidated financial statements. The second table presents the
sales and operating income data on a reportable segments basis. See Note 18 to
the audited consolidated financial statements.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001 2000
------------- ------------------ ------------------
(in millions)
U.S. GOVERNMENT CONTRACTORS AND COMMERCIAL BUSINESSES DATA
----------------------------------------------------------
Sales:
Contracts, primarily U.S. Government ............... $3,581.1 $1,932.2 $1,584.8
Commercial, primarily products ..................... 430.1 415.2 325.3
-------- -------- --------
Consolidated ..................................... $4,011.2 $2,347.4 $1,910.1
======== ======== ========
Operating income:
Contracts, primarily U.S. Government ............... $ 443.6 $ 232.6(1) $ 196.6(1)
Commercial, primarily products ..................... 10.4 42.7(1) 26.1(1)
-------- ------- --------
Consolidated ..................................... $ 454.0 $ 275.3 $ 222.7
======== ======= =======
REPORTABLE SEGMENT DATA(2)
-------------------------
Sales:
Secure Communications & ISR ........................ $ 997.8 $ 450.5 $ 393.0
Training, Simulation & Support Services ............ 806.3 596.8 283.4
Aviation Products & Aircraft Modernization ......... 733.0 263.3 209.1
Specialized Products ............................... 1,474.1 1,036.8 1,024.6
-------- -------- --------
Consolidated ..................................... $4,011.2 $2,347.4 $1,910.1
======== ======== ========
Operating income:
Secure Communications & ISR ........................ $ 104.1 $ 32.0(1) $ 54.1(1)
Training, Simulation & Support Services ............ 96.5 65.7(1) 23.5(1)
Aviation Products & Aircraft Modernization ......... 105.1 85.6(1) 66.9(1)
Specialized Products ............................... 148.3 92.0(1) 78.2(1)
-------- ------- ------
Consolidated ..................................... $ 454.0 $ 275.3 $ 222.7
======== ======= =======
38
- ----------
(1) Operating income includes goodwill amortization expense for the years
ended December 31, 2001 and 2000 as follows:
2001 2000
---------- ----------
Contracts, primarily U.S. Government ................ $31.3 $25.0
Commercial, primarily products ...................... 11.0 10.0
----- -----
Total ............................................ $42.3 $35.0
===== =====
Secure Communications & ISR ......................... $ 3.8 $ 3.7
Training, Simulation & Support Services ............. 7.1 3.6
Aviation Products & Aircraft Modernization .......... 7.7 6.5
Specialized Products ................................ 23.7 21.2
----- -----
Total ............................................ $42.3 $35.0
===== =====
(2) Sales are after intersegment eliminations. See Note 18 to the
consolidated financial statements.
- ----------
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Consolidated sales increased $1,663.8 million to $4,011.2 million for 2002
from $2,347.4 million for 2001. For 2002, sales grew $347.4 million, or 14.8%,
excluding the increase in sales from acquired businesses of $1,316.4 million
discussed below. Had these acquisitions occurred on January 1, 2001, pro forma
sales for 2002 would have been $4,699.1 million, an increase of 13.5% over pro
forma sales of $4,139.6 million for 2001 (See Note 3 to the consolidated
financial statements).
Sales from "Contracts, primarily U.S. Government" increased $1,648.9
million to $3,581.1 million for 2002 from $1,932.2 million for 2001. The
Analytics, BT Fuze, ComCept, EER, Electron Devices, IS, KDI, Ruggedized Command
& Control, Ship Analytics, Spar, SY, Telos, TMA, Wescam and Westwood acquired
businesses contributed $1,222.5 million of the increase in sales. Excluding
these acquisitions, sales grew $426.4 million, or 22.1%, in 2002. Volume
increased $320.9 million for explosive detection systems, $156.8 million for
secure communication systems, $20.6 million for training services and devices,
$20.1 million for navigation and guidance products and $8.1 million for
military displays products. These sales increases were partially offset by
declines of $17.3 million on naval power equipment and $14.5 million on static
transfer switches used for commercial applications. Sales of ballistic missile
targets and services declined $53.0 million. The remaining decline in sales of
$15.3 million was primarily related to acoustic undersea warfare products
because of lower volume on spares.
Sales from "Commercial, primarily products" increased $14.9 million to
$430.1 million for 2002 from $415.2 million for 2001. The Detection Systems,
IMC and Wolf Coach acquired businesses contributed $93.9 million of the
increase in sales. Excluding these acquisitions, sales declined $79.0 million
or 19.0%. This decrease in sales was due to volume declines of $49.2 million on
commercial aviation products, $31.7 million on microwave components and $11.8
million on PrimeWave communication products. These declines were partially
offset by increases of $5.5 million for maritime voyage recorders and $8.2
million primarily for technical and product support services for commercial
customers.
"Commercial, primarily products" sales declined to 10.7% of total sales
for 2002 from 17.7% for 2001. The decline was primarily attributable to the
acquisitions we completed during 2002, including the IS acquisition, and to a
lesser extent, the decline in our commercial sales. This decline was
attributable to the continued weakness in the commercial aviation and
communications markets. Our 2002 acquisitions were comprised substantially of
DoD contractors. Even if a rebound occurs in the commercial aviation and
communications markets, which we are not anticipating for 2003, we expect our
commercial sales as a percentage of total sales to remain at the current level.
Furthermore, even considering our stated interest in expanding L-3's business
in avionics for both military and commercial applications through select niche
acquisitions, we do not expect to make any substantial acquisitions of
commercial businesses.
Consolidated costs and expenses increased $1,485.1 million to $3,557.2
million for 2002 from $2,072.1 million for 2001, primarily as a result of the
increase in sales. In accordance with SFAS No. 142, on
39
January 1, 2002 we stopped amortizing our goodwill to expenses. Goodwill
amortization expense was $42.3 million for 2001. SFAS No. 142 also requires
that we evaluate the fair value of our goodwill annually to determine if it has
been impaired. We evaluated the carrying value of our goodwill as of January 1,
2002 in accordance with the transition provisions of SFAS No. 142 and wrote-off
$30.8 million of goodwill related to certain of our space and broadband
commercial communications businesses, which has been reported as a $24.4
million loss after income taxes for the cumulative effect of a change in
accounting principle, as discussed below. If we experience any impairments to
the carrying value of our goodwill after January 1, 2002, we will have to
report them as a loss from operations. During 2002, we did not have any other
goodwill impairments.
Costs and expenses for "Contracts, primarily U.S. Government" increased
$1,437.9 million to $3,137.5 million for 2002 from $1,699.6 million for 2001.
Approximately 75% of the increase is attributable to our acquired businesses.
The remaining increase is primarily attributed to internal growth for explosive
detection systems and secure communication systems. Goodwill amortization
expense was $31.3 million for 2001. Costs and expenses for sales on our direct
and indirect contracts with the U.S. Government include selling, general and
administrative (SG&A) costs, including independent research and development and
bid and proposal costs, because SG&A costs are allowable indirect contract
costs that we allocate to our U.S. Government contracts in accordance with U.S.
Government regulations. Accordingly, we do not report SG&A costs on U.S.
Government contracts as period expenses. SG&A costs allocated to our U.S.
Government contracts were $431.5 million for 2002 and $304.3 million for 2001
(see Note 4 to our consolidated financial statements).
Costs and expenses for "Commercial, primarily products" increased $47.2
million to $419.7 million for 2002 from $372.5 million for 2001. The increase
is primarily due to increased sales as a result of the Detection Systems
acquired business, which was partially offset by lower expenses for microwave
components products due to lower sales volume. Goodwill amortization expense
was $11.0 million for 2001. SG&A expenses, including research and development
(R&D) expenses, increased $29.2 million to $148.9 million for 2002 from $119.7
million for 2001, primarily because of SG&A expenses incurred by our acquired
businesses.
Consolidated operating income increased by $178.7 million to $454.0
million for 2002 from $275.3 million for 2001. The increase was due to higher
sales for all of our segments. The impact of not amortizing goodwill increased
consolidated operating income by $42.3 million. Consolidated operating income
as a percentage of sales (operating margin) declined by 0.4 percentage points
to 11.3% for 2002 from 11.7% for 2001. The impact of not amortizing goodwill
increased consolidated operating margin by 1.1 percentage points. Operating
margins compared to operating margins for 2001, excluding goodwill amortization
expense, declined for our Training, Simulation & Support Services, Aviation
Products & Aircraft Modernization and Specialized Products segments, and
increased for our Secure Communications & ISR segment. The changes in the
operating margins for our segments are discussed below.
Operating income for "Contracts, primarily U.S Government" increased
$211.0 million to $443.6 million for 2002 from $232.6 million for 2001.
Operating margin increased 0.4 percentage points to 12.4% for 2002, from 12.0%
for 2001. The impact of not amortizing goodwill increased operating margin by
0.9 percentage points. Operating income for 2002 includes a loss of $3.0
million for the settlement in June 2002 of certain litigations that we assumed
in connection with a business we acquired in 1999, which reduced operating
margin for 2002 by 0.1 percentage points. The remaining decline in operating
margin was due to the absence in 2002 of a favorable performance adjustment
recorded in 2001 on the AVCATT contract. Operating income included
approximately $20 million of losses in both 2002 and 2001 related to our naval
power equipment business that were caused by production problems which reduced
sales volume and related costs to fix manufacturing and quality control
problems. We expect to reduce the losses in our naval power equipment business
to about $5 million for 2003 because of higher sales related to increasing
production levels.
Operating income for "Commercial, primarily products" declined $32.3
million to $10.4 million for 2002 from $42.7 million for 2001. Operating margin
declined 7.9 percentage points to 2.4% for 2002 from 10.3% for 2001. The
decline was principally attributable to lower gross margin contributions from
commercial aviation products, microwave components, and space and broadband
communication
40
products because of volume declines, as well as continued marketing, selling
and development expenses for the PrimeWave business. The impact of not
amortizing goodwill partially offset these decreases in operating margin by 2.6
percentage points. We expect to reduce our losses from the PrimeWave
Communications business by approximately $20 million in 2003 because of higher
expected sales volume and lower R&D and SG&A expenses for the business.
Interest expense increased $36.1 million to $122.5 million for 2002 from
$86.4 million for 2001. The increase is attributable to higher outstanding debt
for 2002 primarily related to the financing of the IS acquisition, which was
partially offset by lower interest rates on our debt. Our interest rate swap
agreements which converted the fixed interest rates on $580.0 million of our
senior subordinated notes to variable interest rates reduced our interest
expense for 2002 by $9.6 million because of declining interest rates that the
interest rate swaps enabled us to enjoy. In June 2002, we also redeemed our
$225.0 million 10 3/8% senior subordinated notes and replaced them with senior
subordinated notes that have a 7 5/8% fixed interest rate which reduced our
interest expense by $3.1 million. See "Liquidity and Capital Resources --
Financing Activities" below.
Interest and other income increased $3.2 million to $4.9 million for 2002
from $1.7 million for 2001, principally due to interest income earned on our
cash and cash equivalents. Additionally, 2001 included a net gain of $0.6
million comprising a gain on the sale of a 30% interest in the ACSS business,
largely offset by the write-down of the carrying value of an investment in the
common stock of a telecommunications company, because the decline in value for
that common stock was determined to be other than temporary.
The 2002 loss on retirement of debt was $16.2 million before income taxes
(or $0.11 per diluted share after taxes) and arose from the retirement of our
$225.0 million of 10 3/8% senior subordinated notes in June 2002.
The income tax provision for 2002 is based on an effective income tax rate
of 35.5%, compared with an effective income tax rate of 38.0% for the year
ended December 31, 2001. The decrease in the effective income tax rate is
primarily attributable to the adoption of SFAS No. 142. Amortization expense
for goodwill that is not deductible for income tax purposes caused an increase
in our effective income tax rate prior to the adoption of SFAS No. 142.
Basic earnings per share of L-3 Holdings (EPS) before cumulative effect of
a change in accounting principle increased $0.79 to $2.33 for 2002 from $1.54
for 2001. Diluted EPS before cumulative effect of a change in accounting
principle increased $0.71 to $2.18 for 2002 from $1.47 for 2001. The impact of
not amortizing goodwill in 2002 increased basic EPS before cumulative effect of
a change in accounting principle by $0.45 and diluted EPS before cumulative
effect of a change in accounting principle by $0.40. Excluding the increase in
earnings attributable to not amortizing goodwill, basic EPS before cumulative
effect of a change in accounting principle grew 17.1% and diluted EPS before
cumulative effect of a change in accounting principle grew 16.6%. Basic EPS was
$2.05 and diluted EPS was $1.93 after a loss of $24.4 million ($0.28 per basic
share and $0.25 per diluted share) for the cumulative effect of a change in
accounting principle for a goodwill impairment, recorded effective as of
January 1, 2002 in connection with the adoption of SFAS No. 142.
Diluted weighted-average common shares outstanding increased 14.1% to 97.4
million for 2002 from 85.4 million for 2001. The increase principally reflects
the additional shares outstanding from the sale of 9.2 million shares by L-3
Holdings of its common stock effective May 2, 2001, and the sale by L-3
Holdings of 14.0 million shares of its common stock effective June 28, 2002.
The diluted EPS computation for 2002 did not include the dilutive effect
of the 7.8 million shares of L-3 Holdings common stock that are issuable upon
conversion of the CODES (See Notes 8 and 12 to the consolidated financial
statements) because the conditions for their conversion were not satisfied.
However, if the CODES had been convertible, reported diluted EPS would have
decreased by approximately $0.03 for 2002.
41
SECURE COMMUNICATIONS & ISR
Sales for the Secure Communications & ISR segment increased $547.3 million
to $997.8 million for 2002 from $450.5 million for 2001. The IS-Tactical
Reconnaissance Systems including airborne surveillance & control (TRS) and
ComCept acquired businesses contributed $403.1 million of sales. Excluding
these acquisitions, sales grew $144.2 million or 32.0%. Volumes on secure
communication systems, including Secure Terminal Equipment (STE), secure data
links and military communications products increased $156.8 million because of
greater demand for secure communications from the DoD and U.S. Government
intelligence agencies. These increases were partially offset by a decrease in
sales of $12.6 million primarily due to lower volumes of PrimeWave
communication products. We expect that the demand for our secure communications
systems and ISR products will remain strong for 2003, enabling the segment to
generate sales growth in 2003, excluding acquisitions in excess of 10%.
Operating income increased by $72.1 million to $104.1 million for 2002
from $32.0 million for 2001 because of higher sales and operating margin.
Operating margin improved by 3.3 percentage points to 10.4% for 2002 compared
to 7.1% for 2001. The impact of not amortizing goodwill increased operating
margin by 0.4 percentage points. Increased volume and cost improvements on
secure communication systems increased margins by 1.7 percentage points. Higher
losses for the PrimeWave business in 2002 due to lower sales, higher marketing,
selling and development expenses and a provision to increase the allowance for
doubtful accounts by $3.0 million lowered operating margin by 0.9 percentage
points. The remaining change in operating margins was principally attributable
to margins from the IS-TRS acquired business, which was higher than the segment
operating margin for 2001.
TRAINING, SIMULATION & SUPPORT SERVICES
Sales for the Training, Simulation & Support Services segment increased
$209.5 million to $806.3 million for 2002 from $596.8 million for 2001. The
Analytics, EER, Ship Analytics, SY Technologies, Telos and TMA acquired
businesses contributed $210.9 million of the increase in sales. Excluding these
acquisitions, sales declined $1.4 million or 0.2%. Sales for ballistic missile
targets and services at our Coleman Research business declined $53.0 million
primarily because of a contract completed in 2002 and the delay in the award of
its follow-on contract, which is related to the U.S. Missile Defense Agency's
decision to consolidate the target requirements for all of its major missile
defense programs into a single contract for fiscal year 2003. The decline in
ballistic missile targets and services was largely offset by volume increases
for training services from new contracts with the DoD, contracts competitively
awarded during 2001 and software and systems engineering services. We expect
that the sales growth, excluding acquisitions, for our training, simulation and
support services will be between 6% and 7% in 2003, which is consistent with
the overall increase in the DoD budget. We also expect our sales of ballistic
missile targets and services to increase in 2003.
Operating income increased by $30.8 million to $96.5 million for 2002 from
$65.7 million for 2001 because of higher sales and operating margin. Operating
margin increased by 1.0 percentage points to 12.0% for 2002 compared to 11.0%
for 2001 principally because of the impact of not amortizing goodwill.
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
Sales for the Aviation Products & Aircraft Modernization segment increased
$469.7 million to $733.0 million for 2002 from $263.3 million for 2001. The
IS-Aircraft Modification and Maintenance (AMM) and Spar acquired businesses
contributed $502.0 million to sales. Excluding acquisitions, sales declined
$32.3 million, or 12.3%, because of lower volumes for commercial aviation
recorders and TCAS products that were partially offset by sales increases for
military displays products and commercial maritime voyage recorders. The
decline in commercial aviation products sales was caused by a decline in orders
and customer-directed deferrals of deliveries stemming from the continued
downturn in the commercial aircraft industry that began in 2001 and which
remained weak during 2002. Although we expect the commercial aviation markets
to remain weak during 2003, we do not expect our sales of commercial products
to decline significantly in 2003 because of the introduction of our new T(2)CAS
product, which we plan to begin shipping in the second half of 2003, and higher
volume for our maritime voyage recorders and transponders. We expect sales from
our aircraft modification services, which are primarily performed for the DoD,
to increase slightly during 2003.
42
Operating income increased by $19.5 million to $105.1 million for 2002
from $85.6 million for 2001, because of higher sales from acquired businesses.
Operating margin declined by 18.2 percentage points to 14.3% for 2002 from
32.5% for 2001. The impact of not amortizing goodwill increased operating
margin by 1.1 percentage points. Lower volumes on TCAS and aviation recorders,
increased development expenses for a terrain awareness warning system and a
commercial displays product-line reduced operating margin by 5.5 percentage
points. The remaining decrease in operating margin of 13.8 percentage points
was principally attributable to margins from the IS-AMM and Spar acquired
businesses, which averaged 12.0% and were lower than the segment operating
margin for 2001. Margins for our aircraft modification businesses are lower
than the margins for our commercial aviation products businesses, and the
aircraft modification businesses generated 70.5% of the segment's sales for
2002 compared with only 5.7% for 2001, which reduced the overall margin for the
entire segment as we expected.
SPECIALIZED PRODUCTS
Sales for the Specialized Products segment increased $437.3 million to
$1,474.1 million for 2002 from $1,036.8 million for 2001. The BT Fuze,
Detection Systems, Electron Devices, IMC, KDI, Ruggedized Command & Control,
Wescam, Westwood and Wolf Coach acquired businesses contributed $200.4 million
of sales. Excluding these acquisitions, sales increased $236.9 million or
22.8%. Sales of explosive detection systems used in airport security
principally relating to a contract from the Transportation Security
Administration contributed $320.9 million of the increase in sales. Navigation
and guidance products sales also increased by $20.1 million. These increases to
sales were partially offset by volume declines of $17.3 million on naval power
equipment arising from lower shipments caused by production capacity diverted
to fixing quality control problems, $16.8 million on training devices because
certain contracts were completed in 2002, $15.9 million for acoustic undersea
warfare products primarily arising from lower spares volume, and $14.5 million
for commercial static transfer switches because of the deterioration of the
internet service provider market. The remaining decline of $39.6 million was
principally on microwave components and telemetry and space products arising
from continued softness and declining demand in the space, broadband and
wireless commercial communications markets. We expect that our sales for EDS
systems in 2003 will decline to about $175 million primarily because the
initial installation of EDS systems by TSA for major U.S. airports was
completed in 2002. Excluding the decline in EDS systems in 2003, we expect the
sales growth, excluding acquisitions, for our Specialized Products to be
between 7% and 8%. The majority of the growth is expected for naval power
equipment for which shipments should increase after fixing the production
problems experienced during 2001 and 2002 and for navigation products and
training devices because of continued strong demand and recent orders.
Operating income increased by $56.3 million to $148.3 million for 2002
from $92.0 million for 2001 because of higher sales and operating margin.
Operating margin improved by 1.2 percentage points to 10.1% for 2002 compared
to 8.9% for 2001. The impact of not amortizing goodwill increased operating
margin by 1.6 percentage points. Higher volumes for explosive detection systems
caused an increase in operating margin of 2.6 percentage points. These
increases were partially offset by declines in operating margin that was
primarily related to lower volumes on naval power equipment, microwave
components and training devices, and the absence in 2002 of a favorable
performance adjustment recorded in 2001 on the AVCATT contract discussed below.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Consolidated sales increased $437.3 million to $2,347.4 million for 2001
compared with 2000. Sales from "Contracts, primarily U.S. Government" increased
$347.4 million to $1,932.2 million for 2001 from $1,584.8 million for 2000. The
MPRI, Coleman, KDI and EER acquisitions contributed $335.6 million of the sales
increase in 2001. The remaining sales increase in 2001 was primarily
attributable to volume increases of (1) $66.0 million on secure telephone
equipment and secure data links, (2) $21.2 million on training devices and
services, (3) $16.2 million on acoustic undersea warfare products and (4) $4.4
million on airport security systems. These sales increases were partially
offset by declines of $56.7 million on naval power equipment due to lower
shipments caused by production quality control problems and customer-directed
reductions in delivery requirements, and volume declines of $39.3 million
primarily on telemetry
43
and space products related to the continued decline in the telemetry, space and
broadband markets. Sales from "Commercial, primarily products" increased $89.9
million to $415.2 million in 2001 from $325.3 million in 2000. The increase in
2001 was primarily attributable to volume increases of (1) $53.1 million on
aviation products, (2) $20.8 million in microwave components and (3) $13.5
million from fixed wireless access products. The remaining change in sales was
due to an increase in network support services, which was partially offset by
declines primarily on telemetry and space products related to the continued
decline in the commercial telemetry, space and broadband communications
markets.
The total increase in costs and expenses of $384.7 million to $2,072.1
million for 2001 from $1,687.4 million for 2000 is consistent with the
increases in sales. For 2001, costs and expenses were $1,699.6 million for
"Contracts, primarily U.S. Government" and $372.5 million for "Commercial,
primarily products".
Operating income increased because of higher sales by $52.6 million to
$275.3 million for 2001 compared with 2000. Operating income as a percentage of
sales ("operating margin") remained unchanged at 11.7%. Operating margins
improved at our Training, Simulation & Support Services segment, our Aviation
Products & Aircraft Modernization segment and our Specialized Products segment.
These margin improvements were offset by a margin decline at our Secure
Communications & ISR segment. The change in operating margin for each of our
segments is discussed below.
Interest expense decreased $6.6 million to $86.4 million for 2001 because
of lower interest rates, changes in the components and levels of our debt, and
savings of $4.1 million from the interest rate swap agreements we entered into
in July 2001 and November 2001. The interest rate swap agreements exchange the
fixed interest rate of 8% on our $200.0 million Senior Subordinated Notes due
2008 and the fixed interest rate of 8 1/2% on our $180.0 million Senior
Subordinated Notes due 2008 to variable interest rates determined using the six
month LIBOR rate. See "-- Liquidity and Capital Resources".
Interest and other income decreased $2.6 million to $1.8 million. Interest
and other income for 2001 includes a net pre-tax gain of $0.6 million ($0.01
per diluted share), consisting of an after-tax gain of $4.3 million from the
sale of a 30% interest in ACSS to Thales Avionics and an after-tax charge of
$3.9 million to write-down the carrying amount of an investment in common stock
of a telecommunications company because the decline of its value was determined
to be other than temporary. Also included in interest and other income for 2001
is a pre-tax charge of $0.5 million to account for the increase, in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in the fair value assigned to the embedded derivatives in L-3
Holdings' $420.0 million 4% Senior Subordinated Convertible Contingent Debt
Securities due 2011 ("CODES"), that it sold in the fourth quarter of 2001 (See
"-- Liquidity and Capital Resources"), and a pre-tax loss of $0.8 million from
an equity method investment. Interest and other income for 2000 includes a net
pre-tax gain of $2.5 million ($0.02 per diluted share), consisting of an
after-tax gain of $9.2 million from the sale of our interests in certain
businesses and an after-tax charge of $7.6 million on the write-down in the
carrying amount of an investment in a telecommunications venture that is no
longer a going concern, the carrying amount of an investment in a
telecommunications equipment provider that was determined to be permanently
impaired and a related intangible asset.
The income tax provision for 2001 is based on an effective income tax rate
of 38.0% which declined slightly from the effective tax rate of 38.3% for 2000.
Basic earnings per share of L-3 Holdings (EPS) grew 24.2% to $1.54 for
2001 and diluted EPS grew 24.6% to $1.47 for 2001. Diluted weighted-average
common shares outstanding increased 22.2% for 2001, primarily because of the
sale by L-3 Holdings of its common stock in May 2001, and the dilutive effect
of L-3 Holdings' Convertible Notes that it sold in the fourth quarter of 2000.
See "-- Liquidity and Capital Resources".
SECURE COMMUNICATIONS & ISR
Sales within our Secure Communications & ISR segment increased $57.5
million, or 14.6%, to $450.5 million for 2001 compared with 2000. The increase
in sales was attributed to increased sales of $46.4 million from secure
telephone equipment due to an increase in demand for secure communications, and
$13.6 million from PrimeWave fixed wireless access products related to a
contract for a customer in Argentina. The remaining net decrease in sales was
principally attributable to a decline in communication subsystems for the
International Space Station, which was partially offset by higher volume for
secure data links.
44
Operating income decreased by $22.1 million to $32.0 million for 2001 from
$54.1 million for 2000 because of lower operating margins that were partially
offset by higher operating income from higher sales. Operating margin declined
6.7 percentage points from 13.8% in 2000 to 7.1% in 2001. Negative contract
margins and increased SG&A and development expenditures and bad debt provisions
associated with our PrimeWave business reduced operating margin by 3.7
percentage points. Volume declines and cost overruns related to design and
manufacturing problems on certain signal collection and processing equipment
reduced operating margin by 1.7 percentage points. The remaining decline in
operating margin was principally attributable to lower volumes on certain
military communication systems programs caused by contract deliveries that were
completed or approaching completion in 2001. The declines were partially offset
by higher operating margins on secure telephone equipment attributable to
increased volumes and cost improvements.
TRAINING, SIMULATION & SUPPORT SERVICES
Sales within our Training, Simulation & Support Services segment increased
$313.4 million, or 110.6%, to $596.8 million for 2001 compared with 2000. The
Coleman, MPRI, and EER acquisitions contributed $277.0 million of the increase
in sales. The remaining increase in sales was attributable to various training,
simulation and communications software support services.
Operating income increased by $42.2 million to $65.7 million for 2001
because of higher sales and operating margins. Operating margin increased 2.7
percentage points from 8.3% in 2000 to 11.0% for 2001. Volume increases and
cost improvements from the Link Training Services business increased operating
margin by 1.6 percentage points. The remaining increase was principally
attributable to higher margins from acquired businesses.
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
Sales within our Aviation Products & Aircraft Modernization segment
increased $54.2 million, or 25.9%, to $263.3 million for 2001 compared with
2000. Volume increased $44.9 million on TCAS products and was attributable to
increased customer demand and the timing of the TCAS acquisition completed in
April 2000. Volume also increased by $8.2 million for aviation recorders
because of commercial customer retrofit deliveries. The remaining increase was
primarily attributable to the Spar Aerospace business acquired in November 2001
offset by volume declines of $8.7 million for displays sold to military
customers related to the timing of contractual shipments.
Operating income increased by $18.7 million to $85.6 million for 2001 from
$66.9 million for 2000 primarily because of higher sales. Operating margin
increased 0.5 percentage points from 32.0% for 2000 to 32.5% for 2001.
Operating margin increased by 5.2 percentage points because of higher volume of
TCAS products with higher gross margin contributions. Lower margins on display
products related to volume declines reduced operating margin by 3.3 percentage
points. Lower margins from the Spar Aerospace acquired business, which we
expected, caused the remaining change in the operating margin.
SPECIALIZED PRODUCTS
Sales within our Specialized Products segment increased $12.2 million, or
1.2%, to $1,036.8 million for 2001 compared with 2000. The increase in sales
was principally attributable to the KDI acquired business and increases in
volume for microwave components and acoustic undersea warfare products,
partially offset by decreases in sales of telemetry and space products and
naval power equipment.
Operating income increased by $13.8 million for 2001 to $92.0 million
because of higher operating margin. Operating margin increased 1.3 percentage
points to 8.9% for 2001 from 7.6% for 2000. Reductions in contract costs
related to favorable performance on the AVCATT contract, arising from
engineering design changes, material sourcing changes and unit price reductions
on several parts in the contract bill of materials that occurred during 2001
increased operating margin by 1.3 percentage points. Cost improvements from
increased volume and product sales mix on microwave components resulted in an
increase of 1.0 percentage points. Higher margins from fuzing products resulted
in an increase of 0.7 percentage points. The remaining increase in operating
margin was primarily attributable to overhead
45
cost reductions and other cost improvements for training devices, volume
increases for explosives detection systems and reduced losses on voice and data
communication products. These improvements in operating margin were partially
offset by continued unfavorable performance on certain contracts and lower
production levels for naval power equipment which caused a decrease of 3.2
percentage points in operating margin.
PENSION PLANS
We maintain defined benefit pension plans covering employees at certain of
our businesses. At December 31, 2002, our balance sheet included an aggregate
$205.1 million liability for pension benefits, an increase of $142.8 million
from $62.3 million at December 31, 2001. The increase was primarily caused by
the $77.1 million of pension liabilities that we assumed as part of the IS
acquisition and the increase in the minimum liability of $75.4 million. Our
total estimated projected benefit obligation, including projected future salary
increases for covered employees was $713.9 million at the end of 2002, and
exceeded the fair value of our pension plan assets of $431.8 million by $282.1
million. The difference between this amount and the pension liability recorded
on our balance sheet of $205.1 million is attributable to the deferred
recognition of actuarial gains and losses and accumulated differences between
the assumed and actual rates of return on plan assets which increased by $115.2
million to $184.9 million from $69.7 million. During 2002, our pension plan
assets experienced a loss of $27.8 million, primarily due to the declines in
equity capital markets while the expected rate of return on plan assets which
was included in the determination of pension cost was $40.7 million, a
difference of $68.5 million. In addition, $50.0 million of the increase in our
benefit obligation resulted from changes in the actuarial assumptions and
differences between actuarial assumptions and actual results. In accordance
with SFAS No. 87, Employer's Accounting for Pensions, unrecognized losses that
our pension plans experienced in 2002 were not included in pension expense for
2002. Instead, they will be amortized to pension expense in future years over
the estimated average remaining service periods of the covered employees (See
Notes 3 and 16 to our consolidated financial statements.)
Our pension expense for 2002 was $41.9 million. We expect pension expense
for 2003 to increase by a non-cash amount of between $20.0 million and $25.0
million over our 2002 pension expense, primarily because of the amortization of
unrecognized losses through December 31, 2002, and the reductions that we made
in 2002 to our discount rate from 7.25% to 6.75% and rate of return on plan
assets from 9.5% to 9.0%. We made pension plan contributions for the full year
2002 of $47.4 million, which exceeded our original planned contributions for
2002 by more than $30 million. We expect to make pension plan contributions of
between $40 million and $50 million in 2003. A substantial portion of our
pension plan contributions for L-3's businesses that are U.S. Government
contractors are recoverable as allowable indirect contract costs at amounts
generally equal to the annual pension contributions. Our actual pension expense
for 2003 will be based upon a number of other factors, including the effect of
any additional acquisitions for which we assume liabilities for pension
benefits, actual pension plan contributions and changes (if any) to our pension
assumptions for 2003, including the discount rate, asset return rate and salary
increases.
Our shareholders' equity at December 31, 2002, reflects a non-cash charge
of $45.6 million (net of tax) to record the increase for the year ended
December 31, 2002 in the minimum pension liability in accordance with SFAS No.
87. This non-cash charge had no effect on our compliance with the financial
covenants of our debt agreements and did not impact our results of operations
for 2002.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $22.9 million from December 31, 2002 to
March 31, 2003. The increase included $16.7 million related to acquired
businesses and $6.2 million principally from:
o increases of $19.2 million in inventoried contract costs, primarily for
security products and acoustic undersea warfare products, partially
offset by declines for secure communications products;
46
o increases of $7.0 million in inventories at lower of cost or market due
to increases for aviation products and security products partially offset
by declines of PrimeWave inventory;
o decreases of $11.4 million in billed receivables due to higher
collections from aircraft modifications, ISR systems and secure
communications products partially offset by higher sales from secure data
links; and
o decreases of $8.6 million in unbilled contract receivables, net of
unliquidated progress payments, due to higher billings for ISR systems
and security products partially offset by increases for secure data links
and aircraft modifications.
Billed receivables were $568.7 million at March 31, 2003, basically
unchanged from $568.4 million at December 31, 2002. Billed receivables for our
U.S. Government contractor businesses decreased by $20.7 million from $450.9
million at December 31, 2002 to $430.2 million at March 31, 2003, because
receivables were collected sooner than expected. Billed receivables for our
commercial businesses increased by $21.0 million from $117.5 million at
December 31, 2002 to $138.5 million at March 31, 2003, including receivables
from acquired businesses of $11.7 million.
L-3's days sales outstanding (DSO) declined to 65.5 at March 31, 2003 from
68.9 at December 31, 2002, primarily because of the timing of certain
receivable collections, which occurred sooner than we expected. We calculate
our DSO by dividing (a) our aggregate billed receivables and net unbilled
contract receivables at the end of the period, by (b) our sales for the last
twelve-month period adjusted on a pro forma basis to include sales from
acquired businesses for the entire twelve-month period, divided by 365.
Excluding the IS acquisition, L-3's DSO would have been 77.5 at March 31, 2003
compared with 79.2 at December 31, 2002.
Included in contracts in process at March 31, 2003, are net billed
receivables of $12.6 million and net inventories of $16.3 million related to
our PrimeWave business. At December 31, 2002, we had $11.4 million of net
billed receivables and $18.2 million of net inventories related to our
PrimeWave business.
The increase in property, plant and equipment (PP&E) during the 2003 First
Quarter was principally related to the acquisition of Avionics Systems. The
percentage of depreciation expense to average gross PP&E declined slightly to
2.9% for the 2003 First Quarter from 3.0% for the 2002 First Quarter. The
decline was attributable to (1) the impact from the Avionics Systems
acquisition, for which the balance sheet reflects all of the PP&E of the
acquired business, but the statement of operations only includes depreciation
expense from the date of acquisition rather than for the entire period, and (2)
fully depreciated PP&E used in certain of our operations despite having net
carrying amounts of zero (after accumulated depreciation) and which are not
removed from the balance sheet until they are retired or otherwise disposed of.
Goodwill increased $165.8 million to $2,960.3 million at March 31, 2003
from $2,794.5 million at December 31, 2002. The increase was principally due to
the Avionics Systems acquisition as well as net purchase price increases based
on the closing date balance sheets for acquisitions completed prior to January
1, 2003.
The increase in accrued employment costs was primarily due to the timing
of payments as well as the Avionics Systems acquisition completed in March of
2003. The increase in accrued interest and pension and postretirement
liabilities was primarily due to the timing of payments. The decrease in
accounts payable was due to the timing of payments primarily attributable to
the TSA contract and was partially offset by our acquisition of Avionics
Systems.
Customer advances declined by $17.5 million because liquidations exceeded
collections, primarily related to shipments and performance on contracts with
foreign customers for aircraft modifications and acoustic undersea warfare
products. The timing of collections and liquidation of customer advances are
proscribed by contract terms, and generally do not coincide because collections
mostly occur upon the award of a contract and during the earlier periods of
performance, and conversely, liquidations mostly occur during later periods of
performance as products are delivered and other work items are completed.
Additionally, customer advances do not affect or determine the recognition of
revenue because customer advances are a contract financing method.
47
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH
31, 2002
Cash decreased to $34.4 million at March 31, 2003 from $134.9 million at
December 31, 2002. The table below provides a summary of our cash flows for the
periods indicated.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
----------- -------------
(in millions)
Net cash from operating activities ............ $ 106.1 $ 41.4
Net cash used in investing activities ......... (213.4) (1,212.2)
Net cash from financing activities ............ 6.8 855.8
------- ---------
Net decrease in cash .......................... $(100.5) $ (315.0)
======= =========
OPERATING ACTIVITIES
We generated $106.1 million of cash from operating activities during the
2003 First Quarter, an increase of $64.7 million from the $41.4 million
generated during the 2002 First Quarter. Net income adjusted for non-cash
expenses and deferred income taxes increased $33.7 million to $100.0 million
for the 2003 First Quarter from $66.3 million for the 2002 First Quarter.
Deferred income taxes increased primarily because of larger estimated tax
deductions arising from our recent acquisitions. Other non-cash expenses
consist primarily of contributions of common stock to savings plans and
depreciation and amortization. During the 2003 First Quarter, the change in
operating assets and liabilities provided cash of $6.1 million, compared with a
use of cash of $24.9 million for the 2002 First Quarter, primarily because of
changes in contracts in process, and in particular, the collection of certain
receivables sooner than we expected. The decrease in accounts payable reflects
payments to vendors primarily for security products. Liquidations exceeded
collections of customers advances (discussed above). The timing of payments to
employees for salaries and wages, as well as the timing of interest payments
was a source of cash. The source of cash from the change in pension and
postretirement benefits was due to pension and postretirement expenses for the
2003 First Quarter exceeding related cash contributions.
We expect to generate net cash from operating activities of approximately
$385 million for the full year 2003, including approximately $185 million for
the first half of 2003. We expect that our cash interest payments for the
second quarter of 2003 will exceed those for the 2003 First Quarter by
approximately $29 million. Our cash interest payments, which are based on the
fixed rate coupons and the interest payment dates of our debt, were
approximately $17 million for the 2003 First Quarter and are expected to be
approximately $46 million for the second quarter of 2003, approximately $20
million for the third quarter of 2003, and approximately $37 million for the
fourth quarter of 2003 after giving effect to the offering by L-3
Communications of $400 million of 6 1/8% Senior Subordinated Notes and the
redemption of the 8 1/2% Senior Subordinated Notes (see Financing Activities
below).
INVESTING ACTIVITIES
During the 2003 First Quarter, we invested $197.4 million to acquire
Avionics Systems and to pay for acquisition costs and purchase price
adjustments based on the closing date balance sheets for certain acquisitions
completed prior to January 1, 2003. During the 2002 First Quarter, we invested
$1,201.5 million to acquire businesses, primarily for our acquisition of IS.
We make capital expenditures for the improvement of manufacturing
facilities and equipment. We expect to use approximately $90 million of cash
for capital expenditures, and to receive net cash proceeds of approximately $5
million from the dispositions of property, plant and equipment for the full
year 2003.
FINANCING ACTIVITIES
In May 2003, L-3 Communications sold $400.0 million of 6 1/8% Senior
Subordinated Notes due July 15, 2013 (May 2003 Notes) with interest payable
semi-annually on July 15 and January 15 of each year, commencing July 15, 2003.
The net proceeds from this offering amounted to $391.0 million.
48
The net proceeds from this offering were used to: (1) redeem the 8 1/2%
Senior Subordinated Notes due 2008 and (2) increase cash and cash equivalents.
On May 21, 2003, we initiated a full redemption of all the outstanding
$180.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes
due 2008. All such notes were redeemed on June 20, 2003 at a redemption
price of 104.250% of the principal amount, plus accrued and unpaid interest to
June 20, 2003.
At March 31, 2003, available borrowings under our senior credit facilities
were $676.4 million, after reductions for outstanding letters of credit of
$73.6 million. There were no outstanding borrowings under our senior credit
facilities at March 31, 2003.
In January of 2003, we entered into interest rate swap agreements on
$200.0 million of our 7 5/8% Senior Subordinated Notes due 2012. These swap
agreements exchanged the fixed interest rate for a variable interest rate on
$200.0 million of the $750.0 million principal amount outstanding. In March of
2003, we terminated these interest rate swap agreements and received cash
proceeds of $6.4 million. Prior to the termination of the swap agreements, we
recorded a reduction to interest expense for the 2003 First Quarter of $1.2
million. This reduction represented interest savings for the period prior to
the termination of these swap agreements earned from the lower average variable
interest rates of 4.0% that we paid under the swap agreements compared to the
7 5/8% fixed interest rate on the notes subject to the swaps. The remaining $5.2
million of the proceeds represented the future value of the swap agreements at
the termination date that was recorded as a deferred gain. The deferred gain
will be amortized as a reduction of interest expense over the remaining term of
the 7 5/8% Senior Subordinated Notes due 2012 at an amount of $0.1 million per
quarter, or $0.6 million annually.
In March of 2003, we entered into interest rate swap agreements on $200.0
million of our 7 5/8% Senior Subordinated Notes due 2012. These swap agreements
exchanged the fixed interest rate for a variable interest rate on $200.0
million of the $750.0 million principal amount outstanding. Under the terms of
these swap agreements, we will pay or receive the difference between the fixed
interest rate of 7 5/8% on the senior subordinated notes and a variable interest
rate determined two business days prior to the end of the interest period. The
variable interest rate is equal to (1) the six month LIBOR rate, plus (2) an
average of 327.75 basis points. The difference to be paid or received on these
swap agreements as interest rates change is recorded as an adjustment to
interest expense. These swap agreements are accounted for as fair value hedges.
The senior credit facilities, senior subordinated notes, Convertible Notes
and CODES agreements contain financial covenants and other restrictive
covenants which remain in effect so long as we owe any amount or any commitment
to lend exists thereunder. We are in compliance with those covenants in all
material respects. The borrowings under the senior credit facilities are
guaranteed by L-3 Holdings and by substantially all of the material domestic
subsidiaries of L-3 Communications on a senior basis. The payments of principal
and premium, if any, and interest on the senior subordinated notes are
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally, by all of L-3 Communications' restricted subsidiaries other than
its foreign subsidiaries. The guarantees of the senior subordinated notes are
junior to the guarantees of the senior credit facilities and rank pari passu
with each other and the guarantees of the Convertible Notes and the CODES. The
Convertible Notes and CODES are unconditionally guaranteed, on an unsecured
senior subordinated basis, jointly and severally, by L-3 Communications and
substantially all of its direct and indirect material domestic subsidiaries.
These guarantees rank junior to the guarantees of the senior credit facilities
and rank pari passu with each other and the guarantees of the senior
subordinated notes. The senior credit facilities also limit the payment of
dividends by L-3 Communications to L-3 Holdings except for payment of franchise
taxes, fees to maintain L-3 Holdings' legal existence, income taxes not to
exceed certain amounts, interest accrued on the Convertible Notes and CODES or
to provide for operating costs of up to $1.0 million annually. Under the
covenant, L-3 Communications may also pay permitted dividends to L-3 Holdings
from its excess cash, as defined, up to a cumulative amount of $5.0 million,
provided that the debt ratio is no greater than 3.5 to 1 as of the most recent
fiscal quarter. As a result, at March 31, 2003, $5.0 million of L-3
Communications' net assets were available for payment of dividends to L-3
Holdings. See "Description of Other Indebtedness" for a description of our debt
and related financial covenants.
49
Based upon our current level of operations, we believe that our cash from
operating activities, together with available borrowings under the senior
credit facilities, will be adequate to meet our anticipated requirements for
working capital, capital expenditures, commitments, research and development
expenditures, contingent purchase prices, program and other discretionary
investments, and interest payments for the foreseeable future. There can be no
assurance, however, that our business will continue to generate cash flow at
current levels, or that currently anticipated improvements will be achieved. If
we are unable to generate sufficient cash flow from operations to service our
debt, we may be required to sell assets, reduce capital expenditures, refinance
all or a portion of our existing debt or obtain additional financing. Our
ability to make scheduled principal payments or to pay interest on or to
refinance our indebtedness depends on our future performance and financial
results, which, to a certain extent, are subject to general conditions in or
affecting the defense industry and to general economic, political, financial,
competitive, legislative and regulatory factors beyond our control. There can
be no assurance that sufficient funds will be available to enable us to service
our indebtedness, or make necessary capital expenditures or to make
discretionary investments.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEARS ENDED DECEMBER 31, 2001
AND 2000
Our cash position at December 31, 2002 was $134.9 million, $361.0 million
at December 31, 2001 and $32.7 million at December 31, 2000. The table below
provides a summary of our cash flows for the periods indicated.
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------- ----------- -----------
(IN MILLIONS)
Net cash from operating activities ............ $ 318.5 $ 173.0 $ 113.8
Net cash used in investing activities ......... (1,810.5) (424.9) (608.2)
Net cash from financing activities ............ 1,265.9 580.3 484.3
--------- ------- ------
Net increase (decrease) in cash ............... $ (226.1) $ 328.4 $(10.1)
========= ======= ======
OPERATING ACTIVITIES
We generated $318.5 million of cash from our operating activities during
2002, an increase of $145.5 million from the $173.0 million generated during
2001. Earnings adjusted for non-cash expenses for 2002 and deferred income
taxes increased $132.4 million to $415.9 million in 2002 from $283.5 million in
2001. Deferred income taxes for 2002 compared with 2001 increased primarily
because of larger estimated tax deductions arising from our recently completed
acquisitions, including our acquisition of IS. Other non-cash items consist
primarily of contributions of common stock to savings plans. During 2002, our
working capital and operating assets and liabilities increased $97.4 million,
compared with an increase of $110.5 million in 2001. Our cash flows from
operating activities during 2002 reflect increases in billed and unbilled
receivables, other current assets and other assets. The use of cash related to
customer advances was due to liquidations on certain foreign contracts. The use
of cash for other current liabilities was to fund contracts in a loss position
for which estimated costs exceed the estimated billings, and was partially
offset by an increase in accrued warranty costs primarily for explosive
detection systems delivered in 2002. The timing of payments to employees for
salaries and wages, as well as the timing of interest payments, was a source of
cash. The source of cash in other liabilities was primarily due to deferred
gains on the termination of our swap agreements, discussed below. Pension plan
contributions in 2002 amounted to $47.4 million.
During 2001, we generated $173.0 million of cash from our operating
activities, an increase of $59.2 million from the $113.8 million generated
during 2000. Earnings adjusted for non-cash items and deferred income taxes
increased $83.2 million to $283.5 million in 2001 from $200.3 million in 2000.
During 2001, our working capital and operating assets and liabilities increased
$110.5 million compared with an increase of $86.5 million in 2000.
In 2001, we used cash for increases in inventories, receivables and
negative operating margins related to our PrimeWave business and naval power
equipment products, as well as for incurred contract costs in
50
excess of billings for the continued effort on the AVCATT contract. These uses
of cash were partially offset by a settlement of certain items related to a
services agreement and lower income tax payments.
Our cash from operating activities includes interest payments on debt of
$109.3 million for 2002, $81.6 million for 2001, and $81.4 million for 2000.
Our interest expense also includes amortization of deferred debt issue costs
which is a non-cash expense.
Our cash from operating activities includes income tax payments, net of
refunds of $2.1 million for 2002, $4.9 million for 2001, and $10.1 million for
2000. Our income tax payments were substantially less than our provisions for
income taxes reported on our statements of operations primarily because income
tax benefits arising from our acquisitions, as well as reductions to current
income taxes payable for compensation expense tax deductions arising from the
exercise of employee stock options which are credited directly to shareholders'
equity and excluded from income (see Note 13 to our consolidated financial
statements). Specifically, the difference of $109.5 million between our income
tax payments during 2002 and our provision for income taxes for the year ended
December 31, 2002 is comprised of deferred income tax provisions of $79.1
million, $13.3 million of employee stock options compensation expense tax
deductions and an increase of $17.1 million to our accrued income taxes, net of
certain reclassifications of deferred income tax assets and liabilities.
L-3 receives substantial income tax deductions from its acquisitions of
businesses that are structured as asset purchases for income tax purposes. The
effect of these income tax deductions is that our cash payments for income
taxes are less than our provision for income taxes reported on the statement of
operations. The difference is presented as deferred income tax provisions on
our statement of cash flows. The deferred income tax provisions primarily
result from deducting goodwill amortization from the "asset" acquisitions on
L-3's income tax returns over 15 years, in accordance with tax rules and
regulations, while no amortization is recorded for financial reporting
purposes, in accordance with SFAS No. 142. One of the impacts of SFAS No. 142
was an increase to these income tax benefits because prior to adopting the
provisions of SFAS No. 142, goodwill was also amortized for financial reporting
purposes, although over longer periods of generally 40 years. We expect that
the acquisitions L-3 has completed through December 31, 2002, excluding any
additional acquisitions, will continue to generate deferred tax benefits, from
2003 to 2016, with amounts for 2003 to 2005 approximating L-3's deferred tax
benefits for 2002. While these income tax deductions are reported as increases
or decreases to deferred income tax liabilities and assets, they are not
differences that are scheduled to reverse in future periods through normal
operations. Rather, they will only reverse if L-3 sells its acquired
businesses. Presently, L-3 has no plans to make any material dispositions of
its acquired businesses.
INVESTING ACTIVITIES
During 2002, we invested $1,742.1 million to acquire businesses, including
IS, Detection Systems, Telos, ComCept, TMA, Electron Devices, Ruggedized
Command & Control, Wolf Coach, IMC, Westwood, Wescam and Ship Analytics, and
$43.6 million for the remaining outstanding common stock of Spar which was not
tendered to L-3 at December 31, 2001. The cash invested in acquisitions for
2002 also includes acquisition costs and payments for contingent purchase price
and closing date net assets or net working capital purchase price adjustments
for certain acquisitions completed prior to 2002. During 2001, we invested
$446.9 million to acquire businesses. During 2000, we invested $599.6 million
to acquire businesses.
The IS acquisition was financed using approximately $229.0 million of cash
on hand, borrowings under our senior credit facilities of $420.0 million and a
$500.0 million senior subordinated bridge loan. We used a portion of the
proceeds from the sale in June 2002 of $750.0 million of senior subordinated
notes and 14.0 million shares of common stock to repay borrowings under the
senior credit facilities and the senior subordinated bridge loan as discussed
below in Financing Activities. All of the other acquisitions were financed
using cash on hand.
On May 31, 2001, we sold a 30% interest in ACSS to Thales Avionics for
$75.2 million in cash. In 2000, we sold our interests in two businesses for net
cash proceeds of $19.6 million. The cash proceeds from these transactions are
included in other investing activities.
51
We make capital expenditures for the improvement of manufacturing
facilities and equipment. We expect that our capital expenditures for the year
ending December 31, 2003 will be approximately $90 million.
FINANCING ACTIVITIES
DEBT
At December 31, 2002, the senior credit facilities were comprised of a
$500.0 million five-year revolving credit facility maturing on May 15, 2006 and
a $250.0 million 364-day revolving facility maturing on February 25, 2003 under
which at the maturity date we may, (1) at our request and subject to approval
of the lenders, extend the maturity date, in whole or in part, for an
additional 364-day period or (2) at our election, convert the outstanding
principal amount thereunder into a term loan which would be repayable in a
single payment two years from the conversion date. On February 25, 2003, the
Company's lenders approved an extension of the maturity date of the 364-day
revolving facility to February 24, 2004.
At December 31, 2002, available borrowings under our senior credit
facilities were $661.4 million, after reductions for outstanding letters of
credit of $88.6 million. There were no outstanding borrowings under our senior
credit facilities at December 31, 2002.
In June 2002, L-3 Communications sold $750.0 million of 7 5/8% Senior
Subordinated Notes due June 15, 2012 (the "June 2002 Notes") with interest
payable semi-annually on June 15 and December 15 of each year commencing
December 15, 2002. The net proceeds from that offering amounted to $731.8
million after underwriting discounts and commissions and other offering
expenses.
The net proceeds from the June 2002 Notes and the simultaneous sale of
14.0 million shares by L-3 Holdings of common stock, discussed below under "--
Equity," were used to (1) repay $500.0 million borrowed on March 8, 2002, under
our senior subordinated bridge loan facility, (2) repay the indebtedness
outstanding under our senior credit facilities, (3) repurchase and redeem the
10 3/8% Senior Subordinated Notes due 2007 (discussed in the following
paragraph) and (4) increase cash and cash equivalents.
On June 6, 2002, we commenced a tender offer to purchase any and all of
our $225.0 million aggregate principal amount of 10 3/8% Senior Subordinated
Notes due 2007. The tender offer expired on July 3, 2002. On June 25, 2002 we
sent a notice of redemption for all of our 10 3/8% Senior Subordinated Notes due
2007 that remained outstanding after the expiration of the tender offer. Upon
sending the notice, the remaining notes became due and payable at the
redemption price as of July 25, 2002. During 2002, we recorded a loss on
retirement of debt of $16.2 million, comprised of premiums, fees and other
transaction costs of $12.5 million and $3.7 million to write-off the remaining
balance of unamortized debt issue costs relating to these notes.
In the fourth quarter of 2001, L-3 Holdings sold $420.0 million of 4%
Senior Subordinated Convertible Contingent Debt Securities due 2011 (CODES).
The net proceeds from this offering amounted to approximately $407.5 million
after underwriting discounts and commissions and other offering expenses.
Interest is payable semi-annually on March 15 and September 15 of each year
commencing March 15, 2002. The CODES are convertible into L-3 Holdings' common
stock at a conversion price of $53.81 per share (7,804,878 shares) under any of
the following circumstances: (1) during any Conversion Period (defined below)
if the closing sales price of the common stock of L-3 Holdings is more than
120% of the conversion price ($64.58) for at least 20 trading days in the 30
consecutive trading-day period ending on the first day of the respective
Conversion Period, (2) during the five business day period following any 10
consecutive trading-day period in which the average of the trading prices for
the CODES was less than 105% of the conversion value, (3) if the credit ratings
assigned to the CODES by either Moody's or Standard & Poor's are below certain
specified ratings, (4) if they have been called for redemption by us, or (5)
upon the occurrence of certain specified corporate transactions. A Conversion
Period is the period from and including the thirtieth trading day in a fiscal
quarter to, but not including, the thirtieth trading day of the immediately
following fiscal quarter. There are four Conversion Periods in each fiscal
year. Additionally, holders of the CODES have a right to receive contingent
interest payments, not to exceed a per annum rate of 0.5% of the outstanding
principal amount of the CODES, which will be paid on the CODES during any
six-month period following a six-month
52
period in which the average trading price of the CODES is above 120% of the
principal amount of the CODES. The contingent interest payment provision was
triggered for the period beginning September 15, 2002 to March 14, 2003 and
resulted in additional interest for that period of $0.8 million. The contingent
interest payment provision as well as the ability of the holders of the CODES
to exercise the conversion features as a result of changes in the credit
ratings assigned to the CODES have been accounted for as embedded derivatives.
In the fourth quarter of 2000, L-3 Holdings sold $300.0 million of 5 1/4%
Convertible Senior Subordinated Notes due 2009 (the "Convertible Notes"). The
net proceeds from this offering amounted to $290.5 million after underwriting
discounts and commissions and other offering expenses, and were used to repay
revolver borrowings outstanding under our senior credit facilities. The
Convertible Notes may be converted at any time into L-3 Holdings common stock
at a conversion price of $40.75 per share (7,361,964 shares).
In June and August of 2002, we terminated the interest rate swap
agreements we entered into in 2001 on $380.0 million of our Senior Subordinated
Notes due 2008 and received cash proceeds of $9.3 million. In connection with
the termination, we recorded a reduction in interest expense for 2002 of $4.6
million, which represented the interest savings for the period prior to the
termination of the swap agreements earned from the differences between the
average variable interest rates of 4.6% that we paid under the swap agreements
which were lower than the average fixed interest rate of 8.2% on the notes
subject to the swaps. The remaining $4.7 million represented the future value
of the swap agreements at the termination date and was recorded as a deferred
gain in accordance with SFAS No. 133 and will be amortized as a reduction of
interest expense over the remaining terms of the $380.0 million of Senior
Subordinated Notes due 2008 at an amount equal to $0.2 million per quarter, or
$0.8 million annually. We recorded an additional reduction of interest expense
for 2002 of $2.5 million relating to interest savings for interest periods
which ended prior to the period during which we terminated of the interest rate
swap agreements. In June 2002, we entered into interest rate swap agreements on
$200.0 million of our 7 5/8% Senior Subordinated Notes due 2012. These swap
agreements exchanged the fixed interest rate for a variable interest rate on
$200.0 million of the $750.0 million principal amount outstanding. On September
30, 2002, we terminated these interest rate swap agreements and received cash
proceeds of $13.9 million in October 2002. In connection with the termination,
we recorded a reduction of interest expense for 2002 of $1.8 million, which
represented interest savings based on the variable interest rate of 4.1% that
L-3 paid in accordance with the terms of the swap for the period prior to the
termination of these swap agreements. The remaining $12.1 million represented
the future value of the swap agreements at the termination date and was
recorded as a deferred gain and will be amortized as a reduction of interest
expense over the remaining term of the 7 5/8% Senior Subordinated Notes due 2012
at an amount of $0.3 million per quarter, or $1.3 million annually. All of the
cash proceeds received from the swap agreements are included in cash from
operating activities on L-3's statement of cash flows. L-3's earnings plan for
2002 included anticipated interest expense savings from the swap agreements
because we expected the variable rates payable on the swaps would be lower than
the fixed interest rates on our senior subordinated notes. L-3 may enter into
new interest rate swap agreements in the future if we believe that financial
market conditions are favorable.
53
CONTRACTUAL OBLIGATIONS AND CONTINGENT COMMITMENTS
The tables below present our contractual obligations and contingent
commitments at December 31, 2002.
YEARS ENDING DECEMBER 31,
-------------------------------------------------
2006 AND
CONTRACTUAL OBLIGATIONS: TOTAL 2003 2004 2005 THEREAFTER
- ------------------------ ------------- --------- --------- --------- -------------
(in millions)
Principal amount of L-3 Communications
Corporation's long-term debt ............. $1,130.0 $ -- $ -- $ -- $1,130.0
Principal amount of L-3 Holdings' long-term
debt ..................................... 720.0 -- -- -- 720.0
Non-cancelable operating leases ........... 565.1 71.3 64.6 80.7 348.5
Acquisition earnouts ...................... 7.3 7.3 -- -- --
Capital leases ............................ 2.2 0.7 0.8 0.5 0.2
-------- ----- ----- ----- ----------
Total .................................... $2,424.6 $79.3 $65.4 $81.2 $2,198.7
======== ===== ===== ===== ========
YEARS ENDING DECEMBER 31,
------------------------------------------------
2006 AND
CONTINGENT COMMITMENTS: TOTAL 2003 2004 2005 THEREAFTER
- ----------------------- ---------- ---------- --------- --------- -----------
(in millions)
Outstanding letters of credit under our senior
credit facilities ........................... $ 88.6 $ 77.7 $ 5.4 $ 5.5 $ --
Other outstanding letters of credit .......... 71.1 65.7 0.7 0.2 4.5
Acquisition earnouts (1) ..................... 35.1 1.5 21.9 5.9 5.8
Guarantees of affiliate debt ................. 1.0 1.0 -- -- --
Capital contributions for limited partnership
investments ................................. 5.0 5.0 -- -- --
------ ------ ----- ----- -----
Total ....................................... $200.8 $150.9 $28.0 $11.6 $10.3
====== ====== ===== ===== =====
(1) Represents contingent purchase price payments or "earnouts" for certain
of our acquisitions that are contingent upon the post-acquisition
financial performance of those acquired businesses. Any amount that we
pay for the earnouts will be reported as cash paid for acquisition of
business within investing activities on the statement of cash flows and
will be recorded as an increase to goodwill for the acquisition.
EQUITY. On June 28, 2002, L-3 Holdings sold 14.0 million shares of its
common stock in a public offering for $56.60 per share. Upon closing, we
received net proceeds of $766.8 million after deducting underwriting discounts
and commissions and other offering expenses. As mentioned above, the net
proceeds from this sale and the simultaneous sale of the June 2002 Notes were
used to (1) repay $500.0 million borrowed on March 8, 2002, under our senior
subordinated bridge loan facility, (2) repay the indebtedness outstanding under
our senior credit facilities, (3) repurchase and redeem the 10 3/8% Senior
Subordinated Notes due 2007 discussed above and (4) increase cash and cash
equivalents.
On April 23, 2002, L-3 Holdings announced that its Board of Directors had
authorized a two-for-one stock split on all of its shares of common stock. The
stock split entitled all shareholders of record at the close of business on May
6, 2002 to receive one additional share of L-3 Holdings' common stock for every
share held on that date. The additional shares were distributed to shareholders
in the form of a stock dividend on May 20, 2002. Upon completion of the stock
spilt, L-3 Holdings had approximately 80 million shares of common stock
outstanding.
On May 2, 2001, L-3 Holdings sold 9.2 million shares of its common stock
in a public offering for $40.00 per share. In addition, as part of the
transaction, other selling stockholders, including affiliates of Lehman
Brothers Inc., sold 4.7 million secondary shares. Upon closing, we received net
proceeds of $353.6 million, which we used to repay borrowings outstanding under
our senior credit facilities, pay for the KDI and EER acquisitions and increase
cash and cash equivalents.
54
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
We define EBITDA as operating income plus depreciation expense and
amortization expense. We believe that the most directly comparable GAAP
financial measure to EBITDA is net cash from operating activities. Net cash
from operating activities was $318.5 million for 2002, $173.0 million for 2001
and $113.8 million for 2000. Our EBITDA was $529.9 million for 2002, $326.3
million for 2001 and $297.0 million for 2000. Net cash from operating
activities was $106.1 million for the 2003 First Quarter compared with $41.4
million for the 2002 First Quarter. Our EBITDA was $131.6 million for the 2003
First Quarter compared with $86.5 million for the 2002 First Quarter. The table
below presents a reconciliation of net cash from operating activities to
EBITDA.
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
2003 2002 2002 2001 2000
----------- ---------- ----------- ----------- -----------
(in millions)
Net cash from operating activities .................... $106.1 $ 41.4 $ 318.5 $173.0 $113.8
Less: Adjustments to reconcile net income to net cash
from operating activities .................... (56.4) (36.5) (140.4) (57.5) (31.1)
Add: Cumulative effect of a change in accounting
principle, net of income taxes ............... -- 24.4 24.4 -- --
------ ------ ------- ------ ------
Income before cumulative effect of a change in
accounting principle ................................. 49.7 29.3 202.5 115.5 82.7
Less: Interest and other income ...................... (1.4) (1.0) (5.0) (1.8) (4.4)
Add: Loss on retirement of debt ..................... -- -- 16.2 -- --
Provision for income taxes ..................... 28.0 16.0 111.6 70.8 51.4
Interest expense ............................... 32.2 26.1 122.5 86.4 93.0
Minority interest .............................. 0.3 0.9 6.2 4.4 --
Depreciation and amortization .................. 22.8 15.2 75.9 87.0 74.3
------ ------ ------- ------ ------
EBITDA ................................................ $131.6 $ 86.5 $ 529.9 $362.3 $297.0
====== ====== ======= ====== ======
Other than our amount of debt and interest expense, EBITDA is the major
component in the calculation of the debt ratio and interest coverage ratio
which are part of the financial covenants for our debt. The debt ratio is
defined as the ratio of consolidated total debt to consolidated EBITDA. The
interest coverage ratio is equal to the ratio of consolidated EBITDA to
consolidated cash interest expense. The higher our EBITDA is on a relative
basis to our outstanding debt, the lower our debt ratio will be. A lower debt
ratio indicates a higher borrowing capacity. Similarly, an increase in our
EBITDA on a relative basis to consolidated cash interest expense results in a
higher interest coverage ratio, which indicates a greater capacity to service
debt.
EBITDA is presented as additional information because we believe it to be a
useful indicator of an entity's debt capacity and its ability to service its
debt. EBITDA is not a substitute for operating income, net income or net cash
from operating activities as determined in accordance with generally accepted
accounting principles in the United States of America. EBITDA is not a complete
net cash flow measure because EBITDA is a financial measure that does not
include reductions for cash payments for an entity's obligation to service its
debt, fund its working capital and capital expenditures and pay its income
taxes. Rather, EBITDA is one potential indicator of an entity's ability to fund
these cash requirements. EBITDA as we define it may differ from similarly named
measures used by other entities and, consequently could be misleading unless
all entities calculate and define EBITDA in the same manner. EBITDA is also not
a complete measure of an entity's profitability because it does not include
costs and expenses for depreciation and amortization, interest and income
taxes.
DERIVATIVE FINANCIAL INSTRUMENTS
Included in our derivative financial instruments are foreign currency
forward contracts and the embedded derivatives related to the issuance of our
CODES. All of our derivative financial instruments that are sensitive to market
risk are entered into for purposes other than trading.
55
EMBEDDED DERIVATIVES. The contingent interest payment and contingent
conversion features of the CODES are embedded derivatives which we bifurcated
from the CODES and separately recorded on our balance sheet. On the date of
issuance of the CODES, we ascribed $2.5 million of the net proceeds from the
CODES to those embedded derivatives which represented their aggregate fair
value, and recorded it as a liability in accordance with SFAS No. 133. The
subsequent increases (decreases) to the fair values of the embedded derivatives
are recorded as losses (gains) in the statement of operations. Their fair
values at March 31, 2003 were $1.6 million which represents a liability.
INTEREST RATE RISK. Our financial instruments that are sensitive to
changes in interest rates include borrowings under the senior credit facilities
and interest rate swap agreements, all of which are denominated in U.S.
dollars. The interest rates on the senior subordinated notes, Convertible Notes
and CODES are fixed-rate and are not affected by changes in interest rates.
In March of 2003, we entered into new interest rate swap agreements on
$200.0 million of our senior subordinated notes to convert their fixed interest
rates to variable rates and to take advantage of the current low interest rate
environment. These new swap agreements discussed above are described in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Statement of Cash Flows -- Financing Activities," of this
prospectus. For every basis point (0.01%) that the six-month LIBOR interest
rate is greater than 4.35%, we will incur an additional $20,000 of interest
expense above the fixed interest rate on $200.0 million of senior subordinated
notes calculated on a per annum basis until maturity. Conversely, for every
basis point that the six month LIBOR interest rate is less than 4.35%, we will
recognize $20,000 of interest income on $200.0 million of senior subordinated
notes calculated on a per annum basis until maturity. The six month LIBOR rate
at March 31, 2003 was 1.25%.
We attempt to manage exposure to counterparty credit risk by entering into
interest rate agreements only with major financial institutions that are
expected to perform fully under the terms of such agreements. Cash payments
between us and the counterparties are made on the interest payment dates of the
senior subordinated notes for the interest rate swap agreements. Such payments
are recorded as adjustments to interest expense. Additional data on our debt
obligations and our applicable borrowing spreads included in the interest rates
we pay on borrowings under the senior credit facilities are provided in Notes 8
and 9 to our consolidated financial statements.
The table below presents significant contract terms and fair values at
March 31, 2003 for our interest rate swap agreements.
INTEREST RATE
SWAP AGREEMENTS
----------------
(in millions)
Notional amount ............. $ 200.0
Interest rate ............... 7 5/8%
Reference rate .............. 6 month LIBOR
Designated maturity ......... Semi-Annual
Expiration date ............. June 15, 2012
Fair value .................. $ (4.1)
FOREIGN CURRENCY EXCHANGE RISK. We conduct some of our operations outside
the U.S. in functional currencies other than the U.S. dollar. Additionally,
some of our U.S. operations have contracts with foreign customers denominated
in foreign currencies. To mitigate the risk associated with certain of these
contracts denominated in foreign currency we have entered into foreign currency
forward contracts. At March 31, 2003, the notional value of foreign currency
forward contracts was $37.2 million and the fair value of these contracts was
$0.6 million, which represents a liability. We account for these contracts as
cash flow hedges.
EQUITY PRICE RISK. Our equity investments in common stocks and limited
partnerships are subject to equity price risk. The fair values of our
investments are based on quoted market prices, as available, and on historical
cost for investments in cases in which it is not practicable to estimate fair
value. Both the carrying values and estimated fair values of such instruments
amounted to $24.4 million at March 31, 2003.
56
BACKLOG AND ORDERS
We define funded backlog as the value of funded orders which have not yet
been recognized as sales. We define funded orders as the value of contract
awards received from the U.S. Government, for which the U.S. Government has
appropriated funds, plus the value of contract awards and orders received from
customers other than the U.S. Government. Our funded backlog as of December 31,
2002 was $3,228.6 million and as of December 31, 2001 was $1,719.3 million. We
expect to record as sales approximately 73.0% of our December 31, 2002 funded
backlog during 2003. However, there can be no assurance that our funded backlog
will become sales in any particular period, if at all. Funded orders received
were $4,383.1 million for 2002, $2,456.1 million for 2001 and $2,013.7 million
for 2000.
Our funded backlog does not include the full value of our contract awards
including those pertaining to multi-year, cost-plus reimbursable contracts,
which are generally funded on an annual basis. Funded backlog also excludes the
sales value of unexercised contract options that may be exercised by customers
under existing contracts and the sales value of purchase orders that we may
receive under indefinite quantity contracts or basic ordering agreements.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs, including bid and
proposal costs were $159.9 million for 2002, $107.5 million for 2001 and $101.9
million for 2000. Customer-funded research and development costs were $480.9
million for 2002, $319.4 million for 2001 and $299.3 million for 2000.
CONTINGENCIES
We are engaged in providing products and services under contracts with the
U.S. Government and to a lesser degree, under foreign government contracts,
some of which are funded by the U.S. Government. All such contracts are subject
to extensive legal and regulatory requirements, and, periodically, agencies of
the U.S. Government investigate whether such contracts were and are being
conducted in accordance with these requirements. Under government procurement
regulations, an indictment by a federal grand jury could result in the
suspension for a period of time from eligibility for awards of new government
contracts. A conviction could result in debarment from contracting with the
federal government for a specified term. Additionally, in the event that U.S.
Government expenditures for products and services of the type we manufacture
and provide are reduced, and not offset by greater commercial sales or other
new programs or products, or acquisitions, there may be a reduction in the
volume of contracts or subcontracts awarded to us.
We continually assess our obligations with respect to applicable
environmental protection laws. While it is difficult to determine the timing
and ultimate cost to be incurred in order to comply with these laws, based upon
available internal and external assessments, with respect to those
environmental loss contingencies of which we are aware, we believe that even
without considering potential insurance recoveries, if any, there are no
environmental loss contingencies that, individually or in the aggregate, would
be material to our consolidated financial position, results of operations or
cash flows. Also, we have been periodically subject to litigation, claims or
assessments and various contingent liabilities incidental to our business. We
accrue for these contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
With respect to those investigative actions, items of litigation, claims
or assessments of which we are aware, we are of the opinion that the
probability is remote that, after taking into account certain provisions that
have been made with respect to these matters, the ultimate resolution of any
such investigative actions, items of litigation, claims or assessments will
have a material adverse effect on our consolidated financial position, results
of operations or cash flows.
On August 6, 2002, Aviation Communications & Surveillance Systems, LLC
(ACSS) was sued by Honeywell International Inc. and Honeywell Intellectual
Properties, Inc. (collectively, "Honeywell") for alleged infringement of
patents that relate to terrain awareness avionics. The lawsuit was filed in the
United States District Court for the District of Delaware. In December of 2002,
Honeywell withdrew without prejudice the lawsuit against ACSS and agreed to
proceed with non-binding arbitration. If the
57
matter is not resolved through arbitration, Honeywell may reinstitute the
litigation after August 14, 2003. The Company had previously investigated the
Honeywell patents and believes that ACSS has valid defenses against Honeywell's
patent infringement suit. In addition, ACSS has been indemnified to a certain
extent by Thales Avionics, which provided ACSS with the alleged infringing
technology. Thales Avionics owns 30% of ACSS. In the opinion of management, the
ultimate disposition of Honeywell's pending claim will not result in a material
liability to the Company.
On November 18, 2002, the Company initiated a proceeding against OSI
Systems, Inc. (OSI) in the United States District Court sitting in the Southern
District of New York (the "New York action") seeking, among other things, a
declaratory judgment that the Company had fulfilled all of its obligations
under a letter of intent with OSI (the "OSI Letter of Intent"). Under the OSI
Letter of Intent, the Company was to negotiate definitive agreements with OSI
for the sale of certain businesses the Company acquired from PerkinElmer, Inc.
on June 14, 2002. On December 23, 2002, OSI responded by filing suit against
the Company in the United States District Court sitting in the Central District
of California (the "California action") alleging, among other things, that the
Company breached its obligations under the OSI Letter of Intent and seeking
damages in excess of $100 million not including punitive damages. On February
7, 2003, OSI filed an answer and counterclaims in the New York action that
asserted substantially the same claims OSI had raised in the California action.
The California action was dismissed by the California District Court in favor
of the New York action. Under the OSI Letter of Intent, the Company proposed
selling to OSI the conventional detection business and the ARGUS business that
the Company recently acquired from PerkinElmer, Inc. Negotiations with OSI
lasted for almost one year and ultimately broke down over issues regarding,
among other things, intellectual property, product-line definitions, allocation
of employees and due diligence. The Company believes that the claims asserted
by OSI in its suit are without merit and intends to defend against the OSI
claims vigorously.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities 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 consolidated financial position, results
of operations or cash flows of the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May of 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections as of April
2002. SFAS No. 145, rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishments of Debt made to
Satisfy Sinking-Fund Requirements. Under the provisions of SFAS No. 145, gains
and losses from extinguishment of debt can only be classified as extraordinary
items if they meet the criteria in APB Opinion No. 30. The provisions of this
Statement related to the rescission of SFAS No. 4 shall be applied in fiscal
years beginning after May 15, 2002. Earlier application is permitted. This
statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the accounting for sale-leaseback transactions and
certain lease modifications that have economic effects that are similar and is
effective for transactions occurring after May 15, 2002. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions and are effective for financial statements issued on or after May
15, 2002. In accordance with the provisions of SFAS No. 145, beginning on
January 1, 2003, the loss on the retirement of debt of $16.2 million ($9.9
million after-tax or $0.11 per diluted share) that we recorded in June 2002 has
been presented as a separate caption within income from continuing operations
and the related income tax benefit has been included in the provision for
income taxes.
In January of 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This interpretation
provides guidance on the identification of, and financial reporting for,
entities over which control is achieved through means other than voting rights.
Such entities have been termed by FIN 46 as variable interest entities (VIE).
Once effective, FIN 46 will be the guidance that determines (1) whether
consolidation is required under the "controlling financial interest" model of
ARB
58
Bulletin No. 51, Consolidated Financial Statements, or (2) whether the
variable-interest model under FIN 46 should be used to account for existing and
new entities. FIN 46 includes guidance for identifying the enterprise that will
consolidate a VIE, which is the enterprise that is exposed to the majority of
an entity's risks or receives the majority of the benefits from an entity's
activities. FIN 46 also requires that the enterprises that hold a significant
variable interest in a VIE make new disclosures in their financial statements.
The transitional disclosures of FIN 46, which are effective immediately,
require an enterprise to identify the entities in which it holds a variable
interest, if the enterprise believes that those entities might be considered
VIEs upon the adoption of FIN 46. The implementation and remaining disclosure
requirements of FIN 46 are effective immediately for VIEs created after January
31, 2003, and on July 1, 2003 for all VIEs created before January 31, 2003. The
Company does not believe that it holds any interests in VIEs, however, the
Company is currently evaluating whether it holds a variable interest in
entities that might be considered VIEs.
In March of 2003, the Emerging Issues Task Force (EITF) issued EITF No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF No.
00-21 addresses how to determine whether a contractual arrangement involving
multiple deliverables contains more than one accounting unit and how
consideration should be measured and allocated to the separate accounting
units. EITF No. 00-21 applies to all deliverables within contractually binding
arrangements in all industries, except to the extent that a deliverable in a
contractual arrangement is subject to other existing higher-level authoritative
literature, and is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is currently evaluating the
effect of EITF No. 00-21 on the Company's revenue recognition accounting
policies and on its consolidated results of operations and financial position.
In May of 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement applies to certain financial instruments that, under previous
guidance, issuers could account for as equity. SFAS No. 150 requires that those
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 also requires disclosures about alternative ways of settling the
instruments and the capital structure of entities, whose shares are all
mandatorily redeemable. SFAS No. 150 is effective for these financial
instruments entered into or modified after May 31, 2003. For these financial
instruments entered into before May 31, 2003 SFAS No. 150 is effective for our
interim period beginning July 1, 2003. SFAS No. 150 is not expected to have a
material effect on our consolidated results of operations or financial
position.
INFLATION
The effect of inflation on our sales and earnings has not been
significant. Although a majority of our sales are made under long-term
contracts, the selling prices of such contracts, established for deliveries in
the future, generally reflect estimated costs to be incurred in these future
periods. In addition, some contracts provide for price adjustments through
escalation clauses.
59
BUSINESS
OVERVIEW
We are a leading merchant supplier of secure communications and
intelligence, surveillance and reconnaissance (ISR) systems, training,
simulation and support services, aviation products and aircraft modernization,
as well as specialized products. Our businesses employ proprietary technologies
and capabilities, and we believe our businesses have leading positions in their
respective primary markets. Our customers include the U.S. Department of
Defense (DoD) and prime contractors thereof, certain U.S. Government
intelligence agencies, major aerospace and defense contractors, foreign
governments, commercial customers and certain other U.S. federal, state and
local government agencies. For the year ended December 31, 2002, direct and
indirect sales to the DoD provided approximately 65.5% of our sales, while
sales to commercial customers, foreign governments and U.S. federal, state and
local government agencies other than the DoD provided the remaining 34.5% of
our sales. For the year ended December 31, 2002, we had sales of $4,011.2
million, of which U.S. customers accounted for approximately 85.7% and foreign
customers accounted for approximately 14.3%, and operating income of $454.0
million. We have the following four reportable segments: (1) Secure
Communications & ISR; (2) Training, Simulation & Support Services; (3) Aviation
Products & Aircraft Modernization; and (4) Specialized Products. Financial
information for our reportable segments is included in Management's Discussion
and Analysis of Results of Operations and Financial Condition and in Note 18 of
our consolidated financial statements and Note 12 of our unaudited consolidated
financial statements, each included elsewhere herein.
The discussion below presents summary data on the businesses of each of
our four reportable segments. Detailed data on the products and services for
each of our reportable segments is presented below on pages 67 to 79.
Secure Communications & ISR
Our businesses in this segment provide products and services for the
global ISR market, specializing in signals intelligence and communications
intelligence systems. These products and services provide the warfighter in
real-time with the unique ability to collect and analyze unknown electronic
signals from command centers, communication nodes and air defense systems for
real-time situation awareness and response. These businesses also provide
secure, high data rate communications systems for military and other U.S.
Government and foreign government reconnaissance and surveillance applications.
We believe our systems and products are critical elements of virtually all
major communication, command and control, intelligence gathering and space
systems. Our systems and products are used to connect a variety of airborne,
space, ground and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. Our major secure communication programs and
systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real-time information collection and dissemination to
users;
o highly specialized fleet management and support, including procurement,
systems integration, sensor development, modification and maintenance for
signals intelligence and ISR special mission aircraft and airborne
surveillance systems;
o strategic and tactical signals intelligence systems that detect,
collect, identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management; and
o communication systems for surface and undersea vessels and manned space
flights.
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Training, Simulation & Support Services.
Our businesses in this segment provide a full range of training,
simulation and support services, including:
o services designed to meet customer training requirements for aircrews,
navigators, mission operators, gunners and maintenance technicians for
virtually any platform, including military fixed and rotary wing
aircraft, air vehicles and various ground vehicles;
o communication software support, information services and a wide range of
engineering development services and integration support;
o high-end engineering and information support services used for command,
control, communications and ISR architectures, as well as for air warfare
modeling and simulation tools for applications used by the DoD,
Department of Homeland Security and U.S. Government intelligence
agencies, including missile and space systems, Unmanned Aerial Vehicles
(UAVs) and military aircraft;
o developing and managing extensive programs in the United States and
internationally that focus on teaching, training and education,
logistics, strategic planning, organizational design, democracy
transition and leadership development;
o producing crisis management software and providing command and control
for homeland security applications; and
o design, prototype development and production of ballistic missile
targets for missile defense applications, including present and future
threat scenarios.
Aviation Products & Aircraft Modernization.
Our businesses in this segment provide aviation products and aircraft
modernization services, including:
o airborne traffic and collision avoidance systems (TCAS) for commercial
and military applications;
o commercial, solid-state, crash-protected cockpit voice recorders, flight
data recorders and maritime hardened voyage recorders;
o ruggedized custom displays for military and high-end commercial
applications;
o turnkey aviation life cycle management services that integrate custom
developed and commercial off-the-shelf products for various military and
commercial wide-body and rotary wing aircraft, including heavy
maintenance and structural modifications and Head-of-State and commercial
interior completions; and
o engineering, modification, maintenance, logistics and upgrade services
for U.S. Special Operations Command aircraft, vehicles and personnel
equipment.
Specialized Products.
Our businesses in this segment supply products, including components,
subsystems and systems, to military and commercial customers in several niche
markets. These products include:
o ocean products, including acoustic undersea warfare products for mine
hunting, dipping and anti-submarine sonars and naval power distribution,
conditioning, switching and protection equipment for surface and undersea
platforms;
o ruggedization and integration of commercial-off-the-shelf technology for
displays, computers and electronic systems for military and commercial
applications;
o integrated video security and surveillance systems that provide
perimeter security used by the U.S. Immigration and Naturalization
Service and U.S. Border Patrol to monitor and protect U.S. borders;
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o security systems for aviation, port and border applications to detect
explosives, concealed weapons, contraband and illegal narcotics, to
inspect agricultural products and to examine cargo;
o telemetry, instrumentation, space and navigation products, including
tracking and flight termination;
o premium fuzing products;
o microwave components used in radar communication satellites, wireless
communication equipment, electronic surveillance, communication and
electronic warfare applications and countermeasure systems;
o high performance antennas and ground based radomes;
o training devices and motion simulators which produce advanced virtual
reality simulation and high-fidelity representations of cockpits and
mission stations for fixed and rotary wing aircraft and land vehicles;
and
o precision stabilized electro-optic surveillance systems, including high
magnification lowlight, daylight and forward looking infrared sensors,
laser range finders, illuminators and designators, and digital and
wireless communication systems.
DEVELOPING COMMERCIAL AND CIVIL OPPORTUNITIES
Part of our growth strategy is to identify commercial and non-DoD
applications from select products and technologies that we currently sell to
our defense customers. We have currently identified two vertical markets where
we believe there are significant opportunities to grow our sales:
transportation and broadband wireless communications products.
Within the transportation market, we are offering (1) an explosive
detection system for screening checked baggage at airports, X-ray screening
products for cargo, air freight, port and border security applications, display
and power propulsion systems for rail transportation and power switches for
internet service providers, and (2) maritime voyage recorders and an enhanced
aviation collision avoidance product that incorporates ground proximity
warning. Within the communications product market, we are offering local fixed
wireless access equipment for voice, DSL and internet access, and a broad range
of commercial components and digital test equipment for broadband
communications providers.
We have developed the majority of our commercial and civil products
employing technology used in our defense businesses. Except for our explosive
detection systems, sales generated from our developing commercial and civil
opportunities have not been material to us.
INDUSTRY OVERVIEW
The U.S. defense industry has undergone significant changes precipitated
by ongoing U.S. federal budget pressures and adjustments in political roles and
missions to reflect changing strategic and tactical threats. From fiscal year
1986 to fiscal year 1999, the U.S. DoD budget experienced a decline in nominal
dollars. This trend was reversed with the fiscal 2000 DoD budget, followed by
increases in fiscal 2001, 2002 and 2003 with an anticipated increase in fiscal
2004 to $380.0 billion. In addition, the DoD philosophy has focused on its
transformation strategy that balances modernization and recapitalization (or
upgrading existing platforms) while enhancing readiness and joint operations.
As a result, defense budget program allocations continue to favor advanced
information technologies related to command, control and communications (C(3))
and ISR. Furthermore, the DoD's emphasis on system interoperability, force
multipliers and providing battlefield commanders with real-time data is
increasing the electronic content of nearly all major military procurement and
research programs. As a result, it is expected that the DoD's budget for
communications and defense electronics will continue to grow.
The U.S. defense industry has also undergone dramatic consolidation
resulting in the emergence of five dominant prime system contractors: The
Boeing Company, Lockheed Martin Corporation, Northrop Grumman Corporation,
Raytheon Company and General Dynamics Corporation. We believe that one outcome
of this consolidation is that the DoD must ensure that continued vertical
integration does not
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further diminish the fragmented, yet critical DoD vendor base. Additionally, we
believe it has become uneconomical for the prime contractors to design, develop
and manufacture numerous essential products, components and subsystems for
their own use. We believe this situation has and will continue to create
opportunities for merchant suppliers such as L-3. As the prime contractors
continue to evaluate their core competencies and competitive positions,
focusing their resources on larger programs and platforms, we expect the prime
contractors to continue to exit non-strategic business areas and procure these
needed elements on more favorable terms from independent, commercially oriented
merchant suppliers. Examples of this trend include recent divestitures of
certain non-core defense-related businesses by several of the prime
contractors.
The focus on cost reduction by the prime contractors and the DoD is also
driving increased use of commercial off-the-shelf products for upgrades of
existing systems and in new systems. We believe the prime contractors will
continue to be under pressure to reduce their costs and will increasingly seek
to focus their resources and capabilities on major platforms and systems,
turning to commercially oriented "best of breed" merchant suppliers to produce
subsystems, components and products. We believe successful merchant suppliers
will continue to use their resources to complement and support, rather than
compete with, the prime contractors. We anticipate that the relationships
between the major prime contractors and their primary suppliers will continue
to evolve in a fashion similar to those employed in the automotive and
commercial aircraft industries. We expect that these relationships will be
defined by critical partnerships encompassing increasingly greater outsourcing
of non-core products and systems by the prime contractors to their key merchant
suppliers and increasing supplier participation in the development of future
programs. We believe that early involvement in the upgrading of existing
systems and the design and engineering of new systems incorporating the prime
contractor outsourced products will provide merchant suppliers, including us,
with a competitive advantage in securing new business and provide the prime
contractors with significant cost reduction opportunities through the
coordination of the design, development and manufacturing processes.
BUSINESS STRATEGY
We intend to grow our sales, improve our profitability and build on our
position as a leading merchant supplier of systems, products and services to
the major contractors in the aerospace and defense industry as well as the U.S.
Government. We also intend to continue to leverage our expertise and products
into selected new commercial and civil business areas where we can adapt our
existing products and technologies. Our strategy to achieve these objectives
includes:
EXPAND MERCHANT SUPPLIER RELATIONSHIPS. We have developed strong
relationships with the DoD, several other U.S. Government agencies and all of
the major U.S. defense prime contractors, enabling us to identify new business
opportunities and anticipate customer needs. As an independent merchant
supplier, we anticipate that our growth will be driven by expanding our share
of existing programs and by participating in new programs. We identify
opportunities where we are able to use our strong relationships to increase our
business presence and allow customers to reduce their costs. We also expect to
benefit from continued outsourcing of subsystems, components and products by
prime contractors, which positions us to be a merchant supplier to multiple
bidders on prime contract bids.
SUPPORT CUSTOMER REQUIREMENTS. A significant portion of our sales is
derived from strategic, long-term programs and from programs for which we have
been the incumbent supplier, and in many cases acted as the sole provider over
many years. Our customer satisfaction and excellent performance record are
evidenced by our receipt of performance-based award fees exceeding 90% of the
available award fees on average during the year ended December 31, 2002. We
believe that prime contractors will increasingly award long-term, outsourcing
contracts to the best-of-breed merchant suppliers they believe to be most
capable on the basis of quality, responsiveness, design, engineering and
program management support as well as cost. We intend to continue to align our
research and development, manufacturing and new business efforts to complement
our customers' requirements and provide state-of-the-art products.
IMPROVE OPERATING MARGINS. We have a history of improving the operating
performance of the businesses we acquire by reducing their overhead,
administrative expenses and facilities costs, increasing sales, improving
contract bidding and proposals controls and practices and increasing
competitive
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contract award win rates. We intend to continue to improve our operating
performance by continuing to reduce overhead expenses, consolidating certain of
our business and business processes and increasing the productivity of our
businesses.
LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. We have developed
strong, proprietary technical capabilities that have enabled us to capture the
number one or number two market position in most of our key business areas,
including secure, high data rate communications systems, solid state aviation
recorders, security systems, telemetry, instrumentation and space products,
advanced antenna products and high performance microwave components. We
continue to invest in company-sponsored independent research and development,
including bid and proposal costs, in addition to making substantial investments
in our technical and manufacturing resources. Further, we have a highly skilled
workforce, including approximately 9,200 engineers. We are applying our
technical expertise and capabilities to several closely aligned commercial
business markets and applications such as transportation and broadband wireless
communications and we expect to continue to explore other similar commercial
opportunities.
MAINTAIN DIVERSIFIED BUSINESS MIX. We have a diverse and broad business
mix with limited reliance on any single program, a favorable balance of
cost-reimbursable and fixed-price contracts, a significant follow-on business
and an attractive customer profile. Our largest program represented 8.2% of our
sales for the year ended December 31, 2002 and is a firm fixed-price contract
with the U.S. Transportation Security Administration (TSA) for explosive
detection systems (EDS) used at airports. No other program represented more
than 3.7% of sales for the year ended December 31, 2002. We expect our total
sales for EDS in 2003 to decline to about $175 million, including those for the
TSA, primarily because the initial build-out of EDS by TSA for major U.S.
airports was completed in 2002. Furthermore, 34.2% of our sales for 2002 were
from cost reimbursable contracts, and 65.8% were from fixed-price contracts,
providing us with a mix of predictable profitability (cost-reimbursable) and
higher margin (fixed-price) business. We also enjoy a favorable mix of defense
and non-defense business, with direct and indirect sales to the DoD accounting
for 65.5%, and sales to commercial customers, foreign governments and U.S.
federal, state and local government agencies other than the DoD accounting for
the remaining 34.5% of our sales for the year ended December 31, 2002. We
intend to leverage this business profile to expand our merchant supplier
business base.
CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent U.S. defense
industry consolidation has dramatically reduced the number of traditional
middle-tier aerospace and defense companies, which are smaller than the five
dominant prime system contractors and larger than the many smaller publicly and
privately owned companies, as well as the non-core aerospace and defense
businesses of the prime contractors. We intend to enhance our existing product
base through internal research and development efforts and selective
acquisitions that will add new products in areas that complement our present
technologies. We intend to continue acquiring select smaller publicly and
privately owned companies, as well as non-core aerospace and defense businesses
of larger companies, that exhibit the following criteria:
o significant market position(s) in their business area(s);
o product offerings which complement and/or extend our product offerings;
and
o positive future sales growth and earnings and cash flow prospects.
64
SELECTED RECENT ACQUISITIONS
During the year ended December 31, 2002, we acquired businesses for an
aggregate purchase price of $1,703.2 million. During the three months ended
March 31, 2003, we acquired one business for a purchase price of $188.5
million. The purchase prices represent the contractual consideration for the
acquired business excluding adjustments for net cash acquired and acquisition
costs. For certain of these acquisitions, the purchase price may be subject to
adjustment based on actual closing date net assets or net working capital of
the acquired business and/or the post-acquisition financial performance of the
acquired business. The table below summarizes the primary acquisitions.
PURCHASE
PRICE
BUSINESS DATE ACQUIRED ACQUIRED FROM ($ MILLIONS) BUSINESS DESCRIPTION
- ----------------------- -------------------- ------------------- -------------- ----------------------------------
Aircraft Integration March 8, 2002 Raytheon Company $1,148.7 Provides products and services
Systems for the global ISR market,
specializing in signals
intelligence (SIGINT) and
communications intelligence
(COMINT) systems, which
provide the unique ability to
collect, decode and analyze
electronic signals from command
centers, communications nodes
and air defense systems for
real-time communication and
response to the warfighter. Also
provides complete aircraft and
mission system engineering
integration, test and support
capability.
Detection Systems June 14, 2002 PerkinElmer, Inc. 110.0 Manufactures a range of
detection and imaging products
used to detect explosives,
concealed weapons, contraband
and illegal narcotics, to inspect
agricultural products and to
examine cargo.
Telos Corporation July 19, 2002 Telos Corporation 22.3 Provides systems engineering
(a California (a Maryland services for the military with
Corporation) Corporation) primary emphasis on
communications, and systems
integration for the U. S.
Government.
ComCept, Inc. July 31, 2002 ComCept 25.5 Provides network-centric warfare
stockholders (NCW) capabilities, including
requirements development,
modeling, simulation,
communications and systems
development and integration for
ISR.
Technology, September 23, 2002 Technology, 51.4 Provides engineering, logistics
Management and Management and and program management
Analysis Corporation Analysis services to various government
stockholders clients. Majority of work is for
the Naval Sea Systems
Command.
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SELECTED RECENT ACQUISITIONS (CONTINUED)
PURCHASE
PRICE
BUSINESS DATE ACQUIRED ACQUIRED FROM ($ MILLIONS) BUSINESS DESCRIPTION
- ------------------------ ------------------- ------------------ -------------- ---------------------------------
Electron Devices and October 25, 2002 Northrop Grumman 135.0 Electron Devices provides
Displays-Navigation Corporation microwave vacuum electron
Systems-San Diego devices and power modules to
Businesses military and commercial
markets. Displays-Navigation
Systems-San Diego provides
ruggedized displays, computers
and electronic systems for both
military and commercial
applications.
Wolf Coach, Inc. October 31, 2002 Wolf Coach 4.2 Vehicle modification and systems
stockholders integration for mobile
communications platforms used
for television broadcasters and
government/military users.
International November 8, 2002 International 40.7 Provides wireless
Microwave Corporation Microwave communication, enhanced
Corporation remote video surveillance
stockholders systems, network support
systems, information technology
and defense communications.
IMC provides remote video
surveillance systems, the
WatchTower, for the U.S.
Border Patrol.
Westwood Corporation November 13, 2002 Westwood 22.1 Provides electrical generation,
stockholders distribution and automated
control equipment and related
products directly to the U.S.
government and its prime
contractors.
Wescam Inc. November 21, 2002 Wescam 124.3 Designs and manufactures
stockholders wireless visual information
systems that capture images
from mobile platforms and
transmits them in real-time to
tactical command centers for
interpretation or to production
facilities for broadcast.
Ship Analytics Inc. December 19, 2002 Ship Analytics 12.5 Producer of crisis management
stockholders software applications used to
support emergency management
and homeland security
applications.
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SELECTED RECENT ACQUISITIONS (CONTINUED)
PURCHASE
PRICE
BUSINESS DATE ACQUIRED ACQUIRED FROM ($ MILLIONS) BUSINESS DESCRIPTION
- ----------------------- ---------------- ---------------- -------------- -----------------------------------
Avionics Systems March 28, 2003 Goodrich Corp. 188.5 Develops and manufactures
Business of Goodrich innovative avionics solutions for
Corporation substantially all segments of the
aviation market, and sells its
products to the military, business
jet, general aviation, rotary wing
aircraft and transportation
markets.
PRODUCTS AND SERVICES
SECURE COMMUNICATIONS & ISR
The systems and products, selected applications and selected platforms or
end users of our Secure Communications & ISR segment at December 31, 2002 are
summarized in the table below.
SYSTEMS/PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- --------------------------------------- --------------------------------------- -------------------------------------
Signals Intelligence
o Prime mission systems o Signal processing, airborne radio o USAF Big Safari Fleet, Rivet
integration and sensor frequency applications, antenna Joint, Combat Sent, Cobraball
development technology, real-time process and subsystems for U-2 and EP-3
control and software development
High Data Rate Communications
o Wideband data links and ground o High performance, wideband o Manned and unmanned aircraft,
terminals secure communication links for naval ships, terminals and
relaying of intelligence and satellites
reconnaissance information
Satellite Communication Terminals
o Ground-based satellite o Interoperable, transportable o Remote personnel provided with
communication terminals and ground terminals communication links to distant
payloads forces
Space Communication and Satellite Control
o Satellite communication and o On-board satellite external o International Space Station,
tracking system communications, video systems, Space Shuttle and various
solid state recorders and ground satellites
support equipment
o Satellite command and control o Software integration, test and o U.S. Air Force Satellite Control
sustainment and support maintenance support satellite Network and rocket launch
control network and engineering system
support for satellite launch
system
Military Communications
o Shipboard communications o Internal and external o Naval vessels
systems communications
(radio room)
Information Security Systems
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SECURE COMMUNICATIONS & ISR (CONTINUED)
SYSTEMS/PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ----------------------------- --------------------------------------- --------------------------------------
o STE (Secure Terminal o Secure and non-secure voice, data o U.S. Armed services, intelligence
Equipment) and video communication for and security agencies
office and battlefield utilizing
Integrated Services Digital
Network (ISDN) and Automated
Teller Machine (ATM)
commercial network technologies
We believe that we are an established leader in the development,
construction and installation of communication systems for high performance
intelligence collection, imagery processing and ground, air, sea and satellite
communications for the DoD and other U.S. Government agencies. We provide
secure, high data rate, real-time communication systems for surveillance,
reconnaissance and other intelligence collection systems. We also design,
develop, produce and integrate communication systems and support equipment for
space, ground and naval applications, as well as provide communication software
support services to military and related government intelligence markets.
Product lines of the Secure Communications & ISR business include high data
rate communications links, satellite communications terminals, naval vessel
communication systems, space communications and satellite control systems,
signal intelligence information processing systems, information security
systems, tactical battlefield sensor systems and commercial communication
systems.
Signals Intelligence
We believe that we are a world leader in SIGINT and ISR systems providing
unique, highly specialized fleet management and support for special mission
aircraft, including prime mission systems integration, sensor development,
aircraft modification, maintenance and procurement for a range of customers,
primarily under classified contracts. Our primary mission in this area is to
support the USAF Big Safari fleet, including the Rivet Joint, Combat Sent and
Cobra Ball RC-135 aircraft through long-term sole-source contracts.
High Data Rate Communications
We believe that we are a technology leader in high data rate, covert,
jam-resistant microwave communications used in military and other national
agency reconnaissance and surveillance applications. Our product line covers a
full range of tactical and strategic secure point-to-point and relay data
transmission systems, products and support services that conform to military
and intelligence specifications. Our systems and products are capable of
providing battlefield commanders with real-time, secure surveillance and
targeting information and were used extensively by U.S. armed forces in the
Persian Gulf War and during operations in Bosnia, Kosovo and Afghanistan.
Our current family of strategic and tactical data links or CDL (Common
Data Link) systems are considered DoD standards for data link hardware. Our
primary focus is spread spectrum secure communication links technology, which
involves transmitting a data signal with a high-rate noise signal making it
difficult to detect by others, and then re-capturing the signal and removing
the noise. Our data links are capable of providing information at over 300
megabytes per second and use point-to-point and point-to-multipoint
architectures.
We provide these secure high bandwidth products to the U.S. Air Force, the
U.S. Navy, the U.S. Army and various U.S. Government agencies, many through
long-term programs. The scope of these programs include air-to-ground,
air-to-air, ground-to-air and satellite communications such as the U-2 Support
Program, GUARDRAIL, ASTOR and major UAV (unmanned aerial vehicle) programs,
such as Predator, Global Hawk and Fire Scout.
We remain the industry leader in the mobile airborne satellite terminal
product market, delivering mobile satellite communication services to many
airborne platforms. These services provide real-time connectivity between the
battlefield and non-local exploiters of ISR data.
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Satellite Communication Terminals
We provide ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals
used to communicate with commercial, military and international satellites.
These terminals provide remote personnel with constant and effective
communication capability and provide communication links to distant forces. Our
TSS (TriBand SATCOM Subsystem) employs a 6.25 meter dish with a single point
feed that provides C, Ku and X band communication to support the U.S. Army. We
also offer an 11.3 meter antenna satellite terminal which is transportable on
two C-130 aircraft. The SHF (Super High Frequency) PTS (Portable Terminal
System) is a lightweight (28 pounds), portable terminal, which communicates
through DSCS, NATO or SKYNET satellites and brings connectivity to small
military tactical units and mobile command posts.
We provide System Engineering and Software/Life-cycle support to the Air
Force Satellite control network as well as the eastern and western test ranges.
These contracts were recently won and are scheduled to remain in effect beyond
2010.
Space Communications and Satellite Control
We have produced and are delivering three communication subsystems for the
ISS (International Space Station). These systems will control all ISS radio
frequency communications and external video activities. We also provide
solid-state recorders and memory units for data capture, storage, transfer and
retrieval for space applications. Our standard NASA tape recorder has completed
over five million hours of service without a mission failure. Our recorders are
on National Oceanic & Atmospheric Administration weather satellites, the Earth
Observing Satellite, AM spacecraft and Landsat-7 Earth-monitoring spacecraft.
We have extended this technology to our Strategic Tactical Airborne Recorder
(S/TAR (Trade Mark) ) which was selected for the new Shared Reconnaissance Port
(SHARP) Program. We also provide space and satellite system simulation,
satellite operations and computer system training, depot support, network
engineering, resource scheduling, launch system engineering, support, software
integration and test through cost-plus contracts with the U.S. Air Force.
Military Communications
We provide integrated, computer controlled switching systems for the
interior and exterior voice and data needs of naval vessels. Our products
include the MarCom Integrated Voice Communication Systems for Aegis class
destroyers and for the LPD amphibious ship class. We produced the MarCom
Baseband Switch for Los Angeles class submarines. Our MarCom secure digital
switching system provides an integrated approach to the specialized voice and
data communications needs of shipboard environments, for internal and external
communications, command and control and air traffic control. Along with the
Keyswitch Integrated Terminals, MarCom provides automated switching of
radio/cryptocircuits, which results in significant time savings. Without
MarCom, it would take approximately one hour to switch twelve
radio/cryptocircuits using the previously existing switching system. Our Marcom
secure digital switching system is able to switch the same number of
radio/cryptocircuits in approximately twelve seconds. We also offer on-board,
high data rate communications systems, which provide a data link for carrier
battle groups, which are interoperable with the U.S. Air Force's
Surveillance/reconnaissance terminals. We supply the "communications on the
move" capability needed for the digital battlefield by packaging advanced
communications into the U.S. Army's Interim Brigade Combat Team Commander's
Vehicle.
Information Security Systems
We believe that we are a leader in the development of secure
communications equipment for both military and commercial applications. We are
producing the next generation digital, ISDN-compatible STE (secure telephone
equipment). STE provides clearer voice and approximately thirteen-times faster
data/fax transmission capabilities than the previous generation of secure
telecommunications equipment. STE also supports secure conference calls and
secure video teleconferencing. STE uses a CryptoCard security system which
consists of a small, portable, cryptographic module holding the algorithms,
keys and
69
personalized credentials to identify its user for secure communications access.
We also provide the workstation component of the U.S. Government's EKMS
(Electronic Key Management System), the next generation of information security
systems. EKMS is the government's system to replace current "paper" encryption
keys that are used to secure government communications with "electronic"
encryption keys. The work station component we provide produces and distributes
the electronic keys. We also develop specialized strategic and tactical signal
intelligence systems to detect, acquire, collect, and process information
derived from electronic sources. These systems are used by classified customers
for intelligence gathering and require high-speed digital signal processing and
high-density custom hardware designs.
TRAINING, SIMULATION & SUPPORT SERVICES
The products and services, selected applications and selected platforms or
end users of our Training, Simulation & Support Services segment at December
31, 2002 are summarized in the table below.
SYSTEMS/PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- --------------------------------------- ------------------------------------- -------------------------------------
Training and Simulation
o Battlefield and Weapon o Missile system modeling and o U.S. Army Missile Command
Simulation simulation
o Design and manufacture custom o U.S. Army Missile Command
ballistic missile targets that are
ground launched and air
launched for threat replication
targets
o Training o Training for soldiers on o DoD
complex command and control
systems
o Training and logistics services o DoD and foreign governments
and training device support
o Human Patient Simulators o Medical Training o Medical schools, nursing
schools, and DoD
Engineering Development and
Integration Support
o System Support o C(3)ISR (Command, Control, o U.S. Armed services,
Communications, Intelligence, intelligence and security
Surveillance and agencies, MDA, NASA
Reconnaissance), and other U.S. Government
modeling and simulation agencies
o Communication software support o Value-added, critical software o DoD, FAA and NASA
services support for C(3)I (Command,
Control, Communication and
Intelligence) systems and other
engineering and technical services
o Crisis Incident Management o Emergency operations support o Federal, state, local government
System associated with natural disasters, agencies for homeland defense
industrial accidents and acts of
terrorism
Training and Simulation
We believe that we are a leading provider of training, simulation and
support services to the U.S. and foreign military agencies.
Our products and services are designed to meet customer training
requirements for aircrews, navigators, mission operators, gunners and
maintenance technicians for virtually any platform, including
70
military fixed and rotary wing aircraft, air vehicles and various ground
vehicles. As one of the leading suppliers of training services, we believe that
we are able to leverage our unique full-service capabilities to develop
fully-integrated, innovative solutions for training systems, to propose and
provide program upgrades and modifications, and to provide hands-on,
best-in-class training operations in accordance with customer requirements in a
timely manner. In addition, we are developing, demonstrating, evaluating and
transitioning training technologies and methods for use by warfighters at the
US Air Force's Fighter Training Research Division.
We also design and develop prototypes of ballistic missile targets for
present and future threat scenarios. We provide high-fidelity custom targets to
the DoD that are complementary to the U.S. Government's growing focus and
priority on national missile defense and space programs. We are the only
provider of ballistic missile targets that has successfully launched a
ballistic missile target from an Air Force Cargo Aircraft.
We also develop and manage extensive programs in the United States and
internationally, focusing on training and education, strategic planning,
organizational design, democracy transition and leadership development. To
provide these services, we utilize a pool of experienced former armed service,
law enforcement and other national security professionals. In the United
States, our personnel are instructors in the U.S. Army's Force Management
School and other schools and courses and are also involved in recruiting for
the U.S. Army. In addition, we own a one-third interest in Medical Education
Technologies, Inc., which has developed and is producing human patient
simulators for sale to medical teaching and training institutions and the DoD.
We also produce incident management software to support Emergency
Management and Homeland Security applications for first responders to crisis
situations.
Engineering Development and Integration Support
We believe that we are a premier provider of numerous air campaign
modeling and simulation tools for applications, such as Thunder, Storm and
Brawler, for the U.S. Air Force Studies and Analysis Agency, and of space
science research for NASA. We also provide high-end systems support for the
HAWK and PATRIOT missile systems, Unmanned Aerial Vehicles (UAVs), the
Cooperative Engagement Capacity (CEC) Program, and the F/A-18.
Our products and services specialize in communication systems, training
and simulation equipment and a broad range of hardware and software for the
U.S. Army, Air Force and Navy, the Federal Aviation Administration and the
Missile Defense Agency (MDA). As one of the leading suppliers of high-end
engineering and information support, we believe we are able to provide
value-added C(3)ISR engineering support, wargames simulation and modeling of
battlefield communications.
Our Ilex Systems business provides systems and software engineering
products and services for military applications. We specialize in the
innovative application of state-of-the-art software technology and software
development methodologies to produce comprehensive real-time solutions
satisfying our customers' systems and software needs. We specialize in
providing engineering services to the U.S. Army military intelligence
community, including the Communications-Electronics Command (CECOM) Software
Engineering Center. These engineering services include the development and
maintenance of Intelligence, Electronic Warfare, Fusion and Sensor systems and
software.
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AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
The systems and products, selected applications and selected platforms or
end users of our Aviation Products & Aircraft Modernization segment at December
31, 2002, are summarized in the table below.
SYSTEMS/PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ------------------------------------- ------------------------------------- ---------------------------------
Aviation Products
o Solid state crash protected o Voice recorders continuously o Business and commercial
cockpit voice and flight data record the most recent 30-120 aircraft and certain military
recorders minutes of voice and sounds from transport aircraft; sold to both
cockpit and aircraft aircraft manufacturers and
intercommunications. Flight airlines under the Fairchild
data recorders record the last 25 brand name
hours of flight parameters
o TCAS (Traffic Alert and o Reduce the potential for midair o Commercial, business,
Collision Avoidance System) aircraft collisions by providing regional and military transport
visual and audible warnings and aircraft
maneuvering instructions to pilots
Display Products
o Cockpit and mission displays o High performance, ruggedized o Military aircraft including
and controls flat panel and cathode ray tube surveillance, fighters and
displays and processors bombers, attack helicopters,
transport aircraft and land
vehicles
Aircraft Modernization
o High end aviation product o Turnkey aviation life cycle o Various military and
modernization services management services including commercial wide body and
installation of special mission rotary wing aircraft
equipment, aircraft navigation
and avionics products
Aviation and Maritime Recorders
We manufacture commercial, solid-state, crash-protected recorders,
commonly known as black boxes, under the Fairchild brand name for the aviation
and maritime industries, and have delivered approximately 57,400 flight
recorders to aircraft manufacturers and airlines around the world. We believe
we are the leading manufacturer of commercial cockpit voice recorders and
flight data recorders. The hardened voyage recorder, launched from our
state-of-the-art aviation technology, and expanded to include cutting edge
internet communication protocols, has taken an early leadership position within
the maritime industry. We offer three types of recorders:
o the cockpit voice recorder, which records the last 30 to 120 minutes of
crew conversation and ambient sounds from the cockpit;
o the flight data recorder, which records the last 25 hours of aircraft
flight parameters, such as speed, altitude, acceleration and thrust from
each engine and direction of the flight in its final moments; and
o the hardened voyage recorder, which stores and protects 12 hours of
voice, radar, radio and shipboard performance data on solid state memory.
Recorders are highly ruggedized instruments, designed to absorb the shock
equivalent to that of an object traveling at 268 knots stopping in 18 inches,
fire resistant to 1,100 degrees centigrade and pressure resistant to 20,000
feet undersea for 30 days. Our recorders are mandated and regulated by various
worldwide agencies for use in commercial airlines and many business aviation
aircraft. In addition, our aviation recorders are certified and approved for
installation at many of the world's leading aircraft
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original equipment manufacturers (OEM's), while our maritime recorders are an
integral component of a mandated recording system for numerous vessels that
travel on international waters. The U.S. military requires the installation of
black boxes in military transport aircraft.
We have completed development of a combined voice and data recorder and
are developing an enhanced recorder that monitors engine and other aircraft
parameters for use in maintenance and safety applications.
Traffic Alert and Collision Avoidance Systems (TCAS)
TCAS is an avionics safety system that was developed to reduce the
potential for mid-air collisions. The system is designed to operate
independently from the air traffic control (ATC) system to provide a
complementary supplement to the existing ATC system. TCAS operates by
transmitting interrogations that elicit replies from transponders in nearby
aircraft. The system tracks aircraft within certain range and altitude bands to
determine whether they have the potential to become a collision threat.
There are two levels of TCAS protection currently in operation: TCAS I and
TCAS II. In the United States, passenger aircraft with 10 to 30 seats must be
equipped with a TCAS I system. The TCAS II system is required for passenger
aircraft with more than 30 seats. These aircraft, as well as aircraft used in
all-cargo operations, must also be equipped with either Mode S or Mode C
transponders. The transponder provides altitude and airplane identification to
TCAS-equipped aircraft as well as to the ATC system.
If the TCAS I system calculates that an aircraft may be a threat, it
provides the pilot with a visual and audible traffic advisory. The advisory
information provides the intruder aircraft's range and relative
altitude/bearing. In addition to traffic advisories, a TCAS II system will
provide the pilot a resolution advisory (RA). This resolution advisory
recommends a vertical maneuver to provide separation from the intruder
aircraft.
TCAS systems have proven to be very effective, with many documented
successful RA's. TCAS II has been in worldwide operation in many aircraft types
since 1990. Today, over 16,000 airline, corporate and military aircraft are
equipped with TCAS II-type systems, logging over 100 million hours of
operation. The number of reported near mid-air collisions in the U.S. has
decreased significantly since 1989, a period during which both passenger and
cargo air traffic has increased substantially.
We introduced our Traffic and Terrain Collision Avoidance System
(T(2)CAS(TM)), a safety avionics system that integrates aircraft performance-
based Terrain Awareness Warning System (TAWS) capability into our TCAS. Current
TCAS II operators can upgrade their existing system to incorporate the T(2)CAS
capability. Unlike other products, T(2)CAS is a true terrain avoidance system
that bases its operator alerts on an aircraft's actual ability to climb at a
given moment, instead of using predetermined computations. T(2)CAS also reduces
weight, power consumption, space requirements, and wiring because it's a
combined TCAS and TAWS solution. This allows our TCAS customers to simply swap
out the TCAS box for the new T(2)CAS box and use existing power and wiring.
T(2)CAS was certified by the FAA on February 11, 2003. We expect to begin
shipping our T(2)CAS product in the second half of 2003.
All of our TCAS products, including T(2)CAS are sold by Aviation
Communications & Surveillance Systems L.L.C. (ACSS). We own 70% of ACSS, and
accordingly, it is a consolidated subsidiary.
Display Products
We design, develop and manufacture ruggedized displays for military and
high-end commercial applications. Our current product line includes a family of
high performance display processing systems, which use either a cathode ray
tube or an active matrix liquid crystal display. Our displays are used in
numerous airborne, ship-board and ground based platforms and are designed to
survive in military and harsh environments.
Aircraft Modernization
We are dedicated to providing solutions that integrate custom developed
and commercial off-the-shelf products to satisfy military and commercial
aviation requirements. We have a broad range of
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capabilities in the design, development, manufacturing, installation and
integration of complex special purpose airborne systems, aircraft modifications
and related services on numerous types of multi-engine aircraft and various
rotary platforms for government and commercial customers. We believe that we
are a leader in maritime patrol aircraft (MPA) upgrades and maintenance, for
both domestic and international customers.
SPECIALIZED PRODUCTS
The products, selected applications and selected platforms or end users of
our Specialized Products segment at December 31, 2002 are summarized in the
table below.
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ----------------------------------------- -------------------------------------- ---------------------------------------
Ocean Products
o Airborne dipping sonars o Submarine detection and o Various military helicopters
localization
o Submarine and surface ship o Submarine and surface ship o U.S. Navy and foreign navies
towed arrays detection and localization
o Naval and commercial power o Switching, distribution and o All naval combatants:
delivery and switching products protection, as well as frequency submarines, surface ships and
and voltage conversion aircraft carriers
o Commercial transfer switches, o Production and maintenance of o Federal Aviation
uninterruptible power supplies systems and high-speed switches Administration, internet service
and power products for power interruption providers, financial institutions
prevention and rail transportation
o Shipboard electronic racks, o Ruggedized displays, computers o Naval Vessels and other DoD
rugged computers, rugged and electronic systems applications
displays and communication
terminals
Security Systems
o Explosive detection systems o Rapid scanning of passenger o Airports, embassies, federal/state
checked baggage and carry-on facilities, customs, border patrol
luggage, scanning of large cargo
containers.
o Surveillance products o Remote video surveillance for o Border Patrol, Immigration and
U.S. border and naval ports Naturalization Service and U.S.
Customs
Telemetry, Instrumentation and Space Products
o Aircraft, missile and satellite o Real-time data acquisition, o Aircraft, missiles and satellites
telemetry and instrumentation measurement, processing,
systems simulation, distribution, display
and storage for flight testing
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private
systems video and data networks, direct to home
uplinks, satellite news gathering
and wideband applications
Navigation Products
o GPS (Global Positioning o Location tracking o Guided projectiles and precision
Systems) receivers munitions
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SPECIALIZED PRODUCTS (CONTINUED)
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ------------------------------------------ -------------------------------------- --------------------------------------
o Navigation systems and o Space navigation o Hubble Space Telescope,
subsystems, gyroscopes, Delta IV launch vehicle and
reaction wheels, star sensor satellites
Premium Fuzing Products
o Fuzing Products o Munitions and electronic and o Various DoD and foreign
electro-mechanical safety and military customers
arming devices
(ESADs)
o Radio transmission, switching o DoD, telephony service
Microwave Components and conditioning, antenna and providers and original
o Passive components, switches base station testing and equipment manufacturers
and wireless assemblies monitoring, broad-band and
narrow-band applications
(Personal Communications
Services (PCS), cellular,
Specialized Mobile Radio
(SMR) and paging
infrastructure)
o Safety products o Radio frequency monitoring and o Monitor cellular base station and
measurement for safety industrial radio frequency
emissions
o Satellite and wireless o Satellite transponder control, o Communications satellites and
components (channel amplifiers, channel and frequency wireless communications
transceivers, converters, filters separation equipment
and multiplexers)
o Amplifiers and amplifier based o Automated test equipment o DoD and commercial satellite
components (amplifiers, up/down military electronic warfare, operators
converters and Ka assemblies) ground and space
communications
o Traveling wave tubes, power o Microwave vacuum electron o DoD/Foreign, military-
modules, klystrons and digital devices and power modules to manned/unmanned platforms,
broadcast military and commercial markets various missile programs and
commercial broadcast
Antenna Products
o Ultra-wide frequency and o Surveillance and radar detection o Military aircraft including
advanced radar antennas and surveillance, fighters and
rotary joints bombers, attack helicopters and
transport
o Precision antennas serving major o Antennas for high frequency, o Various military and commercial
military and commercial millimeter satellite customers including scientific
frequencies, including Ka band communications astronomers
Training Devices and Motion Simulators
o Military Aircraft Flight o Training for pilots, navigators, o Military fixed and rotary winged
Simulators flight engineers, gunners and aircraft and ground vehicles
operators
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SPECIALIZED PRODUCTS (CONTINUED)
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
- ------------------------------------ ------------------------------------ -----------------------------
Electro-Optical Sensors
o Targeted stabilized camera o Intelligence, Data Collection, o DoD, intelligence and
systems with integrated Surveillance and security agencies, law
sensors and wireless Reconnaissance enforcement, manned and
communication systems unmanned platforms
Ocean Products
We believe that we are one of the world's leading suppliers of acoustic
undersea warfare systems. Our experience spans a wide range of platforms,
including helicopters, submarines and surface ships. Our products include towed
array sonar, hull mounted sonar, airborne dipping sonar and ocean mapping sonar
for navies around the world.
We believe that we are also a leading provider of state-of-the-art power
electronics systems and electrical power delivery systems and subsystems. We
provide communications and control systems for the military and commercial
customers. We offer the following:
o military power propulsion, distribution and conversion equipment and
components, each of which focus on motor drives switching, distribution
and protection, and also provide engineering design and development,
manufacturing and overhaul and repair services; and
o ship control and interior communications equipment.
We have been able to apply our static transfer switch technology, which we
developed for the U.S. military, to commercial applications. Our commercial
customers for static transfer switches are primarily financial institutions and
internet service providers, including American Express, AOL-Time Warner, AT&T,
Charles Schwab and the Federal Aviation Administration. In addition, we provide
electrical products for rail transportation and utilities businesses.
Telemetry, Instrumentation and Space Products
We believe that we are a leader in the development and marketing of
component products and systems used in telemetry and instrumentation for
airborne applications such as satellites, aircraft, UAVs, launch vehicles,
guided missiles, projectiles and targets. Telemetry involves the collection of
data for various equipment performance parameters and is required when the
object under test is moving too quickly or is of too great a distance to use a
direct connection to collect such data. Telemetry products measure, process,
receive and collect thousands of parameters of a platform's operation,
including heat, vibration, stress and operational performance and transmit this
data to the ground.
Additionally, our satellite telemetry equipment transmit data necessary
for ground processing. These applications demand high reliability of their
components because of the high cost of satellite repair and the need for
uninterrupted service. Telemetry products also provide the data used to
terminate the flight of missiles and rockets under errant conditions and/or at
the end of a mission. These telemetry and command/control products are
currently used for a variety of missile and satellite programs.
We offer value-added solutions that provide our customers with complex
product integration and comprehensive support. Within the satellite ground
segment equipment market, we focus on the telephony, video broadcasting and
multimedia niches. Our customers include foreign communications companies,
domestic and international prime communications infrastructure contractors,
telecommunications and satellite service providers, broadcasters and
media-related companies. We also provide space products for advanced guidance
and control systems, including gyroscopes, controlled momentum devices and star
sensors. These products are used on satellites, launch vehicles, the Hubble
Telescope, the Space Shuttle and the International Space Station.
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Navigation Products
We provide airborne equipment and data link systems that gather critical
information and then process, format and transmit the data to the ground from
communications satellites, spacecraft, aircraft and missiles. These products
are available in both commercial off-the-shelf and custom configurations and
include software and software engineering services. Our primary customers
include many of the major defense contractors who manufacture aircraft,
missiles, warheads, launch vehicles and munitions. Our ground station
instrumentation receives, encrypts and/or decrypts the serial stream of
combined data in real-time as it is received from the airborne platform. We
believe that we are a leader in digital GPS receiver technology for high
performance military applications. These GPS receivers are currently in use on
aircraft, cruise missiles and precision guided bombs and provide highly
accurate positioning and navigational information. Additionally, we provide
navigation systems for high performance weapon pointing and positioning systems
for programs such as Multiple Launch Rocket System (MLRS) and Mortar Fire
Control System (MFCS).
Premium Fuzing Products
We believe that we are a leading provider of premium fuzing products,
including proximity fuzes, electronic and electro-mechanical safety and arming
devices (ESADs) and self-destruct/sub-munition grenade fuzes. ESADs prevent the
inadvertent firing and detonation of guided missiles during handling, flight
operations and the initial phases of launch. Our proximity fuzes are used in
smart munitions. All of these are considered to be critical safety and arming
products. Additionally, during missile flight the ESAD independently analyzes
flight conditions and determines safe separation distance after a missile
launch.
Microwave Components
We are a premier worldwide supplier of commercial off-the-shelf and
custom, high performance radio frequency (RF) microwave components, assemblies
and instruments supplying the wireless communications, industrial and military
markets. We are also a leading provider of state-of-the-art space-qualified
commercial satellite and strategic military RF products and millimeter
amplifier based products. We sell many of these components under the
well-recognized Narda brand name through a comprehensive catalog of standard,
stocked hardware. We also sell our products through a direct sales force and an
extensive network of market representatives. Specific catalog offerings include
wireless products, electro-mechanical switches, power dividers and hybrids,
couplers/detectors, attenuators, terminations and phase shifters, isolators and
circulators, adapters, control products, sources, mixers, waveguide components,
RF safety products, power meters/monitors and custom passive products. Passive
components are generally purchased in both narrow and broadband frequency
configurations by wireless equipment manufacturers, wireless service providers
and military equipment suppliers. Commercial applications include cellular and
PCS base station automated test equipment, and equipment for the paging
industry. Military applications include electronic surveillance and
countermeasure systems.
Our space-qualified and wireless components separate various signals and
direct them to sections of the satellites' payload. Our main satellite products
are channel amplifiers and linearizers, payload products, transponders and
antennas. Channel amplifiers amplify the weak signals received from earth
stations, and then drive the power amplifier tubes that broadcast the signal
back to earth. Linearizers, used either in conjunction with a channel amplifier
or by themselves, pre-distort a signal to be transmitted back to earth before
it enters a traveling wave tube for amplification. This pre-distortion is
exactly the opposite of the distortion created at peak power by the traveling
wave tube and, consequently, has a cancellation effect that keeps the signal
linear over a much larger power band of the tube. The traveling wave tube and
area covered by the satellite is significantly increased.
Narda is the world's largest supplier of non-ionizing radiation safety
detection equipment. These devices are used to quantify and alarm of exposure
to excessive RF radiation. This equipment is used by wireless tower operators
and the military to protect personnel, and insure compliance to various
published standards. We design and manufacture both broad and narrow band
amplifiers and amplifier-based products in the microwave and millimeter wave
frequencies. We use these amplifiers in defense and communications
applications. These devices can be narrow band for communication needs or
broadband for electronic warfare.
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We offer standard packaged amplifiers for use in various test equipment
and system applications. We design and manufacture millimeter range (at least
20 to 38GHz) amplifier products for use in emerging communication applications
such as back haul radios, LMDS (Local Multipoint Distribution Service) and
ground terminals for LEO satellites. Narda filters are sold to some of the
world's leading service providers and base station OEMs. Robust demand
continues for Narda filters due to ongoing system upgrades by service providers
for 2.5G and 3.0G applications geared toward providing higher data rate
capabilities for the commercial cellular and PCS marketplace.
We also design, manufacture and market solid state, broadband wireless
communications infrastructure equipment, subsystems and modules used to provide
point-to-multipoint (PMP) and point-to-point (PTP) terrestrial and
satellite-based distribution services in frequency bands from 24 to 38
Gigahertz. Our products include solid-state power amplifiers, hub transmitters,
active repeaters, cell-to-cell relays, Internet access systems and other
millimeter wave-based modules and subsystems. These products are used in
various applications, such as broadband communications, local loop services and
Ka-band satellite communications.
We also provide microwave vacuum electron devices and power modules for
manned and unmanned airborne radars, F-14, F-16, Predator and Global Hawk
platforms and for missile applications for the AMRAAM and Patriot. In addition,
we provide modules for VHF TV transmitters.
Antenna Products
We produce high performance antennas under the Randtron brand name that
are designed for:
o surveillance of high-resolution, ultra-wide frequency bands;
o detection of low radar cross-section targets and low radar cross-section
installations;
o severe environmental applications; and
o polarization diversity.
Our primary product is a sophisticated 24-foot diameter antenna used on
all E-2C surveillance aircraft. This airborne antenna is a rotating aerodynamic
radome containing a UHF surveillance radar antenna, an IFF antenna, and forward
and aft auxiliary antennas. We have been funded to begin the development of the
next generation for this antenna. We also produce broadband antennas for a
variety of tactical aircraft, and rotary joints for the AWAC antenna. We have
delivered over 2,000 sets of antennas for aircraft and have a backlog of orders
through 2004.
We are a leading supplier of ground based radomes used for air traffic
control, weather radar, defense and scientific purposes. These radomes enclose
an antenna system as a protective shield against the environment and are
intended to enhance the performance of an antenna system.
Training Devices and Motion Simulators
Our training devices and motion simulators business designs, develops and
manufacturers advanced virtual reality simulation and high-fidelity
representations of cockpits and mission stations for aircraft and land
vehicles. We have developed flight simulators for most of the U.S. military
aircraft in active operation. We have numerous proprietary technologies and
fully-developed systems integration capabilities that provide us with a
competitive advantage. Our proprietary software is used for visual display
systems, high-fidelity system models, database production, digital radar land
mass image simulation and creation of synthetic environments. We are also a
leader in developing training systems that allow multiple trainees at multiple
sites to engage in networked group, unit and task force training and combat
simulations.
Security Systems
We also design, manufacture and install screening systems to screen
packages for explosives, firearms and contraband in airports, security check
points, cruise lines, and government, commercial and military buildings. In
addition, we provide cargo-screening systems for rapid inspection of incoming
goods through rapidly deployable mobile systems to high-throughput,
high-penetration fixed systems. We also provide remote robust video
surveillance systems (Watch Tower) to monitor the U.S./Canada and U.S./Mexico
border and Naval ports.
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Electro Optical Cameras
We also design and manufacture wireless visual information systems that
capture images from mobile platforms and transmit them in real time to tactical
command centers for interpretation or to production facilities for broadcast.
DEVELOPING COMMERCIAL AND CIVIL OPPORTUNITIES
Part of our growth strategy is to identify commercial and non-DoD
applications from select products and technologies that we currently sell to
our defense customers. We have initially identified two vertical markets where
we believe there are significant opportunities to expand our products:
transportation and broadband wireless communications.
Transportation. Our products are designed to meet strict government
quality and reliability standards and are easily adapted to the commercial and
civil transportation markets. Our aircraft voice recorders, designed to meet
FAA requirements, have been successfully marketed to the cruise ship, marine
shipping and railroad industries. Similarly, our state-of-the-art power
propulsion products, originally designed for the U.S. Navy, meet the needs of
commuter railroads, including Philadelphia's regional rail system and New York
City's Metropolitan Transportation Authority. Our explosives detection system,
the eXaminer 3DX (Trade Mark) 6000, enables the rapid scanning of passenger
checked baggage at airports using state-of-the-art technology. The
Transportation Security Administration (TSA) of the U.S. Department of
Transportation, created as a result of the Aviation and Transportation Security
Act enacted by Congress on January 3, 2002, ordered 425 eXaminer units from us
during 2002. TSA accepted 406 of our eXaminer units as of December 31, 2002,
and we completed the remaining shipments during the first quarter of 2003. We
are also offering X-ray screening products for cargo, air freight, port and
border security applications.
Communications. The wireless communications technology we developed for
our military customers also meets the needs of the commercial marketplace for
technologically advanced communications products. Some of the products we have
developed or are developing to exploit this market include wireless access
products, transceivers, compression products, remote sensing internet networks,
microwave links and products for microwave base stations. Our PrimeWave
Communications products are an example of our expanding involvement in the
commercial communications industry.
In the broadband wireless commercial communications market, we also have
developed a broad assortment of other products including transponders,
payloads, uplinks, downlinks, fly-away SATCOM terminals, telemetry tracking and
control and test equipment and waveform generators.
These new commercial products are subject to certain risks and may require
us to:
o develop and maintain marketing, sales and customer support capabilities;
o spend additional research and development costs to sustain and enhance
our existing products and to develop new products;
o secure sales and customer support capabilities;
o obtain customer and/or regulatory certification;
o respond to rapidly changing technologies including those developed by
others that may render our products and systems obsolete or
non-competitive; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in commercial and civil markets require
significant resources, including additional working capital and capital
expenditures, as well as the use of our management's time. Our ability to sell
certain commercial products, particularly our broadband wireless communications
products, depends to a significant degree on the efforts of independent
distributors or communications service providers and on the financial viability
of our existing and target customers, including their ability to obtain
financing. Certain of our existing and target customers are agencies or
affiliates of governments of emerging and under-developed countries or private
business enterprises operating in those countries.
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In addition, we have made equity investments in entities that plan to commence
operations as communications service providers using some of our commercial
products. We can give no assurance that these distributors or service providers
will be able to market our products or their services successfully or that we
will be able to realize a return on our investment in them. We also cannot
assure you that we will be successful in addressing these risks or in
developing these commercial and civil business opportunities.
BACKLOG AND ORDERS
We define funded backlog as the value of funded orders which have not yet
been recognized as sales. We define funded orders as the value of contract
awards received from the U.S. Government, for which the U.S. Government has
appropriated funds, plus the value of contract awards and orders received from
customers other than the U.S. Government. Our funded backlog as of December 31,
2002 was $3,228.6 million and as of December 31, 2001 was $1,719.3 million. We
expect to record as sales approximately 73.0% of our funded backlog as of
December 31, 2002 during 2003. However, there can be no assurance that our
funded backlog will become sales in any particular period, if at all. Funded
orders received for the year ended December 31, 2002 were $4,383.1 million, for
the year ended December 31, 2001 were $2,456.1 million and for the year ended
December 31, 2000 were $2,013.7 million.
Our funded backlog does not include the full value of our contract awards,
including those pertaining to multi-year, cost-reimbursable contracts, which
are generally funded on an annual basis. Funded backlog also excludes the sales
value of unexercised contract options that may be exercised by customers under
existing contracts and the sales value of purchase orders that may be issued
under indefinite quantity contracts or basic ordering agreements.
MAJOR CUSTOMERS
For the year ended December 31, 2002, sales to the DoD provided
approximately 65.5% of our sales. Approximately 61% of our sales to the DoD
were directly to the customer, and approximately 39% of our sales to the DoD
were indirect through prime contractors and subcontractors. For the year ended
December 31, 2002, foreign governments provided 9.8% of our sales, and
commercial customers and U.S. federal, state and local government agencies
other than the DoD provided the remaining 24.7% of our sales.
Our U.S. Government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Various U.S.
Government agencies and contracting entities exercise independent and
individual purchasing decisions, subject to annual appropriations by the U.S.
Congress. As of December 31, 2002, we had approximately 800 contracts with a
value exceeding $1.0 million. Our largest program represented 8.2% of our sales
for the year ended December 31, 2002 and is a firm fixed- price contract with
the TSA for explosive detection systems (EDS) used at airports. No other
program represented more than 3.7% of sales for the year ended December 31,
2002. For the year ended December 31, 2002, sales from our five largest
programs amounted to $815.7 million, or 20.3% of our sales. We expect our total
sales for explosive detection systems in 2003 to decline to about $175 million,
including those for the TSA, primarily because the initial installation of EDS
systems by TSA for major U.S. airports was completed in 2002.
RESEARCH AND DEVELOPMENT
We conduct research and development activities that consist of projects
involving basic research, applied research, development, and systems and other
concept studies. We employ scientific, engineering and other personnel to
improve our existing product-lines and develop new products and technologies.
As of December 31, 2002, we employed approximately 9,200 engineers, a
substantial portion of whom hold advanced degrees. For the year ended December
31, 2002, we incurred $480.9 million on research and development costs for
customer-funded contracts and spent $159.9 million on company-sponsored
research and development projects, including bid and proposal costs. For the
year ended December 31, 2001, we incurred $319.4 million on research and
development costs for customer-funded contracts and spent $107.5 million on
company-sponsored research and development projects, including bid and
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proposal costs. For the year ended December 31, 2000, we incurred $299.3
million on research and development costs for customer-funded contracts and
spent $101.9 million on company-sponsored research and development projects,
including bid and proposal costs.
COMPETITION
We encounter intense competition in all of our businesses. We believe that
we are a significant supplier for many of the products that we manufacture and
services we provide in our DoD, government and commercial businesses.
Defense and Government Business
Our ability to compete for defense contracts depends on a variety of
factors, including:
o the effectiveness and innovation of our technologies and research and
development programs;
o our ability to offer better program performance than our competitors at
a lower cost; and
o the capabilities of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, we are the incumbent supplier or have been the sole
provider for many years for certain programs. We refer to such contracts as
"sole-source" contracts. In such cases, there may be other suppliers who have
the capability to compete for the programs involved, but they can only enter or
reenter the market if the customer chooses to reopen or recompete the
particular program to competition. Sole-source contracts accounted for 58.5%
and competitive contracts accounted for 41.5% of our total sales for the year
ended December 31, 2002. The majority of our sales are derived from contracts
with the U.S. Government and its prime contractors, which are principally
awarded on the basis of negotiations or competitive bids.
We believe that the U.S. defense industry structure contains three tiers
of defense contractors. The first tier is dominated by five large prime system
contractors: The Boeing Company, Lockheed Martin Corporation, Northrop Grumman
Corporation, Raytheon Company and General Dynamics Corporation, all of whom
compete for major platform programs. The second tier defense contractors
generally are smaller products and niche subsystems contractors and is
comprised of traditional aerospace and defense companies, as well as the
non-core aerospace and defense businesses of certain larger industrial
conglomerates. Some of the defense contractors in the second tier also compete
for platform programs. We believe the second tier includes L-3, Honeywell
International Inc., Rockwell Collins Inc., Harris Corporation, TRW Inc., ITT
Industries, Inc., Alliant Techsystems Inc., United Technologies Corporation,
Computer Science Corporation, Science Applications International Corporation,
Titan Corporation and United Defense Industries Inc. The third tier represents
the vendor base and supply chain for niche products and is comprised of
numerous smaller publicly and privately owned aerospace and defense
contractors.
We believe we are the aerospace and defense "merchant supplier" with the
broadest and most diverse product portfolio. We supply our products to all of
the five prime system contractors and in several cases directly to the end
customers. We primarily compete with third tier contractors and certain of the
second tier contractors and, to a lesser extent, with the prime system
contractors in certain niche areas. Some of the second tier contractors are
larger than we are and have greater resources than we do. We are larger than
all of the third tier contractors and believe we have greater resources than
all of them. We believe that most of our businesses enjoy the number one or
number two competitive position in their respective market niches. We believe
that the primary competitive factors for our businesses are technology,
research and development capabilities, quality, cost, market position and past
performance. In addition, our ability to compete for non "sole source"
contracts often requires us to "team" with one or more of the prime system
contractors that bid and compete for major platform programs. Furthermore, our
ability to "team" with a prime system contractor is often dependent upon the
outcome of a competitive process.
We believe that we will continue to be a successful participant in the
business areas in which we compete, based upon the quality and cost
competitiveness of our products and services.
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Commercial Activities
Although our commercial activities continue to comprise a significant
portion of our business mix, our commercial sales declined to approximately
10.7% of our total sales for the year ended December 31, 2002 from
approximately 17.7% for the year ended December 31, 2001. This decline in
commercial sales as a percentage of our total sales was primarily attributable
to our 2002 acquisitions, including the IS acquisition, and, to a lesser
extent, the decline in our commercial aviation and communications sales during
2002. Our 2002 acquisitions were comprised substantially of DoD contractors. We
do not expect our commercial sales as a percentage of sales to appreciably
increase on a relative basis in the future. Our ability to compete for
commercial business depends on a variety of factors, including:
o Pricing;
o Product features and performance;
o Reliability, scalability and compatibility;
o Customer relationships, service and support; and
o Brand recognition.
In these markets, we compete with various companies, several of which are
listed below:
o Agilent Technologies, Inc.; o Honeywell International Inc.;
o Globecomm Systems, Inc.; o Smiths Industries; and
o ViaSat, Inc.; o Airspan Networks, Inc.
We believe that our sales in these business areas will remain relatively
constant as a percentage of our total sales.
PATENTS AND LICENSES
We do not believe that our patents, trademarks and licenses are material
to our operations. Furthermore, our U.S. Government contracts generally permit
us to use patents owned by others. Similar provisions in U.S. Government
contracts awarded to other companies make it impossible for us to prevent the
use of our patents in most domestic work performed by other companies for the
U.S. Government.
RAW MATERIALS
In manufacturing our products, we use our own production capabilities as
well as a diverse base of third party suppliers and subcontractors. Although
aspects of certain of our businesses require relatively scarce raw materials,
we have not experienced difficulty in our ability to procure raw materials,
components, sub-assemblies and other supplies required in our manufacturing
processes.
CONTRACTS
A significant portion of our sales are derived from strategic, long-term
programs and from sole-source contracts. Approximately 58.5% of our sales for
the year ended December 31, 2002 were generated from sole-source contracts. Our
customer satisfaction and performance record are evidenced by our receipt of
performance-based award fees exceeding 90% of the available award fees on
average during the year ended December 31, 2002. We believe that our customers
will award long-term, sole-source, outsourcing contracts to the most capable
merchant supplier in terms of quality, responsiveness, design, engineering and
program management support, as well as cost. As a consequence of our strong
competitive position, for the year ended December 31, 2002, we won contract
awards at a rate in excess of 55% on new competitive contracts that we bid on,
and at a rate in excess of 95% on the contracts we rebid for which we were the
incumbent supplier.
Generally, contracts are either fixed-price or cost-reimbursable. On a
fixed-price contract, we agree to perform the scope of work required by the
contract for a predetermined contract price. Although a
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fixed-price contract generally permits us to retain profits if the total actual
contract costs are less than the estimated contract costs, we bear the risk
that increased or unexpected costs may reduce our profit or cause us to sustain
losses on the contract. Conversely, on a cost-reimbursable contract we are paid
our allowable incurred costs plus a profit which can be fixed or variable
depending on the contract's fee arrangement up to predetermined funding levels
determined by our customers. Therefore, on a cost-reimbursable contract we do
not bear the risks of unexpected cost overruns, provided that we do not incur
costs that exceed the predetermined funded amounts. Generally, a fixed-price
contract offers higher profit margins than a cost-reimbursable contract, which
is commensurate with the greater levels of risk assumed on a fixed-price
contract. Our operating profit margins on fixed-price contracts generally range
between 10% and 25%, while our profit margins on cost-reimbursable contracts
generally range between 7% and 10%.
We have a diverse business mix with limited reliance on any single
program, a balance of cost-reimbursable and fixed-price contracts, a
significant sole-source follow-on business and an attractive customer profile.
For the year ended December 31, 2002, approximately 34.2% of our sales were
generated from cost-reimbursable contracts and approximately 65.8% from
fixed-price contracts, providing us with a sales mix of predictable
profitability (cost-reimbursable) and higher profit margin (fixed-price)
business. Substantially all of our cost-reimbursable contracts are with the
U.S. Government, including the DoD. Substantially all of our sales to
commercial customers are transacted under fixed-price sales arrangements, and
are included in our fixed-price contract sales.
Most of our U.S. Government business is subject to unique procurement and
administrative rules based on both laws and regulations, including the U.S.
Federal Acquisition Regulation (FAR) that provide various profit and cost
controls, rules for allocations of costs, both direct and indirect, to
contracts and non-reimbursement of unallowable costs such as lobbying expenses,
interest expenses and certain costs related to business acquisitions, including
for example the incremental depreciation and amortization expenses arising from
fair value increases to the historical carrying values of acquired assets. Our
contract administration and cost accounting policies and practices are also
subject to oversight by government inspectors, technical specialists and
auditors.
Companies supplying defense-related equipment to the U.S. Government are
subject to certain additional business risks specific to the U.S. defense
industry. Among these risks are the ability of the U.S. Government to
unilaterally suspend a company from new contracts pending resolution of alleged
violations of procurement laws or regulations. In addition, U.S. Government
contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds for a given program on a
September 30 fiscal year basis, even though contract performance may take
years. 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 as appropriations are made by Congress for future
fiscal years.
U.S. Government contracts are, by their terms, subject to unilateral
termination by the U.S. Government either for its convenience or default by the
contractor if the contractor fails to perform the contracts' scope of work.
Upon termination other than for a contractor's default, the contractor will
normally be entitled to reimbursement for allowable costs and an allowance for
profit. Foreign defense contracts generally contain comparable provisions
permitting termination at the convenience of the government. To date, none of
our significant fixed price contracts have been terminated.
As is common in the U.S. defense industry, we are subject to business
risks, including changes in the U.S. Government's procurement policies (such as
greater emphasis on competitive procurement), governmental appropriations,
national defense policies or regulations, service modernization plans, and
availability of funds. A reduction in expenditures by the U.S. Government for
products and services of the type we manufacture and provide, lower margins
resulting from increasingly competitive procurement policies, a reduction in
the volume of contracts or subcontracts awarded to us or the incurrence of
substantial contract cost overruns could materially adversely affect our
business.
Certain of our sales are under foreign military sales (FMS) agreements
directly between the U.S. Government and foreign governments. In such cases,
because we serve only as the supplier, we do not
83
have unilateral control over the terms of the agreements. These contracts are
subject to extensive legal and regulatory requirements and, from time to time,
agencies of the U.S. Government investigate whether our operations are being
conducted in accordance with these laws and regulations. Investigations could
result in administrative, civil, or criminal liabilities, including repayments,
disallowance of certain costs, or fines and penalties.
Certain of our sales are direct commercial sales to foreign governments.
These sales are subject to U.S. Government approval and licensing under the
Arms Export Control Act. Legal restrictions on sales of sensitive U.S.
technology also limit the extent to which we can sell our products to foreign
governments or private parties.
ENVIRONMENTAL MATTERS
Our operations are subject to various environmental laws and regulations
relating to the discharge, storage, treatment, handling, disposal and
remediation of certain materials, substances and wastes used in our operations.
We continually assess our obligations and compliance with respect to these
requirements.
In connection with the Aircraft Integration Systems acquisition, we
assumed responsibility for implementing certain corrective actions, required
under federal law to remediate the Greenville, Texas site location, and to pay
a portion of those remediation costs. The hazardous substances requiring
remediation have been substantially characterized, and the remediation system
has been partially implemented. We have estimated that our share of the
remediation cost will not exceed $2.5 million, and will be incurred over a
period of 25 years. We have established adequate reserves for these costs.
We have also assessed the risk of environmental contamination for the
various manufacturing facilities of our other acquired businesses and, where
appropriate, have obtained indemnification, either from the sellers of those
acquired businesses or through pollution liability insurance. We believe that
our current operations are in substantial compliance with all existing
applicable environmental laws and permits. We believe our current expenditures
will allow us to continue to be in compliance with applicable environmental
laws and regulations. While it is difficult to determine the timing and
ultimate cost to be incurred in order to comply with these laws, based upon
available internal and external assessments, with respect to those
environmental loss contingencies of which we are aware, we believe that even
without considering potential insurance recoveries, if any, there are no
environmental loss contingencies that, individually or in the aggregate, would
be material to our consolidated results of operations, financial position or
cash flows.
Despite our current level of compliance, new laws and regulations,
stricter enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new clean-up requirements
may require us to incur costs in the future that could have a negative effect
on our financial condition, results of operations or cash flows.
PENSION PLANS
In connection with our 1997 acquisition of the ten business units from
Lockheed Martin and the formation of L-3, we assumed certain defined benefit
pension plan liabilities for present and former employees and retirees of
certain businesses which were transferred from Lockheed Martin to us. Prior to
this acquisition, Lockheed Martin received a letter from the Pension Benefit
Guaranty Corporation (the "PBGC") which requested information regarding the
transfer of such pension plans and indicated that the PBGC believed certain of
such pension plans were underfunded using the PBGC's actuarial assumptions. The
PBGC assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under Statement of Financial
Accounting Standards No. 87. The PBGC underfunding is related to the
Communication Systems -- West and Aviation Recorders pension plans (the
"Subject Plans").
With respect to the Subject Plans, Lockheed Martin entered into an
agreement (the "Lockheed Martin Commitment") among Lockheed Martin, L-3
Communications and the PBGC dated as of April 30, 1997. The material terms and
conditions of the Lockheed Martin Commitment include a
84
commitment by Lockheed Martin to the PBGC to, under certain circumstances,
assume sponsorship of the Subject Plans or provide another form of financial
support for the Subject Plans. The Lockheed Martin Commitment will continue
with respect to any Subject Plan until such time as such Subject Plan is no
longer underfunded on a PBGC basis for two consecutive years or, at any time
after May 31, 2002, if we achieve investment grade credit ratings.
Upon the occurrence of certain events, Lockheed Martin, at its option, has
the right to decide whether to cause us to transfer sponsorship of any or all
of the Subject Plans to Lockheed Martin, even if the PBGC has not sought to
terminate the Subject Plans. Such a triggering event occurred in 1998, but
reversed itself in 1999, relating to a decrease in the PBGC-mandated discount
rate in 1998 that had resulted in an increase in the underlying liability. We
notified Lockheed Martin of the 1998 triggering event, and in February 1999,
Lockheed Martin informed us that it had no present intention to exercise its
right to cause us to transfer sponsorship of the Subject Plans. If Lockheed
Martin did assume sponsorship of these plans, it would be primarily liable for
the costs associated with funding the Subject Plans or any costs associated
with the termination of the Subject Plans, but we would be required to
reimburse Lockheed Martin for these costs. To date, there has been no impact on
pension expense and funding requirements resulting from this arrangement. In
the event Lockheed Martin assumes sponsorship of the Subject Plans we would be
required to reimburse Lockheed Martin for all amounts that it contributes to,
or costs it incurs with respect to, the Subject Plans. For the year ended
December 31, 2002, we contributed $18.8 million to the Subject Plans. For
subsequent years, our funding requirements will depend upon prevailing interest
rates, return on pension plan assets and underlying actuarial assumptions.
We have performed our obligations under the letter agreement with Lockheed
Martin and the Lockheed Martin Commitment and have not received any
communications from the PBGC concerning actions which the PBGC contemplates
taking in respect of the Subject Plans.
EMPLOYEES
As of December 31, 2002, we employed approximately 27,000 full-time and
part-time employees, the majority of whom are located in the United States. Of
these employees, approximately 11.8% are covered by 35 separate collective
bargaining agreements with various labor unions. We have a continuing need for
skilled and professional personnel to meet contract schedules and obtain new
and ongoing orders for our products. We believe that relations with our
employees are positive.
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PROPERTIES
The table below provides information about our significant facilities and
properties as of December 31, 2002.
LOCATION OWNED LEASED
- ---------------------------------------------- --------- -----------
(thousands of square
feet)
L-3 Corporate Offices, New York, NY .......... -- 40.8
Washington Operations, Arlington, VA ......... -- 8.3
SECURE COMMUNICATION & ISR:
Camden, NJ .................................. -- 575.0
Greenville, TX .............................. -- 3,043.5
Salt Lake City, UT .......................... -- 491.6
Avalon, Australia ........................... -- 151.0
TRAINING, SIMULATION & SUPPORT SERVICES:
Colorado Springs, CO ........................ -- 82.6
Orlando, FL ................................. -- 170.3
Kirkwood, NY ................................ -- 428.0
Arlington, TX ............................... 21.3 47.5
Alexandria, VA .............................. -- 108.8
Arlington, VA ............................... -- 113.4
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION:
Phoenix, AZ ................................. -- 90.0
Sarasota, FL ................................ -- 143.7
Alpharetta, GA .............................. 93.0 --
Rolling Meadows, IL ......................... 45.0 6.7
Lexington, KY ............................... -- 128.5
Waco, TX .................................... 616.1 221.1
Calgary, Canada ............................. 65.5 --
Edmonton, Canada ............................ -- 371.0
SPECIALIZED PRODUCTS:
Anaheim, CA ................................. -- 474.2
Menlo Park, CA .............................. -- 97.5
San Carlos, CA .............................. 191.6 --
San Diego, CA ............................... 196.0 202.6
Sylmar, CA .................................. -- 253.0
Largo, FL ................................... 46.4 60.8
Ocala, FL ................................... 111.7 --
Teterboro, NJ ............................... -- 250.0
Hauppauge, NY ............................... 90.0 150.0
Cinncinatti, OH ............................. 222.6 --
Tulsa, OK ................................... -- 122.7
Lancaster, PA ............................... -- 146.0
Philadelphia, PA ............................ -- 230.0
Williamsport, PA ............................ 208.6 --
Arlington, TX ............................... 60.7 135.1
Grand Prairie, TX ........................... -- 125.0
Burlington, Canada .......................... -- 124.0
Leer, Germany ............................... 32.2 33.2
At December 31, 2002, in the aggregate, we owned approximately 2.1 million
square feet and leased approximately 11.0 million square feet of manufacturing
facilities and properties.
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LEGAL PROCEEDINGS
On August 6, 2002, Aviation Communications & Surveillance Systems, LLC
(ACSS) was sued by Honeywell International Inc. and Honeywell Intellectual
Properties, Inc. (collectively, "Honeywell") for alleged infringement of
patents that relate to terrain awareness avionics. The lawsuit was filed in the
United States District Court for the District of Delaware. In December of 2002,
Honeywell withdrew without prejudice the lawsuit against ACSS and agreed to
proceed with non-binding arbitration. If the matter is not resolved through
arbitration, Honeywell may reinstitute the litigation after August 14, 2003.
The Company had previously investigated the Honeywell patents and believes that
ACSS has valid defenses against Honeywell's patent infringement suit. In
addition, ACSS has been indemnified to a certain extent by Thales Avionics,
which provided ACSS with the alleged infringing technology. Thales Avionics
owns 30% of ACSS. In the opinion of management, the ultimate disposition of
Honeywell's pending claim will not result in a material liability to the
Company.
On November 18, 2002, the Company initiated a proceeding against OSI
Systems, Inc. (OSI) in the United States District Court sitting in the Southern
District of New York (the "New York action") seeking, among other things, a
declaratory judgment that the Company had fulfilled all of its obligations
under a letter of intent with OSI (the "OSI Letter of Intent"). Under the OSI
Letter of Intent, the Company was to negotiate definitive agreements with OSI
for the sale of certain businesses the Company acquired from PerkinElmer, Inc.
on June 14, 2002. On December 23, 2002, OSI responded by filing suit against
the Company in the United States District Court sitting in the Central District
of California (the "California action") alleging, among other things, that the
Company breached its obligations under the OSI Letter of Intent and seeking
damages in excess of $100 million not including punitive damages. On February
7, 2003, OSI filed an answer and counterclaims in the New York action that
asserted substantially the same claims OSI had raised in the California action.
The California action was dismissed by the California District Court in favor
of the New York action. Under the OSI Letter of Intent, the Company proposed
selling to OSI the conventional detection business and the ARGUS business that
the Company recently acquired from PerkinElmer, Inc. Negotiations with OSI
lasted for almost one year and ultimately broke down over issues regarding,
among other things, intellectual property, product-line definitions, allocation
of employees and due diligence. The Company believes that the claims asserted
by OSI in its suit are without merit and intends to defend against the OSI
claims vigorously.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities 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 consolidated financial position, results
of operations or cash flows of the Company.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with our incorporation, L-3 Holdings, Lehman Brothers
Capital Partners III, L.P. and certain of its affiliates, Messrs. Lanza and
LaPenta and Lockheed Martin Corporation entered into the Stockholders
Agreement, which has terminated except for the terms relating to registration
rights.
Pursuant to the Stockholders Agreement, at this time Messrs. Lanza and
LaPenta and the Lehman Partnership have the right, subject to certain
conditions, to require L-3 Holdings to register their shares of its common
stock under the Securities Act of 1933. The Lehman Partnership has four demand
rights and each of Messrs. Lanza and LaPenta has one demand registration right.
Lockheed Martin Corporation sold all of its shares of L-3 Holdings' common
stock in 1999. As of May 31, 2003, the Lehman Partnership owned 2.3% of L-3
Holdings' common stock.
In addition, the Stockholders Agreement also provides Messrs. Lanza and
LaPenta and the Lehman Partnership with piggyback registration rights. The
Stockholders Agreement provides, among other things, that L-3 Holdings will pay
expenses incurred in connection with:
o up to three demand registrations requested by the Lehman Partnership and
the two demand registrations requested by each of Messrs. Lanza and
LaPenta; and
o any registration in which those parties participate through piggyback
registration rights granted
under the agreement.
88
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning the directors and
executive officers of L-3 Communications as of May 31, 2003:
NAME AGE POSITION
- ----------------------------------- ----- -----------------------------------------------------
Frank C. Lanza .................... 71 Chairman, Chief Executive Officer and Director
Robert V. LaPenta ................. 57 President, Chief Financial Officer and Director
Michael T. Strianese .............. 47 Senior Vice President, Finance
Christopher C. Cambria ............ 44 Senior Vice President, General Counsel and Secretary
Jimmie V. Adams ................... 66 Vice President -- Washington D.C. Operations
David T. Butler III ............... 46 Vice President -- Planning
Ralph G. D'Ambrosio ............... 35 Vice President -- Controller
Joseph S. Paresi .................. 47 Vice President -- Product Development
Robert W. RisCassi ................ 67 Vice President -- Washington D.C. Operations
Charles J. Schafer ................ 55 Vice President -- Business Operations
Stephen M. Souza .................. 50 Vice President -- Treasurer
Dr. Jill J. Wittels ............... 53 Vice President -- Business Development
Claude R. Canizares ............... 57 Director
Thomas A. Corcoran(1) ............. 58 Director
Robert B. Millard(2) .............. 51 Director
John M. Shalikashvili(1) .......... 66 Director
Arthur L. Simon(1) ................ 70 Director
Alan H. Washkowitz(2) ............. 62 Director
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Frank C. Lanza, Chairman and Chief Executive Officer and Director since
April 1997. From April 1996, when Loral Corporation was acquired by Lockheed
Martin Corporation, until April 1997, Mr. Lanza was Executive Vice President of
Lockheed Martin, a member of Lockheed Martin's Executive Council and Board of
Directors and President and Chief Operating Officer of Lockheed Martin's
command, control, communications and intelligence ("C3I") and Systems
Integration Sector, which comprised many of the businesses Lockheed Martin
acquired from Loral. Prior to the April 1996 acquisition of Loral, Mr. Lanza
was President and Chief Operating Officer 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 DalmoVictor and Philco Western
Development Laboratory.
Robert V. LaPenta, President and Chief Financial Officer and Director
since April 1997. From April 1996, when Loral was acquired by Lockheed Martin,
until April 1997, Mr. LaPenta was a Vice President of Lockheed Martin and was
Vice President and Chief Financial Officer of Lockheed Martin's C3I and Systems
Integration Sector. Prior to the April 1996 acquisition of Loral, he was
Loral's Senior Vice President and Controller, a position he held since 1981. He
joined Loral in 1972 and was named Vice President and Controller of its largest
division in 1974. He became Corporate Controller in 1978 and was named Vice
President in 1979. Mr. LaPenta is on the Board of Trustees of Iona College, the
Board of Trustees of The American College of Greece and the Board of Directors
of Core Software Technologies.
Michael T. Strianese, Senior Vice President--Finance. Mr. Strianese became
a Senior Vice President in March 2001. He joined us in April 1997 as Vice
President--Finance and Controller and was our Controller until July 2000. From
April 1996, when Loral was acquired by Lockheed Martin, until April 1997, Mr.
Strianese was Vice President and Controller of Lockheed Martin's C3I and
Systems Integration Sector. From 1991 to the April 1996 acquisition of Loral,
he was Director of Special Projects at Loral. Mr. Strianese is a Certified
Public Accountant.
89
Christopher C. Cambria, Senior Vice President--Secretary and General
Counsel. Mr. Cambria became a Senior Vice President in March 2001. He joined us
in June 1997 as Vice President--General Counsel and Secretary. From 1994 until
joining us, Mr. Cambria was an associate with Fried, Frank, Harris, Shriver &
Jacobson. From 1986 until 1993, he was an associate with Cravath, Swaine &
Moore. Mr. Cambria is a director of Core Software Technologies.
Jimmie V. Adams, Vice President--Washington, D.C. Operations. General
Jimmie V. Adams (U.S.A.F.-ret.) joined us in May 1997. From April 1996 until
April 1997, he was Vice President of Lockheed Martin's Washington Operations
for the C3I and Systems Integration Sector. Prior to the April 1996 acquisition
of Loral, he had held the same position at Loral since 1993. Before joining
Loral in 1993, he was Commander in Chief, Pacific Air Forces, Hickam Air Force
Base, Hawaii, capping a 35-year career with the U.S. Air Force. He was also
Deputy Chief of Staff for plans and operation for U.S. Air Force headquarters
and Vice Commander of Headquarters Tactical Air Command and Vice Commander in
Chief of the U.S. Air Forces Atlantic at Langley Air Force Base. He is a
command pilot with more than 141 combat missions.
David T. Butler III, Vice President--Planning. Mr. Butler became a Vice
President in December 2000. He joined us in 1997 as our corporate Director of
Planning and Strategic Development. Prior to joining us, he was the Controller
for Lockheed Martin Fairchild Systems from 1996 to 1997. Prior to the
acquisition of Loral, Mr. Butler was Controller of Loral Fairchild Systems from
1992 to 1996. From 1981 to 1992, Mr. Butler held a number of financial
positions with Loral Electronic Systems.
Ralph G. D'Ambrosio, Vice President and Controller. Mr. D'Ambrosio became
Vice President in July 2001 and Controller in August 2000. He joined us in
August 1997, and until July 2000 was our Assistant Controller. Prior to joining
us, he was a senior manager at Coopers & Lybrand L.L.P., where he held a number
of positions since 1989. Mr. D'Ambrosio is a Certified Public Accountant.
Joseph S. Paresi, Vice President--Product Development and President of the
Security Systems Division. Mr. Paresi joined us in April 1997. From April 1996
until April 1997, Mr. Paresi was Corporate Director of Technology for Lockheed
Martin's C3I and Systems Integration Sector. Prior to the April 1996
acquisition of Loral, Mr. Paresi was Corporate Director of Technology for
Loral, a position he held since 1993. From 1978 to 1993, Mr. Paresi was a
Systems Engineer, Director of Marketing and Director of International Programs
at Loral Electronic Systems. Mr. Paresi is currently a director of AnnisTech,
Inc. and Millivision, Inc.
Robert RisCassi, Vice President--Washington, D.C. Operations. General
Robert W. RisCassi (U.S. Army-ret.) joined us in April 1997. From April 1996
until April 1997, he was Vice President of Land Systems for Lockheed Martin's
C3I and Systems Integration Sector. Prior to the April 1996 acquisition of
Loral, he had held the same position for Loral since 1993. He joined Loral in
1993 after retiring as U.S.Army Commander in Chief, United Nations
Command/Korea. His 35-year military career included posts as Army Vice Chief of
Staff; Director, Joint Staff, Joint Chiefs of Staff; Deputy Chief of Staff for
Operations and Plans; and Commander of the Combined Arms Center. General
RisCassi is currently a director of Alliant Techsystems Inc.
Charles J. Schafer, Senior Vice President--Business Operations and
President of the Products Group. Mr. Schafer became a Senior Vice President
inApril 2002. Mr. Schafer was appointed President of the Products Group in
September 1999. He joined us in August 1998 as VicePresident--Business
Operations. Prior to August 1998, he was President of Lockheed Martin's
Tactical Defense Systems Division, a position he also held at Loral since
September 1994. Prior to the April 1996 acquisition of Loral, Mr. Schafer held
various executive positions with Loral, which he joined in 1984.
Stephen M. Souza, Vice President and Treasurer. Mr. Souza joined us in
August 2001. Prior to joining us he was the Treasurer of ASARCO Inc. from 1999
to August 2001 and Assistant Treasurer from 1992 to 1999.
Jill H. Wittels, Vice President--Business Development. Ms. Wittels joined
us in March 2001. From July 1998 to February 2001 she was President and General
Manager of BAE Systems' Information and Electronic Warfare Systems/Infrared and
Imaging Systems division and its predecessor company.
90
From January 1997 to July 1998, Ms. Wittels was Vice President--Business
Development and Operations for IR Focalplane Products at Lockheed Martin. Ms.
Wittels is on the Board of Overseers for the Department of Energy's Fermi
National Accelerator Lab. Ms. Wittels is also a director of Innovative Micro
Technology, Inc. and Millivision, Inc.
Claude R. Canizares, Director since May 2003. Since 1974, Professor
Canizares has been a faculty member of the Massachusetts Institute of
Technology (MIT). He currently serves as the Associate Provost and Bruno Rossi
Professor of Experimental Physics, overseeing the MIT Lincoln Laboratory. In
addition, he is a principal investigator and Associate Director of NASA's
Chandra X-ray Observatory. Professor Canizares is a member of the National
Academy of Sciences, the International Academy of Astronautics and a fellow of
the American Physical Society and the American Association for the Advancement
of Science. He is also a member of the Board of Trustees of the Associated
Universities, Inc., the Board of Physics and Astronomy of the National Research
Council and the Air Force Scientific Advisory Board.
Thomas A. Corcoran, Director since July 1997. Member of the audit
committee. Since March 2001, Mr. Corcoran has been the President and Chief
Executive Officer of Gemini Air Cargo. Mr. Corcoran is also president of
Corcoran Enterprises, a private management consulting firm. Mr. Corcoran was
the President and Chief Executive Officer of Allegheny Teledyne Incorporated
from October 1999 to December 2000. From October 1998 to September 1999, he was
President and Chief Operating Officer of the Space & Strategic Missiles Sector
of Lockheed Martin Corporation. From March 1995 to September 1998 he was the
President and Chief Operating Officer of the Electronic Systems Sector of
Lockheed Martin Corporation. From 1993 to 1995, Mr. Corcoran was President of
the Electronics Group of Martin Marietta Corporation. Prior to that he worked
for General Electric for 26 years and from 1983 to 1993 he held various
management positions with GE Aerospace and was a company officer from 1990 to
1993. Mr. Corcoran is a member of the Board of Trustees of Worcester
Polytechnic Institute, the Board of Trustees of Stevens Institute of Technology
and the Board of Directors of REMEC Corporation.
Robert B. Millard, Director since April 1997. Chairman of the compensation
committee. Mr. Millard is a Managing Director of Lehman Brothers Inc., 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 Inc. in 1983. Mr. Millard is a director of
GulfMark International, Kirch Media GmbH and Weatherford International, Inc.
John M. Shalikashvili, Director since August 1998. Chairman of the audit
committee. General Shalikashvili (U.S. Army-ret.) is an independent consultant
and a Visiting Professor at Stanford University. General Shalikashvili was the
senior officer of the United States military and principal military advisor to
the President of the United States, the Secretary of Defense and National
Security Council by serving as the thirteenth Chairman of the Joint Chiefs of
Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his
tenure as Chairman of the Joint Chiefs of Staff, he served as the Commander in
Chief of all United States forces in Europe and as NATO's tenth Supreme Allied
Commander, Europe(SACEUR). He has also served in a variety of command and staff
positions in the continental United States, Alaska, Belgium, Germany, Italy,
Korea, Turkey and Vietnam. General Shalikashvili is a director of The Boeing
Company, United Defense Industries Inc., Frank Russell Trust Company and Plug
Power, Inc.
Arthur L. Simon, Director since April 2000. Member of the audit committee.
Mr. Simon is an independent consultant. Before his retirement, Mr. Simon was a
partner at Coopers & Lybrand, L.L.P., Certified Public Accountants, from 1968
to 1994. He is a director of Loral Space & Communications, Inc.
Alan H. Washkowitz, Director since April 1997. Member of the compensation
committee. Mr. Washkowitz is a Managing Director of Lehman Merchant Banking
Group, and is responsible for the oversight of Lehman Brothers Inc. Merchant
Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman Brothers Inc.
in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr. Washkowitz is
a director of Peabody Energy Corporation and K&F Industries, Inc.
91
L-3 Holdings' certificate of incorporation provides for a classified board
of directors divided into three classes. Class I will expire at the annual
meeting of the stockholders to be held in 2005; Class II will expire at the
annual meeting of the stockholders to be held in 2004; and Class III will
expire at the annual meeting of the stockholders to be held in 2006. At each
annual meeting, L-3 Holdings' stockholders will elect the successors to
directors whose terms will then expire to serve from the time of election and
qualification until the third annual meeting following election and until their
successors have been elected and qualified, or until their resignation or
removal, if any. Increases or decreases in the number of directorships will be
distributed among the three classes so that, as nearly as possible, each class
will consist of an equal number of directors.
Our executive officers and key employees serve at the discretion of our
board of directors.
THE BOARD OF DIRECTORS AND CERTAIN COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors directs the management of our business and affairs,
as provided by Delaware law, and conducts its business through meetings of the
board of directors and two standing committees: the audit and compensation
committees. In addition, from time to time, special committees may be
established under the direction of the board of directors when necessary to
address specific issues. We have no nominating committee; however, the audit
committee has agreed to perform the functions of the nominating committee. Each
executive officer serves at the discretion of the board of directors. During
the fiscal year ended December 31, 2002, the board of directors held four
regularly scheduled meetings and one special meeting. All of our directors
attended at least 75% of the combined number of board of directors meetings and
committee meetings during the past fiscal year.
The audit committee currently consists of Messrs. Corcoran, Shalikashvili
(Chairman) and Simon. This committee, which met nine times during 2002, is
responsible generally for (1) recommending to the board of directors the
independent accountants to be nominated to audit our financial statements; (2)
approving the compensation of the independent accountants; (3) meeting with our
independent accountants to review the proposed scope of the annual audit of our
financial statements; (4) reviewing the findings of the independent accountants
with respect to the annual audit; and (5) reviewing with management and the
independent accountants our periodic financial reports prior to our filing them
with the SEC and reporting annually to the board of directors with respect
thereto. In addition, the audit committee, acting as the nominating committee,
nominated the Class III members for reelection to the board of directors.
During the 2002 fiscal year, Messrs. Robert Millard, John Montague and
Alan Washkowitz served as members of the compensation committee of the board of
directors. In May 2003, Mr. Montague resigned as a director and member of the
compensation committee. The compensation committee currently consists of
Messrs. Millard (Chairman) and Washkowitz. This committee, which acted by
written consent four times during 2002, is responsible for administering our
1997 Stock Option Plan for Key Employees (the "1997 Plan") and our 1999 Long
Term Performances Plan (the "1999 Plan") and has limited authority to adopt
amendments to those plans. This committee is also responsible for recommending
to the board of directors the salaries to be paid to our Chief Executive
Officer and the President, and reviewing and approving the Chief Executive
Officer's and the President's other annual cash compensation and long-term
incentives and the total compensation to be paid to certain of our other
executive officers.
COMPENSATION OF DIRECTORS
The directors who are also our employees or employees of our subsidiaries
or affiliates do not receive compensation for their services as directors. The
non-affiliated directors receive annual compensation of $30,000 for service on
the board of directors, of which $25,000 is paid in cash, and $5,000 is paid in
shares of L-3 Holdings' common stock. The chairman of both the audit committee
and the compensation committee each receives additional cash annual
compensation of $3,500. In addition, non-affiliated directors receive an annual
stock option grant of 3,000 shares of L-3 Holdings' common stock, which will
vest in three equal annual installments. The non-affiliated directors are
92
entitled to reimbursement for their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the board of
directors or committees thereof. In addition, the non-affiliated directors will
be compensated $1,250 per meeting attended, including committee meetings, up to
a maximum of $2,500 per day.
Non-affiliated directors may defer up to 100 percent of the cash portion
of their annual cash compensation (including meeting fees) otherwise payable to
the director. Subject to certain limitations, a participating director's
deferred compensation will be distributed in a lump sum on, or distribution in
annual installments commencing on, the 30th day following the date he or she
ceases to be a director. Deferral elections are irrevocable during any calendar
year and must be made before the beginning the calendar year in which his/her
compensation is earned. Interest is accrued on deferred amounts. Depending on a
director's investment election, deferred amounts earn interest at a rate based
on the 90-day U.S. Government Treasury Bill or the performance of L-3 Holdings'
common stock.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides summary information concerning compensation
paid or accrued by us to or on behalf of our Chief Executive Officer and each
of our four other most highly compensated executive officers who served in such
capacities as of December 31, 2002, collectively referred to herein as the
named executive officers, for services rendered to us during each of the last
three years.
LONG TERM
COMPENSATION
AWARD
-------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
-------------------------- STOCK COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(1)
- ----------------------------------------- ------ ------------ ----------- ------------- -------------
Frank C. Lanza 2002 $825,000 $850,000 400,000 $ 11,125
(Chairman and Chief 2001 750,000 750,000 -- 11,125
Executive Officer) ..................... 2000 750,000 500,000 -- 6,858
Robert V. LaPenta 2002 625,000 750,000 400,000 39,287
(President and Chief 2001 545,577 650,000 -- 34,306
Financial Officer) ..................... 2000 500,000 400,000 -- 32,907
Michael T. Strianese 2002 331,250 375,000 -- 19,690
(Senior Vice President, 2001 255,000 300,000 54,000 13,790
Finance) ............................... 2000 209,673 225,000 -- 73,515
Christopher C. Cambria 2002 235,000 375,000 -- 12,038
(Senior Vice President, 2001 235,000 300,000 54,000 10,838
Secretary and General Counsel) ......... 2000 228,025 225,000 -- 10,827
Charles J. Schafer
(Senior Vice President, Business 2002 268,750 350,000 -- 24,449
Operations and President of 2001 248,230 250,000 36,000 118,438
the Products Group) .................... 2000 230,000 175,000 -- 118,368
- ----------
(1) Amounts for the year ended December 31, 2002 include: (a) our matching
contributions of $8,800 under our savings plan for Messrs. LaPenta and
Schafer and $8,000 for Messrs. Strianese and Cambria; and (b) the value
of supplemental life insurance programs in the amounts of $11,125 for Mr.
Lanza, $30,487 for Mr. LaPenta, $11,690 for Mr. Strianese, $4,038 for Mr.
Cambria and $15,649 for Mr. Schafer.
93
OPTION GRANTS IN FISCAL YEAR 2002
The following table shows the options to purchase L-3 Holdings' common
stock granted in fiscal year 2002 to the named executive officers.
% TOTAL PER SHARE GRANT
OPTIONS OPTIONS EXERCISE EXPIRATION DATE
NAME GRANTED (#) GRANTED PRICE ($) DATE VALUE ($)
- -------------------------------- ------------- ----------- ----------- ------------ -------------
Frank C. Lanza ................. 400,000 18.44% $ 53.75 3/25/12 $ 7,922,667
Robert V. LaPenta .............. 400,000 18.44% 53.75 3/25/12 7,922,667
Michael T. Strianese ........... -- 0.00% -- -- --
Christopher C. Cambria ......... -- 0.00% -- -- --
Charles J. Schafer ............. -- 0.00% -- -- --
------- ----- -------- ------- -----------
800,000 $15,845,334
======= ===========
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information on options to purchase L-3
Holdings' common stock that were exercised during fiscal year 2002 by our named
executive officers; the total numbers of exercisable and non-exercisable
options to purchase L-3 Holdings' common stock owned by our named executive
officers at December 31, 2002, and the aggregate dollar value of such options
that were in-the-money at December 31, 2002.
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS OPTIONS AT
ACQUIRED VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
ON REALIZED --------------------------------- --------------------------------
NAME AND PRINCIPAL POSITION EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE (2) EXERCISABLE UNEXERCISABLE (2)
- ----------------------------- ------------- ------------ ------------- ------------------- ------------- ------------------
Frank C. Lanza
(Chairman and Chief
Executive Officer) ......... -- $ -- 1,828,572 400,000 $76,205,738 $ --
Robert V. LaPenta
(President and Chief
Financial Officer) ......... 100,000 5,029,000 1,528,572 400,000 63,703,238 --
Michael T. Strianese
(Senior Vice President,
Finance) ................... 50,000 1,790,950 75,000 36,000 1,547,490 187,740
Christopher C. Cambria
(Senior Vice President,
Secretary and General
Counsel) ................... -- -- 89,800 36,000 1,934,658 187,740
Charles J. Schafer
(Senior Vice President,
Business Operations and
President of the Products
Group) ..................... 27,000 994,680 27,000 24,000 454,980 125,160
- ----------
(1) In accordance with SEC rules, the values of the in-the-money options were
calculated by subtracting the exercise prices of the options from the
December 31, 2002 closing stock price of L-3 Holdings' common stock of
$44.91.
(2) These options are unexercisable because they have not yet vested under
their terms.
94
PENSION PLAN
The following table shows the estimated annual pension benefits payable
under the L-3 Communications Corporation Pension Plan and Supplemental
Executive Retirement Plan to a covered participant upon retirement at normal
retirement age (65), based on the career average compensation (salary and
bonus) and years of credited service with us.
AVERAGE YEAR OF CREDITED SERVICE
COMPENSATION ----------------------------------------------------------------------------
AT RETIREMENT 5 10 15 20 25 30 35
- --------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 300,000 .......... $18,952 $ 34,171 $ 46,357 $ 60,278 $ 71,497 $ 80,603 $ 87,955
400,000 ......... 25,605 46,159 62,629 81,361 96,446 108,652 118,496
500,000 ......... 32,258 58,152 78,905 102,452 121,399 136,704 149,032
600,000 ......... 38,909 70,140 95,176 123,536 146,344 164,749 179,563
700,000 ......... 45,562 82,131 111,451 144,624 171,295 192,799 210,100
800,000 ......... 52,213 94,119 127,722 165,708 196,243 220,847 240,638
900,000 ......... 58,865 106,111 143,997 186,798 221,194 248,898 271,175
1,000,000 ......... 65,517 118,100 160,270 207,883 246,141 276,946 301,711
1,100,000 ......... 72,169 130,089 176,543 228,970 271,092 304,993 332,245
1,200,000 ......... 78,820 142,078 192,814 250,054 296,040 333,039 362,779
1,300,000 ......... 85,473 154,069 209,089 271,142 320,988 361,088 393,315
1,400,000 ......... 92,124 166,058 225,360 292,228 345,938 389,138 423,851
1,500,000 ......... 98,776 178,047 241,633 313,314 370,886 417,186 454,385
As of December 31, 2002, the current annual compensation and current years
of credited service (including for Messrs. LaPenta and Strianese, years of
credited service as an employee of Loral and Lockheed Martin) for each of the
following persons were: Mr. Lanza, $1,575,000 and six years; Mr. LaPenta,
$1,275,000 and 31 years; Mr. Strianese, $631,250 and 13 years; Mr. Cambria,
$535,000 and six years; and Mr. Schafer, $518,750 and four years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the 2002 fiscal year, Messrs. Robert Millard, John Montague, and
Alan Washkowitz served as members of the compensation committee of the board of
directors. In May 2003, Mr. Montague resigned as a director and member of the
compensation committee. None of these individuals has served us or any of our
subsidiaries as an officer or employee.
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of our board of directors or
compensation committee.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement (the "Employment Agreements")
effective on April 30, 1997 with each of Mr. Lanza, our Chairman and Chief
Executive Officer, and Mr. LaPenta, our President and Chief Financial Officer.
The Employment Agreements provided for an initial term of five years, which
would automatically renew for one-year periods thereafter, unless a party
thereto gave notice of its intent to terminate at least 90 days prior to the
expiration of the term. Mr. Lanza's employment agreement was renewed in April
2002. Mr. LaPenta's employment agreement expired in April 2002.
Upon a termination without cause or resignation for good reason, we 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 is offered or obtains comparable benefits coverage from
any other employer. The Employment Agreements provided for confidentiality
during employment and at all times thereafter. There was also a
95
noncompetition and non-solicitation covenant which was effective during the
employment term and for one year thereafter; provided, however, that if the
employment terminated following the expiration of the initial term, the
noncompetition covenant would only be effective during the period, if any, that
we paid the severance described above.
96
OWNERSHIP OF CAPITAL STOCK
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
All outstanding capital stock of L-3 Communications is owned by L-3
Holdings. As of May 31, 2003, there were 95,645,332 shares of L-3 Holdings'
common stock outstanding. We know of no person who, as of May 31, 2003,
beneficially owned more than five percent of the common stock, except as set
forth below.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP OF CLASS (1)
- ------------------------ ------------------ -------------
Citigroup Inc.(2)
153 East 53rd Street
New York, New York 10043. ........... 10,675,192 11.2%
Frank C. Lanza(3)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016. ........... 4,913,248 5.0%
Robert V. LaPenta(4)
c/o L-3 Communications Holdings, Inc.
600 Third Avenue, 34th Floor
New York, New York 10016. ........... 5,268,807 5.4%
- ----------
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are deemed to
be beneficially owned by a person if the person has the right to acquire
the shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of common stock
actually outstanding at May 31, 2003.
(2) Based on a Schedule 13G/A filed with the S.E.C., dated February 4, 2003,
in which Citigroup Inc. reported that it had shared voting and
dispositive power over 10,675,192 shares of common stock.
(3) The shares of common stock beneficially owned includes 1,661,906 shares
issuable under employee stock options and exercisable within 60 days of
May 31, 2003.
(4) The shares of common stock beneficially owned includes 1,661,906 shares
issuable under employee stock options and exercisable within 60 days of
May 31, 2003 and 959 shares allocated to the account of Mr. LaPenta under
our savings plans.
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the amount of L-3 Holdings' common stock
beneficially owned (unless otherwise indicated) by L-3 Holdings' executive
officers, L-3 Holdings' directors, and by all of L-3 Holdings' current
executive officers and directors as a group. Except as otherwise indicated, all
information listed below is as of May 31, 2003.
97
SHARES OF PERCENTAGE OF
COMMON SHARES OF
STOCK COMMON
BENEFICIALLY STOCK
NAME OF BENEFICIAL OWNER OWNED (1)(2) OUTSTANDING (3)
- --------------------------------------------------------------------- -------------- ----------------
Directors and Executive Officers
Frank C. Lanza ..................................................... 4,913,248 5.0%
Robert V. LaPenta .................................................. 5,268,807 5.4%
Michael T. Strianese ............................................... 75,910 --
Christopher C. Cambria ............................................. 90,681 --
Charles J. Schafer ................................................. 27,862 --
Thomas A. Corcoran(4) .............................................. 11,000 --
Robert B. Millard(4)(5)(6) ......................................... 143,178 --
John M. Shalikashvili(4) ........................................... 11,684 --
Arthur L. Simon(4) ................................................. 14,260 --
Alan H. Washkowitz(4)(5)(7) ........................................ 274,722 --
Directors and Executive Officers as a Group (18 persons)(8) ......... 11,047,808 11.1%
- ----------
(1) The shares of L-3 Holdings common stock beneficially owned include the
number of shares (i) issuable under employee stock options and
exercisable within 60 days of May 31, 2003 and (ii) allocated to the
accounts of executive officers under our savings plans. Of the number of
shares shown above, (i) the following represent shares that may be
acquired upon exercise of employee stock options for the accounts of: Mr.
Lanza, 1,661,906 shares; Mr. LaPenta, 1,661,906 shares; Mr. Strianese,
75,000 shares, Mr. Cambria, 89,800 shares and Mr. Schafer, 27,000 shares;
and (ii) the following represent shares allocated under our saving plans
to the accounts of: Mr. LaPenta, 959 shares; Mr. Strianese, 910 shares;
Mr. Cambria, 881 shares; and Mr. Schafer, 862 shares.
(2) The number of shares shown includes shares that are individually or
jointly owned, as well as shares over which the individual has either
sole or shared investment or voting authority.
(3) Share ownership does not exceed one percent of the class unless otherwise
indicated. Under Rule 13d-3, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons
share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of
an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect
the person's actual ownership or voting power with respect to the number
of shares of common stock actually outstanding at May 31, 2003.
(4) Includes 11,000 shares issuable and exercisable under director stock
options within 60 days of May 31, 2003 in the case of Messrs. Corcoran
and Shalikashvili, 8,000 shares in the case of Mr. Simon and 5,000 shares
in the case of Messrs. Millard and Washkowitz.
(5) Robert B. Millard and Alan H. Washkowitz, each of whom is a member of our
board of directors, are each a Managing Director of Lehman Brothers Inc.
and limited partners of Lehman Brothers Capital Partners III, L.P. As
limited partners of Lehman Brothers Capital Partners III, L.P., Messrs.
Millard and Washkowitz may be deemed to share beneficial ownership of
shares of L-3 Holdings' common stock held by Lehman Brothers Capital
Partners III, L.P. Such individuals disclaim any such beneficial
ownership and those shares of common stock are not reflected in the
numbers shown in this table.
98
(6) Includes 105,278 shares owned by a charitable foundation of which Mr.
Millard and his wife are the sole trustees, and as to which Mr. Millard
disclaims beneficial ownership.
(7) Includes 111,330 shares in trust, for the benefit of Mr. Washkowitz's
children, for which Mr. Washkowitz and his wife are co-trustees and as to
which Mr. Washkowitz disclaims beneficial ownership.
(8) Includes 3,755,280 shares issuable under employee stock options and
exercisable under employee stock options within 60 days of May 31, 2003,
and 14,514 shares allocated to the accounts of executive officers under
our savings plans.
99
DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR CREDIT FACILITIES OF L-3 COMMUNICATIONS CORPORATION
The senior credit facilities of L-3 Communications Corporation have been
provided by a syndicate of banks led by Bank of America, N.A., as
administrative agent. The senior credit facilities provide for:
(A) $500 million in revolving credit loans which must be repaid by May 15,
2006 (the "Revolving Credit Facility"); and
(B) $250 million in revolving credit loans which must be repaid by
February 24, 2004 (the "Revolving 364 Day Facility" and together with (A)
above, the "senior credit facilities").
However, all or a portion of the Revolving 364 Day Facility may be extended
annually on the maturity date of the Revolving 364 Day Facility for a period of
364 days with the consent of lenders holding at least 50% of the commitments to
make 364-day loans (February 24, 2004, as extended in accordance with the
foregoing, the "364 Day Termination Date"). L-3 Communications Corporation may
also convert the outstanding principal amount of any or all of the loans
outstanding under the Revolving 364 Day Facility to term loans on the 364 Day
Termination Date if it meets certain conditions. The senior credit facilities
include availability for letters of credit, and the Revolving Credit Facility
allows borrowings up to a specified amount on same-day notice (the "Swingline
Loans").
All borrowings under the senior credit facilities bear interest, at L-3
Communications Corporation's option, at either:
(A) "base rate" equal to, for any day, the higher of:
o 0.50% per annum above the latest federal funds effective rate; and
o the rate of interest in effect for such day as publicly announced from
time to time by Bank of America, N.A. as its "reference rate,"
plus a spread ranging from 2.00% to 0.50% per annum, and adjusted
periodically, depending on
L-3 Communications Corporation's Debt Ratio (as defined below) at the time
of determination or
(B) "LIBOR" equal to, for any interest period (as defined in the senior
credit facilities), the London interbank offered rate for such interest period
as determined in accordance with the senior credit facilities and as adjusted
to reflect any reserve requirements, plus a spread ranging from 3.00% to 1.50%
per annum, and adjusted periodically, depending on the Debt Ratio at the time
of determination, provided that Swingline Loans can only bear interest at the
"base rate" plus the applicable spread.
The Debt Ratio is defined in the senior credit facilities as the ratio of
Consolidated Total Debt to Consolidated EBITDA. Consolidated Total Debt is
equal to outstanding indebtedness for borrowed money or the deferred purchase
price of property, including capitalized lease obligations, plus permitted
convertible securities guaranteed by L-3 Communications Corporation or its
subsidiaries minus the lesser of actual unrestricted cash or $50 million.
Consolidated EBITDA is equal to consolidated net income (excluding
extraordinary gains and losses and gains and losses in connection with asset
dispositions and discontinued operations) for the most recent four quarters,
plus consolidated interest expense (including consolidated interest expense of
L-3 Holdings for permitted convertible securities guaranteed by L-3
Communications Corporation or its subsidiaries), income taxes, depreciation and
amortization minus depreciation and amortization related to minority interest.
L-3 Communications Corporation will pay commitment fees calculated at a
rate ranging from 0.50% to 0.35% per annum for the Revolving Credit Facility
and 0.45% to 0.30% per annum for the Revolving 364 Day Facility, depending on
the Debt Ratio in effect at the time of determination, on the daily amount of
the available unused commitment under the senior credit facilities. These
commitment fees are payable quarterly in arrears and upon termination of the
senior credit facilities.
L-3 Communications Corporation will pay a letter of credit fee calculated
at a rate ranging from (A) 1.50% to 0.75% per annum in the case of performance
letters of credit and (B) 3.00% to 1.50%
100
per annum in the case of all other letters of credit, in each case depending on
the Debt Ratio at the time of determination. L-3 Communications Corporation
will also pay a fronting fee equal to 0.125% per annum on the aggregate face
amount of all outstanding letters of credit. Such fees will be payable
quarterly in arrears and upon the termination of the senior credit facilities.
In addition, L-3 Communications Corporation will pay customary transaction
charges in connection with any letters of credit. The senior credit facilities
provide for the issuance of letters of credit in currencies other than United
States dollars.
The above interest rates are adjusted for changes in the Debt Ratio and
reach their maximum if the Debt Ratio is greater than 4.25 to 1.0 and reach
their minimum if that ratio is less than 2.75 to 1.0.
In the event that we convert any or all of the outstanding principal
amount under the Revolving 364 Day Facility into term loans (the "Applicable
Converted Commitment") on any 364 Termination Date, we would have to repay the
principal amount of the resulting term loans by May 16, 2006 or, if earlier,
the second anniversary of the effective date of such conversion into term
loans.
Borrowings under the senior credit facilities are subject to mandatory
prepayment (i) with the net proceeds of any incurrence of indebtedness that is
not permitted under the senior credit facilities and (ii) with the proceeds of
asset sales, in both cases subject to certain exceptions.
L-3 Communications Corporation's obligations under the senior credit
facilities are secured by:
o a pledge by L-3 Communications Holdings of the stock of L-3
Communications Corporation; and
o a pledge by L-3 Communications Corporation and all of its material
direct and indirect subsidiaries of all of the stock of their respective
material domestic subsidiaries and 65% of the stock of their material
first-tier foreign subsidiaries.
In addition, indebtedness under the senior credit facilities is guaranteed
by L-3 Communications Holdings and by substantially all of L-3 Communications
Corporation's direct and indirect material domestic subsidiaries.
The senior credit facilities contain customary covenants and restrictions
on L-3 Communications Corporation's ability to engage in certain activities. In
addition, the senior credit facilities provide that L-3 Communications
Corporation must meet or exceed an interest coverage ratio and must not exceed
the Debt Ratio. The senior credit facilities also include customary events of
default.
Under the senior credit facilities, each of the following items
constitutes an event of default:
o L-3 Communications Corporation fails to pay principal or amounts drawn
under letters of credit when due;
o L-3 Communications Corporation fails to pay interest within five days
after that amount becomes due;
o any representation or warranty made is incorrect in any material
respect;
o L-3 Communications Corporation does not comply with its financial and
other covenants (and, for some of other covenants, the default continues
for 30 days);
o L-3 Communications Corporation or any of its subsidiaries defaults under
any indebtedness, guarantee obligation or interest rate hedging agreement
in the aggregate amount of at least $15.0 million for more than 10 days
and that default would enable the holder of the obligation to accelerate
the obligation;
o certain events of bankruptcy, insolvency or reorganization occur with
respect to L-3 Communications Corporation or any of its subsidiaries;
o certain events occur with respect to any employee benefit plan of L-3
Communications Corporation or its affiliates covered by ERISA that would
have a material adverse effect;
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o L-3 Communications Holdings, L-3 Communications Corporation or any of
the subsidiaries of L-3 Communications Corporation fails to pay judgments
aggregating in excess of $15.0 million, which judgments are not paid,
covered by insurance, discharged or stayed for a period of 60 days;
o any of the pledge agreements ceases to be in full force and effect or
L-3 Communications Corporation or any party to any pledge agreement so
asserts, or the lien under any of the pledge agreements ceases to be an
enforceable first priority lien (subject to a grace period in certain
cases);
o the guarantees of the senior credit facilities are held to be
enforceable or invalid or cease to be in full force and effect, or any
guarantor denies its obligations under its guarantee; and
o a change of control.
If an event of default occurs involving certain events of bankruptcy,
insolvency or reorganization of L-3 Communications Corporation, the commitments
under the senior credit facilities will automatically terminate and the loans,
including accrued interest, and all other amounts owed under the agreements
will become immediately due and payable. If any other event of default occurs,
then lenders holding the majority in aggregate principal amount of the loans
under any senior credit facility may declare the commitments under that
facility to be terminated and the loans, including accrued interest, and all
other amounts owed under that facility to be immediately due and payable. Upon
any acceleration, L-3 Communications Corporation must cash collateralize any
undrawn letters of credit under the senior credit facilities.
8% SENIOR SUBORDINATED NOTES DUE 2008
L-3 Communications Corporation has outstanding $200.0 million in aggregate
principal amount of 8% Senior Subordinated Notes due 2008 (the "December 1998
Notes"). The December 1998 Notes are subject to the terms and conditions of an
Indenture dated as of December 11, 1998, among L-3 Communications Corporation,
the guarantors named therein and in supplements thereto and The Bank of New
York as trustee (the "December 1998 Indenture"). The following summary of the
material provisions of the December 1998 Indenture does not purport to be
complete, and is subject to and qualified in its entirety by reference to, all
of the provisions of the December 1998 Indenture and those terms made a part of
the December 1998 Indenture by the Trust Indenture Act of 1939, as amended. All
terms defined in the December 1998 Indenture and not otherwise defined herein
are used below with the meanings set forth in the December 1998 Indenture.
General
The December 1998 Notes will mature on August 1, 2008 and bear interest at
8% per annum, payable semi-annually on February 1 and August 1 of each year.
The December 1998 Notes are general unsecured obligations of L-3 Communications
Corporation and are subordinated in right of payment to all existing and future
senior debt of L-3 Communications Corporation and rank pari passu with the 2002
Notes and the outstanding notes and the exchange notes. The December 1998 Notes
are unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally by all of L-3 Communications Corporation's restricted
subsidiaries other than its foreign subsidiaries. These guarantees are pari
passu with the guarantees of the outstanding notes and the exchange notes, the
2002 Notes, the 2000 Convertible Notes and the CODES.
Optional Redemption
The December 1998 Notes are subject to redemption at any time, at the
option of L-3 Communications Corporation, in whole or in part, on or after
August 1, 2003 at redemption prices (plus accrued and unpaid interest) starting
at 104% of principal (plus accrued and unpaid interest) during the 12-month
period beginning August 1, 2003 and declining annually to 100% of principal
(plus accrued and unpaid interest) on August 1, 2006 and thereafter.
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Change of Control
Upon the occurrence of a change of control, each holder of the December
1998 Notes may require L-3 Communications Corporation to repurchase all or a
portion of such holder's December 1998 Notes at a purchase price equal to 101%
of the principal amount (plus accrued and unpaid interest and liquidated
damages, if any). Generally, a change of control means the occurrence of any of
the following:
o the disposition of all or substantially all of L-3 Communications
Corporation's assets to any person;
o the adoption of a plan relating to the liquidation or dissolution of L-3
Communications Corporation;
o the consummation of any transaction in which a person other than the
principals and their related parties becomes the beneficial owner of more
than 50% of the voting stock of L-3 Communications Corporation; or
o the first day on which a majority of the members of the Board of
Directors of L-3 Communications Corporation are not continuing directors.
Subordination
The December 1998 Notes are general unsecured obligations of L-3
Communications Corporation and are subordinate to all existing and future
senior debt of L-3 Communications Corporation. The December 1998 Notes rank
senior in right of payment to all subordinated indebtedness of L-3
Communications Corporation. The guarantees of L-3 Communications Corporation's
subsidiaries under the December 1998 Notes are general unsecured obligations of
the guarantors and are subordinated to the senior debt and to the guarantees of
senior debt of those guarantors. These guarantees under the December 1998 Notes
rank senior in right of payment to all subordinated Indebtedness of those
guarantors.
Antilayering Provision
The December 1998 Indenture provides that (i) L-3 Communications
Corporation 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
December 1998 Notes, and (ii) no guarantor of the December 1998 Notes 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 of the December 1998 Notes.
Certain Covenants
The December 1998 Indenture contains a number of covenants restricting the
operations of L-3 Communications Corporation, limiting the ability of L-3
Communications Corporation to incur additional Indebtedness, pay dividends or
make distributions, sell assets, issue subsidiary stock, restrict distributions
from subsidiaries, create certain liens, enter into certain consolidations or
mergers and enter into certain transactions with affiliates.
Events of Default
Events of Default under the December 1998 Indenture include the following:
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to the December 1998 Notes;
o default in payment when due of the principal of or premium, if any, on
the December 1998 Notes;
o failure by L-3 Communications Corporation to comply with certain
provision of the December 1998 Indenture (subject, in some but not all
cases, to notice and cure periods);
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o default under indebtedness for money borrowed by L-3 Communications
Corporation or any of its restricted subsidiaries in excess of $10.0
million, which default results in the acceleration of such indebtedness
prior to its express maturity;
o failure by L-3 Communications Corporation or any restricted subsidiary
that would be a significant subsidiary 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;
o except as permitted by the December 1998 Indenture, any guarantee under
the December 1998 Notes shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full
force and effect or any guarantor, or any person acting on behalf of any
guarantor under the December 1998 Notes, shall deny or disaffirm its
obligations under its guarantee; or
o certain events of bankruptcy or insolvency with respect to L-3
Communications Corporation or any of its restricted subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding December 1998 Notes may accelerate the maturity of all the December
1998 Notes as provided in the December 1998 Indenture.
5 1/4% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2009
L-3 Communications Holdings has outstanding $300.0 million in aggregate
principal amount of 5 1/4% Convertible Senior Subordinated Notes due 2009 (the
"2000 Convertible Notes"). The 2000 Convertible Notes are subject to the terms
and conditions of an Indenture dated as of November 21, 2000, among L-3
Communications Holdings, L-3 Communications Corporation, as a guarantor, the
other guarantors named therein and in supplements thereto and The Bank of New
York as trustee (the "2000 Indenture"). The following summary of the material
provisions of the 2000 Indenture does not purport to be complete, and is
subject to and qualified in its entirety by reference to, all of the provisions
of the 2000 Indenture and those terms made a part of the 2000 Indenture by the
Trust Indenture Act of 1939, as amended. All terms defined in the 2000
Indenture and not otherwise defined herein are used below with the meanings set
forth in the 2000 Indenture.
General
The 2000 Convertible Notes will mature on June 1, 2009 and bear interest
at 5 1/4% per annum, subject to certain adjustments, payable semi-annually on
June 1 and December 1 of each year. The 2000 Convertible Notes are unsecured
senior subordinated obligations of L-3 Communications Holdings and are
subordinated in right of payment to all existing and future senior debt of L-3
Communications Holdings. The 2000 Convertible Notes are unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly and severally by
all of L-3 Communications Holdings' restricted subsidiaries, including L-3
Communications Corporation, other than its foreign subsidiaries. These
guarantees are pari passu with the guarantees of the 2002 Notes, the
outstanding notes and the exchange notes, the December 1998 Notes and the
CODES. Holders of the 2000 Convertible Notes may convert the 2000 Convertible
Notes into shares of L-3 Communications Holdings' common stock at a conversion
rate of $40.75 per share (equal to a conversion rate of 24.5398 shares per
$1,000 principal amount of 2000 Convertible Notes), subject to adjustment under
certain circumstances.
Optional Redemption
The 2000 Convertible Notes are subject to redemption at any time, at the
option of L-3 Communications Holdings, in whole or in part, on or after
December 1, 2003 at redemption prices (plus accrued and unpaid interest)
starting at 102.625% of principal (plus accrued and unpaid interest) during the
12-month period beginning December 1, 2003 and declining annually to 100% of
principal (plus accrued and unpaid interest) on December 1, 2005 and
thereafter. No interest will be paid on the 2000 Convertible Notes that are
converted into common stock of L-3 Communications Holdings, except the 2000
Convertible Notes that are called for redemption on a date that is after a
record date but prior to the corresponding interest payment date if the 2000
Convertible Notes are converted into common stock after the record date.
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Change of Control
Upon the occurrence of a change of control, each holder of the 2000
Convertible Notes may require L-3 Communications Holdings to repurchase all or
a portion of such holder's 2000 Convertible Notes at a purchase price equal to
100% of the principal amount (plus accrued and unpaid interest and liquidated
damages, if any). Generally, a change of control means the occurrence of any of
the following:
o the disposition of all or substantially all of the assets of L-3
Communications Holdings and certain of its subsidiaries to any person;
o the consummation of any transaction in which a person other than the
principals and their related parties becomes the beneficial owner of more
than 50% of the voting stock of L-3 Communications Holdings;
o the first day on which a majority of the members of the Board of
Directors of L-3 Communications Holdings are not continuing directors; or
o the consolidation or merger of L-3 Communications Holdings with or into
any other person, the merger of another person into L-3 Communications
Holdings or any conveyance, transfer, sale, lease, or other disposition
of all or substantially all of the properties and assets of L-3
Communications Holdings to another person, subject to certain exceptions.
Subordination
The 2000 Convertible Notes are unsecured senior subordinated obligations
of L-3 Communications Holdings and are subordinate to all existing and future
senior debt of L-3 Communications Holdings. The guarantees of L-3
Communications Holdings' subsidiaries under the 2000 Convertible Notes,
including the guarantee by L-3 Communications Corporation, are general
unsecured obligations of the guarantors and are subordinated to the senior debt
and to the guarantees of senior debt of those guarantors. These guarantees
under the 2000 Convertible Notes rank pari passu with all senior subordinated
indebtedness of those guarantors.
Antilayering Provision
The 2000 Indenture provides that (i) L-3 Communications Holdings 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 2000 Convertible
Notes, and (ii) no guarantor of the 2000 Convertible Notes 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 of the 2000 Convertible Notes.
Events of Default
Events of Default under the 2000 Indenture include the following:
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the 2000 Convertible Notes;
o default in payment when due of the principal of or premium, if any, on
the 2000 Convertible Notes;
o failure by L-3 Communications Holdings for 60 days after notice to
comply with certain provisions of the 2000 Convertible Indenture
(subject, in some but not all cases, to notice and cure periods);
o default under indebtedness for money borrowed by L-3 Communications
Holdings or any of its restricted subsidiaries that would be a
significant subsidiary in excess of $10.0 million, which default results
in the acceleration of such indebtedness prior to its express maturity;
o failure by L-3 Communications Holdings or any restricted subsidiary that
would be a significant subsidiary 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;
105
o except as permitted by the 2000 Indenture, any guarantee under the 2000
Convertible Notes shall be held in any judicial proceeding to be
unenforceable or invalid; and
o certain events of bankruptcy, insolvency or reorganization with respect
to L-3 Communications Holdings.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding 2000 Convertible Notes may accelerate the maturity of all the 2000
Convertible Notes as provided in the 2000 Indenture.
4.00% SENIOR SUBORDINATED CONVERTIBLE CONTINGENT DEBT SECURITIES (CODES) DUE
2011
L-3 Communications Holdings has outstanding $420.0 million in aggregate
principal amount of 4.00% Senior Subordinated Convertible Contingent Debt
Securities(SM) (CODES(SM)) due 2011 (the "CODES"). The CODES are subject to the
terms and conditions of an Indenture dated as of October 24, 2001, among L-3
Communications Holdings, L-3 Communications Corporation, as a guarantor, the
other guarantors named therein and in supplements thereto and The Bank of New
York as trustee (the "2001 Indenture"). The following summary of the material
provisions of the 2001 Indenture does not purport to be complete, and is
subject to and qualified in its entirety by reference to, all of the provisions
of the 2001 Indenture and those terms made a part of the 2001 Indenture by the
Trust Indenture Act of 1939, as amended. All terms defined in the 2001
Indenture and not otherwise defined herein are used below with the meanings set
forth in the 2001 Indenture.
General
The CODES will mature on September 15, 2011 and bear interest at 4.00% per
annum, subject to certain adjustments, payable semi-annually on March 15 and
September 15 of each year. Holders of CODES are entitled to contingent interest
not to exceed a per annum rate of 0.50% during any six months period from March
15 to September 14 and from September 15 to March 14 if the average trading
price of the CODES for the five trading days ending on the second trading day
immediately preceding the relevant six month period equals 120% or more of the
principal amount of the CODES. The CODES are unsecured senior subordinated
obligations of L-3 Communications Holdings and are subordinated in right of
payment to all existing and future senior debt of L-3 Communications Holdings.
The CODES are unconditionally guaranteed, on an unsecured senior subordinated
basis, jointly and severally by all of L-3 Communications Holdings' restricted
subsidiaries, including L-3 Communications Corporation, other than its foreign
subsidiaries. These guarantees are pari passu with the guarantees of the 2002
Notes, the outstanding notes and the exchange notes, the December 1998 Notes
and the 2000 Convertible Notes. Holders of the CODES may convert the CODES into
shares of L-3 Communications Holdings' common stock at a conversion rate of
$53.8125 per share (equal to a conversion rate of 18.583 shares per $1,000
principal amount of CODES), subject to adjustment under any of the following
circumstances:
o during any quarterly conversion period, if the closing sale price of our
common stock for a period of at least 20 trading days in the period of 30
consecutive days ending on the first day of such conversion period is
more than 120% of the conversion price on that thirtieth day;
o during the five business day period following any 10 consecutive
trading-day period in which the average of the trading prices (as
defined) for the CODES was less than 105% of the average sale prices (as
defined) of our common stock multiplied by the number of shares into
which such CODES are then convertible;
o during any period in which the credit rating assigned to the CODES by
either Moody's Investors Service, Inc., or Moody's, or Standard & Poor's
Rating Services, or Standard & Poor's, is below B3 and B\-, respectively,
or in which the credit rating assigned to the CODES is suspended or
withdrawn by either rating agency or in which neither rating agency
continues to rate the CODES or provide ratings services or coverage to
us;
o if the CODES have been called for redemption; or
o upon the occurrence of specified corporate transactions described.
106
Optional Redemption
The CODES are subject to redemption at any time, at the option of L-3
Communications Holdings, in whole or in part, on or after October 24, 2004 at
redemption prices (plus accrued and unpaid interest, including contingent
interest, if any) starting at 102.0% of principal (plus accrued and unpaid
interest, including contingent interest, if any) and declining annually to 100%
of principal (plus accrued and unpaid interest, including contingent interest,
if any) on September 15, 2006 and thereafter. No interest, including contingent
interest, will be paid on the CODES that are converted into common stock of L-3
Communications Holdings, except the CODES that are called for redemption on a
date that is after a record date but prior to the corresponding interest
payment date if the CODES are converted into common stock after the record
date, provided, however, the holders of CODES are entitled to interest,
including contingent interest, if any, accrued for a period beginning September
15, 2004 through October 23, 2004 if such holders convert subsequent to October
23, 2004.
Change of Control
Upon the occurrence of a change of control, each holder of the CODES may
require L-3 Communications Holdings to repurchase all or a portion of such
holder's CODES at a purchase price equal to 100% of the principal amount (plus
accrued and unpaid interest, including contingent interest, if any and
additional amounts, if any). Generally, a change of control means the
occurrence of any of the following:
o the disposition of all or substantially all of the assets of L-3
Communications Holdings and certain of its subsidiaries to any person;
o the consummation of any transaction in which a person other than the
principals and their related parties becomes the beneficial owner of more
than 50% of the voting stock of L-3 Communications Holdings;
o the first day on which a majority of the members of the Board of
Directors of L-3 Communications Holdings are not continuing directors; or
o the consolidation or merger of L-3 Communications Holdings with or into
any other person, the merger of another person into L-3 Communications
Holdings or any conveyance, transfer, sale, lease, or other disposition
of all or substantially all of the properties and assets of L-3
Communications Holdings to another person, subject to certain exceptions.
Subordination
The CODES are unsecured senior subordinated obligations of L-3
Communications Holdings and are subordinate to all existing and future senior
debt of L-3 Communications Holdings. The guarantees of L-3 Communications
Holdings' subsidiaries under the CODES, including the guarantee by L-3
Communications Corporation, are general unsecured obligations of the guarantors
and are subordinated to the senior debt and to the guarantees of senior debt of
those guarantors. These guarantees under the CODES rank pari passu with all
senior subordinated indebtedness of those guarantors.
Antilayering Provision
The 2001 Indenture provides that (i) L-3 Communications Holdings 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 CODES, and (ii) no
guarantor of the CODES 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 of the CODES.
Events of Default
Events of Default under the 2001 Indenture include the following:
o a default for 30 days in the payment when due of interest (including
contingent interest, if any) on, or additional amounts with respect to,
the CODES;
107
o default in payment when due of the principal of or premium, if any, on
the CODES;
o failure by L-3 Communications Holdings for 60 days after notice to
comply with certain provisions of the 2001 Indenture (subject, in some
but not all cases, to notice and cure periods);
o default under indebtedness for money borrowed by L-3 Communications
Holdings or any of its restricted subsidiaries that would be a
significant subsidiary in excess of $10.0 million, which default results
in the acceleration of such indebtedness prior to express maturity;
o failure by L-3 Communications Holdings or any restricted subsidiary that
would be a significant subsidiary 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;
o except as permitted by the 2001 Indenture, any guarantee under the CODES
shall be held in any judicial proceeding to be unenforceable or invalid;
and
o certain events of bankruptcy, insolvency or reorganization with respect
to L-3 Communications Holdings or any of its restricted subsidiaries that
would be significant subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding CODES may accelerate the maturity of all the CODES as provided in
the 2001 Indenture.
7 5/8% SENIOR SUBORDINATED NOTES DUE 2012
L-3 Communications Corporation has outstanding $750.0 million in aggregate
principal amount of 7 5/8% Senior Subordinated Notes due 2012 (the "2002
Notes"). The 2002 Notes are subject to the terms and conditions of an Indenture
dated as of June 28, 2002, among L-3 Communications Corporation, the guarantors
named therein and in supplements thereto and The Bank of New York as trustee
(the "2002 Indenture"). The following summary of the material provisions of the
2002 Indenture does not purport to be complete, and is subject to and qualified
in its entirety by reference to, all of the provisions of the 2002 Indenture
and those terms made a part of the 2002 Indenture by the Trust Indenture Act of
1939, as amended. All terms defined in the 2002 Indenture and not otherwise
defined herein are used below with the meanings set forth in the 2002
Indenture.
General
The 2002 Notes will mature on June 15, 2012 and bear interest at 7 5/8% per
annum, payable semi-annually on December 15 and June 15 of each year. The 2002
Notes are general unsecured obligations of L-3 Communications Corporation and
are subordinated in right of payment to all existing and future senior debt of
L-3 Communications Corporation and rank pari passu with the December 1998 Notes
and the outstanding notes and the exchange notes. The 2002 Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally by all of L-3 Communications Corporation's restricted
subsidiaries other than its foreign subsidiaries. These guarantees are pari
passu with the guarantees of the outstanding notes and the exchange notes, the
December 1998 Notes, the 2000 Convertible Notes and the CODES.
Optional Redemption
The 2002 Notes are subject to redemption at any time, at the option of L-3
Communications Corporation, in whole or in part, on or after June 15, 2007 at
redemption prices (plus accrued and unpaid interest) starting at 103.813% of
principal (plus accrued and unpaid interest) during the 12-month period
beginning June 15, 2007 and declining annually to 100% of principal (plus
accrued and unpaid interest) on June 15, 2010 and thereafter.
Before June 15, 2005, L-3 Communications Corporation may on any one or
more occasions redeem up to an aggregate of 35% of the 2002 Notes originally
issued at a redemption price of 107.625% of the principal amount thereof, plus
accrued and unpaid interest to the redemption date,
108
with the net cash proceeds of certain equity offerings by L-3 Communications
Corporation or the net cash proceeds of certain equity offerings by L-3
Communications Holdings that are contributed to L-3 Communications Corporation
as common equity capital; provided that at least 65% of the 2002 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.
Change of Control
Upon the occurrence of a change of control, each holder of the 2002 Notes
may require L-3 Communications Corporation to repurchase all or a portion of
such holder's 2002 Notes at a purchase price equal to 101% of the principal
amount (plus accrued and unpaid interest and liquidated damages, if any).
Generally, a change of control means the occurrence of any of the following:
o the disposition of all or substantially all of L-3 Communications
Corporation's assets to any person;
o the adoption of a plan relating to the liquidation or dissolution of L-3
Communications Corporation;
o the consummation of any transaction in which a person other than the
principals and their related parties becomes the beneficial owner of more
than 50% of the voting stock of L-3 Communications Corporation; or
o the first day on which a majority of the members of the Board of
Directors of L-3 Communications Corporation are not continuing directors.
Subordination
The 2002 Notes are general unsecured obligations of L-3 Communications
Corporation and are subordinate to all existing and future senior debt of L-3
Communications Corporation. The 2002 Notes rank senior in right of payment to
all subordinated indebtedness of L-3 Communications Corporation. The guarantees
of L-3 Communications Corporation's subsidiaries under the 2002 Notes are
general unsecured obligations of the guarantors and are subordinated to the
senior debt and to the guarantees of senior debt of those guarantors. These
guarantees under the 2002 Notes rank senior in right of payment to all
subordinated Indebtedness of those guarantors.
Antilayering Provision
The 2002 Indenture provides that (i) L-3 Communications Corporation 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 2002 Notes, and (ii)
no guarantor of the 2002 Notes 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 of the 2002 Notes.
Certain Covenants
The 2002 Indenture contains a number of covenants restricting the
operations of L-3 Communications Corporation, limiting the ability of L-3
Communications Corporation to incur additional Indebtedness, pay dividends or
make distributions, sell assets, issue subsidiary stock, restrict distributions
from subsidiaries, create certain liens, enter into certain consolidations or
mergers and enter into certain transactions with affiliates.
In the event that the 2002 Notes are assigned a rating of Baa3 or better
by Moody's and BBB- or better by S&P and no event of default has occurred and
is continuing, certain covenants in the 2002 Indenture will be suspended. If
the ratings should subsequently decline to below Baa3 or BBB-, the suspended
covenants will be reinstituted.
Events of Default
Events of Default under the 2002 Indenture include the following:
109
o a default for 30 days in the payment when due of interest on, or
liquidated damages with respect to the 2002 Notes;
o default in payment when due of the principal of or premium, if any, on
the 2002 Notes;
o failure by L-3 Communications Corporation to comply with certain
provision of the 2002 Indenture (subject, in some but not all cases, to
notice and cure periods);
o default under indebtedness for money borrowed by L-3 Communications
Corporation or any of its restricted subsidiaries in excess of $25.0
million, which default results in the acceleration of such indebtedness
prior to its express maturity;
o failure by L-3 Communications Corporation or any restricted subsidiary
that would be a significant subsidiary to pay final judgments aggregating
in excess of $25.0 million, which judgments are not paid, discharged or
stayed for a period of 60 days;
o except as permitted by the 2002 Indenture, any guarantee under the 2002
Notes shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or
any guarantor, or any person acting on behalf of any guarantor under the
2002 Notes, shall deny or disaffirm its obligations under its guarantee;
or
o certain events of bankruptcy or insolvency with respect to L-3
Communications Corporation or any of its restricted subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding 2002 Notes may accelerate the maturity of all the 2002 Notes as
provided in the 2002 Indenture.
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THE EXCHANGE OFFER
GENERAL
L-3 hereby offers, upon the terms and subject to the conditions set forth
in this prospectus and in the accompanying letter of transmittal (which
together constitute the exchange offer), to exchange up to $400.0 million
aggregate principal amount of our 6 1/8% Senior Subordinated Notes due 2013,
which we refer to in this prospectus as the outstanding notes, for a like
aggregate principal amount of our 6 1/8% Series B Senior Subordinated Notes due
2013, which we refer to in this prospectus as the exchange notes, properly
tendered on or prior to the expiration date and not withdrawn as permitted
pursuant to the procedures described below. The exchange offer is being made
with respect to all of the outstanding notes.
As of the date of this prospectus, $400.0 million aggregate principal
amount of the outstanding notes is outstanding. This prospectus, together with
the letter of transmittal, is first being sent on or about , 2003, to all
holders of outstanding notes known to L-3. L-3's obligation to accept
outstanding notes for exchange pursuant to the exchange offer is subject to
certain conditions set forth under "Certain Conditions to the Exchange Offer"
below. L-3 currently expects that each of the conditions will be satisfied and
that no waivers will be necessary.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We have entered into a registration rights agreement with the initial
purchasers of the outstanding notes in which we agreed, under some
circumstances, to file a registration statement relating to an offer to
exchange the outstanding notes for exchange notes. We also agreed to use all
commercially reasonable efforts to cause the exchange offer registration
statement to become effective under the Securities Act as promptly as
practicable, but in no event later than 180 days after the closing date and to
keep the exchange offer open for a period of not less than 20 business days.
The exchange notes will have terms substantially identical to the outstanding
notes, except that the exchange notes will not contain terms with respect to
transfer restrictions, registration rights and additional interest for failure
to observe certain obligations in the registration rights agreement. The
outstanding notes were issued on May 21, 2003.
Under certain circumstances set forth in the registration rights
agreement, we will use all commercially reasonable efforts to cause the SEC to
declare effective a shelf registration statement with respect to the resale of
the outstanding notes and keep the statement, effective for up to two years
after the closing date.
If we fail to comply with certain obligations under the registration
rights agreement, we will be required to pay additional interest to holders of
the outstanding notes.
Each holder of outstanding notes that wishes to exchange outstanding notes
for transferable exchange notes in the exchange offer will be required to make
the following representations:
o any exchange notes will be acquired in the ordinary course of its
business;
o the holder will have no arrangements or understanding with any person to
participate in the distribution of the outstanding notes or the exchange
notes within the meaning of the Securities Act;
o the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of L-3 or if it is an affiliate, that it will comply with
applicable registration and prospectus delivery requirements of the
Securities Act to the extent applicable;
o if the holder is not a broker-dealer, that it is not engaged in, and
does not intend to engage in, the distribution of the exchange notes; and
o if the holder is a broker-dealer, that it will receive exchange notes
for its own account in exchange for outstanding notes that were acquired
as a result of market-making activities or
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other trading activities and that it will be required to acknowledge that
it will deliver a prospectus in connection with any resale of the
exchange notes. See "Plan of Distribution."
RESALE OF EXCHANGE NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to unrelated third parties, we believe that exchange notes issued under
the exchange offer in exchange for outstanding notes may be offered for resale,
resold and otherwise transferred by any exchange note holder without compliance
with the registration and prospectus delivery provisions of the Securities Act,
if:
o the holder is not an "affiliate" of ours within the meaning of Rule 405
under the Securities Act;
o the exchange notes are acquired in the ordinary course of the holder's
business; and
o the holder does not intend to participate in the distribution of the
exchange notes.
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
o cannot rely on the position of the staff of the SEC enunciated in Exxon
Capital Holdings Corporation or similar interpretive letters; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, for the resale or for
other retransfer of exchange notes only as specifically set forth in this
prospectus. With regard to broker-dealers, only broker-dealers that acquired
the outstanding notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives exchange notes for its own account in exchange for outstanding notes,
where the outstanding notes were acquired by the broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange notes.
Please read the section captioned "Plan of Distribution" for more details
regarding the transfer of exchange notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept for exchange any
outstanding notes properly tendered and not withdrawn prior to the expiration
date. We will issue $1,000 principal amount of exchange notes in exchange for
each $1,000 principal amount of outstanding notes surrendered under the
exchange offer. Outstanding notes may be tendered only in integral multiples of
$1,000.
The form and terms of the exchange notes will be substantially identical
to the form and terms of the outstanding notes except the exchange notes will
be registered under the Securities Act, will not bear legends restricting their
transfer and will not provide for any additional amounts upon our failure to
fulfill our obligations under the registration rights agreement to file, and
cause to be effective, a registration statement. The exchange notes will
evidence the same debt as the outstanding notes. The exchange notes will be
issued under and entitled to the benefits of the same indenture that authorized
the issuance of the outstanding notes.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $400.0 million aggregate principal
amount of the outstanding notes are outstanding. This prospectus and a letter
of transmittal are being sent to all registered holders of outstanding notes.
There will be no fixed record date for determining registered holders of
outstanding notes entitled to participate in the exchange offer.
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We intend to conduct the exchange offer in accordance with the provisions
of the exchange offer and registration rights agreement, the applicable
requirements of the Securities Act and the Securities Exchange Act of 1934 and
the rules and regulations of the SEC. Outstanding notes that are not tendered
for exchange in the exchange offer will remain outstanding and continue to
accrue interest and will be entitled to the rights and benefits the holders
have under the indenture relating to the outstanding notes, except for any
rights under the exchange offer and registration rights agreement that by their
terms terminate upon the consummation of the exchange offer.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance
to the exchange agent. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the exchange notes from us and delivering
exchange notes to the holders. Under the terms of the exchange offer and
registration rights agreement, we reserve the right to amend or terminate the
exchange offer, and not to accept for exchange any outstanding notes not
previously accepted for exchange, upon the occurrence of any of the conditions
specified below under the caption "--Certain Conditions to the Exchange Offer."
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the exchange offer. It is
important that you read the section labeled "--Fees and Expenses" below for
more details regarding fees and expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time on July 23,
2003, unless in our sole discretion we extend it.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
o to delay accepting for exchange any outstanding notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of the
conditions set forth below under "--Certain Conditions to the Exchange
Offer" have not been satisfied, by giving oral or written notice of the
delay, extension or termination to the exchange agent; or
o under the terms of the exchange offer and registration rights agreement,
to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination, or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of outstanding notes. If we amend the exchange offer in a manner that
we determine constitutes a material change, we will promptly disclose the
amendment in a manner reasonably calculated to inform the holder of outstanding
notes of the amendment.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, we will have no obligation to publish, advertise, or
otherwise communicate any public announcement, other than by making a timely
release to a financial news service.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange notes for, any outstanding notes,
and we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange if in our reasonable judgment:
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o the exchange notes to be received will not be tradable by the holder.
without restriction under the Securities Act, the Securities Exchange Act
and without material restrictions under the blue sky or securities laws
of substantially all of the states of the United States;
o the exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the SEC: or
o any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us:
o the representations described under "--Purpose and Effect of the
Exchange Offer," "--Procedures for Tendering" and "Plan of Distribution";
and
o such other representations as may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make available to
it an appropriate form for registration of the exchange notes under the
Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we
may delay acceptance of any outstanding notes by giving oral or written notice
of the extension to their holders. During any such extensions, all notes
previously tendered will remain subject to the exchange offer, and we may
accept them for exchange. We will return any outstanding notes that we do not
accept for exchange for any reason without expense to their tendering holder as
promptly as practicable after the expiration or termination of the exchange
offer.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, nonacceptance, or termination to the holders of the outstanding
notes as promptly as practicable.
These conditions are for our sole benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any or at various times in our sole discretion. If we fail
at any time to exercise any of the foregoing rights, this failure will not
constitute a waiver of this right. Each right will be deemed an ongoing right
that we may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding notes
tendered, and will not issue exchange notes in exchange for any outstanding
notes, if at the time any stop order will be threatened or in effect with
respect to the registration statement of which this prospectus constitutes a
part or the qualification of the indenture under the Trust Indenture Act.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender the outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must:
o complete, sign and date the accompanying letter of transmittal, or a
facsimile of the letter of transmittal; have the signature on the letter
of transmittal guaranteed if the letter of transmittal so requires; and
mail or deliver the letter of transmittal or facsimile to the exchange
agent prior to the expiration date; or
o comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
o the exchange agent must receive the outstanding notes along with the
accompanying letter of transmittal; or
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o the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at DTC according to the procedures for
book-entry transfer described below or a properly transmitted agent's
message; or
o the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of a letter of transmittal and other required documents at the address
set forth below under "-- Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between the holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
accompanying letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct it
to tender on the owners behalf. If the beneficial owner wishes to tender on its
own behalf, it must, prior to completing and executing the accompanying letter
of transmittal and delivering its outstanding notes either:
o make appropriate arrangements to register ownership of the outstanding
notes in such owner's name; or
o obtain a properly completed bond power from the registered holder of
outstanding notes.
The transfer of registered ownership may take considerable time and may
not be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another "eligible institution" within the meaning of Rule
17Ad-15 under the Exchange Act, unless the outstanding notes are tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the
accompanying letter of transmittal; or
o for the account of an eligible institution.
If the accompanying letter of transmittal is signed by a person other than
the registered holder of any outstanding notes listed on the outstanding notes,
the outstanding notes must be endorsed or accompanied by a properly completed
bond power. The bond power must be signed by the registered holder as the
registered holder's name appears on the outstanding notes and an eligible
institution must guarantee the signature on the bond power.
If the accompanying letter of transmittal or any outstanding notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, these persons should so indicate when signing. Unless
waived by us, they should also submit evidence satisfactory to us of their
authority to deliver the accompanying letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the
115
program may. instead of physically completing and signing the accompanying
letter of transmittal and delivering it to the exchange agent, transmit their
acceptance of the exchange offer electronically. They may do so by causing DTC
to transfer the outstanding notes to the exchange agent in accordance with its
procedures for transfer. DTC will then send an agent's message to the exchange
agent. The term "agent's message" means a message transmitted by DTC, received
by the exchange agent and forming part of the book-entry confirmation, to the
effect that:
o DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering outstanding notes that
are the subject of the book-entry confirmation;
o the participant has received and agrees to be bound by the terms of the
accompanying letter of transmittal, or, in the case of an agent's message
relating to guaranteed delivery, that the participant has received and
agrees to be bound by the applicable notice of guaranteed delivery; and
o the agreement may be enforced against that participant.
We will determine in our sole discretion all outstanding questions as to
the validity, form, eligibility, including time or receipt, acceptance of
tendered outstanding notes and withdrawal of tendered outstanding notes. Our
determination will be final and binding. We reserve the absolute right to
reject any outstanding notes not properly tendered or any outstanding notes the
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any defects, irregularities or conditions of tender
as to particular outstanding notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the
accompanying letter of transmittal, will be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
outstanding notes must be cured within such time as we will determine. Although
we intend to notify holders of defects or irregularities with respect to
tenders of outstanding notes, neither we, the exchange agent, nor any other
person will incur any liability for failure to give the notification. Tenders
of outstanding notes will not be deemed made until any defects or
irregularities have been cured or waived. Any outstanding notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned to the exchange
agent without cost to the tendering holder, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration date.
In all cases, we will issue exchange notes for outstanding notes that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:
o outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC; and
o a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
By signing the accompanying letter of transmittal or authorizing the
transmission of the agent's message, each tendering holder of outstanding notes
will represent or be deemed to have represented to us that, among other things:
o any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange notes;
o if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange notes;
o if the holder is a broker-dealer that will receive exchange notes for
its own account in exchange for outstanding notes that were acquired as a
result of market-making activities or other trading activities. that it
will deliver a prospectus, as required by law, in connection with any
resale of any exchange notes. See "Plan of Distribution"; and
116
o the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of ours or, if the holder is an affiliate, it will comply
with any applicable registration and prospectus delivery requirements of
the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the outstanding notes at DTC for purposes of the exchange offer
promptly after the date of this prospectus. Any financial institution
participating in DTC's system may make book-entry delivery of outstanding notes
by causing DTC to transfer the outstanding notes into the exchange agent's
account at DTC in accordance with DTC's procedures for transfer. Holders of
outstanding notes who are unable to deliver confirmation of the book-entry
tender of their outstanding notes into the exchange agent's account at DTC or
all other documents required by the letter of transmittal to the exchange agent
on or prior to the expiration date must tender their outstanding notes
according to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver their outstanding
notes, the accompanying letter of transmittal or any other available required
documents to the exchange agent or comply with the applicable procedures under
DTC's Automated Tender Offer Program prior to the expiration date may tender
if:
o the tender is made through an eligible institution;
o prior to the expiration date, the exchange agent receives from the
eligible institution either a properly completed and duly executed notice
of guaranteed delivery, by facsimile transmission, mail or hand delivery,
or a properly transmitted agent's message and notice of guaranteed
delivery:
o setting forth the name and address of the holder, the registered
number(s) of the outstanding notes and the principal amount of
outstanding notes tendered:
o stating that the tender is being made thereby; and
o guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the accompanying letter of transmittal, or
facsimile thereof, together with the outstanding notes or a book-entry
confirmation, and any other documents required by the accompanying
letter of transmittal will be deposited by the eligible institution
with the exchange agent; and
o the exchange agent receives the properly completed and executed letter
of transmittal, or facsimile thereof, as well as all tendered outstanding
notes in proper form for transfer or a book-entry confirmation. and all
other documents required by the accompanying letter of transmittal,
within three New York Stock Exchange trading days after the expiration
date.
Upon request to the exchange agent, a notice of guaranteed delivery will
be sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of outstanding
notes may withdraw their tenders at any time prior to the expiration date.
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For a withdrawal to be effective:
o the exchange agent must receive a written notice of withdrawal, which
notice may be by telegram, telex, facsimile transmission or letter of
withdrawal at one of the addresses set forth below under "-- Exchange
Agent", or
o holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.
Any notice of withdrawal must:
o specify the name of the person who tendered the outstanding notes to be
withdrawn;
o identify the outstanding notes to be withdrawn, including the principal
amount of the outstanding notes; and
o where certificates for outstanding notes have been transmitted, specify
the name in which the outstanding notes were registered, if different
from that of the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of the
certificates, the withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless the holder is an eligible institution.
If outstanding notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn
outstanding notes and otherwise comply with the procedures of that facility. We
will determine all questions as to the validity, form and eligibility,
including time of receipt, of the notices, and our determination will be final
and binding on all parties. We will deem any outstanding notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
Any outstanding notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, the outstanding notes will be credited to an account maintained with DTC
for outstanding notes, as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn, outstanding
notes may be retendered by following one of the procedures described under "--
Procedures for Tendering" above at any time on or prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or for the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent as
follows:
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BY MAIL OR OVERNIGHT DELIVERY: BY FACSIMILE: BY HAND DELIVERY:
The Bank of New York The Bank of New York The Bank of New York
Reorganization Unit Reorganization Unit Reorganization Unit
101 Barclay Street - 7 East 101 Barclay Street - 7 East 101 Barclay Street
New York, NY 10286 New York, NY 10286 Lobby Level - Corp. Trust Window
Attention: William Buckley Attention: William Buckley New York 10286
(212) 298-1915 Attention: William Buckley
CONFIRM RECEIPT OF
FACSIMILE BY TELEPHONE
(212) 815-5788
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, we may make additional
solicitations by telephone or in person by our officers and regular employees
and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptance of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer. The expenses are estimated in the aggregate to be approximately
$300,000. They include:
o SEC registration fees;
o fees and expenses of the exchange agent and trustee;
o accounting and legal fees and printing costs; and
o related fees and expenses.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
o certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
o tendered outstanding notes are registered in the name of any person
other than the person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer.
If satisfactory evidence of payment of the taxes is not submitted with the
letter of transmittal, the amount of the transfer taxes will be billed to that
tendering holder.
Holders who tender their outstanding notes for exchange will not be
required to pay any transfer taxes. However, holders who instruct us to
register exchange notes in the name of, or request that outstanding notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be required to pay any applicable
transfer tax.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes under the exchange offer will remain subject to the
restrictions on transfer of the outstanding notes:
o as set forth in the legend printed on the notes as a consequence of the
issuance of the outstanding notes under the exemption from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
o otherwise as set forth in the offering memorandum distributed in
connection with the private offering of the outstanding notes.
In general, you may not offer or sell the outstanding notes unless they
are registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the outstanding notes under the Securities Act. Based on
interpretations of the SEC staff, exchange notes issued under the exchange
offer may be offered for resale, resold or otherwise transferred by their
holders (other than any holder that is our "affiliate" within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holders
acquired the exchange notes in the ordinary course of the holders' business and
the holders have no arrangement or understanding with respect to the
distribution of the exchange notes to be acquired in the exchange offer. Any
holder who tenders in the exchange offer for the purpose of participating in a
distribution of the exchange notes:
o cannot rely on the applicable interpretations of the SEC; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes, which is the aggregate principal
amount, as reflected in our accounting records on the date of exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes in
connection with the exchange offer. We will record the expenses of the exchange
offer as incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that
are not tendered in the exchange offer or to file a registration
statement to permit resales of any untendered outstanding notes.
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DESCRIPTION OF THE NOTES
The outstanding notes were issued and the exchange notes offered hereby
will be issued under an indenture (the "Indenture") among the Company, as
issuer, the Guarantors and The Bank of New York, as trustee (the "Trustee").
The terms of the 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 Notes are subject to all such terms,
and holders of the 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."
For purposes of this summary, the term "Company" refers only to L-3
Communications Corporation and not to any of its Subsidiaries.
BRIEF DESCRIPTION OF THE NOTES AND THE SUBSIDIARY GUARANTEES
The Notes:
o are general unsecured obligations of the Company;
o rank pari passu in right of payment with the May 1998 Notes, the
December 1998 Notes and the 2002 Notes;
o rank pari passu in right of payment with the obligations of the Company
under Holdings' outstanding 2000 Convertible Notes and 2001 CODES;
o are subordinated in right of payment to all current and future Senior
Debt; and
o are senior in right of payment to any future Indebtedness of the Company
that expressly provides that it is not senior to the Notes.
The Subsidiary Guarantees:
o are general unsecured obligations of the Guarantors;
o rank pari passu in right of payment with the guarantees of the May 1998
Notes, the December 1998 Notes and the 2002 Notes;
o rank pari passu in right of payment with the obligations of the
Guarantors under Holdings' outstanding 2000 Convertible Notes and 2001
CODES;
o are subordinated in right of payment to all current and future Senior
Debt of the Guarantors; and
o are senior in right of payment to any future Indebtedness of the
Guarantors that expressly provides that it is not senior to the
Subsidiary Guarantees.
At March 31, 2003, the Company did not have any Senior Debt outstanding
(excluding letters of credit). The Indenture permits the incurrence of
additional Senior Debt in the future. See "-- Certain Covenants -- Incurrence
of Indebtedness and Issuance of Preferred Stock."
THE SUBSIDIARY GUARANTEES
The Indenture provides that the Company's payment obligations under the
Notes are jointly and severally guaranteed (the "Subsidiary Guarantees") by all
of the Company's present and future Restricted Subsidiaries, other than Foreign
Subsidiaries. The obligations of each Guarantor under its Subsidiary Guarantee
will be limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk Factors --
The guarantees may
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be unenforceable due to fraudulent conveyance statutes, and accordingly, you
could have no claim against 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.
Upon the release of a Guarantee by a Restricted Subsidiary under all then
outstanding Credit Facilities, at any time after the suspension of certain
covenants as provided below under the caption "-- Certain Covenants -- Changes
in Covenants when Notes Rated Investment Grade," the Subsidiary Guarantee of
such Restricted Subsidiary under the Indenture will be released and discharged
at such time. In the event that any such Restricted Subsidiary thereafter
Guarantees any Indebtedness of the Company under any Credit Facility (or if any
released Guarantee under any Credit Facility is reinstated or renewed), or if
at any time certain covenants are reinstituted as provided below under the
caption "-- Certain Covenants -- Changes in Covenants when Notes Rated
Investment Grade," then such Restricted Subsidiary will Guarantee the Notes on
the terms and conditions set forth in the Indenture.
As of the date of this prospectus, not all of the Company's subsidiaries
are "Restricted Subsidiaries." Aviation Communications & Surveillance Systems,
LLC, Honeywell TCAS Inc., L-3 Satellite Networks, LLC, Digital Technics, L.P.,
ITel Solutions, LLC, L-3 Communications Secure Information Technology, Inc.,
Logimetrics, Inc., LogiMetrics FSC, Inc. and mmTech, INC. are currently
Unrestricted Subsidiaries. In addition, under the circumstances described below
under the subheading "-- Certain Covenants -- Restricted Payments", the Company
is permitted to designate certain of the Company's subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries are not subject to many
of the restrictive covenants in the Indenture. Unrestricted Subsidiaries do not
guarantee these Notes.
PRINCIPAL, MATURITY AND INTEREST
The exchange notes will be limited in aggregate principal amount to $400.0
million. The Company may issue additional Notes from time to time after the
offering of exchange notes. Any offering of additional Notes is subject to the
covenant described below under the caption "-- Certain Covenants -- Incurrence
of Indebtedness and Issuance of Preferred Stock." The Notes and any additional
Notes subsequently issued under the Indenture will be treated as a single class
for all purposes under the Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase.
The Notes will mature on July 15, 2013. Interest on the Notes will accrue
at the rate of 6 1/8% per annum and will be payable semi-annually in arrears on
July 15 and January 15, commencing on July 15, 2003, to Holders of record on
the immediately preceding July 1 and January 1.
Interest on the 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.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
Principal, premium and Additional Amounts, if any, and interest on the
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 and Additional Amounts, if any, may be made by
check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes; provided that all payments of
principal, premium, interest and Additional Amounts with respect to 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 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.
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OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to July 15,
2008. Thereafter, the 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 and
Additional Amounts, if any, to the applicable redemption date, if redeemed
during the twelve-month period beginning on July 15 of the years indicated
below:
YEAR PERCENTAGE
- ----------------------- -------------
2008 103.063%
2009 102.042%
2010 101.021%
2011 and thereafter 100.000%
Notwithstanding the foregoing, before July 15, 2006, the Company may on
any one or more occasions redeem up to an aggregate of 35% of the Notes
originally issued at a redemption price of 106.125% of the principal amount
thereof, plus accrued and unpaid interest and Additional Amounts, if any, 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 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 and Additional Amounts, if any, and
interest on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full in cash of all Senior Debt, whether
outstanding on the Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
(3) in an assignment for the benefit of creditors; or
(4) in 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 Notes will be entitled to receive any payment with respect to
the Notes, and until all Obligations with respect to Senior Debt are paid in
full in cash, any distribution to which the Holders of Notes would be entitled
shall be made to the holders of Senior Debt (except, in each case, that Holders
of 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 Notes
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if:
(1) a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing; or
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(2) 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 Notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) 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:
(1) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice; and
(2) all scheduled payments of principal, premium and Additional Amounts,
if any, and interest on the 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 cured or 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 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 Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. At March 31, 2003, the
Company did not have any Senior Debt outstanding.
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 Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of 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 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 and Additional Amounts, if any, 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
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 Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
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(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all Notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such 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 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 provides 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 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 Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facilities prohibits the Company, in certain
circumstances, from purchasing any Notes, and also provides that certain change
of control events with respect to the Company constitutes 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 Notes, the Company could seek the consent of its
lenders to the purchase of 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
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture and under the documentation
governing certain of our other Indebtedness 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 Notes. See "Risk Factors -- Our ability to repurchase notes with
cash upon a change of control may be limited."
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 Debt 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 and under the documentation
governing certain of our other Indebtedness, which would, in turn, constitute a
default under our Senior Credit Facilities. Furthermore, the Change of Control
provisions of the Indenture and under the documentation governing certain of
our other Indebtedness 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
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compliance with the requirements set forth in the Indenture applicable to a
Change of Control Offer made by the Company and purchases all Notes validly
tendered and not withdrawn under such Change of Control Offer.
The definition of Change of Control contains, with respect to the
disposition of assets, the phrase "all or substantially all," which 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 and its Restricted Subsidiaries, and therefore it may be unclear as to
whether a Change of Control has occurred and whether the holders have the right
to require the Company to purchase the Notes. In the event that the Company
were to determine that a Change of Control did not occur because not "all or
substantially all" of the assets of the Company and its Restricted Subsidiaries
had been sold and the holders of the Notes disagreed with such determination,
the holders and/or the Trustee would need to seek a judicial determination of
the issue.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) 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 an Officers' Certificate
delivered to the Trustee which will include a resolution of the Board
of Directors with respect to such fair market value in the event such
Asset Sale involves aggregate consideration in excess of $10.0
million) of the assets or Equity Interests issued or sold or otherwise
disposed of; and
(2) 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:
(1) to repay Indebtedness under a Credit Facility;
(2) to the acquisition of Permitted Securities;
(3) to the acquisition of all or substantially all of the assets of one
or more Similar Businesses;
(4) to the making of a capital expenditure; or
(5) to 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
126
all Holders of the Notes (an "Asset Sale Offer") and any other Indebtedness
that ranks pari passu with the Notes (including, without limitation, the
December 1998 Notes, the May 1998 Notes and the 2002 Notes) that, by its terms,
requires the Company to offer to repurchase such Indebtedness with such Excess
Proceeds to purchase the maximum principal amount of Notes and pari passu
Indebtedness that may be purchased out of such Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest 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 Notes or pari passu Indebtedness tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Company may use any
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Notes or pari passu Indebtedness surrendered by Holders thereof
exceeds the amount of Excess Proceeds in an Asset Sale Offer, the Company shall
repurchase such Indebtedness on a pro rata basis and the Trustee shall select
the 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 Notes. Any future
credit agreements relating to Senior Debt may contain similar restrictions. See
"Description of Other Indebtedness -- Senior Credit Facilities of L-3
Communications."
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee as follows:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed; or
(2) if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate.
No 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 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. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
CERTAIN COVENANTS
CHANGES IN COVENANTS WHEN NOTES RATED INVESTMENT GRADE
If on any date following the date of the Indenture:
(1) the Notes are rated Baa3 or better by Moody's and BBB\- or better by
S&P (or, if either such entity ceases to rate the notes for reasons
outside of the control of the Company, the equivalent investment grade
credit rating from any other "nationally recognized statistical rating
organization" within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the
Exchange Act selected by Company as a replacement agency); and
(2) no Default or Event of Default shall have occurred and be continuing,
then, beginning on that day and subject to the provisions of the following
paragraph, the provisions and covenants specifically listed under the following
captions in this prospectus will be suspended:
(a) "-- Repurchase at the Option of Holders-Asset Sales;"
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(b) "-- Restricted Payments;"
(c) "-- Incurrence of Indebtedness and Issuance of Preferred
Stock;"
(d) "-- Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries;"
(e) "-- Transactions with Affiliates;"
(f) clauses (4)(a) and (b) of the covenant listed under "--
Merger, Consolidation or Sale of Assets;"
(g) "-- Payments for Consent;" and
(h) clauses (3)(a) and (b) of the covenant listed under "--
Future Subsidiary Guarantees."
In addition, following the achievement of such investment grade ratings,
(1) the Subsidiary Guarantees of the Company's Restricted Subsidiaries will be
released at the time of the release of Guarantees under all outstanding Credit
Facilities as described above under the caption "-- The Subsidiary Guarantees"
and, (2) as described below under the caption "-- Future Subsidiary
Guarantees," no Restricted Subsidiary thereafter acquired or created will be
required to execute a Subsidiary Guarantee unless such Subsidiary Guarantees
Indebtedness of the Company under a Credit Facility.
Notwithstanding the foregoing, if the rating assigned by any such rating
agency should subsequently decline to below Baa3 or BBB-, respectively, the
foregoing covenants shall be reinstituted as of and from the date of such
rating decline. For purposes of determining whether a Restricted Payment
exceeds the allowable amount under the calculation described in paragraphs 3(a)
through (d) of "--Restricted Payments" below, the covenant described under the
caption "--Restricted Payments" will be interpreted as if it had been in effect
since the date of the Indenture. However, no default will be deemed to have
occurred as a result of the provisions and covenants listed in 2(a) through (h)
above while those provisions and covenants were suspended. There can be no
assurance that the Notes will ever achieve an investment grade rating or that
any such rating will be maintained.
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly:
(1) 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);
(2) 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;
(3) 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 Notes except a payment of interest or principal at
Stated Maturity; or
(4) make any Restricted Investment (all such payments and other actions
set forth in clauses (1)through (4) above being collectively referred
to as "Restricted Payments"),
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unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(2) 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 the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries since April 30, 1997 (excluding Restricted Payments
permitted by clauses (2) through (8) of the next succeeding paragraph
or of the kind contemplated by such clauses that were made prior to
the date of the Indenture), is less than the sum of:
(a) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from July 1, 1997 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
(b) 100% of the aggregate net cash proceeds received by the
Company since April 30, 1997 as a contribution to its common
equity capital or from the issue or sale of Equity Interests
of the Company (other than Disqualified Stock) or from the
issue or sale 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
(c) to the extent that any Restricted Investment that was made
after April 30, 1997 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
(d) 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.
As of March 31, 2003, the amount that would have been available to the Company
for Restricted Payments pursuant to this paragraph (3) would have been $1,358.0
million.
The foregoing provisions will not prohibit:
(1) 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;
(2) 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 (3) (b) of the preceding paragraph;
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(3) 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;
(4) 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 (4)
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;
(5) 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;
(6) 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;
(7) dividends paid to Holdings in amounts equal to amounts required for
Holdings to pay interest and/or principal on Indebtedness that has
been guaranteed by, or is otherwise considered Indebtedness of, the
Company; and
(8) other Restricted Payments in an aggregate amount since May 22, 1998
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
Restricted 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 provides that the Company will not, and will not permit any
of its Restricted 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
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Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Restricted 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 foregoing limitation will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company of additional Indebtedness under Credit
Facilities (and the guarantee thereof by the Guarantors) in an
aggregate principal amount outstanding pursuant to this clause (1) at
any one time (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), including all Permitted
Refinancing Indebtedness then outstanding incurred to refund,
refinance or replace any other Indebtedness incurred pursuant to this
clause (1), not to exceed $750.0 million less the aggregate amount of
all Net Proceeds of Asset Sales applied to repay any such Indebtedness
pursuant to the covenant described above under the caption "-- Asset
Sales";
(2) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by the Company and the Guarantors of $400.0 million in
aggregate principal amount of each of the outstanding notes and the
Exchange Notes and the Subsidiary Guarantees thereof;
(4) 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 then outstanding incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (4), not to
exceed $100.0 million at any time outstanding;
(5) 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 (5) does not exceed
$50.0 million;
(6) 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 (other
than intercompany Indebtedness or Indebtedness incurred pursuant to
clause (1) above);
(7) 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;
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(8) 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;
(9) 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 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;
(10) 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;
(11) 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;
(12) 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 (12), and the issuance of preferred stock by Unrestricted
Subsidiaries;
(13) 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
(14) 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 then outstanding incurred to
refund, refinance or replace any other Indebtedness incurred pursuant
to this clause (14), not to exceed $100.0 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
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clauses (1) through (14) above or is entitled to be incurred pursuant to the
first paragraph of this covenant, the Company shall, in its sole discretion,
classify, or later reclassify, 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 provides 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 (other than Permitted Liens) 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,
unless all payments due under the Indenture and the Notes are secured on an
equal and ratable basis with the Obligations so secured until such time as such
Obligations are no longer secured by a Lien.
ANTILAYERING PROVISION
The Indenture provides that (A) 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 Notes, and (B) 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 RESTRICTED SUBSIDIARIES
The Indenture provides 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:
(1) (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;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) the provisions of security agreements that restrict the transfer of
assets that are subject to a Lien created by such security agreements;
(2) the provisions of agreements governing Indebtedness incurred pursuant
to clause (5) of the second paragraph of the covenant described above
under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock";
(3) the Senior Credit Facilities, the Indenture, the Notes, the Exchange
Notes, the December 1998 Indenture, the December 1998 Notes, the May
1998 Indenture, the May 1998 Notes, the 2002 Indenture and the 2002
Notes;
(4) applicable law;
(5) 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;
133
(6) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past
practices;
(7) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (3) of the preceding paragraph;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are not materially more restrictive, taken as a whole,
than those contained in the agreements governing the Indebtedness
being refinanced;
(9) 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;
(10) 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;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business; or
(12) 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 provides 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
Person unless:
(1) the Company is the surviving corporation 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;
(2) the Person formed by or surviving any such consolidation or merger
(if other than the Company) or the 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
Registration Rights Agreement, the Notes and the Indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the
Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) 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 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.
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Notwithstanding the foregoing clause (4):
(1) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company; and
(2) 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 provides 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:
(1) 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
(2) 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 $5.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (1) 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 $15.0 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:
(1) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(2) any transaction with a Lehman Investor;
(3) any transaction between or among the Company and/or its Restricted
Subsidiaries;
(4) transactions between the Company or any of its Restricted
Subsidiaries, on the one hand, and a Permitted Joint Venture, 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 (4) involving aggregate
consideration in excess of $5.0 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 (4) 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;
(5) 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
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(6) any Restricted Payment that is permitted by the provisions of the
Indenture described above under the caption "-- Restricted Payments."
PAYMENTS FOR CONSENT
The Indenture provides 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 Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the 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
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on
an annual and quarterly basis on forms provided for such annual and quarterly
reporting pursuant to rules and regulations promulgated by the SEC, the
Indenture requires the Company to file with the Commission (and provide the
Trustee and Holders with copies thereof, without cost to each Holder, within 15
days after it files them with the Commission):
(1) within 90 days after the end of each fiscal year, annual reports on
Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such
successor or comparable form);
(2) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 10-Q (or any successor
or comparable form);
(3) promptly from time to time after the occurrence of an event required
to be therein reported, such other reports on Form 8-K (or any
successor or comparable form); and
(4) any other information, documents and other reports which the Company
would be required to file with the Commission if it were subject to
Section 13 or 15(d) of the Exchange Act;
provided, however, the Company shall not be so obligated to file such reports
with the Commission if the Commission does not permit such filing, in which
event the Company will make available such information to prospective
purchasers of Notes, in addition to providing such information to the Trustee
and the Holders, in each case within 15 days after the time the Company would
be required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
FUTURE SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and
severally guaranteed by all of the Company's existing and future Restricted
Subsidiaries, other than Foreign Subsidiaries. The Indenture provides 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 ranks pari passu with the guarantees of
the 2001 CODES, the 2000 Convertible Notes, the December 1998 Notes, the May
1998 Notes and the 2002 Notes and is 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 are limited so as not to constitute a
fraudulent conveyance under applicable law.
The Indenture also provides that, notwithstanding the foregoing, for so
long as certain covenants are suspended as provided above under the caption "--
Certain Covenants -- Changes in Covenants when Notes Rated Investment Grade,"
no newly acquired or created Subsidiary will be required to execute a
Subsidiary Guarantee unless such Subsidiary Guarantees Indebtedness of the
Company under a Credit Facility. However, any Subsidiary (other than a Foreign
Subsidiary or an Unrestricted
136
Subsidiary) that Guarantees any Indebtedness of the Company under a Credit
Facility will become a Subsidiary Guarantor and, if at any time certain
covenants are reinstituted as provided above under the caption "-- Certain
Covenants -- Changes in Covenants when Notes Rated Investment Grade," any newly
acquired or created Subsidiary (other than a Foreign Subsidiary or an
Unrestricted Subsidiary) will Guarantee the Notes on the terms and conditions
set forth in the Indenture.
The Indenture provides 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:
(1) 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
Notes and the Indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists; and
(3) 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 clause (3):
(1) any Guarantor may consolidate with, merge into or transfer all or
part of its properties and assets to the Company or to another
Guarantor; and
(2) 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 provides 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 "-- Repurchase
at the Option of Holders -- Asset Sales."
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(1) default for 30 days in the payment when due of interest or Additional
Amounts, if any, on the Notes (whether or not prohibited by the
subordination provisions of the Indenture);
(2) default in payment when due of the principal of or premium, if any,
on the Notes (whether or not prohibited by the subordination provisions
of the Indenture);
137
(3) failure by the Company to comply with the provisions described under
the captions "-- Repurchase at the Option of Holders -- Change of
Control", "-- Repurchase at the Option of Holders -- Asset Sales" or
"-- Merger, Consolidation or Sale of Assets";
(4) failure by the Company for 60 days after notice to comply with any of
its other agreements in the Indenture or the Notes;
(5) 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 $25.0 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $25.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
(7) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries or any group of
Subsidiaries that, taken as a whole, would constitute a Significant
Subsidiary; and
(8) 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 Notes may
declare all the 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:
(1) the day which is five Business Days after receipt by the
Representatives of Designated Senior Debt of such notice of
acceleration; or
(2) 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
Significant Subsidiary or any group of Subsidiaries that, taken as a whole,
would constitute a Significant Subsidiary, all outstanding Notes will become
due and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the 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 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 Notes. If an Event of Default occurs prior to July
15, 2008 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 Notes prior to July 15, 2008, 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 Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of
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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 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
or any Subsidiary of the Company, as such, shall have any liability for any
obligations of the Company or any Subsidiary of the Company under the Notes,
the Subsidiary Guarantees or the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the 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 Notes ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium and Additional Amounts, if any,
and interest on such Notes when such payments are due from the trust
referred to below;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith; and
(4) 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 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 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the 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 and Additional Amounts, if any, and interest on
the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular
redemption date;
(2) 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
139
(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 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;
(3) 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 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;
(4) 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;
(5) 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 Restricted Subsidiaries is a party or by which
the Company or any of its Restricted Subsidiaries is bound;
(6) 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;
(7) 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 Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and
(8) 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 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 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 Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
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Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Note or
alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under
the caption "-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
Note;
(4) waive a Default or Event of Default in the payment of principal of or
premium and Additional Amounts, if any, or interest on the Notes
(except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a
waiver of the payment default that resulted from such acceleration);
(5) make any Note payable in money other than that stated in the Notes;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium and Additional Amounts, if any, or
interest on the Notes;
(7) 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
(8) 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 Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) to provide for the assumption of the Company's obligations to Holders
of Notes in the case of a merger or consolidation;
(4) to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder; or
(5) 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 is 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
Notes 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
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the degree of care of a prudent person in the conduct of such person's 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
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to L-3 Communications
Corporation, 600 Third Avenue, New York, New York 10016, Attention: Senior Vice
President -- Finance.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes will be represented by one or more global notes in
registered, global form without interest coupons (collectively, the "Global
Exchange Note"). The Global Exchange Note initially will be deposited upon
issuance with the Trustee as custodian for The Depository Trust Company
("DTC"), in New York, New York, and registered in the name of DTC or its
nominee, in each case for credit to an account of a direct or indirect
participant as described below.
Except as set forth below, the Global Exchange Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. Beneficial interests in the Global Exchange Notes may not
be exchanged for Exchange Notes in certificated form except in the limited
circumstances described below. See "-- Exchange of Book-Entry Notes for
Certificated Notes." In addition, transfer of beneficial interests in the
Global Notes will be subject to the applicable rules and procedures of DTC and
its direct or indirect participants (including, if applicable, those of
Euroclear and Clearstream), which may change from time to time.
The Notes may be presented for registration of transfer and exchange at
the offices of the registrar.
DEPOSITORY PROCEDURES
DTC has advised the Company that DTC 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
DTC'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 DTC 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 DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that pursuant to procedures established
by it:
(1) upon deposit of the Global Exchange Note, DTC will credit the
accounts of Participants with portions of the principal amount of
Global Exchange Note; and
(2) ownership of such interests in the Global Exchange Note will be shown
on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to Participants) or
by Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Exchange Note).
Investors in the Global Exchange Note may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and
142
Clearstream) that are Participants in such system. All interests in a Global
Exchange Note, including those held through Euroclear or Clearstream, may be
subject to the procedures and requirements of DTC. Those interests held by
Euroclear or Clearstream 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 Exchange Note to such
persons may be limited to that extent. Because DTC 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
Exchange Note to pledge such interest to persons or entities that do not
participate in DTC 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 Notes
see, "-- Exchange of Book-Entry Notes for Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL EXCHANGE
NOTES WILL NOT HAVE 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 Additional Amounts,
if any, and interest on a Global Exchange Note registered in the name of DTC or
its nominee will be payable by the Trustee to DTC 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:
(1) any aspect of DTC'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 DTC's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Exchange Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC 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 DTC.
Payments by Participants and the Indirect Participants to the beneficial owners
of Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants and
will not be the responsibility of DTC, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by DTC 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 DTC or its nominee as the registered owner of the Exchange
Notes for all purposes.
Except for trades involving only Euroclear and Clearstream participants,
interests in the Global Exchange Notes will trade in DTC'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 DTC and its participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and Clearstream 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
DTC, on the one hand, and Euroclear or
143
Clearstream participants, on the other hand, will be effected through DTC in
accordance with DTC's rules on behalf of Euroclear or Clearstream, as the case
may be, by its respective depository; however, such cross-market transactions
will require delivery of instructions to Euroclear or Clearstream, 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 Clearstream, 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 Exchange Note in DTC, and making or
receiving payment in accordance with normal procedures for same-day fund
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the Depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities accounts of a Euroclear
or Clearstream participant purchasing an interest in a Global Exchange Note
from a Participant in DTC will be credited, and any such crediting will be
reported to the relevant Euroclear or Clearstream participant, during the
securities settlement processing day (which must be a business day for
Euroclear or Clearstream) immediately following the settlement date of DTC.
Cash received in Euroclear or Clearstream as a result of sales of interests in
a Global Exchange Note by or through a Euroclear or Clearstream participant to
a Participant in DTC will be received with value on the settlement date of DTC
but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
DTC 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 DTC interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Participant or Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
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 DTC, Euroclear and Clearstream
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 DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Exchange Note
among participants in DTC, Euroclear and Clearstream, 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
DTC, Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Exchange Note is exchangeable for definitive Exchange Notes in
registered certificated form if:
(1) DTC (A) notifies the Company that it is unwilling or unable to
continue as depository for the Global Exchange 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
(2) 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 Exchange 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 DTC in
accordance with customary procedures. In all cases, certificated Exchange Notes
delivered in exchange for any Global Exchange Note or beneficial interest
therein will be registered in names, and issued in any approved denominations,
requested by or on behalf of DTC (in accordance with its customary procedures).
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CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange 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 DTC 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 Exchange Note Holder of its Global Note, Notes in such
form will be issued to each person that the Global Exchange Note Holder and DTC
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 Exchange Note Holder or DTC 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 Exchange Note
Holder or DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Exchange Note (including principal, premium, if any,
interest and Additional Amounts, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Global Exchange
Note Holder. With respect to certificated Exchange Notes, the Company will make
all payments of principal, premium, if any, interest and Additional Amounts, if
any, 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; ADDITIONAL AMOUNTS
The Company, the Guarantors and the initial purchasers entered into the
Registration Rights Agreement on May 21, 2003. Pursuant to the Registration
Rights Agreement, the Company and the Guarantors 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:
(1) the Company and the Guarantors are 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
(2) 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) 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) it is a broker-dealer and owns Notes acquired directly from the
Company or an affiliate of the Company,
the Company and the Guarantors will file with the Commission a Shelf
Registration Statement to cover resales of the Notes by the Holders thereof who
satisfy certain conditions relating to the
145
provision of information in connection with the Shelf Registration Statement.
The Company and the Guarantors will use their reasonable 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
outstanding note until:
(1) the date on which such outstanding note has been exchanged by a
person other than a broker-dealer for an Exchange Note in the Exchange
Offer;
(2) following the exchange by a broker-dealer in the Exchange Offer of an
outstanding 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;
(3) the date on which such outstanding note has been effectively
registered under the Securities Act and disposed of in accordance with
the Shelf Registration Statement; or
(4) the date on which such outstanding note is distributed to the public
pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that:
(1) the Company and the Guarantors will file an Exchange Offer
Registration Statement with the Commission on or prior to 90 days
after the Issue Date;
(2) the Company and the Guarantors will use all commercially reasonable
efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to 180 days after the Issue
Date;
(3) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company and the Guarantors will commence the
Exchange Offer and use all commercially reasonable 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,
Exchange Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer; and
(4) if obligated to file the Shelf Registration Statement, the Company
and the Guarantors will use their best efforts to file the Shelf
Registration Statement with the Commission on or prior to 30 days
after such filing obligation arises and to use all commercially
reasonable efforts 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 and the Guarantors fail 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 and the Guarantors fail 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, subject to certain exceptions, 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 and the Guarantors will pay Additional Amounts to each Holder
of outstanding 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 outstanding notes held by such
Holder.
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The amount of the Additional Amounts will increase by an additional $.05
per week per $1,000 principal amount of outstanding notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Additional Amounts of $.50 per week per $1,000 principal
amount of outstanding notes.
All accrued Additional Amounts will be paid by the Company and the
Guarantors 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 outstanding 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 Additional
Amounts will cease.
Holders of outstanding notes will be required to make certain
representations to the Company and the Guarantors (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 outstanding notes included in the Shelf
Registration Statement and benefit from the provisions regarding Additional
Amounts 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.
"2000 Convertible Notes" means the $300,000,000 in aggregate principal
amount of Holdings' 5.25% Convertible Senior Subordinated Notes due 2009,
issued pursuant to the 2000 Convertible Note Indenture in November and December
of 2000 and guaranteed by the Company and the other guarantors thereof.
"2000 Convertible Note Indenture" means the indenture, dated as of
November 21, 2000, among The Bank of New York, as trustee, Holdings, the
Company, as a guarantor, and the other guarantors named therein, with respect
to the 2000 Convertible Notes.
"2001 CODES" means the $420,000,000 in aggregate principal amount of
Holdings' 4.00% Senior Subordinated Convertible Contingent Debt Securities
(CODES) due 2011, issued pursuant to the 2001 CODES Indenture in October and
November 2001 and guaranteed by the Company and the other guarantors thereof.
"2001 CODES Indenture" means the indenture, dated as of October 24, 2001,
among The Bank of New York, as trustee, Holdings, the Company, as a guarantor,
and the other guarantors named therein, with respect to the 2001 CODES.
"2002 Indenture" means the indenture, dated as of June 28, 2002, among The
Bank of New York, as trustee, the Comany and the guarantors thereto, with
respect to the 2002 Notes.
"2002 Notes" means the $750,000,000 in aggregate principal amount of the
Company's 7 5/8% Senior Subordinated Notes due 2012, issued pursuant to the 2002
Indenture on June 28, 2002.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted 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 Restricted Subsidiary of such
specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Additional Amounts" means all additional amounts then owing pursuant to
Section 5 of the Registration Rights Agreement.
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"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:
(1) 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
(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
(2) 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 (1) or (2), whether in a single transaction or a
series of related transactions (A) that have a fair market value in excess of
$5.0 million or (B) for net proceeds in excess of $5.0 million.
Notwithstanding the foregoing:
(1) a transfer of assets by the Company to a Restricted Subsidiary or by
a Restricted Subsidiary to the Company or to another Restricted
Subsidiary;
(2) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;
(3) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments";
and
(4) 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:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) 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.
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"Cash Equivalents" means:
(1) United States dollars;
(2) 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;
(3) 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;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's or
S&P and in each case maturing within six months after the date of
acquisition;
(6) investment funds investing 95% of their assets in securities of the
types described in clauses (1)-(5) above; and
(7) 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.
"Change of Control" means the occurrence of any of the following:
(1) 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);
(2) the adoption of a plan relating to the liquidation or dissolution of
the Company;
(3) 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
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) 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
(2) 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
(3) 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
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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
(4) 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
(5) non-cash items (excluding any items that were accrued in the ordinary
course of business) 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:
(1) 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;
(2) 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;
(3) 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;
(4) the cumulative effect of a change in accounting principles shall be
excluded;
(5) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Restricted
Subsidiaries; and
(6) 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 Tangible Assets" means, with respect to the Company, the
total consolidated assets of the Company and its Restricted Subsidiaries, less
the total intangible assets of the Company and its Restricted Subsidiaries, as
shown on the most recent internal consolidated balance sheet of the Company and
such Restricted Subsidiaries calculated on a consolidated basis in accordance
with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the Indenture;
or
(2) 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.
150
"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.
"December 1998 Indenture" means the indenture, dated as of December 11,
1998, between The Bank of New York, as trustee, the Company and the guarantors
party thereto, with respect to the December 1998 Notes.
"December 1998 Notes" means the $200,000,000 in aggregate principal amount
of the Company's 8% Senior Subordinated Notes due 2008, issued pursuant to the
December 1998 Indenture on December 11, 1998.
"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:
(1) any Indebtedness outstanding under the Senior Credit Facilities; and
(2) 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 Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of
a Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such
repurchase or redemption complies with the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments"; and provided further,
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.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means any Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Senior Credit
Facilities and the Notes) in existence on the date of the Indenture, until such
amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
151
(1) 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);
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(3) 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
(4) 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:
(1) 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 (3) of the proviso set forth in the
definition of Consolidated Net Income;
(2) 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
(3) 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 or has not
guaranteed or otherwise provided credit support for any Indebtedness of the
Company.
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"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 were in effect on April 30, 1997.
"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:
(1) currency exchange or interest rate swap agreements, interest rate cap
agreements and currency exchange or interest rate collar agreements;
and
(2) 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., a Delaware
corporation.
"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:
(1) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest; and
(2) 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 Restricted Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted 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 May 21, 2003.
"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
153
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:
(1) traded on The New York Stock Exchange, the American Stock Exchange or
the Nasdaq National Market; and
(2) 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.
"May 1998 Indenture" means the indenture, dated as of May 22, 1998,
between the Bank of New York, as trustee, and the Company, with respect to the
May 1998 Notes.
"May 1998 Notes" means the $180,000,000 in aggregate principal amount of
the Company's 8 1/2% Senior Subordinated notes due 2008, issued pursuant to the
May 1998 Indenture on May 22, 1998.
"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:
(1) 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
(2) any extraordinary gain or loss, together with any related provision
for taxes on such extraordinary gain or loss; and
(3) 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:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries:
154
(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;
(2) 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
(3) 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), Additional Amounts
(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, guarantees and
other liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereto.
"Permitted Investment" means:
(1) any Investment in the Company or in a Restricted Subsidiary of the
Company that is a Guarantor;
(2) any Investment in cash or Cash Equivalents;
(3) 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;
(4) 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;
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) advances to employees not to exceed $2.5 million at any one time
outstanding;
(7) any Investment acquired in connection with or as a result of a
workout or bankruptcy of a customer or supplier;
(8) Hedging Obligations permitted to be incurred under the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(9) any Investment in a Similar Business that is not a Restricted
Subsidiary; provided that the aggregate fair market value of all
Investments outstanding pursuant to this clause (9) (valued on the
date each such Investment was made and without giving effect to
subsequent changes in value) may not at any one time exceed 10% of the
Consolidated Tangible Assets of the Company; and
(10) 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 (10) that are at the
time outstanding, not to exceed $30.0 million.
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"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of Directors (until designation by the Board of
Directors to the contrary); provided that:
(1) at least 25% of the Capital Stock thereof with voting power under
ordinary circumstances to elect directors (or Persons having similar
or corresponding powers and responsibilities) is at the time owned
(beneficially or directly) by the Company and/or by one or more
Restricted Subsidiaries of the Company; and
(2) such joint venture, partnership or other Person is engaged in a
Similar Business. Any such designation or designation to the contrary
shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with
the foregoing provisions.
"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 Notes and the Subsidiary Guarantees are
subordinated to Senior Debt under the Indenture.
"Permitted Liens" means:
(1) Liens securing Senior Debt of the Company or any Guarantor that was
permitted by the terms of the Indenture to be incurred;
(2) Liens in favor of the Company or any Guarantor;
(3) 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;
(4) 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;
(5) 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;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant
entitled "-- Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
(7) Liens existing on the Issue Date;
(8) 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;
(9) 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 $50.0 million at any one time outstanding;
(10) Liens on assets of Guarantors to secure Senior Debt of such
Guarantors that was permitted by the Indenture to be incurred;
(11) 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;
156
(12) 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);
(13) 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;
(14) 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
(15) 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:
(1) 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);
(2) 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;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness is subordinated in right of
payment to the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded; and
(4) 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, unless the Asset Sale relates to a Foreign Subsidiary, a
Guarantor.
"Principals" means any Lehman Investor, Frank C. Lanza and Robert V.
LaPenta.
"Related Party" with respect to any Principal means:
(1) any controlling stockholder, 50% (or more) owned Subsidiary, or
spouse or immediate family member (in the case of an individual) of
such Principal; or
(2) 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 (1).
157
"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 Second Amended and Restated 364 Day
Credit Agreement, dated as of May 16, 2001, as in effect on the date of the
Indenture among the Company, the lenders party thereto, Banc of America, N.A.,
as administrative agent, and Lehman Commercial Paper Inc., as syndication agent
and documentation agent, and the Third Amended and Restated Credit Agreement,
dated as of May 16, 2001, as in effect on the date of the Indenture among the
Company, the lenders party thereto, Banc of America, N.A., as administrative
agent, and Lehman Commercial Paper Inc., as syndication agent and documentation
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:
(1) all Indebtedness of the Company or any of its Restricted Subsidiaries
outstanding under Credit Facilities and all Hedging Obligations with
respect thereto;
(2) 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 Notes; and
(3) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt
will not include:
(1) any liability for federal, state, local or other taxes owed or owing
by the Company;
(2) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates;
(3) any trade payables; or
(4) any Indebtedness that is incurred in violation of the Indenture. The
May 1998 Notes, the December 1998 Notes, the 2000 Convertible Notes,
the 2001 CODES and the 2002 Notes will be pari passu with the Notes
and will not constitute Senior Debt.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" within the meaning of Rule 405 under the Securities Act.
"Similar Business" means a business, a majority of whose revenues in the
most recently ended calendar year were derived from:
(1) the sale of defense products, electronics, communications systems,
aerospace products, avionics products and/or communications products;
(2) any services related thereto;
(3) any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary
thereto; and
(4) 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
158
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:
(1) 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
(2) 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 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:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) 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;
(3) 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;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries; and
(5) 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.
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 "-- Certain Covenants -- 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:
159
(1) 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
(2) no Default or Event of Default would be in existence following such
designation.
"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.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) 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
(2) 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 INCOME TAX CONSIDERATIONS
EXCHANGE OF NOTES
The exchange of outstanding notes for exchange notes in the exchange offer
will not constitute a taxable event to holders for United States federal income
tax purposes. Consequently, no gain or loss will be recognized by a holder upon
receipt of an exchange note, the holding period of the exchange note will
include the holding period of the outstanding note exchanged therefor and the
basis of the exchange note will be the same as the basis of the outstanding
note immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR
EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
The following is a summary of certain United States federal income tax
consequences as of the date of this prospectus regarding the purchase,
ownership and disposition of the exchange notes. Except where noted, this
summary deals only with exchange notes that are held as capital assets by a
non-United States holder.
A "non-United States holder" means a holder of exchange notes that is not
any of the following for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation or partnership created or organized in or under the laws
of the United States or any political subdivision thereof;
o an estate the income of which is subject to United States federal income
taxation regardless of its source; or
o a trust if it (1) is subject to the primary supervision of a court
within the United States and one or more United States persons have the
authority to control all of its substantial decisions, or (2) has a valid
election in effect under applicable United States Treasury regulations to
be treated as a United States person.
160
This summary is based upon provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
as of the date of this prospectus. Those authorities may be changed, perhaps
retroactively, so as to result in United States federal income tax consequences
different from those summarized below. This summary does not represent a
detailed description of the federal income tax consequences to you in light of
your particular circumstances. In addition, it does not represent a detailed
description of the United States federal income tax consequences applicable to
you if you are subject to special treatment under the United States federal
income tax laws (including if you are a United States expatriate, "controlled
foreign corporation," "passive foreign investment company" or "foreign personal
holding company"). We cannot assure you that a change in law will not alter
significantly the tax considerations that we describe in this summary.
If a partnership holds our exchange notes, the tax treatment of a partner
will generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding our exchange notes,
you should consult your tax advisors.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE UNITED STATES
FEDERAL INCOME TAX AND ESTATE TAX CONSEQUENCES TO YOU IN LIGHT OF YOUR
PARTICULAR SITUATION, AS WELL AS THE CONSEQUENCES TO YOU ARISING UNDER THE LAWS
OF ANY OTHER TAXING JURISDICTION.
UNITED STATES FEDERAL WITHHOLDING TAX
The 30% United States federal withholding tax will not apply to any
payment of principal or interest on the exchange notes under the "portfolio
interest rule," provided that:
o interest paid on the note is not effectively connected with your conduct
of a trade or business in the United States;
o you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Code and applicable United States Treasury regulations;
o you are not a controlled foreign corporation that is related to us
through stock ownership;
o you are not a bank whose receipt of interest on the exchange notes is
described in Section 881(c)(3)(A) of the Code; and
o either (a) you provide your name and address on an IRS Form W-8BEN (or
other applicable form), and certify, under penalties of perjury, that you
are not a United States person or (b) you hold your exchange notes
through certain foreign intermediaries and satisfy the certification
requirements of applicable United States Treasury regulations.
Special certification rules apply to certain non-United States holders
that are entities rather than individuals.
If you cannot satisfy the requirements described above, payments of
premium, if any, and interest made to you will be subject to the 30% United
States federal withholding tax, unless you provide us with a properly executed:
o IRS Form W-8BEN (or other applicable form) claiming an exemption from,
or reduction in, withholding under the benefit of an applicable income
tax treaty; or
o IRS Form W-8ECI (or successor form) stating that interest paid on the
exchange notes is not subject to withholding tax because it is
effectively connected with your conduct of a trade or business in the
United States (as discussed below under "--United States Federal Income
Tax").
The 30% United States federal withholding tax generally will not apply to
any gain that you realize on the sale, exchange, retirement or other disposition
of exchange notes.
161
UNITED STATES FEDERAL INCOME TAX
If you are engaged in a trade or business in the United States and
premium, if any, or interest on the exchange notes is effectively connected
with the conduct of that trade or business, you will be subject to United
States federal income tax on that premium or interest on a net income basis
(although exempt from the 30% withholding tax, provided certain certification
and disclosure requirements discussed above under "--United States Federal
Withholding Tax" are satisfied), in the same manner as if you were a United
States person, as defined under the Code. In addition, if you are a foreign
corporation, you may be subject to a branch profits tax equal to 30% (or lower
applicable income tax treaty rate) of your effectively connected earnings and
profits for the taxable year, subject to adjustments.
Any gain realized on the disposition of the exchange notes generally will
not be subject to United States federal income tax unless:
o the gain is effectively connected with your conduct of a trade or
business in the United States; or
o you are an individual who is present in the United States for 183 days
or more in the taxable year of that disposition, and certain other
conditions are met.
UNITED STATES FEDERAL ESTATE TAX
Your estate will not be subject to United States federal estate tax on
exchange notes beneficially owned by you at the time of your death provided
that any payment to you on the exchange notes would be eligible for exemption
from the 30% withholding tax under the "portfolio interest rule" described
under "--United States Federal Withholding Tax" without regard to the fifth
bullet point.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting will generally apply to payments of interest on the
exchange notes and the amount of tax, if any, withheld with respect to such
payments. Copies of the information returns reporting such interest payments
and any withholding may also be made available to the tax authorities in the
country in which you reside under the provisions of an applicable income tax
treaty.
In general, no backup withholding will be required with respect to
payments if a statement described in the fifth bullet point under "--United
States Federal Withholding Tax" has been received (and the payor does not have
actual knowledge or reason to know that you are a United States person).
In addition, information reporting and, depending on the circumstances,
backup withholding, will apply to the proceeds of the sale of a note within the
United States or conducted through United States-related financial
intermediaries unless the statement described in the fifth bullet point under
"--United States Federal Withholding Tax" has been received (and the payor does
not have actual knowledge or reason to know that you are a United States
person) or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your United States federal income tax liability
provided the required information is furnished to the Internal Revenue Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where the outstanding notes were acquired as a
result of market-making activities or other trading
162
activities. To the extent any such broker-dealer participates in the exchange
offer and so notifies L-3, or causes L-3 to be so notified in writing, L-3 has
agreed that for a period of 180 days after the date of this prospectus, it will
make this prospectus, as amended or supplemented, available to such
broker-dealer for use in connection with any such resale, and will promptly
send additional copies of this prospectus and any amendment or supplement to
this prospectus to any broker-dealer that requests such documents in the letter
of transmittal.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own
accounts pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of these
methods of resale, at market prices prevailing at the time of resale, at prices
related to the prevailing market prices or negotiated prices. Any resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any broker-dealer
or the purchasers of any exchange notes. Any broker-dealer that resells
exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
the exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any resale of exchange notes and any
commissions or concessions received by these persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the outstanding notes,
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of outstanding notes, including any broker-dealers,
against certain liabilities, including liabilities under the Securities Act.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer hereby agrees to notify L-3 prior
to using the prospectus in connection with the sale or transfer of exchange
notes, and acknowledges and agrees that, upon receipt of notice from L-3 of the
happening of any event which makes any statement in this prospectus untrue in
any material respect or which requires the making of any changes in this
prospectus in order to make the statements therein not misleading or which may
impose upon L-3 disclosure obligations that may have a material adverse effect
on L-3 (which notice L-3 agrees to deliver promptly to such broker-dealer) such
broker-dealer will suspend use of this prospectus until L-3 has notified such
broker-dealer that delivery of this prospectus may resume and has furnished
copies of any amendment or supplement to this prospectus to such broker-dealer.
LEGAL MATTERS
The validity of the exchange notes offered by this prospectus will be
passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 2002 and 2001,
and for the three years ended December 31, 2002 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent auditors, given on the authority of said firm as experts in
auditing and accounting.
163
INDEX TO FINANCIAL STATEMENTS
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 3003 AND
DECEMBER 31, 2002 AND FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
MARCH 31, 2002 ......................................................................... F-2
Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31,
2002 .............................................................................. F-3
Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 2003 and March 31, 2002 ................................................. F-4
Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2003 and March 31, 2002 ................................................. F-5
Notes to Unaudited Condensed Consolidated Financial Statements ...................... F-6
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001 AND FOR THE YEARS
ENDED DECEMBER 31, 2002, 2001 AND 2000 ............................................... F-25
Report of Independent Auditors ...................................................... F-26
Consolidated Balance Sheets as of December 31, 2002 and 2001 ........................ F-27
Consolidated Statements of Operations for the Years ended December 31, 2002,
2001 and 2000 ..................................................................... F-28
Consolidated Statements of Shareholders' Equity for the Years ended December 31,
2002, 2001 and 2000 ............................................................... F-29
Consolidated Statements of Cash Flows for the Years ended December 31, 2002,
2001 and 2000 ..................................................................... F-30
Notes to Consolidated Financial Statements .......................................... F-31
F-1
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2003 AND
DECEMBER 31, 2002 AND FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
F-2
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 34,392 $ 134,856
Contracts in process ................................................ 1,340,865 1,317,993
Deferred income taxes ............................................... 138,162 143,634
Other current assets ................................................ 40,202 42,891
---------- ----------
Total current assets .............................................. 1,553,621 1,639,374
---------- ----------
Property, plant and equipment, net ................................... 467,699 458,639
Goodwill ............................................................. 2,960,318 2,794,548
Intangible assets .................................................... 88,679 90,147
Deferred income taxes ................................................ 137,316 147,190
Deferred debt issue costs ............................................ 47,461 48,839
Other assets ......................................................... 65,689 63,571
---------- ----------
Total assets ...................................................... $5,320,783 $5,242,308
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ............................................. $ 157,020 $ 167,240
Accrued employment costs ............................................ 203,953 187,754
Accrued expenses .................................................... 57,964 56,763
Customer advances ................................................... 54,299 71,751
Accrued interest .................................................... 34,168 20,509
Income taxes ........................................................ 36,584 33,729
Other current liabilities ........................................... 155,770 158,893
---------- ----------
Total current liabilities ......................................... 699,758 696,639
---------- ----------
Pension and postretirement benefits .................................. 355,585 343,527
Other liabilities .................................................... 78,136 78,947
Long-term debt ....................................................... 1,843,742 1,847,752
---------- ----------
Total liabilities ................................................. 2,977,221 2,966,865
---------- ----------
Commitments and contingencies
Minority interest .................................................... 73,525 73,241
---------- ----------
Shareholders' equity:
L-3 Holdings' common stock $.01 par value; authorized
300,000,000 shares, issued and outstanding 95,465,910 and
94,577,331 shares (L-3 Communications common stock: $.01
par value, 100 shares authorized, issued and outstanding) ......... 1,815,537 1,794,976
Retained earnings ................................................... 529,564 479,827
Unearned compensation ............................................... (6,383) (3,302)
Accumulated other comprehensive loss ................................ (68,681) (69,299)
---------- ----------
Total shareholders' equity .......................................... 2,270,037 2,202,202
---------- ----------
Total liabilities and shareholders' equity ........................ $5,320,783 $5,242,308
========== ==========
See notes to unaudited condensed consolidated financial statements.
F-3
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
-------------- -----------
Sales:
Contracts, primarily U.S. Government ...................... $ 964,796 $ 618,604
Commercial, primarily products ............................ 124,251 78,236
----------- ---------
Total sales ............................................ 1,089,047 696,840
----------- ---------
Costs and expenses: ........................................
Contracts, primarily U.S. Government ...................... 858,620 546,587
Commercial, primarily products:
Cost of sales ........................................... 80,975 43,528
Selling, general and administrative expenses ............ 31,768 25,527
Research and development expenses ....................... 8,847 9,891
----------- ---------
Total costs and expenses ............................... 980,210 625,533
----------- ---------
Operating income ........................................... 108,837 71,307
Interest and other income .................................. 1,377 1,027
Interest expense ........................................... 32,216 26,093
Minority interest .......................................... 284 988
----------- ---------
Income before income taxes and cumulative effect of a change
in accounting principle ................................... 77,714 45,253
Provision for income taxes ................................. 27,977 15,974
----------- ---------
Income before cumulative effect of a change in accounting
principle ................................................. 49,737 29,279
Cumulative effect of a change in accounting principle,
net of income taxes of $6,428 ............................. -- (24,370)
----------- ---------
Net income ................................................. $ 49,737 $ 4,909
=========== =========
L-3 Holdings' earnings per common share:
Basic:
Income before accounting change ......................... $ 0.52 $ 0.37
Accounting change ....................................... -- (0.31)
----------- ---------
Net income .............................................. $ 0.52 $ 0.06
=========== =========
Diluted:
Income before accounting change ......................... $ 0.50 $ 0.36
Accounting change ....................................... -- (0.30)
----------- ---------
Net income .............................................. $ 0.50 $ 0.06
=========== =========
L-3 Holdings' weighted average common shares outstanding:
Basic ................................................... 95,137 78,900
=========== =========
Diluted ................................................. 105,026 82,354
=========== =========
See notes to unaudited condensed consolidated financial statements.
F-4
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2002
------------ ---------------
OPERATING ACTIVITIES:
Net income .................................................................. $ 49,737 $ 4,909
Adjustments to reconcile net income to net cash from operating activities:
Cumulative effect of a change in accounting principle ...................... -- 24,370
Depreciation ............................................................... 18,415 12,860
Amortization of intangibles and other assets ............................... 4,364 2,347
Amortization of deferred debt issue costs (included in interest expense) ... 2,019 1,747
Deferred income tax provision .............................................. 18,687 12,447
Minority interest .......................................................... 284 988
Other non-cash items, principally contributions to employee savings
plans in L-3 Holdings' common stock ...................................... 6,496 6,644
Changes in operating assets and liabilities, excluding acquired amounts:
Contracts in process ..................................................... (6,212) (65,378)
Other current assets ..................................................... (3,105) (1,778)
Other assets ............................................................. (1,969) (3,651)
Accounts payable ......................................................... (16,099) 28,503
Customer advances ........................................................ (17,467) (8,115)
Accrued interest ......................................................... 13,659 11,101
Accrued expenses and other current liabilities ........................... 21,162 9,823
Pension and postretirement benefits and other liabilities ................ 12,556 5,238
All other operating activities, principally foreign currency translation . 3,599 (663)
---------- ------------
Total adjustments ....................................................... 56,389 36,483
---------- ------------
Net cash from operating activities ......................................... 106,126 41,392
---------- ------------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ............................. (197,421) (1,201,547)
Capital expenditures ........................................................ (16,499) (10,358)
Disposition of property, plant and equipment ................................ 496 85
Other investing activities .................................................. -- (387)
---------- ------------
Net cash used in investing activities ....................................... (213,424) (1,212,207)
---------- ------------
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities ................................ -- 441,000
Repayment of borrowings under revolving credit facilities ................... -- (91,000)
Borrowings under bridge loan facility ....................................... -- 500,000
Debt issuance costs ......................................................... (641) (1,281)
Proceeds from exercise of stock options ..................................... 2,793 10,103
Distributions paid to minority interest ..................................... -- (287)
Other financing activities .................................................. 4,682 (2,737)
---------- ------------
Net cash from financing activities .......................................... 6,834 855,798
---------- ------------
Net decrease in cash ........................................................ (100,464) (315,017)
Cash and cash equivalents, beginning of the period .......................... 134,856 361,022
---------- ------------
Cash and cash equivalents, end of the period ................................ $ 34,392 $ 46,005
========== ============
See notes to unaudited condensed consolidated financial statements.
F-5
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
L-3 Communications Holdings, Inc. conducts its operations and derives all
its operating income and cash flow through its wholly owned subsidiary, L-3
Communications Corporation ("L-3 Communications"). L-3 Communications Holdings,
Inc. ("L-3 Holdings" and together with its subsidiaries, "L-3" or "the
Company") is a merchant supplier of secure communications and intelligence,
surveillance and reconnaissance (ISR) systems, training, simulation and support
services, aviation products and aircraft modernization, as well as specialized
products. The Company's customers include the U.S. Department of Defense (DoD)
and prime contractors thereof, certain U.S. Government intelligence agencies,
major aerospace and defense contractors, foreign governments, commercial
customers and certain other U.S. federal, state and local government agencies.
The Company has the following four reportable segments: (1) Secure
Communications & ISR; (2) Training, Simulation & Support Services; (3) Aviation
Products & Aircraft Modernization; and (4) Specialized Products.
Secure Communications & ISR. The businesses in this segment provide
products and services for the global ISR market, specializing in signals
intelligence (SIGINT) and communications intelligence (COMINT) systems. These
products and services provide to the warfighter in real-time the unique ability
to collect and analyze unknown electronic signals from command centers,
communication nodes and air defense systems for real-time situation awareness
and response. This segment also provides secure, high data rate communications
systems for military and other U.S. Government and foreign government
reconnaissance and surveillance applications. 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 products
are used to connect a variety of airborne, space, ground and sea-based
communication systems and are used in the transmission, processing, recording,
monitoring and dissemination functions of these communication systems. The
major secure communications programs and systems include:
o secure data links for airborne, satellite, ground and sea-based
remote platforms for real-time information collection and
dissemination to users;
o highly specialized fleet management and support, including
procurement, systems integration, sensor development,
modifications and maintenance for signals intelligence and ISR
special mission aircraft and airborne surveillance systems;
o strategic and tactical signals intelligence systems that detect,
collect, identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management;
and
o communication systems for surface and undersea vessels and manned
space flights.
Training, Simulation & Support Services. The businesses in this segment
provide a full range of training, simulation and support services, including:
o services designed to meet customer training requirements for
aircrews, navigators, mission operators, gunners and maintenance
technicians for virtually any platform, including military fixed
and rotary wing aircraft, air vehicles and various ground
vehicles;
o communication software support, information services and a wide
range of engineering development services and integration
support;
o high-end engineering and information support services used for
command, control, communications and ISR architectures, as well
as for air warfare modeling and simulation tools for
F-6
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
applications used by the DoD, Department of Homeland Security and
U.S. Government intelligence agencies, including missile and
space systems, Unmanned Aerial Vehicles (UAVs) and military
aircraft;
o developing and managing extensive programs in the United States
and internationally that focus on teaching, training and
education, logistics, strategic planning, organizational design,
democracy transition and leadership development;
o producing crisis management software and providing command and
control for homeland security applications; and
o design, prototype development and production of ballistic missile
targets for missile defense applications, including present and
future threat scenarios.
Aviation Products & Aircraft Modernization. The businesses in this segment
provide aviation products and aircraft modernization services, including:
o airborne traffic and collision avoidance systems (TCAS) for
commercial and military applications;
o commercial, solid-state, crash-protected cockpit voice recorders,
flight data recorders and maritime hardened voyage recorders;
o ruggedized custom displays for military and high-end commercial
applications;
o turnkey aviation life cycle management services that integrate
custom developed and commercial off-the-shelf products for
various military and commercial wide-body and rotary wing
aircraft, including heavy maintenance and structural
modifications and Head-of-State and commercial interior
completions; and
o engineering, modification, maintenance, logistics and upgrades
for U.S. Special Operations Command aircraft, vehicles and
personnel equipment.
Specialized Products. The businesses in this segment supply products,
including components, subsystems and systems, to military and commercial
customers in several niche markets. These products include:
o ocean products, including acoustic undersea warfare products for
mine hunting, dipping and anti-submarine sonars and naval power
distribution, conditioning, switching and protection equipment
for surface and undersea platforms;
o ruggedization and integration of commercial off-the-shelf
technology for displays, computers and electronic systems for
military and commercial applications;
o integrated video security and surveillance systems that provide
perimeter security used by the U.S. Immigration and
Naturalization Service and U.S. Border Patrol to monitor and
protect U.S. borders;
o security systems for aviation, port and border applications to
detect explosives, concealed weapons, contraband and illegal
narcotics, to inspect agricultural products and to examine cargo;
o telemetry, instrumentation, space and navigation products,
including tracking and flight termination;
o premium fuzing products;
F-7
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o microwave components used in radar communication satellites,
wireless communication equipment, electronic surveillance,
communication and electronic warfare applications and
countermeasure systems;
o high performance antennas and ground based radomes;
o training devices and motion simulators which produce advanced
virtual reality simulation and high-fidelity representations of
cockpits and mission stations for fixed and rotary wing aircraft
and land vehicles; and
o precision stabilized electro-optic surveillance systems,
including high magnification lowlight, daylight and forward
looking infrared sensors, laser range finders, illuminators and
designators, and digital and wireless communication systems.
2. BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements should be read
in conjunction with the Consolidated Financial Statements of L-3 Holdings and
L-3 Communications for the fiscal year ended December 31, 2002, included in
their Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
The unaudited condensed consolidated financial statements comprise the
unaudited condensed consolidated financial statements of L-3 Holdings and L-3
Communications. L-3 Holdings' only asset is its investment in the common stock
of L-3 Communications, its wholly-owned subsidiary, and its only obligations
are its 5 1/4% Convertible Senior Subordinated Notes due 2009 and its 4% Senior
Subordinated Convertible Contingent Debt Securities due 2011 (CODES). L-3
Holdings has also guaranteed the borrowings under the senior credit facilities
of L-3 Communications. L-3 Holdings' obligations have been jointly, severally,
fully and unconditionally guaranteed by L-3 Communications and certain of its
domestic subsidiaries, and accordingly, such debt has been reflected as debt of
L-3 Communications in its unaudited condensed consolidated financial statements
in accordance with the U.S. Securities and Exchange Commission's (SEC) Staff
Accounting Bulletin (SAB) No. 54. In addition, all issuances of equity
securities including grants of stock options and restricted stock by L-3
Holdings to employees of L-3 Communications have been reflected in the
unaudited condensed consolidated financial statements of L-3 Communications. As
a result, the unaudited condensed consolidated financial positions, results of
operations and cash flows of L-3 Holdings and L-3 Communications are
substantially the same. See Note 14 for additional information.
The Company presents its sales and cost and expenses in two categories in
the statement of operations, "Contracts, primarily U.S. Government" and
"Commercial, primarily products", which are based on how the Company recognizes
revenue. Sales and costs and expenses for the Company's businesses that are
primarily U.S. Government contractors are presented as "Contracts, primarily
U.S. Government." The sales for the Company's U.S. Government contractor
businesses are transacted using written contractual arrangements or contracts,
most of which require the Company to design, develop, manufacture and/or modify
complex products, and/or perform related services according to specifications
provided by the customer. These contracts are within the scope of the American
Institute of Certified Public Accountants Statement of Position 81-1, Accounting
for Performance of Construction-Type and certain Production-Type Contracts (SOP
81-1) and Accounting Research Bulletin No. 43, Chapter 11, Section A, Government
Contracts, Cost-Plus-Fixed Fee Contracts (ARB 43). Sales reported under
"Contracts, primarily U.S. Government" also include certain sales by the
Company's U.S. Government contractor businesses transacted using contracts for
domestic and foreign commercial customers which also are within the scope of SOP
81-1. Sales and costs and expenses for the Company's businesses whose
F-8
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
customers are primarily commercial customers are presented as "Commercial,
primarily products". These sales to commercial customers are not within the
scope of SOP 81-1 or ARB 43, and are recognized in accordance with the SEC's SAB
No. 101, Revenue Recognition in Financial Statements. The Company's commercial
businesses are substantially comprised of Aviation Communication & Surveillance
Systems (ACSS), Aviation Recorders, Microwave components, Detection Systems
business acquired from PerkinElmer, Inc., Satellite Networks, and PrimeWave
Communications.
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles in the United States of America for a
complete set of financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of the results for the interim periods presented have been
included. The results of operations for the interim periods are not necessarily
indicative of results for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of sales and
costs and expenses during the reporting period. The most significant of these
estimates and assumptions relate to estimates of total contract revenue and
total costs at completion for contracts in process; estimated costs in excess
of billings to complete contracts in process in a loss position; market values
for inventories reported at lower of cost or market; pension and postretirement
benefit obligations; recoverability and valuation of recorded amounts of
long-lived assets and intangible assets, including goodwill; income taxes;
litigation reserves; and environmental obligations. Changes in estimates are
reflected in the periods during which they become known. Actual results will
differ from these estimates.
Certain reclassifications have been made to conform prior period amounts
to the current period presentation.
3. STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Compensation expense
for employee stock-based compensation is recognized in income based on the
excess, if any, of L-3 Holdings' fair value of the stock at the grant date of
the award or other measurement date over the amount an employee must pay to
acquire the stock. When the exercise price for stock-based compensation
arrangements granted to employees equals or exceeds the fair value of the L-3
Holdings common stock at the date of grant, the Company does not recognize
compensation expense. The Company elected not to adopt the fair value based
method of accounting for stock-based employee compensation as permitted by the
Financial Accounting Standards Board's (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123),
as amended by SFAS No. 148, Accounting for Stock-Based Compensation--Transition
and Disclosure--an amendment of SFAS No. 123. Had the Company adopted the fair
value based method provisions of SFAS 123, it would have recorded a non-cash
expense for the estimated fair value of the stock-based compensation
arrangements that the Company has granted to its employees. The table below
compares the "as reported" net income and L-3 Holdings earnings per share (EPS)
to the "pro forma" net income and L-3 Holdings EPS that the Company would have
reported if the Company had elected to recognize compensation expense in
accordance with the fair value based method of accounting of SFAS 123.
F-9
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ -------------
Net income:
As reported ............ $ 49,737 $ 4,909
Pro forma .............. 44,708 1,960
L-3 Holdings Basic EPS:
As reported ............ $ 0.52 $ 0.06
Pro forma .............. 0.47 0.02
L-3 Holdings Diluted EPS:
As reported ............ $ 0.50 $ 0.06
Pro forma .............. 0.45 0.02
4. ACQUISITIONS
Avionics Systems. On March 28, 2003, the Company acquired 100% of the
common stock of the Avionics Systems business of Goodrich Corporation for
$188,512 in cash, plus acquisition costs. The acquisition was financed using
cash on hand. The purchase price includes an increase to the contract purchase
price of $512 related to additional assets received at closing and is subject
to final adjustment based on closing date net working capital, as defined.
Avionics Systems develops and manufactures innovative avionics solutions for
substantially all segments of the aviation market, and sells its products to
the military, business jet, general aviation, rotary wing aircraft and air
transport markets. The acquisition provides the Company with enhanced
manufacturing capabilities, expanded marketing expertise, an expanded
distribution network and increased efficiencies in research and development
initiatives, which the Company expects to use to sell its avionics portfolio,
including advanced displays, aviation recorders, transponders, collision
avoidance and proximity awareness products. Avionics Systems also provides a
unique set of products to add to the Company's existing product line for the
commercial air transport, business jet and military aircraft markets. Based on
a preliminary purchase price allocation for Avionics Systems, goodwill of
$155,771 was assigned to the Aviation Products & Aircraft Modernization
segment, most of which is expected to be deductible for income tax purposes.
All of the Company's acquisitions have been accounted for as purchase
business combinations and are included in the Company's results of operations
from their respective effective dates. The Company values its acquired
contracts in process on the date of acquisition at contract value less the
Company's estimated costs to complete the contract and a reasonable profit
allowance on the Company's completion effort commensurate with the profit
margin that the Company earns on similar contracts. The assets and liabilities
recorded in connection with the purchase price allocations for the acquisitions
of Detection Systems, Telos, ComCept, Technology, Management and Analysis
Corporation, Electron Devices, Ruggedized Command & Control, Wolf Coach,
International Microwave Corporation, Westwood, Wescam, Ship Analytics, and
Avionics Systems are based upon preliminary estimates of fair values for
contracts in process, inventories, estimated costs in excess of billings to
complete contracts in process, identifiable intangibles and deferred income
taxes. Actual adjustments will be based on the final purchase prices and final
appraisals and other analyses of fair values which are in process. The Company
does not expect the differences between the preliminary and final purchase
price allocations for these acquisitions to be material. The Company expects to
complete the purchase price allocations for these acquisitions during the first
half of 2003, except for the acquisition of the Avionics Systems business. We
expect to complete the purchase price allocation for the Avionics Systems
business by the end of 2003.
The Company is continuing its discussions with Raytheon Company regarding
the adjustment of the purchase price for the acquisition of Aircraft
Integration Systems (AIS). The Company's proposed
F-10
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
purchase price adjustment amounts to a $100,000 reduction to the final purchase
price for AIS submitted by Raytheon to the Company. Any amount received by the
Company for a reduction to the AIS purchase price will be reported as a
reduction to goodwill.
Pro Forma Statement of Operations Data. Had the acquisition of Avionics
Systems and the related financing transaction occurred on January 1, 2003, the
unaudited pro forma sales, net income and diluted earnings per share would have
been approximately $1,113,300, $52,700 and $0.53, respectively, for the three
months ended March 31, 2003. Had the acquisitions of L-3 Integrated Systems,
Detection Systems, Telos, ComCept, Technology, Management and Analysis
Corporation, Electron Devices, Ruggedized Command & Control, Wolf Coach,
International Microwave Corporation, Westwood, Wescam, Ship Analytics, and
Avionics Systems and the related financing transactions occurred on January 1,
2002, the unaudited pro forma sales, net loss and diluted loss per share would
have been approximately $1,096,800, $(9,300) and $(0.10), respectively, for the
three months ended March 31, 2002. The pro forma results are based on various
assumptions and are not necessarily indicative of the result of operations that
would have occurred had the Company completed the acquisitions and the related
financing transactions on January 1, 2002 and 2003.
5. CONTRACTS IN PROCESS
The components of contracts in process are presented in the table below.
MARCH 31, 2003 DECEMBER 31, 2002
---------------- ------------------
Billed receivables, less allowances of $13,778 and $12,801 .. $ 568,701 $ 568,382
---------- ----------
Unbilled contract receivables ............................... 502,215 490,678
Less: unliquidated progress payments ........................ (207,018) (171,457)
---------- ----------
Unbilled contract receivables, net ......................... 295,197 319,221
---------- ----------
Inventoried contract costs, gross ........................... 338,682 320,043
Less: unliquidated progress payments ........................ (9,093) (13,507)
---------- ----------
Inventoried contract costs, net ............................ 329,589 306,536
---------- ----------
Inventories at lower of cost or market ...................... 147,378 123,854
---------- ----------
Total contracts in process ................................. $1,340,865 $1,317,993
========== ==========
Inventoried contract costs for the Company's businesses that are primarily
U.S. Government contractors include selling, general and administrative (SG&A)
costs, including independent research and development (R&D) and bid and
proposal (B&P) costs. The table below presents a summary of the changes in the
SG&A, independent R&D and B&P costs included in inventoried contract costs,
including those that have been used in the determination of the Company's costs
and expenses for "Contracts, primarily U.S. Government", which are presented on
the Company's statements of operations.
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
--------------- ----------------
Balance at beginning of period ................... $ 52,253 $ 19,970
Add: Acquired inventoried contract costs ......... -- 15,491
Incurred costs(1) ............................ 117,103 86,404
Less: Costs and expenses ......................... (116,423) (84,127)
---------- ---------
Balance at end of period ......................... $ 52,933 $ 37,738
========== =========
F-11
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------
(1) Incurred costs include independent R&D and B&P costs of $34,208 and $24,562
for the three months ended March 31, 2003 and 2002, respectively.
The cost data in the table above does not include the SG&A and R&D
expenses for the Company's businesses that are primarily not U.S. Government
contractors, which are separately presented on the Company's statement of
operations under costs and expenses for "Commercial, primarily products".
6. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Effective January 1, 2002, the Company ceased recording goodwill
amortization expense and began testing goodwill for impairment based on
estimated fair values at the beginning of the year using a discounted cash
flows valuation. Based on the estimated fair values of the Company's reporting
units at January 1, 2002, the goodwill for certain space and broadband
commercial communications businesses included in the Specialized Products
segment was impaired. Effective the first quarter of 2002, the Company
completed its valuation of the assets and liabilities for these businesses and
recorded an impairment charge of $24,370, net of a $6,428 income tax benefit.
The impairment charge was recorded as a cumulative effect of a change in
accounting principle effective January 1, 2002, in accordance with the adoption
provisions of SFAS No. 142.
The table below presents the changes in goodwill allocated to the
reportable segments during the three months ended March 31, 2003.
TRAINING AVIATION
SECURE SIMULATION & PRODUCTS &
COMMUNICATIONS SUPPORT AIRCRAFT SPECIALIZED CONSOLIDATED
& ISR SERVICES MODERNIZATION PRODUCTS TOTAL
---------------- -------------- --------------- ------------- -------------
BALANCE JANUARY 1, 2003 ......... $722,135 $445,427 $620,289 $1,006,697 $2,794,548
Acquisitions ................... (7) 1,549 156,261 7,967 165,770
---------- -------- -------- ---------- ----------
BALANCE MARCH 31, 2003 .......... $722,128 $446,976 $776,550 $1,014,664 $2,960,318
========= ======== ======== ========== ==========
During the three months ended March 31, 2003, the Company completed its
annual impairment test for the goodwill of each of its reporting units, which
resulted in no impairment losses.
The gross carrying amount and accumulated amortization balances for the
Company's identifiable intangible assets that are subject to amortization are
presented in the tables below.
MARCH 31, 2003
---------------------------------------
GROSS
CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
---------- -------------- -------------
Identifiable intangible assets that are subject to amortization:
Customer relationships ........................................ $80,826 $1,772 $79,054
Unpatented technology ......................................... 9,825 2,087 7,738
Non-compete agreements ........................................ 2,000 113 1,887
------- ------ -------
Total ....................................................... $92,651 $3,972 $88,679
======= ====== =======
F-12
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
---------------------------------------
GROSS
CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
---------- -------------- -------------
Identifiable intangible assets that are subject to amortization:
Customer relationships ........................................ $80,826 $ 600 $80,226
Unpatented technology ......................................... 9,825 1,844 7,981
Non-compete agreements ........................................ 2,000 60 1,940
------- ------ -------
Total ....................................................... $92,651 $2,504 $90,147
======= ====== =======
The Company recorded $1,468 and $170 of identifiable intangible asset
amortization for the three months ended March 31, 2003 and 2002, respectively.
Identifiable intangible asset amortization, based on gross carrying amounts at
March 31, 2003, is estimated to be $5,861 for 2003, $8,580 for 2004, $9,240 for
2005, $8,538 for 2006, and $8,197 for 2007.
7. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
The components of other current liabilities are presented in the table
below.
MARCH 31, 2003 DECEMBER 31, 2002
---------------- ------------------
Accrued product warranty ............................. $ 60,461 $ 56,487
Negative balances in contracts in process ............ 26,153 36,841
Estimated cost in excess of billings to complete
contracts in process in a loss position ............. 14,596 12,451
Notes payable and capital lease obligations .......... 12,044 3,380
Other ................................................ 42,516 49,734
-------- --------
Total other current liabilities ................... $155,770 $158,893
======== ========
The table below presents the changes in the Company's accrual for product
warranties for the three months ended March 31, 2003.
Balance January 1, 2003 ..................................... $ 56,487
Acquisitions during the period .............................. 2,642
Accruals for product warranties issued during the
period ..................................................... 5,299
Accruals related to pre-existing product warranties ......... 127
Settlements made during the period .......................... (4,094)
--------
Balance March 31, 2003 ...................................... $ 60,461
========
The components of other liabilities are presented in the table below.
F-13
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2003 DECEMBER 31, 2002
---------------- ------------------
Non-current portion of net deferred gains on
terminations of interest rate swap agreements ......... $18,170 $14,026
Estimated cost in excess of billings to complete
contracts in process in a loss position ............... 13,303 13,303
Notes payable and capital lease obligations ............ 4,633 8,631
Other non-current liabilities .......................... 42,030 42,987
------- -------
Total other liabilities ............................. $78,136 $78,947
======= =======
8. DEBT
The components of long-term debt and a reconciliation to the carrying
amount of long-term debt are presented in the table below.
MARCH 31, 2003 DECEMBER 31, 2002
---------------- ------------------
L-3 Communications:
Borrowings under Senior Credit Facilities .............. $ -- $ --
8 1/2% Senior Subordinated Notes due 2008 .............. 180,000 180,000
8% Senior Subordinated Notes due 2008 .................. 200,000 200,000
7 5/8% Senior Subordinated Notes due 2012 .............. 750,000 750,000
---------- ----------
1,130,000 1,130,000
L-3 Holdings:
5 1/4% Convertible Senior Subordinated Notes due
2009 .................................................. 300,000 300,000
4% Senior Subordinated Convertible Contingent Debt
Securities due 2011 (CODES) ........................... 420,000 420,000
---------- ----------
Principal amount of long-term debt ..................... $1,850,000 $1,850,000
Less: unamortized discount on CODES .................... (2,184) (2,248)
Fair value of interest rate swap agreements ......... (4,074) --
---------- ----------
Carrying amount of long-term debt ...................... $1,843,742 $1,847,752
========== ==========
Available borrowings under the Company's senior credit facilities at
March 31, 2003 were $676,447, after reductions for outstanding letters of credit
of $73,553. There were no borrowings outstanding under the senior credit
facilities at March 31, 2003. On February 25, 2003, the maturity date of the
$250,000 364-day revolving credit facility was extended to February 24, 2004.
In January of 2003, L-3 Communications entered into interest rate swap
agreements on $200,000 of its 7 5/8% Senior Subordinated Notes due 2012. These
swap agreements exchanged the fixed interest rate for a variable interest rate
on $200,000 of the $750,000 principal amount outstanding. In March of 2003, L-3
Communications terminated these interest rate swap agreements and received cash
proceeds of $6,440. Prior to the termination of the swap agreements, L-3
Communications recorded a reduction to interest expense for the three months
ended March 31, 2003 of $1,202. This reduction represented interest savings for
the period prior to the termination of these swap agreements earned from the
lower average variable interest rates of 4.0% that the Company paid under the
swap agreements compared to the 7 5/8% fixed interest rate on the notes subject
to the swaps. The remaining $5,238 of the proceeds represented the future value
of the swap agreements at the termination date that was recorded as a deferred
gain. The
F-14
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
deferred gain will be amortized as a reduction of interest expense over the
remaining term of the 7 5/8% Senior Subordinated Notes due 2012 at an amount of
$142 per quarter, or $566 annually.
In March of 2003, L-3 Communications entered into interest rate swap
agreements on $200,000 of its 7 5/8% Senior Subordinated Notes due 2012. These
swap agreements exchanged the fixed interest rate for a variable interest rate
on $200,000 of its $750,000 principal amount outstanding. Under the terms of
these swap agreements, L-3 Communications will pay or receive the difference
between the fixed interest rate of 7 5/8% on the senior subordinated notes and a
variable interest rate determined two business days prior to the end of the
interest period. The variable interest rate is equal to (1) the six month LIBOR
rate, plus (2) an average of 327.75 basis points. The difference to be paid or
received on these swap agreements as interest rates change is recorded as an
adjustment to interest expense. These swap agreements are accounted for as fair
value hedges.
The aggregate net deferred gains recorded in connection with the
terminations of the interest rate swap agreements was $20,850 at March 31, 2003
and $16,140 at December 31, 2002. These net deferred gains will be amortized as
reductions to interest expense through 2012. The current portion of the net
deferred gains of $2,680 at March 31, 2003 and $2,114 at December 31, 2002
that will be amortized over the next 12 months is included in accrued interest.
The non-current portions of the net deferred gains is included in other
liabilities.
9. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2003 and 2002 is
presented in the table below.
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
---------- ---------
Net income ........................................................ $49,737 $4,909
Other comprehensive income (loss):
Foreign currency translation adjustments, net of $467 tax
expense in 2003 and $236 tax benefit in 2002 ................... 709 (433)
Unrealized gains (losses) on hedging instruments:
Unrealized losses arising during the period, net of tax benefits
of $58 in 2003 and $40 in 2002 ................................ (91) (74)
Reclassification adjustment for losses included in net income,
net of tax expense of $198 .................................... -- 323
------- ------
Comprehensive income .............................................. $50,355 $4,725
======= ======
The changes in the Company's accumulated other comprehensive balances for
the three months ended March 31, 2003 and for the year ended December 31, 2002
are presented in the table below.
F-15
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOREIGN UNREALIZED UNREALIZED MINIMUM ACCUMULATED
CURRENCY LOSSES LOSSES ON PENSION OTHER
TRANSLATION ON HEDGING LIABILITY COMPREHENSIVE
ADJUSTMENTS SECURITIES INSTRUMENTS ADJUSTMENTS LOSS
------------- ------------ ------------- ------------- --------------
MARCH 31, 2003
Balance January 1, 2003 ........... $ (2,787) $ (246) $ (277) $ (65,989) $ (69,299)
Period change ..................... 709 -- (91) -- 618
-------- ------ ------ --------- ---------
Balance March 31, 2003 ............ $ (2,078) $ (246) $ (368) $ (65,989) $ (68,681)
======== ====== ====== ========= =========
DECEMBER 31, 2002
Balance January 1, 2002 ........... $ (2,852) $ (246) $ (163) $ (20,409) $ (23,670)
Period change ..................... 65 -- (114) (45,580) (45,629)
-------- ------ ------ --------- ---------
Balance December 31, 2002 ......... $ (2,787) $ (246) $ (277) $ (65,989) $ (69,299)
======== ====== ====== ========= =========
F-16
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. L-3 HOLDINGS EARNINGS PER SHARE
A reconciliation of basic and diluted EPS is presented in the table below.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
BASIC:
Income before cumulative effect of a change in accounting principle ...... $ 49,737 $ 29,279
Cumulative effect of a change in accounting principle, net of income
taxes ................................................................... -- (24,370)
--------- ---------
Net income ............................................................... $ 49,737 $ 4,909
========= =========
Weighted average common shares outstanding ............................... 95,137 78,900
========= =========
Basic earnings per share before cumulative effect of a change in
accounting principle .................................................... $ 0.52 $ 0.37
========= =========
Basic earnings per share ................................................. $ 0.52 $ 0.06
========= =========
DILUTED:
Income before cumulative effect of a change in accounting principle ...... $ 49,737 $ 29,279
After-tax interest expense savings on the assumed conversion of
Convertible Notes ....................................................... 2,588 --
--------- ---------
Income before cumulative effect of a change in accounting principle,
including assumed conversion of Convertible Notes ....................... 52,325 29,279
Cumulative effect of a change in accounting principle, net of income
taxes ................................................................... -- (24,370)
--------- ---------
Net income, including assumed conversion of Convertible Notes ............ $ 52,325 $ 4,909
========= =========
Common and potential common shares:
Weighted average common shares outstanding .............................. 95,137 78,900
Assumed exercise of stock options ....................................... 7,374 7,944
Assumed purchase of common shares for treasury .......................... (4,847) (4,490)
Assumed conversion of Convertible Notes ................................. 7,362 --
--------- ---------
Common and potential common shares ...................................... 105,026 82,354
========= =========
Diluted earnings per share before cumulative effect of a change in
accounting principle .................................................... $ 0.50 $ 0.36
========= =========
Diluted earnings per share ............................................... $ 0.50 $ 0.06
========= =========
The 7,361,964 shares of L-3 Holdings common stock that are issuable upon
conversion of the Convertible Notes were not included in the computation of
diluted EPS for the three months ended March 31, 2002 because the effect of the
assumed conversion would have been anti-dilutive for that period.
The 7,804,878 shares of L-3 Holdings' common stock that are issuable upon
conversion of the CODES were not included in the computation of diluted EPS for
the three months ended March 31, 2003 and 2002 because the conditions required
for the CODES to become convertible were not satisfied.
F-17
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. CONTINGENCIES
The Company is engaged in providing products and services under contracts
directly or as a subcontractor with the U.S. Government and to a lesser degree,
under foreign government contracts, some of which are funded by the U.S.
Government. All such contracts are subject to extensive legal and regulatory
requirements, and, from time to time, agencies of the U.S. Government
investigate whether such contracts were and are being conducted in accordance
with these requirements. Under U.S. Government procurement regulations, an
indictment of the Company by a federal grand jury could result in the Company
being suspended for a period of time from eligibility for awards of new
government contracts. A conviction could result in debarment from contracting
with the federal government for a specified term. Additionally, in the event
that U.S. Government expenditures for products and services of the type
manufactured and provided by the Company are reduced, and not offset by greater
commercial sales or other new programs or products, or acquisitions, there may
be a reduction in the volume of contracts or subcontracts awarded to the
Company.
Management continually assesses the Company's obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management is aware,
the Company believes that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's
consolidated results of operations. The Company accrues for these contingencies
when it is probable that a liability has been incurred and the amount of the
loss can be reasonably estimated.
On August 6, 2002, Aviation Communications & Surveillance Systems, LLC
(ACSS) was sued by Honeywell International Inc. and Honeywell Intellectual
Properties, Inc. (collectively, "Honeywell") for alleged infringement of
patents that relate to terrain awareness avionics. The lawsuit was filed in the
United States District Court for the District of Delaware. In December of 2002,
Honeywell withdrew without prejudice the lawsuit against ACSS and agreed to
proceed with non-binding arbitration. If the matter is not resolved through
arbitration, Honeywell may reinstitute the litigation after August 14, 2003.
The Company had previously investigated the Honeywell patents and believes that
ACSS has valid defenses against Honeywell's patent infringement suit. In
addition, ACSS has been indemnified to a certain extent by Thales Avionics,
which provided ACSS with the alleged infringing technology. Thales Avionics
owns 30% of ACSS. In the opinion of management, the ultimate disposition of
Honeywell's pending claim will not result in a material liability to the
Company.
On November 18, 2002, the Company initiated a proceeding against OSI
Systems, Inc. (OSI) in the United States District Court sitting in the Southern
District of New York (the "New York action") seeking, among other things, a
declaratory judgment that the Company had fulfilled all of its obligations
under a letter of intent with OSI (the "OSI Letter of Intent"). Under the OSI
Letter of Intent, the Company was to negotiate definitive agreements with OSI
for the sale of certain businesses the Company acquired from PerkinElmer, Inc.
on June 14, 2002. On December 23, 2002, OSI responded by filing suit against
the Company in the United States District Court sitting in the Central District
of California (the "California action") alleging, among other things, that the
Company breached its obligations under the OSI Letter of Intent and seeking
damages in excess of $100,000, not including punitive damages. On February 7,
2003, OSI filed an answer and counterclaims in the New York action that
asserted substantially the same claims OSI had raised in the California action.
The California action was dismissed by the California District Court in favor
of the New York action. Under the OSI Letter of Intent, the Company proposed
selling to OSI the conventional detection business and the ARGUS business that
the Company recently acquired from PerkinElmer, Inc. Negotiations with OSI
lasted for almost one year and
F-18
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ultimately broke down over issues regarding, among other things, intellectual
property, product-line definitions, allocation of employees and due diligence.
The Company believes that the claims asserted by OSI in its suit are without
merit and intends to defend against the OSI claims vigorously.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities 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 consolidated financial position, results
of operations or cash flows of the Company.
12. SEGMENT INFORMATION
The Company has four reportable segments: (1) Secure Communications & ISR,
(2) Training, Simulation & Support Services, (3) Aviation Products & Aircraft
Modernization and (4) Specialized Products, which are described in Note 1. The
Company evaluates the performance of its operating segments and reportable
segments based on their sales and operating income.
The tables below present sales, operating income, depreciation and
amortization and total assets by reportable segment.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
-------------- -----------
SALES:
Secure Communications & ISR ........................ $ 321,388 $157,736
Training, Simulation & Support Services ............ 241,569 197,302
Aviation Products & Aircraft Modernization ......... 159,720 107,309
Specialized Products ............................... 383,569 237,713
Elimination of intersegment sales .................. (17,199) (3,220)
---------- --------
Consolidated total ............................... $1,089,047 $696,840
========== ========
OPERATING INCOME:
Secure Communications & ISR ........................ $ 33,301 $ 16,409
Training, Simulation & Support Services ............ 28,498 21,470
Aviation Products & Aircraft Modernization ......... 19,887 17,470
Specialized Products ............................... 27,151 15,958
---------- --------
Consolidated total ............................... $ 108,837 $ 71,307
========== ========
DEPRECIATION AND AMORTIZATION:
Secure Communications & ISR ........................ $ 7,118 $ 4,242
Training, Simulation & Support Services ............ 1,998 2,005
Aviation Products & Aircraft Modernization ......... 3,916 2,441
Specialized Products ............................... 9,747 6,519
---------- --------
Consolidated total ............................... $ 22,779 $ 15,207
========== ========
F-19
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
MARCH 31, 2003 2002
---------------- -------------
TOTAL ASSETS:
Secure Communications & ISR ........................ $1,084,461 $1,149,016
Training, Simulation & Support Services ............ 678,023 648,554
Aviation Products & Aircraft Modernization ......... 1,198,590 965,038
Specialized Products ............................... 1,935,446 1,940,982
Corporate .......................................... 424,263 538,718
---------- ----------
Consolidated total ............................... $5,320,783 $5,242,308
========== ==========
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In May of 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002.
SFAS No. 145, rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishments of Debt made to Satisfy
Sinking-Fund Requirements. Under the provisions of SFAS No. 145, gains and
losses from extinguishment of debt can only be classified as extraordinary items
if they meet the criteria in APB Opinion No. 30. The provisions of this
Statement related to the rescission of SFAS No. 4 shall be applied in fiscal
years beginning after May 15, 2002. Earlier application is permitted. This
statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar and is effective
for transactions occurring after May 15, 2002. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions and
are effective for financial statements issued on or after May 15, 2002. In
accordance with the provisions of SFAS No. 145, beginning on January 1, 2003,
the loss on the retirement of debt of $16,187 ($9,858 after-tax or $0.11 per
diluted share) that the Company recorded in June 2002 has been presented as a
separate caption within income from continuing operations and the related income
tax benefit has been included in the provision for income taxes.
In January of 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This interpretation
provides guidance on the identification of, and financial reporting for,
entities over which control is achieved through means other than voting rights.
Such entities have been termed by FIN 46 as variable interest entities (VIE).
Once effective, FIN 46 will be the guidance that determines (1) whether
consolidation is required under the "controlling financial interest" model of
ARB Bulletin No. 51, Consolidated Financial Statements, or (2) whether the
variable-interest model under FIN 46 should be used to account for existing and
new entities. FIN 46 includes guidance for identifying the enterprise that will
consolidate a VIE, which is the enterprise that is exposed to the majority of
an entity's risks or receives the majority of the benefits from an entity's
activities. FIN 46 also requires that the enterprises that hold a significant
variable interest in a VIE make new disclosures in their financial statements.
The transitional disclosures of FIN 46, which are effective immediately,
require an enterprise to identify the entities in which it holds a variable
interest, if the enterprise believes that those entities might be considered
VIEs upon the adoption of FIN 46. The implementation and remaining disclosure
requirements of FIN 46 are effective immediately for VIEs created after January
31, 2003, and on July 1, 2003 for all VIEs created before January 31, 2003. The
Company does not believe that it holds any interests in VIEs, however, the
Company is currently evaluating whether it holds a variable interest in
entities that might be considered VIEs.
F-20
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In March of 2003, the Emerging Issues Task Force (EITF) issued EITF No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF No.
00-21 addresses how to determine whether a contractual arrangement involving
multiple deliverables contains more than one accounting unit and how
consideration should be measured and allocated to the separate accounting
units. EITF No. 00-21 applies to all deliverables within contractually binding
arrangements in all industries, except to the extent that a deliverable in a
contractual arrangement is subject to other existing higher-level authoritative
literature, and is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is currently evaluating the
effect of EITF No. 00-21 on the Company's revenue recognition accounting
policies and on its consolidated results of operations and financial position.
In May of 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement applies to certain financial instruments that, under previous
guidance, issuers could account for as equity. SFAS No. 150 requires that those
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 also requires disclosures about alternative ways of settling the
instruments and the capital structure of entities whose shares are all
mandatorily redeemable. SFAS No. 150 is effective for these financial
instruments entered into or modified after May 31, 2003. For these financial
instruments entered into before May 31, 2003, SFAS No. 150 is effective for the
Company's interim period beginning July 1, 2003. SFAS No. 150 is not expected
to have a material effect on the Company's consolidated results of operations
or financial position.
14. UNAUDITED FINANCIAL INFORMATION OF L-3 COMMUNICATIONS AND ITS SUBSIDIARIES
L-3 Communications is a wholly owned subsidiary of L-3 Holdings. The debt
of L-3 Communications, including its outstanding Senior Subordinated Notes and
borrowings under amounts drawn against the senior credit facilities are
guaranteed, on a joint and several, full and unconditional basis, by certain of
its wholly-owned domestic subsidiaries (the "Guarantor Subsidiaries"). The
foreign subsidiaries and certain domestic subsidiaries of L-3 Communications
(the "Non-Guarantor Subsidiaries") do not guarantee the debt of L-3
Communications. None of the debt of L-3 Communications has been issued by its
subsidiaries. There are no restrictions on the payment of dividends from the
Guarantor Subsidiaries to L-3 Communications.
The following unaudited condensed combining financial information present
the results of operations, financial position and cash flows of (i) L-3
Holdings, excluding L-3 Communications and its consolidated subsidiaries, (ii)
L-3 Communications, excluding its consolidated subsidiaries (the "Parent"),
(iii) the Guarantor Subsidiaries, (iv) the Non-Guarantor Subsidiaries and (v)
the eliminations to arrive at the information for L-3 Communications on a
consolidated basis.
F-21
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
L-3 NON- CONSOLIDATED
COMMUNICATIONS GUARANTOR GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATION
------------- ---------------- -------------- -------------- ---------------- --------------
CONDENSED COMBINING
BALANCE SHEETS:
AS OF MARCH 31, 2003:
Current assets:
Cash and cash equivalents .......... $ -- $ 33,150 $ (16,788) $ 18,030 $ -- $ 34,392
Contracts in process ............... -- 560,347 589,793 190,725 -- 1,340,865
Other current assets ............... -- 145,129 29,209 4,026 -- 178,364
---------- ---------- ---------- -------- ------------ ----------
Total current assets ............. -- 738,626 602,214 212,781 -- 1,553,621
---------- ---------- ---------- -------- ------------ ----------
Goodwill ............................ -- 754,671 1,867,136 338,511 -- 2,960,318
Other assets ........................ -- 362,292 361,608 82,944 -- 806,844
Investment in and amounts
due from consolidated
subsidiaries ....................... 2,987,853 2,863,967 469,406 37,870 (6,359,096) --
---------- ---------- ---------- -------- ------------ ----------
Total assets ..................... $2,987,853 $4,719,556 $3,300,364 $672,106 $ (6,359,096) $5,320,783
========== ========== ========== ======== ============ ==========
Current liabilities ................. -- 343,996 267,381 88,381 -- 699,758
Long-term debt ...................... 717,816 1,843,742 -- -- (717,816) 1,843,742
Other long-term liabilities ......... -- 261,781 160,380 11,560 -- 433,721
Minority interest ................... -- -- -- 73,525 -- 73,525
Shareholders' equity ................ 2,270,037 2,270,037 2,872,603 498,640 (5,641,280) 2,270,037
---------- ---------- ---------- -------- ------------ ----------
Total liabilities and
shareholders' equity ............ $2,987,853 $4,719,556 $3,300,364 $672,106 $ (6,359,096) $5,320,783
========== ========== ========== ======== ============ ==========
AS OF DECEMBER 31, 2002:
Current assets:
Cash and cash equivalents .......... $ -- $ 126,421 $ (7,248) $ 15,683 $ -- $ 134,856
Contracts in process ............... -- 524,500 630,351 163,142 -- 1,317,993
Other current assets ............... -- 155,387 28,319 2,819 -- 186,525
---------- ---------- ---------- -------- ------------ ----------
Total current assets ............. -- 806,308 651,422 181,644 -- 1,639,374
---------- ---------- ---------- -------- ------------ ----------
Goodwill ............................ -- 753,672 1,702,384 338,492 -- 2,794,548
Other assets ........................ -- 372,207 355,866 80,313 -- 808,386
Investment in and amounts
due from consolidated
subsidiaries ....................... 2,919,954 2,688,750 398,282 53,779 (6,060,765) --
---------- ---------- ---------- -------- ------------ ----------
Total assets ..................... $2,919,954 $4,620,937 $3,107,954 $654,228 $ (6,060,765) $5,242,308
========== ========== ========== ======== ============ ==========
Current liabilities ................. -- 322,747 298,646 75,246 -- 696,639
Long-term debt ...................... 717,752 1,847,752 -- -- (717,752) 1,847,752
Other long-term liabilities ......... -- 248,236 166,188 8,050 -- 422,474
Minority interest ................... -- -- -- 73,241 -- 73,241
Shareholders' equity ................ 2,202,202 2,202,202 2,643,120 497,691 (5,343,013) 2,202,202
---------- ---------- ---------- -------- ------------ ----------
Total liabilities and
shareholders' equity ............ $2,919,954 $4,620,937 $3,107,954 $654,228 $ (6,060,765) $5,242,308
========== ========== ========== ======== ============ ==========
F-22
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
L-3 CONSOLIDATED
COMMUNICATIONS GUARANTOR NON-GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATIONS
------------- ---------------- -------------- --------------- -------------- ---------------
CONDENSED COMBINING
STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED
MARCH 31, 2003:
Sales .............................. $ -- $ 456,436 $548,596 $ 92,054 $ (8,039) $1,089,047
Costs and expenses ................. -- 404,907 497,403 85,939 (8,039) 980,210
-------- --------- -------- -------- --------- ----------
Operating income ................... -- 51,529 51,193 6,115 -- 108,837
Interest and other income
(expense) ......................... -- 3,424 (70) (223) (1,754) 1,377
Interest expense ................... 8,488 31,835 223 1,912 (10,242) 32,216
Minority interest .................. -- -- -- 284 -- 284
Provision (benefit) for
income taxes ...................... (3,056) 8,322 18,324 1,331 3,056 27,977
Equity in net income of
consolidated subsidiaries ......... 55,169 34,941 -- -- (90,110) --
-------- --------- -------- -------- --------- ----------
Net income ......................... $ 49,737 $ 49,737 $ 32,576 $ 2,365 $ (84,678) $ 49,737
======== ========= ======== ======== ========= ==========
FOR THE THREE MONTHS ENDED
MARCH 31, 2002:
Sales .............................. $ -- $ 340,703 $302,700 $ 56,634 $ (3,197) $ 696,840
Costs and expenses ................. -- 299,699 281,043 47,988 (3,197) 625,533
-------- --------- -------- -------- --------- ----------
Operating income ................... -- 41,004 21,657 8,646 -- 71,307
Interest and other income .......... -- 822 75 130 -- 1,027
Interest expense ................... 8,092 24,760 1,261 72 (8,092) 26,093
Minority interest .................. -- -- -- 988 -- 988
Provision (benefit) for
income taxes ...................... (2,856) 6,024 7,226 2,724 2,856 15,974
Cumulative effect of a change in
accounting principle .............. -- (14,749) -- (9,621) -- (24,370)
Equity in net income (loss) of
consolidated subsidiaries ......... 10,145 8,616 -- -- (18,761) --
-------- --------- -------- -------- --------- ----------
Net income (loss) .................. $ 4,909 $ 4,909 $ 13,245 $ (4,629) $ (13,525) $ 4,909
======== ========= ======== ======== ========= ==========
F-23
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
L-3 CONSOLIDATED
COMMUNICATIONS GUARANTOR NON-GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATIONS
------------- ---------------- --------------- --------------- --------------- ---------------
CONDENSED COMBINING
STATEMENTS OF CASH FLOWS:
FOR THE THREE MONTHS ENDED
MARCH 31, 2003:
Net cash from (used in) operating
activities ......................... $ -- $ 45,333 $ 66,271 $ (5,478) $ -- $ 106,126
---------- ------------- ------------- --------- ------------- -------------
INVESTING ACTIVITIES:
Acquisition of businesses, net of
cash acquired .................... -- (1,836) (193,711) (1,874) -- (197,421)
Other investing activities ......... (20,561) (203,365) (6,911) (1,312) 216,146 (16,003)
---------- ------------- ------------- --------- ------------- -------------
Net cash used in investing
activities ......................... (20,561) (205,201) (200,622) (3,186) 216,146 (213,424)
---------- ------------- ------------- --------- ------------- -------------
FINANCING ACTIVITIES:
Other financing activities ......... 20,561 66,597 124,811 11,011 (216,146) 6,834
---------- ------------- ------------- --------- ------------- -------------
Net cash from financing activities .. 20,561 66,597 124,811 11,011 (216,146) 6,834
---------- ------------- ------------- --------- ------------- -------------
Net increase (decrease) in cash ..... -- (93,271) (9,540) 2,347 -- (100,464)
Cash and cash equivalents,
beginning of period ................ -- 126,421 (7,248) 15,683 -- 134,856
---------- ------------- ------------- --------- ------------- -------------
Cash and cash equivalents, end of
period ............................. $ -- $ 33,150 $ (16,788) $ 18,030 $ -- $ 34,392
========== ============= ============= ========= ============= =============
FOR THE THREE MONTHS ENDED
MARCH 31, 2002:
Net cash from (used in) operating
activities ......................... $ -- $ (11,782) $ 57,015 $ (3,841) $ -- $ 41,392
---------- ------------- ------------- --------- ------------- -------------
INVESTING ACTIVITIES:
Acquisition of businesses, net of
cash acquired .................... -- (344) (1,155,257) (45,946) -- (1,201,547)
Other investing activities ......... (25,379) (1,207,229) (2,455) (2,179) 1,226,582 (10,660)
---------- ------------- ------------- --------- ------------- -------------
Net cash used in investing
activities ......................... (25,379) (1,207,573) (1,157,712) (48,125) 1,226,582 (1,212,207)
---------- ------------- ------------- --------- ------------- -------------
FINANCING ACTIVITIES:
Borrowings under revolving
credit facilities ................ -- 350,000 -- -- -- 350,000
Borrowings under bridge loan
facility ......................... -- 500,000 -- -- -- 500,000
Other financing activities ......... 25,379 86,675 1,098,842 21,484 (1,226,582) 5,798
---------- ------------- ------------- --------- ------------- -------------
Net cash from financing activities .. 25,379 936,675 1,098,842 21,484 (1,226,582) 855,798
---------- ------------- ------------- --------- ------------- -------------
Net decrease in cash ................ -- (282,680) (1,855) (30,482) -- (315,017)
Cash and cash equivalents,
beginning of period ................ -- 320,210 (4,412) 45,224 -- 361,022
---------- ------------- ------------- --------- ------------- -------------
Cash and cash equivalents,
end of period ...................... $ -- $ 37,530 $ (6,267) $ 14,742 $ -- $ 46,005
========== ============= ============= ========= ============= =============
F-24
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001
AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
F-25
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
L-3 Communications Holdings, Inc.
We have audited the accompanying consolidated balance sheets of L-3
Communications Holdings, Inc. ("L-3 Holdings") and L-3 Communications
Corporation ("L-3 Communications") and subsidiaries (collectively, the
"Company") as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of L-3
Holdings and L-3 Communications and subsidiaries as of December 31, 2002 and
2001 and their respective consolidated results of operations and cash flows for
each of the three years ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As indicated in Note 5 to the financial statements, in 2002 the Company adopted
the provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.
As indicated in Note 2 to the financial statements, in 2003 the Company adopted
the provisions of Statement of Financial Accounting Standards No. 145,
Recission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical
Corrections as of April 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 27, 2003, except for the first paragraph of
Recently Issued Accounting Standards
in Note 2, for which the date is June 10, 2003.
F-26
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------------------
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 134,856 $ 361,022
Contracts in process ...................................... 1,317,993 801,824
Deferred income taxes ..................................... 143,634 62,965
Other current assets ...................................... 42,891 16,590
----------- -----------
Total current assets .................................... 1,639,374 1,242,401
----------- -----------
Property, plant and equipment, net ......................... 458,639 203,374
Goodwill ................................................... 2,794,548 1,707,718
Intangible assets .......................................... 90,147 3,833
Deferred income taxes ...................................... 147,190 97,883
Deferred debt issue costs .................................. 48,839 40,190
Other assets ............................................... 63,571 43,850
----------- -----------
Total assets ............................................ $ 5,242,308 $ 3,339,249
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ................................... $ 167,240 $ 129,538
Accrued employment costs .................................. 187,754 126,981
Accrued expenses .......................................... 56,763 38,823
Customer advances ......................................... 71,751 74,060
Accrued interest .......................................... 20,509 13,288
Income taxes .............................................. 33,729 16,768
Other current liabilities ................................. 158,893 125,113
----------- -----------
Total current liabilities ............................... 696,639 524,571
----------- -----------
Pension and postretirement benefits ........................ 343,527 155,052
Other liabilities .......................................... 78,947 60,585
Long-term debt ............................................. 1,847,752 1,315,252
----------- -----------
Total liabilities ....................................... 2,966,865 2,055,460
----------- -----------
Commitments and contingencies
Minority interest .......................................... 73,241 69,897
----------- -----------
Shareholders' equity:
L-3 Holdings' common stock; $.01 par value; authorized
300,000,000 shares, issued and outstanding 94,577,331 and
78,496,626 shares (L-3 Communications' common stock;
$.01 par value, 100 shares authorized, issued and
outstanding) ............................................ 1,794,976 939,037
Retained earnings ......................................... 479,827 301,730
Unearned compensation ..................................... (3,302) (3,205)
Accumulated other comprehensive loss ...................... (69,299) (23,670)
----------- -----------
Total shareholders' equity ................................. 2,202,202 1,213,892
----------- -----------
Total liabilities and shareholders' equity .............. $ 5,242,308 $ 3,339,249
=========== ===========
See notes to consolidated financial statements.
F-27
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000
-------------- ---------------- ----------------
Sales:
Contracts, primarily U.S. Government ................... $ 3,581,102 $ 1,932,205 $ 1,584,824
Commercial, primarily products ......................... 430,127 415,217 325,237
----------- ------------ ------------
Total sales ......................................... 4,011,229 2,347,422 1,910,061
----------- ------------ ------------
Costs and expenses:
Contracts, primarily U.S. Government ................... 3,137,561 1,699,617 1,388,263
Commercial, primarily products:
Cost of sales ........................................ 270,800 252,790 204,989
Selling, general and administrative expenses ......... 114,052 93,238 70,039
Research and development expenses .................... 34,837 26,447 24,052
----------- ------------ ------------
Total costs and expenses ............................ 3,557,250 2,072,092 1,687,343
----------- ------------ ------------
Operating income ....................................... 453,979 275,330 222,718
Interest and other income .............................. 4,921 1,739 4,393
Interest expense ....................................... 122,492 86,390 93,032
Minority interest ...................................... 6,198 4,457 --
Loss on retirement of debt ............................. 16,187 -- --
----------- ------------ ------------
Income before income taxes and cumulative effect of a
change in accounting principle ....................... 314,023 186,222 134,079
Provision for income taxes ............................. 111,556 70,764 51,352
----------- ------------ ------------
Income before cumulative effect of a change in
accounting principle ................................. 202,467 115,458 82,727
Cumulative effect of a change in accounting principle,
net of income taxes of $6,428 (Note 5) ............... (24,370) -- --
----------- ------------ ------------
Net income ............................................. $ 178,097 $ 115,458 $ 82,727
=========== ============ ============
L-3 Holdings' earnings per common share:
Basic:
Income before accounting change ..................... $ 2.33 $ 1.54 $ 1.24
Accounting change ................................... ( 0.28) -- --
----------- ------------ ------------
Net income .......................................... $ 2.05 $ 1.54 $ 1.24
=========== ============ ============
Diluted:
Income before accounting change ..................... $ 2.18 $ 1.47 $ 1.18
Accounting change ................................... ( 0.25) -- --
----------- ------------ ------------
Net income .......................................... $ 1.93 $ 1.47 $ 1.18
=========== ============ ============
L-3 Holdings' weighted average common shares
outstanding:
Basic ................................................ 86,943 74,880 66,710
=========== ============ ============
Diluted .............................................. 97,413 85,438 69,906
=========== ============ ============
See notes to consolidated financial statements.
F-28
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
L-3 HOLDINGS'
---------------- ADDITIONAL
SHARES PAR PAID-IN RETAINED
ISSUED VALUE CAPITAL EARNINGS
-------- ------- -------------- ------------
Balance December 31, 1999 ................................ 65,590 $ 655 $ 483,039 $ 103,545
Comprehensive income:
Net income .............................................. 82,727
Minimum pension liability, net of ($553) tax benefit. ...
Foreign currency translation adjustment .................
Unrealized loss on securities, net of ($2,316)
tax benefit ............................................
Shares issued:
Employee savings plans .................................. 469 5 12,637
Exercise of stock options ............................... 1,154 12 18,050
Grant of restricted stock ................................ 1,512
Amortization of unearned compensation ....................
Other .................................................... 16
------ ----- ----------- ---------
Balance December 31, 2000 ................................ 67,213 672 515,254 186,272
Comprehensive income:
Net income .............................................. 115,458
Minimum pension liability, net of ($11,955)
tax benefit ............................................
Foreign currency translation adjustment, net of ($164)
tax benefit ............................................
Unrealized loss on securities, net of ($111) tax benefit
Unrealized loss on securities reclassified to net income
from other comprehensive loss, net of $2,274 of
taxes ..................................................
Unrealized losses on hedging instruments, net of
($100) tax benefit .....................................
Shares issued:
Sale of common stock .................................... 9,150 92 353,530
Employee savings plans .................................. 418 4 16,864
Acquisition consideration ............................... 588 6 17,351
Exercise of stock options ............................... 1,128 11 28,253
Employee stock purchase plan contributions ............... 4,861
Grant of restricted stock ................................ 2,118
Amortization of unearned compensation ....................
Other .................................................... 21
------ ----- ----------- ---------
Balance December 31, 2001 ................................ 78,497 785 938,252 301,730
Comprehensive income:
Net income .............................................. 178,097
Minimum pension liability, net of ($29,859)
tax benefit ............................................
Foreign currency translation adjustment, net of
($1,626) tax benefit ...................................
Unrealized losses on hedging instruments reclassified
to net income from other comprehensive loss, net of
$198 of taxes ..........................................
Unrealized losses on hedging instruments, net of
($275) tax benefit .....................................
Shares issued:
Sale of common stock .................................... 14,000 140 766,640
Employee savings plans .................................. 529 5 28,133
Acquisition consideration ............................... 229 2 10,605
Exercise of stock options ............................... 970 10 30,665
Employee stock purchase plan contributions .............. 352 4 17,474
Grant of restricted stock ................................ 2,231
Amortization of unearned compensation ....................
Other .................................................... 30
------ ----- ----------- ---------
Balance December 31, 2002 ................................ 94,577 $ 946 $ 1,794,030 $ 479,827
====== ===== =========== =========
ACCUMULATED
OTHER
UNEARNED COMPREHENSIVE
COMPENSATION INCOME (LOSS) TOTAL
-------------- -------------- ---------------
Balance December 31, 1999 ................................ $ (1,661) $ (2,403) $ 583,175
Comprehensive income:
Net income .............................................. 82,727
Minimum pension liability, net of ($553) tax benefit. ... (819) (819)
Foreign currency translation adjustment ................. (1,222) (1,222)
Unrealized loss on securities, net of ($2,316)
tax benefit ............................................ (2,728) (2,728)
-----------
77,958
Shares issued:
Employee savings plans .................................. 12,642
Exercise of stock options ............................... 18,062
Grant of restricted stock ................................ (1,512) --
Amortization of unearned compensation .................... 716 716
Other .................................................... 16
--------- ---------- -----------
Balance December 31, 2000 ................................ (2,457) (7,172) 692,569
Comprehensive income:
Net income .............................................. 115,458
Minimum pension liability, net of ($11,955)
tax benefit ............................................ (19,519) (19,519)
Foreign currency translation adjustment, net of ($164)
tax benefit ............................................ (268) (268)
Unrealized loss on securities, net of ($111) tax benefit (180) (180)
Unrealized loss on securities reclassified to net income
from other comprehensive loss, net of $2,274 of
taxes .................................................. 3,632 3,632
Unrealized losses on hedging instruments, net of
($100) tax benefit ..................................... (163) (163)
-----------
98,960
Shares issued:
Sale of common stock .................................... 353,622
Employee savings plans .................................. 16,868
Acquisition consideration ............................... 17,357
Exercise of stock options ............................... 28,264
Employee stock purchase plan contributions ............... 4,861
Grant of restricted stock ................................ (2,118) --
Amortization of unearned compensation .................... 1,370 1,370
Other .................................................... 21
--------- ---------- -----------
Balance December 31, 2001 ................................ (3,205) (23,670) 1,213,892
Comprehensive income:
Net income .............................................. 178,097
Minimum pension liability, net of ($29,859)
tax benefit ............................................ (45,580) (45,580)
Foreign currency translation adjustment, net of
($1,626) tax benefit ................................... 65 65
Unrealized losses on hedging instruments reclassified
to net income from other comprehensive loss, net of
$198 of taxes .......................................... 323 323
Unrealized losses on hedging instruments, net of
($275) tax benefit ..................................... (437) (437)
-----------
132,468
Shares issued:
Sale of common stock .................................... 766,780
Employee savings plans .................................. 28,138
Acquisition consideration ............................... 10,607
Exercise of stock options ............................... 30,675
Employee stock purchase plan contributions .............. 17,478
Grant of restricted stock ................................ (2,231) --
Amortization of unearned compensation .................... 2,134 2,134
Other .................................................... 30
--------- ---------- -----------
Balance December 31, 2002 ................................ $ (3,302) $ (69,299) $ 2,202,202
========= ========== ===========
See notes to consolidated financial statements.
F-29
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
--------------- ------------ -------------
OPERATING ACTIVITIES:
Net income .......................................................... $ 178,097 $ 115,458 $ 82,727
Loss on retirement of debt .......................................... 16,187 -- --
Cumulative effect of a change in accounting principle ............... 24,370 -- --
Goodwill amortization ............................................... -- 42,356 34,994
Depreciation ........................................................ 66,230 40,362 36,158
Amortization of intangibles and other assets ........................ 9,630 4,233 3,102
Amortization of deferred debt issue costs (included in interest
expense) ........................................................... 7,392 6,388 5,724
Minority interest ................................................... 6,198 4,457 --
Deferred income tax provision ....................................... 79,092 52,638 25,103
Other non-cash items, principally contributions to employee savings
plans in L-3 Holdings' common stock ................................ 28,653 17,576 12,517
Changes in operating assets and liabilities, net of amounts acquired:
Contracts in process ............................................... (75,031) (40,652) (66,402)
Other current assets ............................................... (15,257) 1,643 (2,599)
Other assets ....................................................... (16,641) (12,033) (416)
Accounts payable ................................................... (21,904) (43,165) 38,065
Accrued employment costs ........................................... 30,100 11,931 6,239
Accrued expenses ................................................... (2,581) (20,300) 2,274
Customer advances .................................................. (11,272) 12,627 (17,087)
Accrued interest ................................................... 7,199 (3,047) 3,637
Income taxes ....................................................... 30,852 14,431 13,161
Other current liabilities .......................................... (41,206) (37,555) (59,286)
Pension and postretirement benefits ................................ (1,670) 4,550 (7,214)
Other liabilities .................................................. 20,517 1,423 1,959
All other operating activities ..................................... (495) (353) 1,149
------------ ---------- ----------
Net cash from operating activities .................................. 318,460 172,968 113,805
------------ ---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ..................... (1,742,133) (446,911) (599,608)
Proceeds from sale of interest in subsidiary ........................ -- 75,206 --
Capital expenditures ................................................ (62,058) (48,121) (33,580)
Disposition of property, plant and equipment ........................ 3,548 1,237 18,060
Other investing activities .......................................... (9,885) (6,301) 6,905
------------ ---------- ----------
Net cash used in investing activities ............................... (1,810,528) (424,890) (608,223)
------------ ---------- ----------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility .......................... 566,000 316,400 858,500
Repayment of borrowings under revolving credit facility ............. (566,000) (506,400) (668,500)
Borrowings under bridge loan facility ............................... 500,000 -- --
Repayment of borrowings under bridge loan facility .................. (500,000) -- --
Proceeds from sale of senior subordinated notes ..................... 750,000 420,000 300,000
Redemption of senior subordinated notes ............................. (237,468) -- --
Proceeds from sale of L-3 Holdings' common stock, net ............... 766,780 353,622 --
Debt issuance costs ................................................. (19,759) (16,671) (12,916)
Proceeds from exercise of stock options ............................. 17,372 16,325 8,954
Employee stock purchase plan contributions .......................... 17,478 4,861 --
Distributions to minority interest .................................. (2,854) (2,530) --
Other financing activities .......................................... (25,647) (5,343) (1,728)
------------ ---------- ----------
Net cash from financing activities .................................. 1,265,902 580,264 484,310
------------ ---------- ----------
Net increase (decrease) in cash ..................................... (226,166) 328,342 (10,108)
Cash and cash equivalents, beginning of period ...................... 361,022 32,680 42,788
------------ ---------- ----------
Cash and cash equivalents, end of period ............................ $ 134,856 $ 361,022 $ 32,680
============ ========== ==========
See notes to consolidated financial statements.
F-30
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
L-3 Communications Holdings, Inc. conducts its operations and derives all
its operating income and cash flow through its wholly owned subsidiary, L-3
Communications Corporation ("L-3 Communications"). L-3 Communications Holdings,
Inc. ("L-3 Holdings" and together with its subsidiaries, "L-3" or "the
Company") is a merchant supplier of secure communications and intelligence,
surveillance and reconnaissance (ISR) systems, training, simulation and support
services, aviation products and aircraft modernization, as well as specialized
products. The Company's customers include the U.S. Department of Defense (DoD)
and prime contractors thereof, certain U.S. Government intelligence agencies,
major aerospace and defense contractors, foreign governments, commercial
customers and certain other U.S. federal, state and local government agencies.
The Company has the following four reportable segments: (1) Secure
Communications & ISR, (2) Training, Simulation & Support Services; (3) Aviation
Products & Aircraft Modernization; and (4) Specialized Products.
Secure Communications & ISR. The businesses in this segment provide
products and services for the global ISR market, specializing in signals
intelligence (SIGINT) and communications intelligence (COMINT) systems. These
products and services provide to the warfighter in real-time the unique ability
to collect and analyze unknown electronic signals from command centers,
communication nodes and air defense systems for real-time situation awareness
and response. This segment also provides secure, high data rate communications
systems for military and other U.S. Government and foreign government
reconnaissance and surveillance applications. 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 products
are used to connect a variety of airborne, space, ground and sea-based
communication systems and are used in the transmission, processing, recording,
monitoring and dissemination functions of these communication systems. The
major secure communication programs and systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real-time information collection and dissemination to
users;
o highly specialized fleet management and support, including
procurement, systems integration, sensor development, modifications
and maintenance for signals intelligence and ISR special mission
aircraft and airborne surveillance systems;
o strategic and tactical signals intelligence systems that detect,
collect, identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management; and
o communication systems for surface and undersea vessels and manned
space flights.
Training, Simulation & Support Services. The businesses in this segment
provide a full range of training, simulation and support services, including:
o services designed to meet customer training requirements for aircrews,
navigators, mission operators, gunners and maintenance technicians for
virtually any platform, including military fixed and rotary wing
aircraft, air vehicles and various ground vehicles;
o communication software support, information services and a wide range
of engineering development services and integration support;
o high-end engineering and information support services used for
command, control, communications and ISR architectures, as well as for
air warfare modeling and simulation tools for applications used by the
DoD, Department of Homeland Security and U.S. Government intelligence
agencies, including missile and space systems, Unmanned Aerial
Vehicles (UAVs) and military aircraft;
F-31
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o developing and managing extensive programs in the United States and
internationally that focus on teaching, training and education,
logistics, strategic planning, organizational design, democracy
transition and leadership development;
o producing crisis management software and providing command and control
for homeland security applications; and
o design, prototype development and production of ballistic missile
targets for missile defense applications, including present and future
threat scenarios.
Aviation Products & Aircraft Modernization. The businesses in this segment
provide aviation products and aircraft modernization services, including:
o airborne traffic and collision avoidance systems (TCAS) for commercial
and military applications;
o commercial, solid-state, crash-protected cockpit voice recorders,
flight data recorders and maritime hardened voyage recorders;
o ruggedized custom displays for military and high-end commercial
applications;
o turnkey aviation life cycle management services that integrate custom
developed and commercial off-the-shelf products for various military
and commercial wide-body and rotary wing aircraft, including heavy
maintenance and structural modifications and Head-of-State and
commercial interior completions; and
o engineering, modification, maintenance, logistics and upgrades for
U.S. Special Operations Command aircraft, vehicles and personnel
equipment.
Specialized Products. The businesses in this segment supply products,
including components, subsystems and systems, to military and commercial
customers in several niche markets. These products include:
o ocean products, including acoustic undersea warfare products for mine
hunting, dipping and anti-submarine sonars and naval power
distribution, conditioning, switching and protection equipment for
surface and undersea platforms;
o ruggedization and integration of commercial-off-the-shelf technology
for displays, computers and electronic systems for military and
commercial applications;
o integrated video security and surveillance systems that provide
perimeter security used by the U.S. Immigration and Naturalization
Service and U.S. Border Patrol to monitor and protect U.S. borders;
o security systems for aviation, port and border applications to detect
explosives, concealed weapons, contraband and illegal narcotics, to
inspect agricultural products and to examine cargo;
o telemetry, instrumentation, space and navigation products, including
tracking and flight termination;
o premium fuzing products;
o microwave components used in radar communication satellites, wireless
communication equipment, electronic surveillance, communication and
electronic warfare applications and counter measure systems;
F-32
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o high performance antennas and ground based radomes;
o training devices and motion simulators which produce advanced virtual
reality simulation and high-fidelity representations of cockpits and
mission stations for fixed and rotary wing aircraft and land vehicles;
and
o precision stabilized electro-optic surveillance systems, including
high magnification lowlight, daylight and forward looking infrared
sensors, laser range finders, illuminators and designators, and
digital and wireless communication systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements comprise the
consolidated financial statements of L-3 Holdings and L-3 Communications. L-3
Holdings' only asset is its investment in the common stock of L-3
Communications, its wholly-owned subsidiary, and its only obligations are its
5 1/4% Convertible Senior Subordinated Notes due 2009 and its 4% Senior
Subordinated Convertible Contingent Debt Securities due 2011 (CODES). L-3
Holdings has also guaranteed the borrowings under the senior credit facilities
of L-3 Communications. L-3 Holdings' obligations have been jointly, severally,
fully and unconditionally guaranteed by L-3 Communications and certain of its
domestic subsidiaries, and accordingly, such debt has been reflected as debt of
L-3 Communications in its consolidated financial statements in accordance with
the U.S. Securities and Exchange Commission's (SEC) Staff Accounting Bulletin
(SAB) No. 54. In addition, all issuances of equity securities including grants
of stock options and restricted stock by L-3 Holdings to employees of L-3
Communications have been reflected in the consolidated financial statements of
L-3 Communications. As a result, the consolidated financial positions, results
of operations and cash flows of L-3 Holdings and L-3 Communications are
substantially the same. See Note 20 for additional information.
SALES AND COSTS AND EXPENSES PRESENTATION: The Company presents its sales
and cost and expenses in two categories in the statement of operations,
"Contracts, primarily U.S. Government" and "Commercial, primarily products",
which are based on how the Company recognizes revenue. Sales and costs and
expenses for the Company's businesses that are primarily U.S. Government
contractors are presented as "Contracts, primarily U.S. Government." The sales
for the Company's U.S. Government contractor businesses are transacted using
written contractual arrangements or contracts, most of which require the Company
to design, develop, manufacture and/or modify complex products, and/or perform
related services according to specifications provided by the customer. These
contracts are within the scope of the American Institute of Certified Public
Accountants Statement of Position 81-1, Accounting for Performance of
Construction-Type and certain Production-Type Contracts (SOP 81-1) and
Accounting Research Bulletin No. 43, Chapter 11, Section A, Government
Contracts, Cost-Plus-Fixed Fee Contracts (ARB 43). Sales reported under
"Contracts, primarily U.S. Government" also include certain sales by the
Company's U.S. Government contractor businesses transacted using contracts for
domestic and foreign commercial customers which also are within the scope of SOP
81-1. Sales and costs and expenses for the Company's businesses whose customers
are primarily commercial customers are presented as "Commercial, primarily
products". These sales to commercial customers are not within the scope of SOP
81-1 or ARB 43, and are recognized in accordance with the SEC's SAB No. 101,
Revenue Recognition in Financial Statements. The Company's commercial businesses
are substantially comprised of Aviation Communication & Surveillance Systems
(ACSS), Aviation Recorders, Microwave components, Detection Systems business
acquired from PerkinElmer, Inc., Satellite Networks, and PrimeWave
Communications.
During 2002, certain commercial businesses of L-3 were combined with other
larger L-3 businesses, which are primarily U.S. Government contractors. Sales
and costs and expenses for these commercial businesses are now presented under
the caption "Contracts, primarily U.S. Government." The Company has
reclassified sales and costs and expenses for all prior periods presented to
conform to the 2002 presentation.
F-33
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the
Company include all wholly-owned and significant majority-owned subsidiaries.
All significant intercompany transactions are eliminated in consolidation.
Investments over which the Company has significant influence but does not have
voting control are accounted for by the equity method.
CASH AND CASH EQUIVALENTS: Cash equivalents consist of highly liquid
investments with a maturity of three months or less at time of purchase.
REVENUE RECOGNITION: The substantial majority of the Company's direct and
indirect sales to the U.S. Government and certain of the Company's sales to
foreign governments and commercial customers are made pursuant to written
contractual arrangements or "contracts" to design, develop, manufacture and/or
modify complex products, and to the specifications of the buyers (customers) or
to provide services related to the performance of such contracts. These
contracts are within the scope of SOP 81-1, and sales and profits on them are
recognized using percentage-of-completion methods of accounting. Sales and
profits on fixed-price production contracts whose units are produced and
delivered in a continuous or sequential process are recorded as units are
delivered based on their selling prices (the "units-of-delivery" method). Sales
and profits on other fixed-price contracts are recorded based on the ratio of
total actual incurred costs to date to the total estimated costs for each
contract (the "cost-to-cost method"). Amounts representing contract change
orders or claims are included in sales only when they can be reliably estimated
and their realization is reasonably assured. Losses on contracts are recognized
in the period in which they are determined. The impact of revisions of contract
estimates, which may result from contract modifications, performance or other
reasons, are recognized on a cumulative catch-up basis in the period in which
the revisions are made.
Revenue recognition on sales arrangements that are cost-reimbursable
contracts with the U.S. Government are also specifically within the scope of
ARB 43, in addition to SOP 81-1. Sales and profits on a cost-reimbursable
contract are recognized as allowable costs are incurred on the contract and
become billable to the customer, in an amount equal to the allowable costs plus
the profit on those cost which is generally fixed or variable based on the
contract fee arrangement.
Sales on arrangements that are not within the scope of SOP 81-1 or ARB 43
are recognized in accordance with the SEC's SAB No. 101. Sales are recognized
when there is persuasive evidence of an arrangement, delivery has occurred or
services have been performed, the selling price to the buyer is fixed or
determinable and collectibility is reasonably assured.
CONTRACTS IN PROCESS: Contracts in process include receivables and
inventories for contracts that are within the scope of SOP 81-1, as well as
receivables and inventories related to other contractual arrangements. Billed
Receivables represent the uncollected portion of amounts recorded as sales and
billed to customers, including those amounts for sales arrangements that are
not within the scope of SOP 81-1. Unbilled Contract Receivables represent
accumulated incurred costs and earned profits or losses on contracts in process
that have been recorded as sales, but have not yet been billed to customers.
Inventoried Contract Costs represent incurred costs on contracts in process
that have not been recognized as costs and expenses and which are recoverable
under contracts. Incurred contract costs include direct costs and overhead
costs. In accordance with SOP 81-1 and the AICPA Audit and Accounting
Guidelines, Audits of Federal Government Contractors, the Company's inventoried
contract costs for U.S. Government contracts, and contracts with prime
contractors or subcontractors of the U.S. Government, also include allocated
general and administrative costs, independent research and development costs
and bid and proposal costs. Contracts in Process may contain amounts relating
to contracts and programs with long performance cycles, a portion of which may
not be realized within one year. Provisions for contracts in a loss position in
excess of the amounts included in Contracts in Process are reported in
Estimated Costs in Excess of Billings to Complete Contracts in Process, which
is a component of Other Current Liabilities and Other Liabilities. Under the
contractual arrangements on certain contracts with the U.S. Government, the
Company receives progress payments as it incurs costs. The U.S. Government has
a security interest in the Unbilled Contract Receivables and Inventoried
Contract Costs to which progress
F-34
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
payments have been applied, and such progress payments are reflected as a
reduction of the related Unbilled Contract Receivables and Inventoried Contract
Costs. Customer Advances are classified as current liabilities.
Inventories other than Inventoried Contract Costs are stated at the lower
of cost or market primarily using the average cost method.
The Company values its acquired contracts in process on the date of
acquisition at contract value less the Company's estimated costs to complete
the contract and a reasonable profit allowance on the Company's completion
effort commensurate with the profit margin that the Company earns on similar
contracts.
DERIVATIVE FINANCIAL INSTRUMENTS: In connection with its risk management
and financial derivatives, the Company has entered into interest rate swap
agreements, interest rate cap and floor contracts and foreign currency forward
contracts. Derivative financial instruments also include embedded derivatives.
The Company's interest rate swap agreements are accounted for as fair value
hedges. The difference between the variable interest rates paid on the interest
rate swap agreements and the fixed interest rate on the debt instrument
underlying the swap agreements is recorded as increases or decreases to
interest expense. Upon termination of an interest rate swap agreement, the cash
received or paid that relates to the future value of the swap agreements at the
termination date is a deferred gain or loss, which is recognized as a decrease
or increase to interest expense over the remaining term of the underlying debt
instrument. The foreign currency forward contracts are accounted for as cash
flow hedges. Upon settlement, gains and losses on foreign currency forward
contracts are reported as a component of the underlying transaction within
contracts in process. The embedded derivatives related to the issuance of the
Company's debt are recorded at fair value with changes reflected in the
statement of operations.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed by applying
principally the straight-line method to the estimated useful lives of the
related assets. Useful lives range substantially from 10 to 40 years for
buildings and improvements and 3 to 10 years for machinery, equipment,
furniture and fixtures. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful life of the improvements. When
property or equipment is retired or otherwise disposed of, the net book value
of the asset is removed from the Company's balance sheet and the net gain or
loss is included in the determination of income.
DEBT ISSUANCE COSTS: Costs incurred to issue debt are deferred and
amortized as interest expense over the term of the related debt using a method
that approximates the effective interest method.
IDENTIFIABLE INTANGIBLES: Identifiable intangibles include contracts and
customer relationships, unpatented technology and non-compete agreements.
Effective January 1, 2002, the initial measurement of these intangible assets
has been based on their fair values. Fair value for customer relationships and
non-compete agreements are derived using the present value of estimated future
cash flows, net of income taxes, that are expected to result from the programs.
Identifiable intangibles are amortized over their useful lives, which range
from 5 to 20 years.
GOODWILL: Effective January 1, 2002, the Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and other Intangible Assets. The carrying value of goodwill and
indefinite lived identifiable intangible assets are not amortized, but are
tested for impairment based on their estimated fair values using discounted
cash flows valuation at the beginning of each year, and whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. Prior to January 1, 2002, goodwill was amortized on a
straight-line basis over periods ranging from 15 to 40 years except for
goodwill related to acquisitions consummated after June 30, 2001. Prior to the
adoption of SFAS No. 142, the Company evaluated the carrying amount of goodwill
by reference to current and estimated profitability and undiscounted cash
flows.
F-35
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME TAXES: The Company provides for income taxes using the liability
method. Deferred income tax assets and liabilities reflect tax carryforwards
and the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes, as
determined under enacted tax laws and rates. The effect of changes in tax laws
or rates is accounted for in the period of enactment.
RESEARCH AND DEVELOPMENT: Independent research and development costs
sponsored by the Company include bid and proposal costs, and relate to both
U.S. Government products and services and those for commercial and foreign
customers. The independent research and development (IRAD) and bid and proposal
costs (B&P) for the Company's businesses that are U.S. Government contractors
are allowable indirect contract costs that are allocated to our U.S. Government
contracts in accordance with U.S. Government regulations. In accordance with
SOP 81-1 and the AICPA Audit and Accounting Guide, Audits of Federal Government
Contractors, the Company reports IRAD and B&P costs allocated to U.S.
Government contracts as costs of sales when the related contract sales are
recognized, and are not accounted for as period expenses. Research and
development costs for the Company's businesses that are not U.S. Government
contractors are expensed as incurred in accordance with SFAS No. 2, Accounting
for Research and Development Costs.
Customer-funded research and development costs, including software
development costs, are incurred pursuant to contracts under which the customer
directs the scope of work and are accounted for as direct contract costs, which
are not research and development expenses under SFAS No. 2.
COMPUTER SOFTWARE COSTS. The Company's software development costs for
computer software to be sold, leased or marketed that are incurred after
establishing technological feasibility for the computer software are
capitalized as other assets and amortized on a product by product basis using
the amount that is the greater of the straight-line method over the useful life
or the ratio of current revenues to total estimated revenues in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed. Capitalized software development costs, net of
accumulated amortization, was $25,724 at December 31, 2002 and $16,025 at
December 31, 2001, and is included in other assets on the consolidated balance
sheets.
STOCK OPTIONS: The Company accounts for stock options under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Compensation expense
for incentive stock options is recognized in income based on the excess, if
any, of L-3 Holdings' fair value of the stock at the grant date of the award or
other measurement date over the amount an employee must pay to acquire the
stock. When the exercise price for incentive stock options granted to employees
equals or exceeds the fair value of the L-3 Holdings common stock at the date
of grant, the Company does not recognize compensation expense. The table below
presents pro forma net income and L-3 Holdings EPS had the Company elected to
recognize compensation expense in accordance with the fair value approach of
SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
amendment of SFAS No. 123.
F-36
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
-------------- -------------- -------------
Net income:
As reported ............ $ 178,097 $ 115,458 $ 82,727
Pro forma .............. 160,079 107,573 75,064
L-3 Holdings Basic EPS:
As reported ............ $ 2.05 $ 1.54 $ 1.24
Pro forma .............. 1.84 1.44 1.13
L-3 Holdings Diluted EPS:
As reported ............ $ 1.93 $ 1.47 $ 1.18
Pro forma .............. 1.75 1.38 1.07
The assumptions used to calculate the fair value of stock options at their
grant dates are presented in Note 14.
PRODUCT WARRANTIES: Product warranty costs are accrued when the covered
products are shipped to customers. Product warranty expense is recognized based
on the terms of the product warranty and the related estimated costs. Accrued
warranty costs are reduced as these costs are incurred.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
sales and costs and expenses during the reporting period. The most significant
of these estimates and assumptions relate to contract estimates of sales and
estimated costs to complete contracts in process, estimates of market values
for inventories reported at lower of cost or market, estimates of pension and
postretirement benefit obligations, recoverability of recorded amounts of fixed
assets and goodwill, income taxes, litigation and environmental obligations.
Actual amounts will differ from these estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS: In May 2002, the FASB issued SFAS
No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections as of April 2002. SFAS No. 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Under the
provisions of SFAS No. 145, gains and losses from extinguishment of debt can
only be classified as extraordinary items if they meet the criteria in APB
Opinion No. 30. The provisions of this Statement related to the rescission of
SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002.
Earlier application is permitted. This statement also amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have economic
effects that are similar, and is effective for transactions occurring after May
15, 2002. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions and are effective for
financial statements issued on or after May 15, 2002. In accordance with the
provisions of SFAS No. 145, beginning on January 1, 2003, the loss on the
retirement of debt of $16,187 ($9,858 after-tax or $0.11 per diluted share)
that the Company recorded in June 2002 (see Note 8) has been presented as a
separate caption within income from continuing operations and the related
income tax benefit has been included in the provision for income taxes. All
related data in these financial statements have been restated to conform with
this presentation.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 applies to legal obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a long-lived
asset, except for certain obligations of lessees. This statement does not apply
to obligations that arise solely from a plan to dispose of a long-lived asset.
SFAS No. 143 requires that estimated asset retirement costs be measured at
their fair values and recognized as assets and depreciated over the useful life
of the related asset.
F-37
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Similarly, liabilities for the present value of asset retirement obligations
are to be recognized and accreted as interest expense each year to their
estimated future value until the asset is retired. These provisions will be
applied to existing asset retirement obligations as of the adoption date as a
cumulative-effect of a change in accounting policy. SFAS No. 143 is effective
for the Company's fiscal years beginning January 1, 2003. SFAS No. 143 is not
expected to have a material effect on the Company's consolidated results of
operations and financial position.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces FASBs'
Emerging Issues Task Force (EITF) No. 94-3 Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan as
was required by EITF No. 94-3. Examples of costs covered by SFAS No. 146
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity. SFAS No. 146 is to be applied to exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 is not
expected to have a material effect on the Company's consolidated results of
operations and financial position.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). This interpretation addresses
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees and clarifies when a
liability for the obligation undertaken should be recognized. The initial
measurement of the liability is the fair value of the guarantee at its
inception. This interpretation does not prescribe a specific account for the
guarantor's offsetting entry when it recognizes the liability at the inception
of a guarantee nor does it specify the subsequent measurement of the guarantors
recognized liability. The initial recognition and measurement provisions shall
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are included in Notes 6 and 15.
FIN 45 is not expected to have a material effect on the Company's consolidated
results of operation and financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to Statement No. 123 that relate to annual financial statements are
effective for the Company's 2002 annual financial statements. The amendments to
Statement No. 123 that relate to interim financial statements are effective for
the Company's March 31, 2003 financial statements. The Company does not intend
to adopt the fair value based method of accounting for stock-based employee
compensation which would require the Company to record a non-cash expense for
the estimated fair value of stock-based compensation grants. Instead the
Company will continue to apply the disclosure-only provisions of SFAS No. 123
(see accounting policy for stock options above and Note 14). Therefore, SFAS
No. 148 is not expected to have a material effect on the Company's consolidated
results of operations and financial position.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). This interpretation provides guidance
on the identification of, and financial reporting for, entities over which
control is achieved through means other than voting rights. Such entities have
been termed by FIN 46 as variable interest entities (VIE). Once effective, FIN
46 will be the guidance that determines (1) whether consolidation is required
under the "controlling financial interest" model of ARB Bulletin No. 51,
Consolidated Financial Statements, or (2) whether the variable-interest model
under FIN 46 should be used to account for existing and new entities. FIN 46
includes guidance for identifying the
F-38
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
enterprise that will consolidate a VIE, which is the enterprise that is exposed
to the majority of an entity's risks or receives the majority of the benefits
from an entity's activities. FIN 46 also requires that the enterprises that
hold a significant variable interest in a VIE make new disclosures in their
financial statements. The transitional disclosures of FIN 46, which are
effective immediately, require an enterprise to identify the entities in which
it holds a variable interest if the enterprise believes that those entities
might be considered VIEs upon the adoption of FIN 46. The implementation and
remaining disclosure requirements of FIN 46 are effective immediately for VIE's
created after January 31, 2003, and on July 1, 2003 for all VIE's created
before January 31, 2003. The Company does not believe that it holds any
interests in VIEs, however, the Company is currently evaluating whether it
holds a variable interest in entities that might be considered VIEs.
RECLASSIFICATIONS: Certain reclassifications have been made to conform
prior-year amounts to the current-year presentation.
3. ACQUISITIONS, DIVESTITURE AND OTHER TRANSACTIONS
ACQUISITIONS
Aircraft Integration Systems. On March 8, 2002, the Company acquired the
assets of Aircraft Integration Systems ("AIS"), a division of Raytheon Company
(Raytheon), for $1,148,700 in cash, which includes $1,130,000 for the original
contract purchase price, and an increase to the contract purchase price of
$18,700 related to additional net assets received at closing, plus acquisition
costs. Following the acquisition, the Company changed AIS's name to L-3
Communications Integrated Systems ("IS"). The purchase price is subject to
adjustment based on the IS closing date net tangible book value, as defined.
The acquisition was financed using approximately $229,000 of cash on hand,
borrowings under the Company's senior credit facilities of $420,000 and a
$500,000 senior subordinated bridge loan (See Note 8.). The Company acquired IS
because it is a long-standing supplier of critical COMINT, SIGINT and unique
sensor systems for special customers within the U.S. Government. The Company
believes that IS has excellent operating prospects as its major customers
increasingly focus on intelligence gathering and information distribution to
the battlefield. The Company also believes there are significant opportunities
to apply its proven business integration and cost control skills to further
enhance IS's operating and financial performance. The Company also believes
that IS creates significant opportunities for the sale of the Company's secure
communications and aviation products, including communication links, signal
processing, antennas, data recorders, displays and traffic control and
collision avoidance systems.
The table below presents a summary of (1) the initial purchase price
allocation for the IS acquired assets and assumed liabilities as was reported
in the Company's unaudited condensed consolidated financial statements as of
March 31, 2002, (2) the adjustments made to the initial purchase price
allocation during the nine months ended December 31, 2002, and (3) the final
purchase price allocation for IS, which includes the results from the audit of
AIS's acquired net assets that was performed by the Company's independent
auditors and the final appraisals and other valuations of fair value for the IS
acquired assets and assumed liabilities. The AIS acquired contracts in process
reflected in the Company's initial purchase price allocation for IS was based
on the accounting records of AIS, which reflected September 2001 contract
estimates prepared by AIS. In order to complete the audit of AIS's acquired net
assets and prepare the Company's final purchase price allocation for IS as of
March 1, 2002, the effective date of acquisition, the Company updated those
September 2001 contract estimates for the five months of activity and changes
in circumstances that occurred from September 2001 to March 1, 2002.
F-39
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
IS PURCHASE PRICE ALLOCATION
-----------------------------------------------------
INITIAL ADJUSTMENT(A) FINAL
------------- --------------- -------------------
Contracts in process ........................ $ 360,567 $ (157,245) $ 203,322 (b)
Other current assets ........................ 1,678 81,844 83,522 (c)
Property, plant and equipment ............... 182,307 20,408 202,715 (d)
Goodwill .................................... 663,215 99,155 762,370 (e)
Intangible assets ........................... 16,894 41,486 58,380 (f)
Other non-current assets .................... 37,958 47,710 85,668 (c)
---------- ---------- ----------
Total assets acquired ...................... 1,262,619 133,358 1,395,977
---------- ---------- ----------
Other current liabilities ................... 17,020 100,425 117,445 (g)
Pension and postretirement benefits ......... 95,000 24,606 119,606 (h)
Other long-term liabilities ................. 1,279 3,334 4,613 (i)
---------- ---------- ----------
Total liabilities assumed .................. 113,299 128,365 241,664
---------- ---------- ----------
Net assets acquired ...................... $1,149,320 $ 4,993 $1,154,313
========== ========== ==========
- ----------------
(a) The adjustments to the initial purchase price allocation include the
preliminary adjustments recorded by the Company in September 2002 that were
reported in the Company's unaudited condensed consolidated financial
statements as of September 30, 2002.
(b) The reduction to contracts in process includes $86,149 to update estimated
costs to complete the AIS acquired contracts as of the date of acquisition
to reflect changes in circumstances that occurred prior to the date of
acquisition; $74,517 to value acquired contracts in process at estimated
contract value less the Company's estimated costs to complete the contracts
and a reasonable profit allowance on the Company's completion effort
commensurate with the profit margin that the Company earns on similar
contracts in accordance with SFAS 141, paragraph 37(c); $12,000 to reduce
the estimated net realizable value of an assumed claim against an AIS
subcontractor; $9,535 to properly translate receivables, inventoried
contract costs and estimated billings and costs to complete a foreign
contract from Australian dollars to U.S. dollars; $19,799 primarily to
reduce the value of unbilled contract receivables and inventoried contract
costs related to inactive and completed contracts for which there is no
remaining contract value, to record the results of physical inventory
counts and to adjust excess and obsolete inventories for amounts that will
not be used on acquired contracts; $7,816 to reduce the percentage of
completion sales on certain acquired contracts in process in order to
reconcile them to AIS's September 2001 contract estimates at completion
contained in the accounting records of AIS; and, $24,856 to record
adjustments made by Raytheon prior to the Company's acquisition of AIS
which were not reflected in the accounting records of AIS primarily
relating to contracts and receivables retained by Raytheon. The AIS
acquired contracts in process had an aggregate contract value of
approximately $3,900,000, including funded and unfunded amounts, with
approximately $1,000,000 of funded backlog at the date of acquisition. The
majority of the revisions to estimated costs to complete acquired contracts
relate to the Sea Sentinel contract, with other amounts relating to the
Extract, Peace Pioneer, SIVAM, SRP and LC-130 contracts. The Company's
aggregate adjustments to contracts in process discussed in this item (b)
amounted to $234,672. In addition, the Company reclassified $77,427 of
negative balances in contracts in process to other current liabilities (see
item (g) below).
(c) The increases to other current assets and other non-current assets
primarily represents estimated deferred income tax assets related to the
differences between financial statement amounts and income tax basis
amounts included in the final IS acquisition balance sheet and tax purchase
price allocations for the acquired assets and assumed liabilities.
F-40
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(d) The increase to property, plant and equipment includes a valuation
adjustment of $26,719 to increase the carrying value of land and buildings
to fair value based on an independent appraisal, partially offset by a
reduction to internal-use software costs and other fixed assets included in
the AIS historical net assets that will not be used by the IS business.
(e) The increase to goodwill represents the effect of the final adjustments to
the purchase price allocation. Goodwill in the amount of $518,412 was
assigned to the Secure Communications & ISR segment and $243,958 was
assigned to the Aviation Products & Aircraft Modernization segment.
Approximately $508,350 of the IS goodwill is expected to be deductible for
income tax purposes, which is less than the amount of goodwill for
financial reporting purposes because of differences in the financial
statement amounts and income tax basis amounts for certain of the acquired
asset and liabilities, pertaining primarily to contracts in process,
property, plant and equipment, other current liabilities and pension and
postretirement benefits.
(f) The increase to intangible assets is to value identifiable intangible
assets relating to acquired contracts and customer-relationships and a
non-compete agreement based on an independent valuation, reduced by $16,894
for certain technology rights included in the AIS historical net assets
that will not be used by the IS business.
(g) The increase to other current liabilities is comprised of reclasses of
$77,427 from contracts in process for contracts with credit balances (see
item (b) above); $3,254 for employee termination costs; and $19,744 for
accounts payable, accrued employment costs and accrued expenses assumed in
the AIS acquisition that were not recorded in the accounting records of
AIS.
(h) The increase to pension and postretirement benefits is based on the final
actuarial valuation for the assumed liabilities.
(i) The increase to other long-term liabilities represents environmental
remediation liabilities assumed in the IS acquisition that were not
recorded in the accounting records of AIS.
The final IS purchase price allocation does not include an adjustment for
the final purchase price of AIS which will be based on the difference between
AIS's final closing date net tangible book value, as defined in the AIS asset
purchase agreement, and AIS's net tangible book value as of September 30, 2001.
The Company has submitted its proposed purchase price adjustment in accordance
with the asset purchase agreement to the Raytheon Company, the seller of the
AIS business, which amounts to a reduction of $100,000 to the final purchase
price submitted by Raytheon to the Company. The Company expects to resolve the
final purchase price for AIS with the seller in 2003. Any amount received by
the Company for a reduction to the AIS purchase price will be recorded as a
reduction to the goodwill for IS.
The cash required to fund the revisions that the Company made to the
estimated costs to complete the AIS acquired contracts in process and estimated
costs in excess of billings on the acquired contracts in a loss position will
be reported as reductions to cash flows from operating activities on the
Company's statement of cash flows as the costs are incurred.
Detection Systems. On June 14, 2002, the Company completed the acquisition
of the detection systems business of PerkinElmer ("Detection Systems") for
$110,000 in cash, which includes $100,000 for the original contract purchase
price, and an increase to the contract purchase price of $10,000 related to a
preliminary purchase price adjustment, plus acquisition costs. The purchase
price is subject to final adjustment based on closing date net working capital,
as defined. Detection Systems offers X-ray screening for several major security
applications, including: (1) aviation systems for checked and oversized
baggage, break bulk cargo and air freight; (2) port and border applications
including pallets, break bulk and air freight; and (3) facility protection such
as parcels, mail and cargo. Detection Systems has a broad range of systems and
technology, and an installed base of over 16,000 units. Detection Systems'
customer base includes major airlines and airports, a number of domestic
agencies, such as the U.S. Customs Service, U.S. Marshals Service, U.S.
Department of Agriculture and U.S. Department of State, and international
authorities throughout Europe, Asia and South America. The acquisition
F-41
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
broadens the Company's capabilities and product offerings in the rapidly
growing areas of airport security and other homeland defense markets, including
explosive detection systems (EDS). The acquisition provides the Company with
enhanced manufacturing and marketing capabilities, which will be used as the
Company works to meet growing demand for its EDS products. Based on the
preliminary purchase price allocation for Detection Systems, goodwill of
$59,942 was assigned to the Specialized Products segment and is not expected to
be deductible for income tax purposes.
Telos, ComCept and TMA. During the third quarter of 2002, in separate
transactions the Company acquired three businesses for an aggregate
consideration of $99,274, which was comprised of $88,667 in cash, 229,494
shares of L-3 Holdings common stock for part of the ComCept purchase price
valued at $10,607, plus acquisition costs. The purchase prices for ComCept and
Technology, Management and Analysis Corporation are subject to adjustment based
on the closing date net assets or net working capital of the acquired
businesses. The Company acquired:
o all of the outstanding common stock of Telos Corporation (Telos), a
business incorporated in California, which provides software development
for command, control and communications and other related services for
military and national security requirements, on July 19, 2002;
o all of the outstanding common stock of ComCept, Inc. (ComCept), a company
with network-centric warfare capabilities, including requirements
development, modeling, simulation, communications and systems development
and integration for ISR, on July 31, 2002. This acquisition is subject to
additional consideration not to exceed 219,088 shares of L-3 Holdings
common stock which is contingent upon the financial performance of ComCept
for the fiscal years ending June 30, 2003 and 2004; and which will be
accounted for as goodwill; and
o all of the outstanding common stock of Technology, Management and Analysis
Corporation (TMA), a provider of professional services to the DoD,
primarily in support of the Naval surface and combat fleet, on September
23, 2002. The core competencies of TMA include engineering, logistics, ship
test and trials, network engineering and support and hardware and software
products. This acquisition is subject to additional purchase price not to
exceed $7,000 which is contingent upon the financial performance of TMA for
the twelve months ending September 30, 2003 and which will be accounted for
as goodwill.
Based on the preliminary purchase price allocations, the goodwill
recognized for the acquisitions of Telos, ComCept and TMA was $87,109, of which
$46,707 is expected to be deductible for income tax purposes. Goodwill of
$22,421 was assigned to the Secure Communications & ISR segment and $64,688 was
assigned to the Training, Simulation & Support Services segment.
Northrop Grumman's Electron Devices and Displays - Navigation Systems -
San Diego Businesses, Wolf Coach Inc., International Microwave Corporation,
Westwood Corporation, Wescam Inc. and Ship Analytics, Inc. During the fourth
quarter of 2002, in separate transactions the Company acquired seven businesses
for an aggregate purchase price of $338,766 in cash plus acquisition costs.
Except for Westwood Corporation and Wescam Inc., the purchase prices are
subject to adjustment based on the closing date net assets or net working
capital of the acquired businesses. The Company acquired:
o the net assets of Northrop Grumman's Electron Devices and Displays -
Navigation Systems - San Diego businesses on October 25, 2002. Electron
Devices is a supplier of microwave power devices to all major prime
contractors on key military programs, including missile seekers, aircraft
navigation and landing systems, airborne and ground radar's and electronic
warfare and communications systems. Following the acquisition, the Company
changed Electron Devices name to L-3 Communications Electron Devices
(Election Devices). Displays - Navigation Systems is a supplier of
ruggedized displays and computer and electronic systems for both military
and commercial applications. Following the acquisition, the Company changed
Displays - Navigation Systems name to L-3 Communications Ruggedized Command
and Control Solutions (Ruggedized C&C);
F-42
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o all of the outstanding common shares of Wolf Coach, Inc. (Wolf Coach), a
producer of mobile communications vehicles, for customers in the television
industry, the military and for the homeland defense market, on November 1,
2002. The acquisition is subject to additional purchase price not to exceed
$4,100 which is contingent upon the financial performance of Wolf Coach for
the years ending December 31, 2003, 2004 and 2005, and which will be
accounted for as goodwill;
o all of the outstanding common stock of International Microwave Corporation
(IMC), a global communications company that provides wireless
communications, network support services, information technology, defense
communications and enhanced surveillance systems, on November 8, 2002. The
acquisition is subject to additional purchase price not to exceed $5,000
which is contingent upon the financial performance of IMC for the year
ending December 31, 2003, and which will be accounted for as goodwill;
o all of the outstanding common stock of Westwood Corporation (Westwood), a
supplier of shipboard power control, switchgear and power distribution
systems to the United States Navy, Army, Air Force and Coast Guard, on
November 13, 2002;
o all of the outstanding common stock of Wescam Inc. (Wescam), a designer and
manufacturer of systems for defense applications that capture images from
mobile platforms and transmit them in real time to tactical command centers
for interpretation and for commercial broadcast applications to production
facilities. On November 21, 2002, the Company purchased approximately 78%
of the outstanding common shares of Wescam. As of December 23, 2002, the
Company had purchased all of the outstanding common shares of Wescam; and
o all of the outstanding common stock of Ship Analytics, Inc (Ship
Analytics), a producer of crisis management software, providing command and
control for homeland security applications, on December 19, 2002. Ship
Analytics also designs, manufactures and operates real-time simulation
systems for critical shipboard operations for commercial maritime and naval
customers. The acquisition is subject to additional purchase price not to
exceed $13,500 which is contingent upon the financial performance of Ship
Analytics for the years ending December 31, 2003, 2004 and 2005, and which
will be accounted for as goodwill.
Based on the preliminary purchase price allocations, the goodwill
recognized for the acquisitions of Electron Devices, Ruggedized C&C, Wolf
Coach, IMC, Westwood, Wescam and Ship Analytics was $199,038, of which $41,174
is expected to be deductible for income tax purposes. Goodwill of $195,575 was
assigned to the Specialized Products segment and $3,463 was assigned to the
Training, Simulation & Support Services segment.
Spar Aerospace. At December 31, 2001, the Company had acquired 70.3% of
the outstanding common stock of Spar Aerospace Limited (Spar), a leading
provider of high-end aviation product modernization, for $103,172 in cash, plus
acquisition costs and acquired control of Spar and the ability to require the
remaining stockholders to tender their shares. The Company acquired control of
Spar on November 23, 2001 after an initial tender offer under which the Company
acquired 65.8% of the outstanding common stock of Spar. During January 2002,
the Company completed the acquisition and paid $43,641 for the remaining
outstanding common stock of Spar which was not tendered to the Company at
December 31, 2001.
SY Technology, BT Fuze and Emergent. During the fourth quarter of 2001, in
separate transactions the Company acquired three other businesses for an
aggregate purchase price of $149,273 in cash plus acquisition costs, including
net purchase price increases of $10,183 based on the closing date balance
sheets of the acquired businesses and $1,800 of additional purchase price based
on the financial performance of the acquired companies for the year ended
December 31, 2001. The Company acquired:
F-43
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o the net assets of SY Technology, Inc. (SY), a provider of air warfare
simulation services, on December 31, 2001. This acquisition is subject to
additional purchase price not to exceed $3,000 which is contingent upon the
financial performance of SY for the year ended December 31, 2002 and the
year ending December 31, 2003 and which will be accounted for as goodwill;
o the net assets of Bulova Technologies, a producer of military fuzes that
prevent the inadvertent firing and detonation of weapons during handling,
on December 19, 2001. Bulova Technologies was later renamed BT Fuze
Products (BT Fuze). This acquisition is subject to additional purchase
price not to exceed $2,500 which is contingent upon the financial
performance of BT Fuze for the year ending December 31, 2003 and which will
be accounted for as goodwill; and
o all of the outstanding common stock of Emergent Government Services Group
(Emergent), a provider of engineering and information services to the U.S.
Air Force, Army, Navy and intelligence agencies, on November 30, 2001.
Following the acquisition, the Company changed Emergent's name to L-3
Communications Analytics (L-3 Analytics).
Based on the final purchase price allocations, the goodwill recognized in
the acquisitions of Spar, SY, BT Fuze and Emergent was $199,916, of which
78,497 is expected to be fully deductible for tax purposes. Goodwill of
$103,804 was assigned to the Aviation Products & Aircraft Modernization
segment, $61,075 was assigned to the Training, Simulation & Support Services
segment and $35,037 was assigned to the Specialized Products segment.
KDI and EER. On May 4, 2001, the Company acquired all of the outstanding
common stock of KDI Precision Products (KDI) for $78,862 in cash plus
acquisition costs. On May 31, 2001, the Company acquired all of the outstanding
common stock of EER Systems (EER) for $119,392 in cash plus acquisition costs.
The purchase price for EER was increased on December 31, 2002 by $5,000, which
will be paid to the EER shareholders in 2003, for a purchase price adjustment
that was based on the financial performance of EER for the year ended December
31, 2002.
TDTS, TrexCom, TCAS, MPRI and Coleman. On February 10, 2000, the Company
acquired the assets of the Training Devices and Training Services (TDTS)
business of Raytheon Company for $160,000 in cash plus acquisition costs.
Following the acquisition, the Company changed TDTS's name to L-3
Communications Link Simulation and Training ("Link Simulation and Training").
On February 14, 2000, the Company acquired the assets of the LNR and EMP
businesses of Trex Communications Corporation (TrexCom) for $49,310 in cash
plus acquisition costs. On April 28, 2000, the Company acquired the Traffic
Alert and Collision Avoidance System (TCAS) product line from Honeywell Inc.
for a purchase price of $239,200 in cash plus acquisition costs. On June 30,
2000, the Company acquired all the outstanding common stock of MPRI Inc. (MPRI)
for $39,606 in cash plus acquisition costs. On December 29, 2000, the Company
acquired all of the outstanding common stock of Coleman Research Corporation
(Coleman), a subsidiary of Thermo Electron Corporation, for $60,000 in cash
plus acquisition costs, and additional purchase price not to exceed $5,000
which is contingent upon the financial performance of Coleman for the year
ended December 31, 2001.
Additionally, during the years ended December 31, 2002, 2001 and 2000, the
Company purchased other businesses, which individually and in the aggregate
were not material to its consolidated results of operations, financial position
or cash flows in the year acquired.
Substantially all of the acquisitions were initially financed with cash on
hand or borrowings on the Company's bank credit facilities.
All of the Company's acquisitions have been accounted for as purchase
business combinations and are included in the Company's results of operations
from their respective effective dates. The assets and liabilities recorded in
connection with the purchase price allocations for the acquisitions of
Detection Systems, Telos, ComCept, TMA, Electron Devices and Display --
Navigation Systems -- San Diego, Wolf Coach, IMC, Westwood, Wescam and Ship
Analytics are based upon preliminary estimates of fair
F-44
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
values for contracts in process, inventories, estimated costs in excess of
billings to complete contracts in process, identifiable intangibles and
deferred income taxes. Actual adjustments will be based on the final purchase
prices and final appraisals and other analyses of fair values which are in
process. The Company does not expect the differences between the preliminary
and final purchase price allocations for the acquisitions to be material. The
Company expects to complete the purchase price allocations during the first
half of 2003.
Pro Forma Statement of Operations Data. Had the acquisitions of IS,
Detection Systems, Telos, ComCept, TMA, Electron Devices, Ruggedized C&C, Wolf
Coach, IMC, Westwood, Wescam and Ship Analytics and the related financing
transactions occurred on January 1, 2002, the unaudited pro forma sales, net
income and diluted earnings per share would have been approximately $1,353,400,
$76,600 and $0.76 for the three months ended December 31, 2002, and $4,699,100,
$167,800 and $1.71 for the year ended December 31, 2002.
Had the acquisitions of KDI, EER, SY, BT Fuze, L-3 Analytics, Spar, IS,
Detection Systems, Telos, ComCept, TMA, Electron Devices, Ruggedized C&C, Wolf
Coach, IMC, Westwood, Wescam and Ship Analytics and the related financing
transactions occurred on January 1, 2001, the unaudited pro forma sales, net
income and diluted earnings per share would have been approximately $1,157,700,
$20,300 and $0.22 for the three months ended December 31, 2001, and $4,139,600,
$113,900 and $1.21 for the year ended December 31, 2001.
The pro forma results disclosed in the preceding paragraphs are based on
various assumptions and are not necessarily indicative of the result of
operations that would have occurred had the Company completed the acquisitions
and the related financing transactions on January 1, 2001 and January 1, 2002.
Goodrich Avionics Systems. On January 29, 2003, the Company announced that
it had agreed to acquire Goodrich Avionics Systems of Goodrich Corporation, for
$188,000 in cash. Goodrich Avionics Systems develops and produces avionics
products for commercial and military applications which are focused on aircraft
safety and situational awareness, and include collision avoidance systems,
display systems, weather avoidance systems, terrain awareness and warning
systems, navigation systems and power supply and conditioning systems. Goodrich
Avionics Systems also has a service, repair and overhaul operation.
DIVESTITURE AND OTHER TRANSACTIONS
On May 31, 2001, the Company sold a 30% interest in Aviation
Communications and Surveillance Systems LLC (ACSS) which comprised the
Company's TCAS business to Thales Avionics, a wholly owned subsidiary of Thales
(formerly Thomson-CSF), for $75,206 of cash. L-3 continues to consolidate the
financial statements of ACSS.
Interest and other income for the year ended December 31, 2001 includes a
gain of $6,966 from the sale of a 30% interest in ACSS which was largely offset
by a $6,341 write-down in the carrying amount of an investment in common stock.
Also included in interest and other income for 2001 is a charge of $515 to
account for the increase, in accordance with SFAS No. 133, in the fair value
assigned to the embedded derivatives in L-3 Holdings' $420,000 4% Senior
Subordinated Contingent Debt Securities due 2011 sold in the fourth quarter of
2001, and a loss of $751 from an equity method investment. Interest and other
income for the year ended December 31, 2000 includes gains of $14,940 from the
sales of the Company's interests in certain businesses. These gains were
largely offset by losses of $12,456 on the write-down in the carrying value of
certain investments and intangible assets. The net proceeds from the sales were
$19,638, and are included in Other Investing Activities on the Statement of
Cash Flows. In March 2001, the Company settled certain items with a third party
provider related to an existing services agreement. In connection with the
settlement, L-3 received a net cash payment of $14,200. The payment represents
a credit for fees being paid over the term of the services agreement and
incremental costs incurred by the Company over the same period arising from
performance deficiencies under the services agreement. These incremental costs
include additional operating costs for material management, vendor replacement,
F-45
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
rework, warranty, manufacturing and engineering support, and administrative
activities. The $14,200 cash receipt was recorded as a reduction of costs and
expenses in 2001.
4. CONTRACTS IN PROCESS
The components of contracts in process are presented in the table below.
The unbilled contract receivables, inventoried contract costs and unliquidated
progress payments are principally related to contracts with the U.S. Government
and prime contractors or subcontractors of the U.S. Government.
DECEMBER 31,
----------------------------
2002 2001
------------- ------------
Billed receivables, less allowances of $12,801 and $11,649 ......... $ 568,382 $ 330,795
---------- ---------
Unbilled contract receivables ...................................... 490,678 353,262
Less: unliquidated progress payments ............................... (171,457) (102,739)
---------- ---------
Unbilled contract receivables, net ................................ 319,221 250,523
---------- ---------
Inventoried contract costs, gross .................................. 320,043 122,211
Less: unliquidated progress payments ............................... (13,507) (6,575)
---------- ---------
Inventoried contract costs, net ................................... 306,536 115,636
---------- ---------
Inventories at lower of cost or market ............................. 123,854 104,870
---------- ---------
Total contracts in process ........................................ $1,317,993 $ 801,824
========== =========
The Company believes that approximately 93% of the unbilled contract
receivables at December 31, 2002 will be billed and collected within one year.
The selling, general and administrative (SG&A) cost data presented in the
table below pertains to the Company's businesses that are primarily U.S.
Government contractors and have been used in the determination of the Company's
costs and expenses for "Contracts, primarily U.S. Government", which are
presented on the Company's statements of operations.
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
SG&A costs included in inventoried contract costs at
December 31, ............................................. $ 52,253 $ 19,970 $ 24,396
SG&A costs included in inventoried contract costs
related to businesses acquired during the period ......... 34,417 1,575 3,066
SG&A incurred costs ....................................... 429,386 298,317 256,470
SG&A included in costs and expenses for Contracts,
primarily U.S. Government ................................ 431,520 304,318 258,777
Independent research and development, including bid
and proposal costs included in SG&A incurred
costs .................................................... 125,108 81,019 77,831
The cost data in the table above does not include the SG&A and research
and development expenses for the Company's businesses that are primarily not
U.S. Government contractors, which are separately presented on the Company's
statement of operations under costs and expenses for "Commercial, primarily
products".
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company ceased recording goodwill
amortization expense and began testing goodwill for impairment based on
estimated fair values at the beginning of the year using a
F-46
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
discounted cash flows valuation. Based on the estimated fair values of the
Company's reporting units as of January 1, 2002, the goodwill for certain space
and broadband commercial communications businesses included in the Specialized
Products segment was impaired. In the first quarter of 2002, the Company
completed its valuation of the assets and liabilities for these businesses and
has recorded an impairment charge of $24,370, net of a $6,428 income tax
benefit. The impairment charge was recorded as a cumulative effect of a change
in accounting principle effective January 1, 2002, in accordance with the
adoption provisions of SFAS No. 142.
The table below presents net income and basic and diluted EPS for the year
ended December 31, 2002 compared with those amounts for the same period in 2001
and 2000, adjusted to exclude goodwill amortization, net of income taxes for
2001 and 2000.
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Reported income before accounting change .......... $ 202,467 $ 115,458 $ 82,727
Add: Goodwill amortization, net of income taxes and
minority interest ................................ -- 33,899 29,617
---------- ---------- ----------
Adjusted income before accounting change .......... $ 202,467 $ 149,357 $ 112,344
========== ========== ==========
Adjusted net income ............................... $ 178,097 $ 149,357 $ 112,344
========== ========== ==========
BASIC EPS:
Reported before accounting change ................. $ 2.33 $ 1.54 $ 1.24
Goodwill amortization, net of income tax and
minority interest ................................ -- 0.45 0.44
---------- ---------- ----------
Adjusted before accounting change ................. $ 2.33 $ 1.99 $ 1.68
========== ========== ==========
Adjusted net income ............................... $ 2.05 $ 1.99 $ 1.68
========== ========== ==========
DILUTED EPS:
Reported before accounting change ................. $ 2.18 $ 1.47 $ 1.18
Goodwill amortization, net of income tax
and minority interest ............................ -- 0.40 0.43
---------- ---------- ----------
Adjusted before accounting change ................. $ 2.18 $ 1.87 $ 1.61
========== ========== ==========
Adjusted net income ............................... $ 1.93 $ 1.87 $ 1.61
========== ========== ==========
The table below presents the changes in goodwill allocated to the
reportable segments during the year ended December 31, 2002.
TRAINING AVIATION
SECURE SIMULATION & PRODUCTS &
COMMUNICATIONS SUPPORT AIRCRAFT SPECIALIZED CONSOLIDATED
& ISR SERVICES MODERNIZATION PRODUCTS TOTAL
---------------- -------------- --------------- --------------- ---------------
BALANCE JANUARY 1, 2002 ........... $ 181,215 $ 377,127 $ 371,222 $ 778,154 $ 1,707,718
Acquisitions ..................... 540,920 68,300 249,067 259,341 1,117,628
Impairment losses ................ -- -- -- (30,798) (30,798)
--------- --------- --------- ----------- -----------
BALANCE DECEMBER 31, 2002 ......... $ 722,135 $ 445,427 $ 620,289 $ 1,006,697 $ 2,794,548
========= ========= ========= =========== ===========
The gross carrying amount and accumulated amortization balances of the
Company's other intangible assets that are subject to amortization are
presented in the tables below.
F-47
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
-------------------------------------------
GROSS
CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
---------- -------------- -------------
Intangible assets that are subject to amortization:
Customer relationships ........................... $ 80,826 $ 600 $ 80,226
Unpatented technology ............................ 9,825 1,844 7,981
Non-compete agreements ........................... 2,000 60 1,940
-------- ------- --------
Total .......................................... $ 92,651 $ 2,504 $ 90,147
======== ======= ========
DECEMBER 31, 2001
-------------------------------------------
GROSS
CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
---------- -------------- -------------
Intangible assets that are subject to amortization:
Unpatented technology ............................ $ 5,000 $ 1,167 $ 3,833
======= ======= =======
The Company recorded $1,337 and $333 of other intangible asset
amortization for the years ended December 31, 2002 and 2001, respectively.
Other intangible assets amortization, based on gross carrying amounts at
December 31, 2002, is estimated to be $5,861 for 2003, $8,580 for 2004, $9,250
for 2005, $8,538 for 2006, and $8,197 for 2007.
6. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
The components of other current liabilities are presented in the table
below.
DECEMBER 31,
-------------------------
2002 2001
----------- -----------
Accrued product warranty .................................... $ 56,487 $ 15,968
Negative balances in contracts in process ................... 36,841 --
Estimated cost in excess of billings to complete contracts in
process in a loss position ................................ 12,451 17,859
Spar purchase price payable ................................. -- 43,641
Other ....................................................... 53,114 47,645
-------- ---------
Total other current liabilities ........................... $158,893 $ 125,113
======== =========
F-48
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below presents the changes in the Company's accrual for product
warranties for the year ended December 31, 2002.
Balance January 1, 2002 ....................................... $ 15,968
Acquisitions during this period ............................... 14,185
Accruals for product warranties issued during the period ...... 34,016
Accruals related to pre-existing product warranties ........... 2,231
Settlements made during the period ............................ (9,913)
--------
Balance December 31, 2002 ..................................... $ 56,487
========
At December 31, 2002 and 2001, other liabilities include $13,303 and
$18,814 for the non-current portion of estimated costs in excess of billings to
complete contracts in process in a loss position.
7. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-------------------------
2002 2001
----------- -----------
Land ..................................................... $ 33,876 $ 12,947
Buildings and improvements ............................... 121,830 38,544
Machinery, equipment, furniture and fixtures ............. 372,602 260,338
Leasehold improvements ................................... 121,814 29,232
-------- ---------
Gross property, plant and equipment ..................... 650,122 341,061
Less: accumulated depreciation and amortization .......... 191,483 137,687
-------- ---------
Property, plant and equipment, net ...................... $458,639 $ 203,374
======== =========
Depreciation expense for property, plant and equipment was $66,230 for
2002, $40,362 for 2001 and $36,158 for 2000.
8. DEBT
The components of long-term debt and a reconciliation to the carrying
amount of long-term debt are presented in the table below.
DECEMBER 31,
-------------------------------
2002 2001
-------------- --------------
L-3 Communications:
Borrowings under Senior Credit Facilities .................... $ -- $ --
10 3/8% Senior Subordinated Notes due 2007 ................... -- 225,000
8 1/2% Senior Subordinated Notes due 2008 .................... 180,000 180,000
8% Senior Subordinated Notes due 2008 ........................ 200,000 200,000
7 5/8% Senior Subordinated Notes due 2012 .................... 750,000 --
----------- -----------
1,130,000 605,000
L-3 Holdings:
5 1/4% Convertible Senior Subordinated Notes due 2009 ........ 300,000 300,000
4% Senior Subordinated Convertible Contingent Debt Securities
due 2011 (CODES) ............................................ 420,000 420,000
----------- -----------
Principal amount of long-term debt ........................... 1,850,000 1,325,000
Less: Unamortized discount on CODES .......................... 2,248 2,502
Fair value of interest rate swap agreements ............... -- 7,246
----------- -----------
Carrying amount of long-term debt ............................ $ 1,847,752 $ 1,315,252
=========== ===========
On February 26, 2002, the Company's lenders approved a $150,000 increase
in the amount of the Senior Credit Facilities. The five-year revolving credit
facility, which matures on May 15, 2006, was
F-49
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
increased by $100,000 to $500,000 and the 364-day revolving credit facility
increased by $50,000 to $250,000. On February 25, 2003, the maturity date of
the $250,000 364-day revolving credit facility was extended to February 24,
2004.
At December 31, 2002, available borrowings under the Company's Senior
Credit Facilities were $661,405, after reductions for outstanding letters of
credit of $88,595. There were no outstanding borrowings under the Senior Credit
Facilities at December 31, 2002.
Borrowings under the Senior Credit Facilities bear interest, at L-3
Communications' option, at either: (i) a "base rate" equal to the higher of
0.50% per annum above the latest federal funds rate and the Bank of America
"reference rate" (as defined) plus a spread ranging from 2.00% to 0.50% per
annum depending on L-3 Communications' Debt Ratio at the time of determination
or (ii) a "LIBOR rate" (as defined) plus a spread ranging from 3.00% to 1.50%
per annum depending on L-3 Communications' Debt Ratio at the time of
determination. The Debt Ratio is defined as the ratio of Consolidated Total
Debt to Consolidated EBITDA. Consolidated Total Debt is equal to outstanding
debt plus capitalized lease obligations minus the lesser of actual unrestricted
cash or $50,000. Consolidated EBITDA is equal to consolidated net income
(excluding extraordinary gains and losses, and gains and losses in connection
with asset dispositions and discontinued operations) for the most recent four
quarters, plus consolidated interest expense, income taxes, depreciation and
amortization minus depreciation and amortization related to minority interest.
At December 31, 2002, there were no borrowings outstanding under the Senior
Credit Facilities. L-3 Communications pays commitment fees calculated on the
daily amounts of the available unused commitments under the Senior Credit
Facilities at a rate ranging from 0.50% to 0.30% per annum, depending on L-3
Communications' Debt Ratio in effect at the time of determination. L-3
Communications pays letter of credit fees calculated at a rate ranging from
1.50% to 0.75% per annum for performance letters of credit and 3.00% to 1.50%
for all other letters of credit, in each case depending on L-3 Communications'
Debt Ratio at the time of determination.
In June 2002, L-3 Communications sold $750,000 of 7 5/8% Senior
Subordinated Notes due June 15, 2012 (the "June 2002 Notes") with interest
payable semi-annually on June 15 and December 15 of each year commencing
December 15, 2002. The net proceeds from this offering and the concurrent sale
of common stock by L-3 Holdings (see Note 10) were used to (1) repay $500,000
borrowed on March 8, 2002, under the Company's senior subordinated bridge loan
facility, (2) repay the indebtedness outstanding under the Company's senior
credit facilities, (3) repurchase and redeem the 10 3/8% Senior Subordinated
Notes due 2007 and (4) increase cash and cash equivalents. The June 2002 Notes
are general unsecured obligations of L-3 Communications and are subordinated in
right of payment to all existing and future senior debt of L-3 Communications.
The June 2002 Notes are subject to redemption at any time, at the option of L-3
Communications, in whole or in part, on or after June 15, 2007 at redemption
prices (plus accrued and unpaid interest) starting at 103.813% of the principal
amount (plus accrued and unpaid interest) during the 12-month period beginning
June 15, 2007 and declining annually to 100% of principal (plus accrued and
unpaid interest) on June 15, 2010 and thereafter. Prior to June 15, 2005, L-3
Communications may redeem up to 35% of the June 2002 Notes with the proceeds of
certain equity offerings at a redemption price of 107.625% of the principal
amount (plus accrued and unpaid interest).
In the fourth quarter of 2001, L-3 Holdings sold $420,000 of 4% Senior
Subordinated Convertible Contingent Debt Securities (CODES) due September 15,
2011. The net proceeds from this offering amounted to approximately $407,450
after underwriting discounts and commissions and other offering expenses.
Interest is payable semi-annually on March 15 and September 15 of each year
commencing March 15, 2002. The CODES are convertible into L-3 Holdings' common
stock at a conversion price of $53.813 per share (7,804,878 shares) under any
of the following circumstances: (1) during any Conversion Period (defined
below) if the closing sales price of the common stock of L-3 Holdings is more
than 120% of the conversion price ($64.58) for at least 20 trading days in the
30 consecutive trading-day period ending on the first day of the respective
Conversion Period; (2) during the five business day period following any 10
consecutive trading-day period in which the average of the trading prices for
the CODES was less than 105% of the conversion value; (3) if the credit ratings
assigned to the CODES by either
F-50
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Moody's or Standard & Poor's are below certain specified ratings, (4) if they
have been called for redemption by the Company, or (5) upon the occurrence of
certain specified corporate transactions. A Conversion Period is the period
from and including the thirtieth trading day in a fiscal quarter to, but not
including, the thirtieth trading day of the immediately following fiscal
quarter. There are four Conversion Periods in each fiscal year. The CODES are
subject to redemption at any time at the option of L-3 Holdings, in whole or in
part, on or after October 24, 2004 at redemption prices (plus accrued and
unpaid interest -- including contingent interest) starting at 102% of principal
(plus accrued and unpaid interest -- including contingent interest) during the
12 month period beginning October 24, 2004 and declining annually to 100% of
principal (plus accrued and unpaid interest -- including contingent interest)
on September 15, 2006. The CODES are general unsecured obligations of L-3
Holdings and are subordinated in right of payment to all existing and future
senior debt of L-3.
Additionally, holders of the CODES have a right to receive contingent
interest payments, not to exceed a per annum rate of 0.5% of the outstanding
principal amount of the CODES, which will be paid on the CODES during any
six-month period following a six-month period in which the average trading
price of the CODES exceeds 120% of the principal amount of the CODES. The
contingent interest payment provision was triggered for the period beginning
September 15, 2002 to March 14, 2003 and resulted in additional interest for
that period of $840.
The contingent interest payment provision as well as the ability of the
holders of the CODES to exercise the conversion features as a result of changes
in the credit ratings assigned to the CODES have been accounted for as embedded
derivatives. The initial aggregate fair values assigned to the embedded
derivatives was $2,544, which was also recorded as a discount to the CODES. The
carrying values assigned to the embedded derivatives were recorded in other
liabilities and are adjusted periodically through other income (expense) for
changes in their fair values.
In the fourth quarter of 2000, L-3 Holdings sold $300,000 of 5 1/4%
Convertible Senior Subordinated Notes (Convertible Notes) due June 1, 2009. The
net proceeds from this offering amounted to approximately $290,500 after
underwriting discounts and other offering expenses. Interest is payable
semi-annually on June 1 and December 1 of each year commencing June 1, 2001.
The Convertible Notes may be converted at any time into L-3 Holdings common
stock at a conversion price of $40.75 per share. If all the Convertible Notes
were converted, an additional 7,361,964 shares of L-3 Holdings common stock
would have been outstanding at December 31, 2002. The Convertible Notes are
general unsecured obligations of L-3 Holdings and are subordinated in right of
payment to all existing and future senior debt of L-3 Holdings and L-3
Communications. The Convertible Notes are subject to redemption at any time, at
the option of L-3 Holdings, in whole or in part, on or after December 1, 2003
at redemption prices (plus accrued and unpaid interest) starting at 102.625% of
principal (plus accrued and unpaid interest) during the 12-month period
beginning December 1, 2003 and declining annually to 100% of principal (plus
accrued and unpaid interest) on December 1, 2005 and thereafter.
In December 1998, L-3 Communications sold $200,000 of 8% Senior
Subordinated Notes due August 1, 2008 (December 1998 Notes) with interest
payable semi-annually on February 1 and August 1 of each year commencing
February 1, 1999. The December 1998 Notes are general unsecured obligations of
L-3 Communications and are subordinated in right of payment to all existing and
future senior debt of L-3 Communications. The December 1998 Notes are subject
to redemption at any time, at the option of L-3 Communications, in whole or in
part, on or after August 1, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 104% of principal (plus accrued and unpaid interest)
during the 12-month period beginning August 1, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on August 1, 2006 and
thereafter.
In May 1998, L-3 Communications sold $180,000 of 8 1/2% Senior Subordinated
Notes due May 15, 2008 (May 1998 Notes) with interest payable semi-annually on
May 15 and November 15 of each year commencing November 15, 1998. The May 1998
Notes are general unsecured obligations of L-3 Communications and are
subordinated in right of payment to all existing and future senior debt of L-3
F-51
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Communications. The May 1998 Notes are subject to redemption at any time, at
the option of L-3 Communications, in whole or in part, on or after May 15, 2003
at redemption prices (plus accrued and unpaid interest) starting at 104.250% of
principal (plus accrued and unpaid interest) during the 12-month period
beginning May 15, 2003 and declining annually to 100% of principal (plus
accrued and unpaid interest) on May 15, 2006 and thereafter.
In April 1997, L-3 Communications sold $225,000 of 10 3/8% Senior
Subordinated Notes due May 1, 2007 (1997 Notes) with interest payable
semi-annually on May 1 and November 1 of each year commencing November 1, 1997.
On June 6, 2002, L-3 Communications commenced a tender offer to purchase any
and all of the $225,000 aggregate principal amount of 10 3/8% Senior
Subordinated Notes due 2007. The tender offer expired on July 3, 2002. On June
25, 2002, L-3 Communications sent a notice of redemption for all of its
$225,000 aggregate principal amount of 10 3/8% Senior Subordinated Notes due
2007 that remained outstanding after the expiration of the tender offer. Upon
sending the notice, the remaining notes became due and payable at the
redemption price as of July 25, 2002. At December 31, 2002, L-3 Communications
had purchased and paid cash for all of these notes plus accrued interest, and
premiums, fees and other transaction costs of $12,469. For the year ended
December 31, 2002, L-3 Communications recorded a loss on retirement of debt of
$16,187, comprising premiums, fees and other transaction costs of $12,469 and
$3,718 to write-off the remaining balance of debt issue costs relating to
these notes.
Collectively the May 1998 Notes, December 1998 Notes and June 2002 Notes
comprise the "Senior Subordinated Notes". The maturities on the Senior
Subordinated Notes, Convertible Notes and CODES are $380,000 in 2008, $300,000
in 2009, $420,000 in 2011 and $750,000 in 2012.
In June and August of 2002, L-3 Communications terminated the interest
rate swap agreements entered into in 2001 on $380,000 of its Senior
Subordinated Notes due 2008 and received cash of $9,302. In connection with the
termination, L-3 Communications recorded a reduction in interest expense for
the year ended December 31, 2002 of $4,632, which represented interest
reductions related to the period prior to the termination of these swap
agreements. The remaining $4,670 was recorded as a deferred gain and will be
amortized as a reduction of interest expense over the remaining terms of the
$380,000 of Senior Subordinated Notes due 2008 at an amount of $191 per
quarter, or $764 annually. L-3 Communications recorded an additional reduction
of interest expense for the year ended December 31, 2002 of $2,504 relating to
interest savings for interest periods which ended prior to the termination of
these interest rate swap agreements.
In June 2002, L-3 Communications entered into interest rate swap
agreements on $200,000 of its 7 5/8% Senior Subordinated Notes due 2012. These
swap agreements exchanged the fixed interest rate for a variable interest rate
on $200,000 of the $750,000 principal amount outstanding. On September 30,
2002, L-3 Communications terminated these interest rate swap agreements and
received cash of $13,935 in October 2002. In connection with the termination,
L-3 Communications recorded a reduction of interest expense for the year ended
December 31, 2002 of $1,762, which represented interest reductions related to
the period prior to the termination of these swap agreements. The remaining
$12,173 was recorded as a deferred gain and will be amortized as a reduction of
interest expense over the remaining term of the 7 5/8% Senior Subordinated Notes
due 2012 at an amount of $313 per quarter, or $1,254 annually.
The Senior Credit Facilities, Senior Subordinated Notes, Convertible Notes
and CODES agreements contain financial and other restrictive covenants that
limit, among other things, the ability of the Company to borrow additional
funds, dispose of assets, or pay cash dividends. The Company's most restrictive
covenants are contained in the Senior Credit Facilities, as amended. The
covenants require that (1) the Company's Debt Ratio be less than or equal to
4.25 for the quarters ended December 31, 2002 through September 30, 2003,
thereafter declining to less than or equal to 3.50 for the quarters ending
December 31, 2004 and thereafter, and (2) the Company's Interest Coverage Ratio
be greater than or equal to 2.75 for the quarter ended December 31, 2002, and
that the minimum allowable Interest Coverage Ratio thereafter increase to
greater than or equal to 3.00 for the quarters ending December 31, 2003 and
F-52
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
thereafter. The Interest Coverage Ratio is equal to the ratio of Consolidated
EBITDA to Consolidated Cash Interest Expense. Consolidated Cash Interest
Expense is equal to interest expense less the amortization of deferred debt
issue costs included in interest expense. For purposes of calculating the
financial covenants under the Senior Credit Facilities, the Convertible Notes
and CODES are considered debt of L-3 Communications. The Senior Credit
Facilities also limit the payment of dividends by L-3 Communications to L-3
Holdings except for payment of franchise taxes, fees to maintain L-3 Holdings'
legal existence, income taxes up to certain amounts, interest accrued on the
Convertible Notes and CODES or to provide for operating costs of up to $1,000
annually. Under the covenant, L-3 Communications may also pay permitted
dividends to L-3 Holdings from its excess cash flow, as defined, a cumulative
amount of $5,000, provided that the Debt Ratio is no greater than 3.5 to 1 as
of the most recent fiscal quarter. As a result, at December 31, 2002, $5,000 of
L-3 Communications net assets were available for payment of dividends to L-3
Holdings. Through December 31, 2002, the Company was in compliance with these
covenants at all times.
In connection with the Senior Credit Facilities, the Company has granted
the lenders a first priority lien on the stock of L-3 Communications and
substantially all of its material domestic subsidiaries. The borrowings under
the Senior Credit Facilities are guaranteed by L-3 Holdings and by
substantially all of the material domestic subsidiaries of L-3 Communications
on a senior basis. The payment of principal and premium, if any, and interest
on the Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, jointly and severally, by substantially
all of L-3 Communications' restricted subsidiaries other than its foreign
subsidiaries. The guarantees of the Senior Subordinated Notes are junior to the
guarantees of the Senior Credit Facilities and rank pari passu with each other
and the guarantees of the Convertible Notes and the CODES. Additionally, the
Convertible Notes and CODES are unconditionally guaranteed, on an unsecured
senior subordinated basis, jointly and severally, by L-3 Communications and
substantially all of its restricted subsidiaries other than its foreign
subsidiaries. These guarantees rank junior to the guarantees of the Senior
Credit Facilities and rank pari passu with each other and the guarantees of the
Senior Subordinated Notes.
9. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments. The Company's financial instruments
consist primarily of cash and cash equivalents, billed receivables,
investments, trade accounts payable, customer advances, Senior Credit
Facilities, Senior Subordinated Notes, Convertible Notes, CODES, foreign
currency forward contracts, interest rate cap and floor contracts, interest
rate swap agreements and embedded derivatives related to the issuance of the
CODES. The carrying amounts of cash and cash equivalents, billed receivables,
trade accounts payable, Senior Credit Facilities, and customer advances are
representative of their respective fair values because of the short-term
maturities or expected settlement dates of these instruments. The Company's
investments are stated at fair value, which is based on quoted market prices,
as available, and on historical cost for investments for which it is not
practicable to estimate fair value. Adjustments to the fair value of
investments, which are classified as available-for-sale, are recorded, as an
increase or decrease in shareholders' equity and are included as a component of
accumulated other comprehensive income. The Senior Subordinated Notes are
registered, unlisted public debt which are traded in the over-the-counter
market and their fair values are based on quoted trading activity. The fair
values of the Convertible Notes and CODES are based on quoted prices for the
same or similar issues. The fair value of foreign currency forward contracts
were estimated based on exchange rates at December 31, 2002 and 2001. The fair
values of the interest rate cap and floor contracts, interest rate swap
agreements and the embedded derivatives were estimated by discounting expected
cash flows using quoted market interest rates. The carrying amounts and
estimated fair values of the Company's financial instruments are presented in
the table below.
F-53
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
--------------------------------------------------------
2002 2001
--------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ -----------
Equity investments accounted for using the
cost method ............................... $ 16,140 $ 16,140 $ 13,305 $ 13,305
Equity investments accounted for using the
equity method ............................. 8,481 8,481 3,027 3,027
Securities available-for-sale .............. 100 100 100 100
Senior Subordinated Notes .................. 1,130,000 1,170,500 597,754 630,925
Convertible Notes .......................... 300,000 385,500 300,000 387,000
CODES ...................................... 417,752 469,350 417,498 432,600
Interest rate caps ......................... -- -- -- --
Interest rate floor ........................ -- -- (432) (432)
Foreign currency forward contracts ......... (454) (454) 258 258
Interest rate swaps ........................ -- -- (7,246) (7,246)
Embedded derivatives ....................... (3,087) (3,087) (3,060) (3,060)
Interest Rate Risk Management. To mitigate risks associated with changing
interest rates on borrowings under the Senior Credit Facilities, the Company
entered into interest rate cap and interest rate floor contracts. The interest
rate caps and floors were denominated in U.S. dollars and had designated
maturities which occurred every three months until the interest rate cap and
floor contracts expired in March 2002. In 2001 and 2002, the Company entered
into interest rate swap agreements on certain of its Senior Subordinated Notes
to take advantage of the current low interest rate environment. These swap
agreements exchanged the fixed interest rate for a variable interest rate on a
notional amount equal to either a portion or the entire principal amount of the
hedged notes, were denominated in U.S. dollars and had designated maturities
which occurred on the interest payment dates of the related Senior Subordinated
Notes. Collectively the interest rate cap and floor contracts and interest rate
swap agreements are herein referred to as the ("interest rate agreements").
Cash payments received from or paid to the counterparties on the interest rate
agreements are the difference between the amount that the reference interest
rates are greater than or less than the contract rates on the designated
maturity dates, multiplied by the notional amounts underlying the respective
interest rate agreements. Cash payments or receipts between the Company and
counterparties were recorded as a component of interest expense. The initial
cost or receipt of the interest rate cap and floor contracts were deferred and
amortized as a component of interest expense over the term of the interest rate
cap and floor contracts. The Company manages exposure to counterparty credit
risk by entering into the interest rate agreements only with major financial
institutions that are expected to fully perform under the terms of such
agreements. The notional amounts are used to measure the volume of these
agreements and do not represent exposure to credit loss. There were no
outstanding interest rate agreements at December 31, 2002.
Foreign Currency Exchange Risk Management. Some of the Company's U.S.
operations have contracts with foreign customers which are denominated in
foreign currencies. To mitigate the risk associated with certain of these
contracts denominated in foreign currency, the Company has entered into foreign
currency forward contracts. The Company's activities involving foreign currency
forward contracts are designed to hedge the foreign denominated cash paid or
received, primarily Euro and British Pound. The Company manages exposure to
counterparty credit risk by entering into foreign currency forward contracts
only with major financial institutions that are expected to fully perform under
the terms of such contracts. The notional amounts are used to measure the
volume of these contracts and do not represent exposure to foreign currency
losses.
Information with respect to the interest rate agreements and foreign
currency forward contracts is presented in the table below.
F-54
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
------------------------------------------------------
2002 2001
------------------------- --------------------------
UNREALIZED
NOTIONAL UNREALIZED NOTIONAL GAINS
AMOUNT LOSSES AMOUNT (LOSSES)
---------- ------------ ------------ -----------
Interest rate swaps ........................ $ -- $ -- $ 380,000 $ --
Interest rate caps ......................... -- -- 100,000 (107)
Interest rate floor ........................ -- -- 50,000 (414)
Foreign currency forward contracts ......... 6,048 (454) 7,138 258
10. L-3 HOLDINGS COMMON STOCK
On April 23, 2002, the Company announced that its Board of Directors had
authorized a two-for-one stock split on all shares of L-3 Holdings common
stock. The stock split entitled all shareholders of record at the close of
business on May 6, 2002 to receive one additional share of L-3 Holdings common
stock for every share held on that date. The additional shares were distributed
to shareholders in the form of a stock dividend on May 20, 2002. Upon
completion of the stock split, L-3 Holdings had approximately 80 million shares
of common stock outstanding. All of L-3 Holdings' historical share and earnings
per share (EPS) data have been restated to give effect to the stock split.
On April 23, 2002, the Company's shareholders approved an increase in the
number of authorized shares of L-3 Holdings common stock from 100,000,000 to
300,000,000 and an increase in the number of authorized shares of L-3 Holdings
preferred stock from 25,000,000 to 50,000,000.
On June 28, 2002, L-3 Holdings sold 14,000,000 shares of its common stock
in a public offering for $56.60 per share. Upon closing, L-3 Holdings received
net proceeds after deducting discounts, commissions and estimated expenses of
$766,780. The net proceeds of this offering, which were contributed to L-3
Communications, and the concurrent sale of senior subordinated notes by L-3
Communications (see Note 8) were used to (1) repay $500,000 borrowed on March
8, 2002, under the Company's senior subordinated bridge loan facility, (2)
repay the indebtedness outstanding under the Company's Senior Credit
Facilities, (3) repurchase and redeem the 10 3/8% Senior Subordinated Notes due
2007 and (4) increase cash and cash equivalents.
On June 29, 2001, the Company established the L-3 Communications
Corporation Employee Stock Purchase Plan (ESPP) and registered 3,000,000 shares
of L-3 Holdings common stock, which may be purchased by employees of L-3
Communications Corporation and its U.S. subsidiaries through payroll
deductions. In general, an eligible employee who participates in the ESPP may
purchase L-3 Holdings' common stock at a fifteen percent discount. The ESPP is
not subject to the Employment Retirement Income Security Act of 1974, as
amended. The Company received $17,478 and $4,861 of employee contributions for
the ESPP in 2002 and 2001, respectively. These contributions were recorded as a
component of shareholders' equity in the consolidated balance sheet. During
2002, L-3 Holdings issued 352,054 shares of its common stock to the trustee of
the ESPP relating to contributions received during the period July 1, 2001 to
June 30, 2002. In January 2003, the Company issued 260,027 shares of L-3
Holdings' common stock to the trustee of the ESPP relating to contributions
received during the period July 1, 2002 to December 31, 2002.
On May 2, 2001, L-3 Holdings sold 13,800,000 shares of common stock in a
public offering for $40.00 per share. L-3 Holdings sold 9,150,000 shares and
other selling stockholders, including affiliates of Lehman Brothers Inc., sold
4,650,000 secondary shares. Upon closing, L-3 Holdings received net proceeds
after underwriting discounts and commissions and other offering expenses of
$353,622. The net proceeds were contributed to L-3 Communications and were used
to repay borrowings under the Senior Credit Facilities, pay for the KDI and EER
acquisitions and to increase cash and cash equivalents.
As additional consideration for the ILEX acquisition, L-3 Holdings issued
588,248 shares of its common stock valued at $17,357 in April 2001 based on the
financial performance of ILEX in 1999 and 2000. There is no remaining
contingent consideration for the ILEX acquisition.
F-55
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in the Company's accumulated other comprehensive balances for
each of the three years ended December 31, 2002 are presented in the table
below.
FOREIGN UNREALIZED ACCUMULATED
CURRENCY UNREALIZED LOSSES ON MINIMUM OTHER
TRANSLATION GAINS (LOSSES) HEDGING PENSION LIABILITY COMPREHENSIVE
ADJUSTMENTS ON SECURITIES INSTRUMENTS ADJUSTMENTS LOSS
------------- ---------------- ------------- ------------------- --------------
Balance at January 1, 2000 ....... $(1,362) $ (970) $ -- $ (71) $ (2,403)
Period change .................... (1,222) (2,728) -- (819) (4,769)
------------ --------------- ------------ ------------------- --------------
Balance at December 31, 2000 ..... (2,584) (3,698) -- (890) (7,172)
Period change .................... (268) 3,452 (163) (19,519) (16,498)
------------ --------------- ------------ ------------------- --------------
Balance at December 31, 2001 ..... (2,852) (246) (163) (20,409) (23,670)
Period change .................... 65 -- (114) (45,580) (45,629)
------------ -------------- ------------ ------------------- --------------
Balance at December 31, 2002 ..... $(2,787) $ (246) $(277) $(65,989) $(69,299)
============ =============== ============ =================== ==============
F-56
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. L-3 HOLDINGS EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share (EPS) is
presented in the table below.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
-------------- -------------- -------------
BASIC:
Income before accounting change ......................... $ 202,467 $ 115,458 $ 82,727
Accounting change, net of income taxes .................. (24,370) -- --
------------ --------- --------
Net income .............................................. $ 178,097 $ 115,458 $ 82,727
========== ========= ========
Weighted average common shares outstanding .............. 86,943 74,880 66,710
========== ========= ========
Basic earnings per share before accounting change ....... $ 2.33 $ 1.54 $ 1.24
========== ========= ========
Basic earnings per share ................................ $ 2.05 $ 1.54 $ 1.24
========== ========= ========
DILUTED:
Income before accounting change ......................... $ 202,467 $ 115,458 $ 82,727
After-tax interest expense savings on the assumed
conversion of Convertible Notes ........................ 10,316 10,502 --
---------- --------- --------
Income before accounting change, including assumed
conversion of Convertible Notes ........................ 212,783 125,960 82,727
Accounting change, net of income taxes .................. (24,370) -- --
------------ --------- --------
Net income, including assumed conversion of
Convertible Notes ...................................... $ 188,413 $ 125,960 $ 82,727
========== ========= ========
Common and potential common shares:
Weighted average common shares outstanding ............. 86,943 74,880 66,710
Assumed exercise of stock options ...................... 7,750 7,692 7,880
Assumed purchase of common shares for treasury ......... (4,642) (4,496) (4,684)
Assumed conversion of Convertible Notes ................ 7,362 7,362 --
---------- ---------- ---------
Common and potential common shares ..................... 97,413 85,438 69,906
========== ========== =========
Diluted earnings per share before accounting change ..... $ 2.18 $ 1.47 $ 1.18
========== ========== =========
Diluted earnings per share .............................. $ 1.93 $ 1.47 $ 1.18
========== ========== =========
The 7,804,878 shares of L-3 Holdings' common stock that are issuable upon
conversion of the CODES were not included in the computation of diluted EPS for
the years ended December 31, 2002 and 2001 because the conditions required for
the CODES to become convertible have not been met.
F-57
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. INCOME TAXES
The Company's income before income tax and cumulative effect of a change
in accounting principle and the components of the Company's provision for
income taxes are presented in the table below.
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Income before income taxes and cumulative effect of
a change in accounting principle ....................... $ 314,023 $186,222 $134,079
========= ======== ========
Current income tax provision, primarily federal ......... $ 32,464 $ 18,126 $ 26,249
Deferred income tax provision:
Federal ................................................ 67,524 43,965 23,130
State and local ........................................ 11,568 8,673 1,973
--------- -------- --------
Subtotal ............................................. 79,092 52,638 25,103
--------- -------- --------
Total provision for income taxes ........................ $ 111,556 $ 70,764 $ 51,352
========= ======== ========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate of the Company is presented in the table below.
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Statutory federal income tax rate ...................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ........................................... 3.9 5.3 4.4
Foreign sales corporation and extra territorial income
benefits .............................................. (1.8) (3.6) (2.6)
Nondeductible goodwill amortization and other
expenses .............................................. -- 4.8 6.8
Research and experimentation and other tax credits ..... (2.5) (5.0) (6.1)
Other, net ............................................. 0.9 1.5 0.8
---- ----- -----
Effective income tax rate .............................. 35.5% 38.0% 38.3%
==== ===== =====
The provision for income taxes excludes current tax benefits related to
compensation expense deductions for income tax purposes arising from the
exercise of stock options that were credited directly to shareholders' equity
of $13,303 for 2002, $11,939 for 2001, and $9,108 for 2000. These tax benefits
reduced current income taxes payable.
F-58
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The significant components of the Company's net deferred tax assets and
liabilities are presented in the table below.
DECEMBER 31,
---------------------------
2002 2001
------------ ------------
Deferred tax assets:
Inventoried costs .................................. $ 43,678 $ 8,520
Compensation and benefits .......................... 15,796 11,460
Pension and postretirement benefits ................ 136,699 59,397
Property, plant and equipment ...................... 33,669 16,579
Income recognition on contracts in process ......... 59,663 16,670
Net operating loss carryforwards ................... 6,579 32,480
Tax credit carryforwards ........................... 38,385 31,943
Other, net ......................................... 24,533 21,555
--------- ---------
Total deferred tax assets ........................ 359,002 198,604
--------- ---------
Deferred tax liabilities:
Goodwill ........................................... (49,317) (26,493)
Other, net ......................................... (18,861) (11,263)
--------- ----------
Total deferred tax liabilities ................... (68,178) (37,756)
--------- -----------
Net deferred tax assets ......................... $ 290,824 $ 160,848
========= ==========
The following table presents the classification of the Company's net deferred tax
assets.
Current deferred tax assets ......................... $ 143,634 $ 62,965
Long-term deferred tax assets ....................... 147,190 97,883
--------- ----------
Total net deferred tax assets .................... $ 290,824 $ 160,848
========= ==========
At December 31, 2002, the Company had $10,596 of federal net operating
losses, $46,474 of state net operating losses and $38,385 of tax credit
carryforwards primarily related to U.S. and state research and experimentation
credits and state investment tax credits. The net operating losses, some of
which are subject to limitation, expire if unused between 2011 and 2021. The
tax credit carryforwards expire, if unused, primarily beginning in 2012. The
Company believes that it will generate sufficient taxable income to utilize
these net operating losses and tax credit carryforwards before they expire.
14. STOCK OPTIONS
In April 1999, the Company adopted the 1999 Long Term Performance Plan
(1999 Plan). Awards under the 1999 Plan may be granted to any employee or to
any other individual who provides services to or on behalf of the Company or
any of its subsidiaries, subject to the discretion of the Compensation
Committee of the Board of Directors. Awards under the 1999 Plan may be in the
form of non-qualified stock options, incentive stock options, stock
appreciation rights (SARs), restricted stock and other incentive awards,
consistent with the 1999 Plan. In April 1997, the Company adopted the 1997
Stock Option Plan (1997 Plan). The 1997 Plan authorizes the Compensation
Committee of the Board of Directors to grant incentive stock options to key
employees of the Company and its subsidiaries. Awards under both plans are in
the form of L-3 Holdings common stock. At December 31, 2002, the number of
shares of L-3 Holdings' common stock authorized for grant under the 1999 Plan
and 1997 Plan was 16,611,630, of which 2,937,099 shares were available for
awards under these plans. The price at which incentive stock options may be
granted shall not be less than 100% of the fair market value of L-3 Holdings'
common stock on the date of grant. In general, options expire after 10 years
and are exercisable ratably over a 3 year period.
F-59
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At December 31, 2002, the Company has granted restricted stock awards of
282,358 shares, of which 31,838 shares have been forfeited. The Company awarded
54,960 shares on January 1, 2002, 60,928 shares on January 1, 2001 and 85,792
shares on January 1, 2000. The aggregate fair values of the restricted stock
awards on their grant dates were $2,473 in 2002, $2,346 in 2001 and $1,713 in
2000. The restricted stock awards granted on January 1, 2002 and January 1,
2001 vest over three years. The restricted stock award granted on January 1,
2000 vests over five years. Compensation expense charged against earnings for
these restricted stock awards was $2,134 in 2002, $1,370 in 2001 and $716 in
2000. Shareholders' Equity has been reduced by $3,302 at December 31, 2002 for
unearned compensation on these restricted stock awards.
The table below presents the Company's incentive stock option activity
over the past three years under the 1999 Plan and 1997 Plan.
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
--------------- -----------
(IN THOUSANDS)
Outstanding at January 1, 2000 ............................... 7,530 $ 8.51
Options granted .............................................. 1,322 23.87
Options exercised ............................................ (1,154) 7.76
Options cancelled ............................................ (442) 19.91
--------------
Outstanding at January 1, 2001 (3,858 exercisable) ........... 7,256 10.71
Options granted .............................................. 2,214 35.81
Options exercised ............................................ (1,128) 14.57
Options cancelled ............................................ (362) 21.23
--------------
Outstanding at January 1, 2002 (4,216 exercisable) ........... 7,980 16.68
Options granted .............................................. 2,169 52.02
Options exercised ............................................ (970) 17.99
Options cancelled ............................................ (155) 35.62
--------------
Outstanding at December 31, 2002 (5,216 exercisable) ......... 9,024 $ 24.71
==============
The table below summarizes information about the Company's incentive stock
options outstanding at December 31, 2002.
OUTSTANDING | EXERCISABLE
--------------------------------------- | ----------------------------------------
WEIGHTED | WEIGHTED
AVERAGE WEIGHTED | AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE | NUMBER REMAINING AVERAGE
EXERCISE OF CONTRACTUAL EXERCISE | OF CONTRACTUAL EXERCISE
PRICES OPTIONS LIFE (YEARS) PRICE | OPTIONS LIFE (YEARS) PRICE
- -------------------------- --------- -------------- ---------- | --------- -------------- -----------
$3.24 .................... 3,487 4.5 $ 3.24 | 3,487 4.5 $ 3.24
$11.00 ................... 128 5.3 $11.00 | 128 5.3 $11.00
$16.38 -- $19.84 ......... 521 6.7 $18.80 | 518 6.7 $18.80
$20.25 -- $23.13 ......... 516 6.6 $20.85 | 362 6.4 $20.65
$29.00 ................... 283 7.6 $29.00 | 151 7.6 $29.00
$32.50 -- $35.00 ......... 1,121 8.3 $33.31 | 293 8.3 $33.42
$39.70 ................... 837 8.9 $39.70 | 277 8.9 $39.70
$49.00 -- $53.75 ......... 2,131 9.4 $52.05 | -- -- $ --
----- ------ | ----- ------
Total ................... 9,024 6.9 $24.71 | 5,216 5.4 $10.56
===== ====== ===== ======
The weighted average fair values of incentive stock options at their grant
date during 2002, 2001 and 2000, where the exercise price equaled the market
price (estimated fair value) on the grant date were $18.75, $14.87 and $10.10,
respectively. In accordance with APB No. 25, no compensation expense was
recognized.
F-60
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For purposes of determining the impact of adopting SFAS No. 123, the
estimated fair value of options granted was calculated using the Black-Scholes
option-pricing valuation model. The weighted average assumptions used in the
valuation models are presented in the table below.
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Expected holding period (in years) ......... 4.0 5.0 5.0
Expected volatility ........................ 39.2% 39.5% 35.8%
Expected dividend yield .................... -- -- --
Risk-free interest rate .................... 4.0% 4.5% 6.4%
15. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2028. The following table presents future
minimum payments under non-cancelable operating leases with initial or
remaining terms in excess of one year at December 31, 2002.
REAL ESTATE EQUIPMENT TOTAL
------------- ----------- -----------
2003 ................ $ 61,572 $ 9,752 $ 71,324
2004 ................ 56,871 7,759 64,630
2005 ................ 74,704 6,012 80,716
2006 ................ 41,667 5,490 47,157
2007 ................ 36,909 5,133 42,042
Thereafter .......... 197,217 62,050 259,267
--------- -------- --------
Total ............... $ 468,940 $ 96,196 $565,136
========= ======== ========
Real estate lease commitments have been reduced by minimum sublease rental
income of $1,622 due in the future under non-cancelable subleases. Leases
covering major items of real estate and equipment contain renewal and/or
purchase options. Rent expense, net of sublease income was $65,277 for 2002,
$41,370 for 2001 and $34,123 for 2000.
On December 31, 2002, the Company entered into two real estate lease
agreements, as lessee, with an unrelated lessor which expire on December 31,
2005, and which are accounted for as operating leases. On or before the lease
expiration date, the Company can exercise options under the lease agreements to
either renew the leases, purchase both properties for $28,000, or sell both
properties on behalf of the lessor (the "Sale Option"). If the Company elects
the Sale Option, the Company must pay the lessor a residual guarantee amount of
$22,673 for both properties, on or before the lease expiration date, and at the
time both properties are sold, the Company must pay the lessor a supplemental
rent equal to the gross sales proceeds in excess of the residual guarantee
amount not to exceed $5,327.
For the real estate lease agreements discussed above, if the gross sales
proceeds are less than the sum of the residual guarantee amount and the
supplemental rent, the Company is required to pay a supplemental rent to the
extent the reduction in the fair value of the properties are demonstrated by an
independent appraisal to have been caused by the Company's failure to properly
maintain the properties. Accordingly, the aggregate residual guarantee amounts
of $22,673 has been included in the non-cancelable real estate operating lease
payments relating to the expiration of such leases.
On December 28, 2000, the Company entered into a sale-leaseback
transaction on its facility located in Hauppauge, NY. The facility was sold for
$13,650. The lease agreement which is accounted for as an operating lease, has
an initial term of 14 years with an annual rent that increases 2.5% annually.
The Company has the option to extend the lease term for an additional 3 terms
of 5 years each. The gain of $4,110 on the sale of the facility has been
deferred and will be recognized ratably over the term of the lease.
F-61
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has a contract to provide and operate for the U.S. Air Force
(USAF) a full-service training facility, including simulator systems near a
USAF base. The Company acted as the construction agent on behalf of the
owner-lessors for procurement and construction for the simulator systems which
were completed and delivered in August 2002. On December 31, 2002, the Company,
as lessee, entered into an operating lease agreement for a term of 15 years for
one of the simulator systems with the owner-lessor. At the end of the lease
term, the Company may elect to purchase the simulator system at fair market
value, which can be no less than $2,552 and no greater than $6,422. If the
Company does not elect to purchase the simulator system, then on the date of
expiration, the Company shall pay to the lessor, as additional rent $2,552 and
return the simulator system to the lessor. The aggregate non-cancelable rental
payments under this operating lease is $32,480, including the additional rent
of $2,552. On February 27, 2003, the Company, as lessee, entered into an
operating lease agreement for a term of 15 years for the remaining simulation
systems with the owner-lessor. At the end of the lease term, the Company may
elect to purchase the simulator systems at fair market value, which can be no
less than $4,146 and no greater than $14,544. If the Company does not elect to
purchase the simulator systems, then on the date of expiration, the Company
shall return the simulator systems to the lessor. The aggregate non-cancelable
rental payments under this operating lease is $53,254.
The Company is engaged in providing products and services under contracts
with the U.S. Government and to a lesser degree, under foreign government
contracts, some of which are funded by the U.S. Government. All such contracts
are subject to extensive legal and regulatory requirements, and, from time to
time, agencies of the U.S. Government investigate whether such contracts were
and are being conducted in accordance with these requirements. Under U.S.
Government procurement regulations, an indictment of the Company by a federal
grand jury could result in the Company being suspended for a period of time
from eligibility for awards of new government contracts. A conviction could
result in debarment from contracting with the federal government for a
specified term. Additionally, in the event that U.S. Government expenditures
for products and services of the type manufactured and provided by the Company
are reduced, and not offset by greater commercial sales or other new programs
or products, or acquisitions, there may be a reduction in the volume of
contracts or subcontracts awarded to the Company.
In connection with the acquisition on March 8, 2002 of the Aircraft
Integration Systems business from Raytheon, the Company assumed responsibility
for implementing certain corrective actions, required under federal law to
remediate the Greenville, Texas site location, and to pay a portion of those
remediation costs. The hazardous substances requiring remediation have been
substantially characterized, and the remediation system has been partially
implemented. The Company has estimated that its share of the remediation cost
will not exceed $2.5 million, and will be incurred over a period of 25 years.
The Company has established adequate reserves for these costs in the purchase
price allocation for this acquisition.
The Company has been periodically subject to litigation, claims or
assessments and various contingent liabilities incidental to its business.
Management continually assesses the Company's obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management is aware,
the Company believes that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's
consolidated results of operations. The Company accrues for these contingencies
when it is probable that a liability has been incurred and the amount of the
loss can be reasonably estimated.
On August 6, 2002, ACSS was sued by Honeywell International Inc. and
Honeywell Intellectual Properties, Inc. (collectively, "Honeywell") for alleged
infringement of patents that relate to terrain awareness avionics. The lawsuit
was filed in the United States District Court for the District of Delaware. In
December 2002, Honeywell withdrew without prejudice the lawsuit against ACSS
and agreed to
F-62
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
proceed with non-binding arbitration. If the matter is not resolved through
arbitration, Honeywell may reinstitute the litigation after August 14, 2003.
The Company had previously investigated the Honeywell patents and believes that
ACSS has valid defenses against Honeywell's patent infringement suit. In
addition, ACSS has been indemnified to a certain extent by Thales Avionics,
which provided ACSS with the alleged infringing technology. Thales Avionics is
the Company's joint venture partner in ACSS. In the opinion of management, the
ultimate disposition of Honeywell's pending claim will not result in a material
liability to the Company.
On November 18, 2002, the Company initiated a proceeding against OSI
Systems, Inc. (OSI) in the United States District Court sitting in the Southern
District of New York (the "New York action") seeking, among other things, a
declaratory judgment that the Company had fulfilled all of its obligations
under a letter of intent with OSI (the "OSI Letter of Intent"). Under the OSI
Letter of Intent, the Company was to negotiate definitive agreements with OSI
for the sale of certain businesses the Company acquired from PerkinElmer, Inc.
on June 14, 2002. On December 23, 2002, OSI responded by filing suit against
the Company in the United States District Court sitting in the Central District
of California (the "California action") alleging, among other things, that the
Company breached its obligations under the OSI Letter of Intent and seeking
damages in excess of $100,000, not including punitive damages. On February 7,
2003, OSI filed an answer and counterclaims in the New York action that
asserted substantially the same claims OSI had raised in the California action.
The Company has filed a motion to have the California action dismissed in favor
of the New York action. Under the OSI Letter of Intent, the Company proposed
selling to OSI the conventional detection business and the ARGUS business that
the Company recently acquired from PerkinElmer, Inc. Negotiations with OSI
lasted for almost one year and ultimately broke down over issues regarding,
among other things, intellectual property, product-line definitions, allocation
of employees and due diligence. The Company believes that the claims asserted
by OSI in its suit are without merit and intends to defend against the OSI
claims vigorously.
With respect to those investigative actions, items of litigation, claims
or assessments of which it is aware, management of the Company is of the
opinion that the probability is remote that, after taking into account certain
provisions that have been made with respect to these matters, the ultimate
resolution of any such investigative actions, items of litigation, claims or
assessments will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
16. PENSIONS AND OTHER EMPLOYEE BENEFITS
The Company maintains a number of pension plans, both contributory and
non-contributory, covering employees at certain locations. Eligibility for
participation in these plans varies and benefits are generally based on the
participant's compensation and/or years of service. The Company's funding
policy is generally to contribute in accordance with cost accounting standards
that affect government contractors, subject to the Internal Revenue Code and
regulations thereon. Plan assets are invested primarily in U.S. Government and
U.S. Government agency obligations and listed stocks and bonds.
The Company also provides postretirement medical and life insurance
benefits for retired employees and dependents at certain locations.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension plans.
These benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.
The following table summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and postretirement benefit plans.
F-63
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................ $ 533,451 $ 415,483 $ 87,143 $ 68,538
Service cost ........................................... 35,825 18,516 3,777 1,709
Interest cost .......................................... 43,108 31,428 7,779 4,746
Participants' contributions ............................ 260 62 720 607
Amendments ............................................. (2,554) -- (10,032) --
Actuarial loss ......................................... 49,990 22,277 4,411 4,043
Acquisitions ........................................... 77,066 63,793 41,639 12,369
Benefits paid .......................................... (23,221) (18,108) (6,031) (4,869)
------------ ----------- ----------- ----------
Benefit obligation at end of year ...................... $ 713,925 $ 533,451 $ 129,406 $ 87,143
------------ ----------- ----------- ----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ......... $ 430,915 $ 391,263 $ -- $ --
Actual return on plan assets ........................... (27,819) (13,754) -- --
Acquisitions ........................................... 4,250 63,344 -- --
Employer contributions ................................. 47,386 8,108 5,311 4,262
Participants' contributions ............................ 260 62 720 607
Benefits paid .......................................... (23,221) (18,108) (6,031) (4,869)
------------ ----------- ----------- ----------
Fair value of plan assets at end of year ............... $ 431,771 $ 430,915 $ -- $ --
------------ ----------- ----------- ----------
FUNDED STATUS OF THE PLANS ............................. $ (282,154) $ (102,536) $ (129,406) $ (87,143)
Unrecognized actuarial loss (gain) ..................... 184,894 69,697 (188) (5,032)
Unrecognized prior service cost ........................ 560 3,426 (8,877) (547)
------------ ----------- ----------- ----------
Net amount recognized .................................. $ (96,700) $ (29,413) $ (138,471) $ (92,722)
------------ ----------- ----------- ----------
AMOUNTS RECOGNIZED IN THE BALANCE SHEETS
CONSIST OF:
Accrued benefit liability .............................. $ (205,056) $ (62,330) $ (138,471) $ (92,722)
Accumulated other comprehensive income ................. 108,356 32,917 -- --
------------ ----------- ----------- ----------
Net amount recognized .................................. $ (96,700) $ (29,413) $ (138,471) $ (92,722)
============ =========== =========== ==========
RATE ASSUMPTIONS:
Discount rate .......................................... 6.75% 7.25% 6.75% 7.25%
Rate of return on plan assets .......................... 9.00% 9.50% n.a. n.a.
Salary increases ....................................... 4.50% 4.50% 4.50% 4.50%
The annual increase in cost of benefits ("health care cost trend rate") is
assumed to be an average of 10.00% in 2002 and is assumed to gradually decrease
to a rate of 4.5% thereafter. Assumed health care cost trend rates have a
significant effect on amounts reported for postretirement medical benefit
plans. A one percentage point decrease in the assumed health care cost trend
rates would have the effect of decreasing the aggregate service and interest
cost by $711 and the postretirement medical obligations by $6,406. A one
percentage point increase in the assumed health care cost trend rate would have
the effect of increasing the aggregate service and interest cost by $940 and
the postretirement medical obligations by $7,980.
The following table summarizes the components of net periodic pension and
postretirement medical costs.
F-64
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PENSION PLANS POSTRETIREMENT PENSION PLANS
--------------------------------------- ------------------------------------
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ---------- ---------- ----------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ............................... $ 35,825 $ 18,516 $ 16,343 $ 3,777 $ 1,709 $ 1,670
Interest cost .............................. 43,108 31,428 28,029 7,779 4,746 4,754
Amortization of prior service cost ......... 312 351 351 (1,701) (99) (99)
Expected return on plan assets ............. (40,663) (37,716) (39,109) -- -- --
Recognized actuarial (gain) loss ........... 3,246 (424) (3,981) (530) (887) (865)
Recognition due to settlement .............. 62 -- 307 -- -- --
--------- --------- --------- -------- ------- -------
Net periodic benefit cost .................. $ 41,890 $ 12,155 $ 1,940 $ 9,325 $ 5,469 $ 5,460
========= ========= ========= ======== ======= =======
The accumulated benefit obligation, projected benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $565,904, $696,968 and $406,809, respectively, as of
December 31, 2002 and $300,072, $324,840 and $247,383, respectively, as of
December 31, 2001.
In connection with the Company's acquisition in 1997 of the ten business
units from Lockheed Martin and the formation of the Company, the Company
assumed certain defined benefit plan liabilities for present and former
employees and retirees of certain businesses which we acquired from Lockheed.
Lockheed Martin also has provided the Pension Benefit Guaranty Corporation
("PBGC") with commitments to assume sponsorship or other forms of financial
support under certain circumstances with respect to the Company's pension plans
for Communication Systems -- West and Aviation Recorders (the "Subject Plans").
Upon the occurrence of certain events, Lockheed Martin, at its option, has the
right to decide whether to cause the Company to transfer sponsorship of any or
all of the Subject Plans to Lockheed Martin, even if the PBGC has not sought to
terminate the Subject Plans. Such a triggering event occurred in 1998, but
reversed in 1999, relating to a decrease in the PBGC-mandated discount rate in
1998 that had resulted in an increase in the underlying liability. The Company
notified Lockheed Martin of the 1998 triggering event, and in February 1999,
Lockheed Martin informed the Company that it had no present intention to
exercise its right to cause the Company to transfer sponsorship of the Subject
Plans. If Lockheed Martin did assume sponsorship of these plans, it would be
primarily liable for the costs associated with funding the Subject Plans or any
costs associated with the termination of the Subject Plans but L-3
Communications would be required to reimburse Lockheed Martin for these costs.
To date, the impact on pension expense and funding requirements resulting from
this arrangement has not been significant. However, should Lockheed Martin
assume sponsorship of the Subject Plans or if these plans were terminated, the
impact of any increased pension expenses or funding requirements could be
material to the Company. For the year ended December 31, 2002, the Company
contributed $18,753 to the Subject Plans. The Company has performed its
obligations under the letter agreement with Lockheed Martin and the Lockheed
Martin Commitment and has not received any communications from the PBGC
concerning actions which the PBGC contemplates taking in respect of the Subject
Plans.
Employee Savings Plans. Under its various employee savings plans, the
Company matches the contributions of participating employees up to a designated
level. The extent of the match, vesting terms and the form of the matching
contributions vary among the plans. Under these plans, the Company's matching
contributions in L-3 Holdings common stock and cash were $36,120 for 2002,
$21,462 for 2001 and $15,201 for 2000.
F-65
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
------------ ----------- -----------
Interest paid .......................................... $ 109,301 $ 81,552 $ 81,390
Income tax payments, net of refunds .................... 2,127 4,904 10,052
Noncash transactions:
Common stock issued related to acquisition ............ 10,607 17,357 --
Contribution in common stock to savings plans ......... 28,138 16,868 12,642
18. SEGMENT INFORMATION
The Company has four reportable segments: (1) Secure Communications & ISR,
(2) Training, Simulation & Support Services, (3) Aviation Products & Aircraft
Modernization and (4) Specialized Products, which are described in Note 1. The
Company evaluates the performance of its operating segments and reportable
segments based on their sales and operating income. All corporate expenses are
allocated to the Company's divisions using an allocation methodology prescribed
by U.S. Government regulations for government contractors. Accordingly, all
costs and expenses are included in the Company's measure of segment
profitability.
AVIATION ELIMINATION
SECURE TRAINING PRODUCTS & OF
COMMUNICATIONS SIMULATION & AIRCRAFT SPECIALIZED INTERSEGMENT CONSOLIDATED
& ISR SUPPORT SERVICES MODERNIZATION PRODUCTS CORPORATE SALES TOTAL
---------------- ------------------ --------------- ------------- ----------- -------------- -------------
2002
Sales ................ $ 998,843 $ 826,286 $ 733,300 $ 1,479,996 $ -- $ (27,196) $ 4,011,229
Operating income ..... 104,054 96,513 105,075 148,337 453,979
Total assets ......... 1,149,016 648,554 965,038 1,940,982 538,718 5,242,308
Capital expenditures . 19,350 4,957 14,035 23,542 174 62,058
Depreciation and
amortization ........ 23,692 6,857 15,513 29,798 75,860
2001
Sales ................ $ 452,152 $ 597,029 $ 263,450 $ 1,040,753 $ -- $ (5,962) $ 2,347,422
Operating income ..... 31,975 65,715 85,602 92,038 275,330
Total assets ......... 366,482 497,368 545,517 1,382,010 547,872 3,339,249
Capital expenditures . 11,561 2,999 9,625 23,657 279 48,121
Depreciation and
amortization ........ 13,839 13,207 12,064 47,841 86,951
2000
Sales ................ $ 405,379 $ 283,407 $ 209,207 $ 1,028,802 $ -- $ (16,734) $ 1,910,061
Operating income ..... 54,174 23,491 66,854 78,199 222,718
Total assets ......... 293,023 295,139 360,469 1,325,108 189,805 2,463,544
Capital expenditures . 6,405 2,762 2,145 21,667 601 33,580
Depreciation and
amortization ........ 13,093 6,401 10,085 44,675 74,254
Corporate assets not allocated to the reportable segments primarily
include cash and cash equivalents, corporate office fixed assets, deferred
income tax assets and deferred debt issuance costs.
Substantially all of the Company's operations are domestic. The Company's
foreign operations are not material to the Company's results of operations,
cash flows or financial position. Sales to principal customers are summarized
in the table below.
F-66
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
U.S. Government agencies .................... $ 3,107,271 $ 1,614,858 $ 1,284,379
Foreign governments ......................... 395,062 200,913 144,274
Commercial export ........................... 179,948 218,971 172,101
Other (principally U.S. commercial) ......... 328,948 312,680 309,307
----------- ----------- -----------
Consolidated sales ......................... $ 4,011,229 $ 2,347,422 $ 1,910,061
=========== =========== ===========
The Company's sales by product and services are summarized in the table
below.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Aircraft modification and maintenance .......................... $ 517,309 $ 15,067 $ --
Security and detection systems ................................. 431,325 18,058 13,624
Intelligence, surveillance and reconnaissance products ......... 410,412 -- --
Telemetry and instrumentation .................................. 243,420 254,664 295,266
Military and high data rate communications ..................... 306,650 231,895 230,478
Ocean products ................................................. 280,564 299,684 342,861
Avionics products .............................................. 229,734 254,983 219,307
Information security systems ................................... 201,934 140,153 95,342
Training devices and motion simulators ......................... 144,310 160,549 148,394
Fuzing products ................................................ 142,135 62,973 --
Navigation products ............................................ 141,778 128,690 133,821
Space and commercial communications, satellite control
and tactical sensor systems ................................... 106,084 88,225 85,247
Microwave components ........................................... 93,365 112,896 92,767
----------- ----------- -----------
Subtotal products ............................................. 3,249,020 1,767,837 1,657,107
----------- ----------- -----------
Simulation and support services ................................ 569,351 378,186 123,742
Training services .............................................. 256,935 218,843 159,665
----------- ----------- -----------
Subtotal services ............................................. 826,286 597,029 283,407
----------- ----------- -----------
Intercompany eliminations ...................................... (64,077) (17,444) (30,453)
----------- ----------- -----------
Total ......................................................... $ 4,011,229 $ 2,347,422 $ 1,910,061
=========== =========== ===========
F-67
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
19. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years ended
December 31, 2002 and 2001 is presented in the table below.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ -------------- ---------------- ----------------
2002
Sales ........................................ $ 696,840 $ 955,189 $ 1,053,613 $ 1,305,587
========= ========== ============ ============
Operating income ............................. $ 71,307 $ 97,688 $ 127,387 $ 157,597
========= ========== ============ ============
Income before cumulative effect of a change in
accounting principle ........................ $ 29,279 $ 31,640 $ 61,760 $ 79,788
Cumulative effect of a change in accounting
principle, net of income taxes .............. (24,370) -- -- --
--------- ---------- ------------ ------------
Net income ................................... $ 4,909 $ 31,640 $ 61,760 $ 79,788
========= ========== ============ ============
Basic EPS:
Income before accounting change .............. $ 0.37 $ 0.40 $ 0.66 $ 0.84
Cumulative effect of a change in accounting
principle ................................... ( 0.31) -- -- --
--------- ---------- ------------ ------------
Net income ................................... $ 0.06 $ 0.40 $ 0.66 $ 0.84
========= ========== ============ ============
Diluted EPS:
Income before accounting change .............. $ 0.36 $ 0.38 $ 0.62 $ 0.79
Cumulative effect of a change in accounting
principle ................................... ( 0.30) -- -- --
--------- ---------- ------------ ------------
Net income ................................... $ 0.06 $ 0.38 $ 0.62 $ 0.79
========= ========== ============ ============
2001
Sales ........................................ $ 461,901 $ 561,560 $ 618,164 $ 705,797
Operating income ............................. 46,869 60,467 75,208 92,786
Net income ................................... 14,158 23,336 33,435 44,529
Basic EPS .................................... $ 0.21 $ 0.31 $ 0.43 $ 0.57
Diluted EPS .................................. $ 0.20 $ 0.30 $ 0.41 $ 0.53
F-68
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. FINANCIAL INFORMATION OF L-3 COMMUNICATIONS AND ITS SUBSIDIARIES
The shareholders' equity of L-3 Communications equals that of L-3 Holdings
but its components of the common stock and additional paid-in capital accounts
are different. The table below presents information regarding the balances and
changes in common stock and additional paid-in capital of L-3 Communications
for each of the three years ended December 31, 2002.
L-3 COMMUNICATIONS
COMMON STOCK
--------------------
ADDITIONAL
SHARES PAR PAID-IN
ISSUED VALUE CAPITAL TOTAL
-------- --------- --------------- ---------------
Balance at December 31, 1999 ............. 100 $ -- $ 483,694 $ 483,694
Contributions from L-3 Holdings ......... 322,732 322,732
Push down of Convertible Notes .......... (290,500) (290,500)
--- ------ ----------- -----------
Balance at December 31, 2000 ............. 100 -- 515,926 515,926
Contributions from L-3 Holdings ......... 830,561 830,561
Push down of CODES ...................... (407,450) (407,450)
--- ------ ----------- -----------
Balance at December 31, 2001 ............. 100 -- 939,037 939,037
Contributions from L-3 Holdings ......... 855,939 855,939
--- ------ ----------- -----------
Balance at December 31, 2002 ............. 100 $ -- $ 1,794,976 $ 1,794,976
=== ====== =========== ===========
The net proceeds received by L-3 Holdings from the sale of its common
stock, exercise of L-3 Holdings employee stock options and L-3 Holdings common
stock contributed to the Company's savings plans are contributed to L-3
Communications. The net proceeds from the sale of the Convertible Notes and
CODES by L-3 Holdings were also contributed to L-3 Communications and are
reflected as indebtedness of L-3 Communications. See Notes 2 and 8.
The debt of L-3 Communications, including the Senior Subordinated Notes
and borrowings under amounts drawn against the Senior Credit Facilities are
guaranteed, on a joint and several, full and unconditional basis, by certain of
its wholly-owned domestic subsidiaries (the "Guarantor Subsidiaries"). See Note
8. The foreign subsidiaries and certain domestic subsidiaries of L-3
Communications (the "Non-Guarantor Subsidiaries") do not guarantee the debt of
L-3 Communications. None of the debt of L-3 Communications has been issued by
its subsidiaries. There are no restrictions on the payment of dividends from
the Guarantor Subsidiaries to L-3 Communications.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries, the Company has included the accompanying condensed
combining financial statements based on Rule 3-10 of SEC Regulation S-X. The
Company does not believe that separate financial statements of the Guarantor
Subsidiaries are material to users of the financial statements.
F-69
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following condensed combining financial information present the
results of operations, financial position and cash flows of (i) L-3 Holdings
excluding L-3 Communications, (ii) L-3 Communications excluding its
consolidated subsidiaries (the "Parent") (iii) the Guarantor Subsidiaries, (iv)
the Non-Guarantor Subsidiaries and (v) the eliminations to arrive at the
information for L-3 Communications on a consolidated basis.
L-3 NON- CONSOLIDATED
COMMUNICATIONS GUARANTOR GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATIONS
------------- ---------------- -------------- -------------- ---------------- ---------------
CONDENSED COMBINING
BALANCE SHEETS:
AS OF DECEMBER 31, 2002:
Current assets:
Cash and cash equivalents .... $ -- $ 126,421 $ (7,248) $ 15,683 $ -- $ 134,856
Contracts in process ......... -- 524,500 630,351 163,142 -- 1,317,993
Other current assets ......... 155,387 28,319 2,819 -- 186,525
---------- ---------- ---------- -------- ------------ ----------
Total current assets ....... -- 806,308 651,422 181,644 -- 1,639,374
---------- ---------- ---------- -------- ------------ ----------
Goodwill ...................... -- 753,672 1,702,384 338,492 -- 2,794,548
Other assets .................. -- 372,207 355,866 80,313 -- 808,386
Investment in and amounts
due from consolidated
subsidiaries ................. 2,919,954 2,688,750 398,282 53,779 (6,060,765) --
---------- ---------- ---------- -------- ------------ ----------
Total assets ............... $2,919,954 $4,620,937 $3,107,954 $654,228 $ (6,060,765) 5,242,308
========== ========== ========== ======== ============ ==========
Current liabilities ........... -- 322,747 298,646 75,246 -- 696,639
Long-term debt ................ 717,752 1,847,752 -- -- (717,752) 1,847,752
Other long-term liabilities ... -- 248,236 166,188 8,050 -- 422,474
Minority interest ............. -- -- -- 73,241 -- 73,241
Shareholders' equity .......... 2,202,202 2,202,202 2,643,120 497,691 (5,343,013) 2,202,202
---------- ---------- ---------- -------- ------------ ----------
Total liabilities and
shareholders' equity ...... $2,919,954 $4,620,937 $3,107,954 $654,228 $ (6,060,765) $5,242,308
========== ========== ========== ======== ============ ==========
AS OF DECEMBER 31, 2001:
Current assets:
Cash and cash equivalents .... $ -- $ 320,210 $ (4,412) $ 45,224 $ -- $ 361,022
Contracts in process ......... -- 390,040 300,996 110,788 -- 801,824
Other current assets ......... 76,248 4,001 (694) -- 79,555
---------- ---------- ---------- -------- ------------ ----------
Total current assets ....... -- 786,498 300,585 155,318 -- 1,242,401
---------- ---------- ---------- -------- ------------ ----------
Goodwill ...................... -- 694,221 631,648 381,849 -- 1,707,718
Other assets .................. -- 271,345 70,239 47,546 -- 389,130
Investment in and amounts
due from consolidated
subsidiaries ................. 1,931,390 1,229,572 150,580 43,236 (3,354,778) --
---------- ---------- ---------- -------- ------------ ----------
Total assets ............... $1,931,390 $2,981,636 $1,153,052 $627,949 $ (3,354,778) $3,339,249
========== ========== ========== ======== ============ ==========
Current liabilities ........... -- 278,598 136,579 109,394 -- 524,571
Long-term debt ................ 717,498 1,315,252 -- -- (717,498) 1,315,252
Other long-term liabilities ... -- 173,894 31,080 10,663 -- 215,637
Minority interest ............. -- -- -- 69,897 -- 69,897
Shareholders' equity .......... 1,213,892 1,213,892 985,393 437,995 (2,637,280) 1,213,892
---------- ---------- ---------- -------- ------------ ----------
Total liabilities and
shareholders' equity ...... $1,931,390 $2,981,636 $1,153,052 $627,949 $ (3,354,778) $3,339,249
========== ========== ========== ======== ============ ==========
F-70
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
L-3 NON- CONSOLIDATED
COMMUNICATIONS GUARANTOR GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATION
-------------- ---------------- -------------- -------------- -------------- --------------
CONDENSED COMBINING STATEMENTS OF
OPERATIONS:
FOR THE YEAR ENDED DECEMBER 31,
2002:
Sales ................................. $ -- $ 1,875,389 $1,895,410 $ 260,799 $ (20,369) $ 4,011,229
Costs and expenses .................... -- 1,622,200 1,736,233 219,186 (20,369) 3,557,250
--------- ----------- ---------- --------- ----------- -----------
Operating income ...................... -- 253,189 159,177 41,613 -- 453,979
Interest and other income (expense) ... 11,202 (286) 262 (6,257) 4,921
Interest expense ...................... 35,499 120,774 1,622 6,353 (41,756) 122,492
Minority interest ..................... -- -- -- 6,198 -- 6,198
Loss on retirement of debt ............ -- 16,187 -- -- -- 16,187
Provision (benefit) for income taxes .. (13,880) 44,942 56,145 10,469 13,880 111,556
Cumulative effect of a change in
accounting principal ................. -- (14,749) -- (9,621) -- (24,370)
Equity in net income of consolidated
subsidiaries ......................... 199,716 110,358 -- -- (310,074) --
--------- ----------- ---------- --------- ----------- -----------
Net income ............................ $ 178,097 $ 178,097 $ 101,124 $ 9,234 $ (288,455) $ 178,097
========= =========== ========== ========= =========== ===========
FOR THE YEAR ENDED DECEMBER 31,
2001:
Sales ................................. $ -- $ 1,328,702 $ 854,094 $ 168,558 $ (3,932) $ 2,347,422
Costs and expenses .................... -- 1,109,329 823,857 142,838 (3,932) 2,072,092
--------- ----------- ---------- --------- ----------- -----------
Operating income ...................... -- 219,373 30,237 25,720 -- 275,330
Interest and other income (expense) ... 8,335 (515) (6,081) 1,739
Interest expense ...................... 20,400 86,024 51 315 (20,400) 86,390
Minority interest ..................... -- -- -- 4,457 -- 4,457
Provision (benefit) for income taxes .. (7,976) 53,840 11,275 5,649 7,976 70,764
Equity in net income of consolidated
subsidiaries ......................... 127,882 27,614 -- -- (155,496) --
--------- ----------- ---------- --------- ----------- -----------
Net income ............................ $ 115,458 $ 115,458 $ 18,396 $ 9,218 $ (143,072) $ 115,458
========= =========== ========== ========= =========== ===========
FOR THE YEAR ENDED DECEMBER 31,
2000:
Sales ................................. -- $ 1,313,998 $ 441,677 $ 159,735 $ (5,349) $ 1,910,061
Costs and expenses .................... -- 1,107,318 435,922 149,452 (5,349) 1,687,343
--------- ----------- ---------- --------- ----------- -----------
Operating income ...................... -- 206,680 5,755 10,283 -- 222,718
Interest and other income ............. 3,061 264 1,068 4,393
Interest expense ...................... 1,638 92,633 149 250 (1,638) 93,032
Provision (benefit) for income taxes .. (640) 44,852 2,248 4,252 640 51,352
Equity in net income of consolidated
subsidiaries ......................... 83,725 10,471 -- -- (94,196) --
--------- ----------- ---------- --------- ----------- -----------
Net income ............................ $ 82,727 $ 82,727 $ 3,622 $ 6,849 $ (93,198) $ 82,727
========= =========== ========== ========= =========== ===========
F-71
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
L-3 NON- CONSOLIDATED
COMMUNICATIONS GUARANTOR GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATIONS
------------- --------------- --------------- ------------- --------------- ---------------
CONDENSED COMBINING STATEMENTS OF
CASH FLOWS:
FOR THE YEAR ENDED DECEMBER 31,
2002:
Net cash from operating activities .... $ -- $ 137,837 $ 169,221 $ 11,402 $ -- $ 318,460
----------- ---------- ------------- ----------- ------------- -------------
INVESTING ACTIVITIES:
Acquisition of businesses, net of
cash acquired ...................... -- (146,913) (1,499,891) (95,329) -- (1,742,133)
Other investing activities ........... (855,939) (1,627,853) (27,130) (8,632) 2,451,159 (68,395)
----------- ----------- ------------- ----------- ------------- -------------
Net cash used in investing activities . (855,939) (1,774,766) (1,527,021) (103,961) 2,451,159 (1,810,528)
----------- ----------- ------------- ----------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from sale of senior
subordinated notes ................. -- 750,000 -- -- -- 750,000
Redemption of senior
subordinated notes ................. -- (237,468) -- -- -- (237,468)
Proceeds from sale of L-3
Holdings' common stock, net ........ 766,780 -- -- -- -- 766,780
Other financing activities ........... 89,159 930,608 1,354,964 63,018 (2,451,159) (13,410)
----------- ----------- ------------- ----------- ------------- -------------
Net cash from financing activities .... 855,939 1,443,140 1,354,964 63,018 (2,451,159) 1,265,902
----------- ----------- ------------- ----------- ------------- -------------
Net decrease in cash .................. -- (193,789 ) (2,836) (29,541) -- (226,166)
Cash and cash equivalents, beginning
of period ............................ -- 320,210 (4,412) 45,224 -- 361,022
----------- ----------- ------------- ----------- ------------- -------------
Cash and cash equivalents, end of
period ............................... -- $ 126,421 $ (7,248) $ 15,683 $ -- $ 134,856
=========== =========== ============= =========== ============= =============
FOR THE YEAR ENDED DECEMBER 31,
2001:
Net cash from operating activities .... -- $ 104,169 $ 30,014 $ 38,785 $ -- $ 172,968
----------- ----------- ------------- ----------- ------------- -------------
INVESTING ACTIVITIES:
Acquisition of businesses, net of
cash acquired ...................... -- (112,691) (212,556) (121,664) -- (446,911)
Other investing activities ........... (830,561) (357,400) (14,643) 59,844 1,164,781 22,021
----------- ----------- ------------- ----------- ------------- -------------
Net cash used in investing activities . (830,561) (470,091) (227,199) (61,820) 1,164,781 (424,890)
----------- ----------- ------------- ----------- ------------- -------------
FINANCING ACTIVITIES:
Repayment of borrowings under
senior credit facilities ........... -- (190,000) -- -- -- (190,000)
Proceeds from sale of senior
subordinated notes ................. 420,000 -- -- -- -- 420,000
Proceeds from sale of L-3
Holdings' common stock, net ........ 353,622 -- -- -- -- 353,622
Other financing activities ........... 56,939 857,424 187,862 59,198 (1,164,781) (3,358)
----------- ----------- ------------- ----------- ------------- -------------
Net cash from financing activities .... 830,561 667,424 187,862 59,198 (1,164,781) 580,264
----------- ----------- ------------- ----------- ------------- -------------
Net increase (decrease) in cash ....... -- 301,502 (9,323) 36,163 -- 328,342
Cash and cash equivalents, beginning
of period ............................ -- 18,708 4,911 9,061 -- 32,680
----------- ----------- ------------- ----------- ------------- -------------
Cash and cash equivalents, end of
period ............................... $ -- $ 320,210 $ (4,412) $ 45,224 $ -- $ 361,022
=========== =========== ============= =========== ============= =============
F-72
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
L-3 NON- CONSOLIDATED
COMMUNICATIONS GUARANTOR GUARANTOR L-3
L-3 HOLDINGS (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMMUNICATIONS
------------- ---------------- -------------- -------------- -------------- ---------------
FOR THE YEAR ENDED DECEMBER 31,
2000:
Net cash from (used in) operating
activities ............................ -- $ 108,726 $ (10,504) $ 15,583 $ -- $ 113,805
-- ---------- ---------- --------- ----------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of
cash acquired ....................... -- (570,270) (15,624) (13,714) -- (599,608)
Other investing activities ............ (322,732) (37,309) (6,195) 5,551 352,070 (8,615)
-------- ---------- ---------- --------- ----------- ----------
Net cash used in investing activities .. (322,732) (607,579) (21,819) (8,163) 352,070 (608,223)
-------- ---------- ---------- --------- ----------- ----------
FINANCING ACTIVITIES:
Proceeds from sale of senior
subordinated notes .................. -- 300,000 -- -- -- 300,000
Borrowings under senior credit
facilities .......................... -- 190,000 -- -- -- 190,000
Other financing activities ............ 322,732 (6,476) 32,070 (1,946) (352,070) (5,690)
-------- ---------- ---------- --------- ----------- ----------
Net cash from (used in) financing
activities ............................ 322,732 483,524 32,070 (1,946) (352,070)) 484,310
-------- ---------- ---------- --------- ----------- ----------
Net (decrease) increase in cash ........ -- (15,329) (253) 5,474 -- (10,108)
Cash and cash equivalents, beginning
of period ............................. -- 34,037 5,164 3,587 -- 42,788
-------- ---------- ---------- --------- ----------- ----------
Cash and cash equivalents, end of
period ................................ -- $ 18,708 $ 4,911 $ 9,061 $ -- $ 32,680
======== ========== ========== ========= =========== ==========
F-73
[L-3 COMMUNICATIONS LOGO OMITTED]
OFFER TO EXCHANGE ALL OUTSTANDING 6 1/8% SENIOR SUBORDINATED NOTES DUE 2013 FOR
6 1/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2013, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
------------------
PROSPECTUS
------------------
UNTIL AUGUST 3, 2003 ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
JUNE 24, 2003