-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TVOuaZXDe7aYGXjy4ZrEseuYwIR5v5ZXwLA83Qt9uhlNxDRqiPOgB/4IUOCuxaq8 eOTgXNTrh82y9HrfY9s5Yw== 0000950136-00-000465.txt : 20000509 0000950136-00-000465.hdr.sgml : 20000509 ACCESSION NUMBER: 0000950136-00-000465 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS HOLDINGS INC CENTRAL INDEX KEY: 0001056239 STANDARD INDUSTRIAL CLASSIFICATION: 3663 IRS NUMBER: 133937434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14141 FILM NUMBER: 589578 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001039101 STANDARD INDUSTRIAL CLASSIFICATION: 3663 IRS NUMBER: 133937436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-46983 FILM NUMBER: 589579 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 1216971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file numbers 001-14141 and 333-46983 L-3 COMMUNICATIONS HOLDINGS, INC. L-3 COMMUNICATIONS CORPORATION (Exact names of registrants as specified in their charters) DELAWARE 13-3937434 AND 13-3937436 (State or other jurisdiction of (I.R.S. Employer Identification Nos.) incorporation or organization) 600 THIRD AVENUE, NEW YORK, NEW YORK 10016 (Address of principal executive offices) (Zip Code) (212) 697-1111 (Telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS Common stock, par value $0.01 per share NAME OF EACH EXCHANGE ON WHICH REGISTERED: New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] There were 32,900,408 shares of L-3 Communications Holdings, Inc. common stock with a par value of $0.01 outstanding as of the close of business on March 29, 2000. The aggregate market value of the L-3 Communications Holdings, Inc. voting stock held by non-affiliates of the registrant as of March 29, 2000 was approximately $1,114.4 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement to be filed with Securities and Exchange Commission ("SEC") pursuant to Regulation 14A relating to the registrant's Annual Meeting of Shareholders, to be held on April 25, 2000, will be incorporated by reference in Part III of this Form 10-K. Such proxy statement will be filed with the SEC not later than 120 days after the registrant's fiscal year ended December 31, 1999. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- L-3 COMMUNICATIONS HOLDINGS, INC. L-3 COMMUNICATIONS CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
PAGE ---- PART I Item 1: Business ............................................................. 1 Item 2: Properties ........................................................... 18 Item 3: Legal Proceedings .................................................... 18 Item 4: Submission of Matters to a Vote of Security Holders .................. 18 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters ............................................................. 19 Item 6: Selected Financial Data .............................................. 20 Item 7: Management's Discussion and Analysis of Results of Operations and Financial Condition ................................................. 20 Item 7A: Quantitative and Qualitative Disclosures About Market Risk ........... 30 Item 8: Financial Statements and Supplementary Data .......................... 30 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................ 30 PART III Item 10: Directors and Executive Officers of the Registrant ................... 31 Item 11: Executive Compensation ............................................... 31 Item 12: Security Ownership of Certain Beneficial Owners and Management ....... 31 Item 13: Certain Relationships and Related Transactions ....................... 31 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K ...... 32 Signatures ..................................................................... 34
PART I "Holdings", "the Company", "L-3", "we", "us" and "our" refer to L-3 Communications Holdings, Inc. and its subsidiaries, including L-3 Communications Corporation ("L-3 Communications"), a wholly owned subsidiary. The "Predecessor Company" means ten initial business units purchased by the Company from Lockheed Martin Corporation ("Lockheed Martin") in April 1997 (the "L-3 Acquisition"). ITEM 1. BUSINESS COMPANY OVERVIEW L-3 is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. We produce secure, high data rate communication systems, microwave components, avionics and ocean systems and telemetry, instrumentation and space products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. Our systems and specialized products are used to connect a variety of airborne, space, ground-and sea-based communication systems and are used in the transmission, processing, recording, monitoring and dissemination functions of these communication systems. Our customers include the U.S. department of defense ("DoD"), certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. Our business areas employ proprietary technologies and capabilities and have leading positions in their respective primary markets. We have two reportable segments, Secure Communication Systems and Specialized Communication Products. In addition, we are seeking to expand the products and technologies of our reportable segments in commercial markets as we discuss under "-- Emerging Commercial Products" below. Financial information on our reportable segments is presented in Note 17 to our Consolidated (Combined) Financial Statements included under Item 14. Additional financial data and commentary on the results of operations for reportable segments are included in Management's Discussion and Analysis of Results of Operations and Financial Condition under Item 7. These data and comments should be referred to in conjunction with the summary description of each of our reportable segments which follows. SECURE COMMUNICATION SYSTEMS. We are the established leader in secure, high data rate communications for military and other U.S. government reconnaissance and surveillance applications. The operations of our Secure Communication Systems segment are located in Salt Lake City, Utah, Camden, New Jersey and Shrewsbury, New Jersey. These operations are principally performed under cost plus, sole source contracts supporting long-term programs for the U.S. armed forces and classified customers. Our major secure communication programs and systems include: o secure data links for airborne, satellite, ground-and sea-based remote platforms for information collection, command and control and dissemination to users in real time; o strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information and related support contracts for military and intelligence efforts; o secure telephone, fax and network equipment and encryption management; o communication software support services to military and related government intelligence markets; and o communication systems for surface and undersea platforms and manned space flights. We believe that we have developed virtually every high bandwidth data link that is currently used by the military for surveillance and reconnaissance. We are also a leading supplier of communication software support services to military and related government intelligence markets. In addition to these core government programs, we are capitalizing on our technology base by expanding into related commercial communication equipment markets. For instance, we are applying our high data rate communications and archiving technology to the medical image archiving market and our wireless communication expertise to develop local wireless loop telecommunications equipment for the last mile interconnect. 1 SPECIALIZED COMMUNICATION PRODUCTS. This reportable segment includes three product categories: Microwave Components. We are the preeminent worldwide supplier of commercial off-the-shelf, high-performance microwave components and frequency monitoring equipment. Our microwave products are sold under the industry-recognized Narda brand name through a standard catalog to wireless, industrial and military communication markets. We also provide state-of-the-art, space-qualified communication components including channel amplifiers and frequency filters for the commercial communications satellite market serving major military and commercial frequencies, including Ka band. Approximately 81% of Microwave Components sales for 1999 were made to commercial customers, including Loral Space & Communications, Ltd., Motorola, Inc., Lucent Technologies Inc., AT&T Corp. and Lockheed Martin. Avionics and Ocean Products. Avionics and Ocean Products include our aviation recorders, display systems, antenna systems, acoustic undersea warfare systems and naval power distribution, conditioning, switching and protection equipment for naval ships and submarines. We are the world's leading manufacturer of commercial cockpit voice and flight data recorders (known as "black boxes"). These recorders are sold under the Fairchild brand name both to aircraft manufacturers and to the world's major airlines for their existing fleets of aircraft. Our aviation recorders are also installed on military transport aircraft throughout the world. We provide military and high-end commercial displays for use in military aircraft. We also manufacture high performance surveillance and precision millimeter wave antennas and related equipment for U.S. Air Force, U.S. Army and U.S. Navy aircraft and are the leading supplier of ground-based radomes. We are one of the world's leading product suppliers of acoustic undersea warfare systems and airborne dipping sonar systems to the U.S. and over 20 foreign navies. We are the only fully integrated, full-line provider of qualified turnkey electrical power delivery and management systems for U.S. Navy surface ships and submarines. Telemetry, Instrumentation and Space Products. Our Telemetry, Instrumentation and Space Products operations develop and manufacture commercial off-the-shelf, real-time data collection and transmission products and components for missile, aircraft and space-based electronic systems. These products are used to gather flight data and other critical information and transmit it from air or space to the ground. Telemetry products are also used for range safety and training applications to simulate battlefield situations. We are a leading global satellite communications systems provider offering systems and services used in the satellite transmission of voice, video and data through earth stations for uplink and downlink terminals. We provide global satellite communications systems and services to customers that include foreign post, telephone and telegraph administrations, domestic and international prime communications infrastructure contractors, telecommunications and satellite service providers, broadcasters and media-related companies, government agencies and large corporations. We also provide commercial, off-the-shelf satellite control software, telemetry, tracking and control ("TT&C"), mission processors and software engineering services to the worldwide military, civilian and commercial satellite markets. EMERGING COMMERCIAL PRODUCTS. One of our strategies which builds upon our core technical expertise and capabilities, is to select applications from our defense electronics technologies, develop them into commercial products, and then partner with or sell them to companies that have proven marketing infrastructures for those commercial products. We are seeking to expand into several closely aligned commercial business areas and applications. Emerging Commercial Products currently include the following niche markets: o medical simulation systems; o local wireless loop telecommunications equipment; o airport security equipment; and o information security. 2 A majority of these commercial products were developed based on technology used in our military businesses with relatively small additional expense. We are applying our technical capabilities in high data rate communications and archiving technology developed in our Secure Communication Systems segment to the medical image archiving market. Based on secure, high data rate communication technology also developed in our Secure Communication Systems segment, we have developed local wireless loop telecommunications equipment that is primarily designed for emerging market countries and rural areas where voice and data communication infrastructure is inadequate or does not exist. We have completed the development phase for the local wireless loop telecommunications equipment and have begun deliveries. In addition, the Federal Aviation Administration awarded us a development contract for next generation airport security equipment for explosive detection. On November 23, 1998, we received FAA certification for our eXaminer 3DXTM 6000 system which is the only second-generation system to receive certification and the only system to generate full, three-dimensional images of all objects in a piece of baggage. In the aggregate, revenues generated from our Emerging Commercial Products have not yet been material to us. INDUSTRY OVERVIEW The U.S. defense industry has undergone significant changes precipitated by ongoing federal budget pressures and new roles and missions to reflect changing strategic and tactical threats. Since the mid-1980's, the overall U.S. defense budget has declined in real dollars. In response, the DoD had focused its resources on enhancing its military readiness, joint operations and digital command and control communications capabilities by incorporating advanced electronics to improve the performance, reduce operating cost and extend the life expectancy of its existing and future platforms. The emphasis on system interoperability, force multipliers and providing battlefield commanders with real-time data is increasing the electronics content of nearly all of the major military procurement and research programs. As a result, the DoD's budget for communications and defense electronics is expected to grow. The industry has also undergone dramatic consolidation resulting in the emergence of three dominant prime system contractors (The Boeing Company ("Boeing"), Lockheed Martin and Raytheon Company ("Raytheon")). One outgrowth of this consolidation among the remaining major prime contractors is their desire to limit purchases of products and sub-systems from one another. However, there are numerous essential products, components and systems that are not economical for the major prime contractors to design, develop or manufacture for their own internal use which creates opportunities for merchant suppliers such as L-3. As the prime contractors continue to evaluate their core competencies and competitive position, focusing their resources on larger programs and platforms, the Company expects the prime contractors to continue to exit non-strategic business areas and procure these needed elements on more favorable terms from independent, commercially oriented merchant suppliers. Recent examples of this trend include divestitures of certain non-core defense-related businesses by Honeywell International ("Honeywell"), Lockheed Martin and Raytheon. The prime contractors' focus on cost control is also driving increased use of commercial off-the-shelf products for upgrades of existing systems and in new systems. The Company believes the prime contractors will continue to be under pressure to reduce their costs and will increasingly seek to focus their resources and capabilities on major systems, turning to commercially oriented merchant suppliers to produce sub-systems, components and products. Going forward, successful merchant suppliers will use their resources to complement and support, rather than compete with the prime contractors. L-3 anticipates the relationship between the major prime contractors and their primary suppliers will, as in the automotive and commercial aircraft industry, develop into critical partnerships encompassing increasingly greater outsourcing of non-core products and systems by the prime contractors to their key merchant suppliers and increasing supplier participation in the development of future programs. Early involvement in the upgrading of existing systems and the design and engineering of new systems incorporating these outsourced products will provide merchant suppliers, including the Company, with a competitive advantage in securing new business and provide the prime contractors with significant cost reduction opportunities through coordination of the design, development and manufacturing processes. 3 RECENT DEVELOPMENTS LINK SIMULATION AND TRAINING. On February 10, 2000, we acquired the assets of the Training Devices and Training Service ("TDTS") business of Raytheon for $160.0 million in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition, we changed the name of TDTS to L-3 Communications Link Simulation and Training ("Link Simulation and Training"). TDTS is a leader in high fidelity, fully integrated simulator training products, such as flight simulators and pilot training systems for aircraft and helicopters, combat vehicle trainers and training support services. Its products and services are used by U.S. and foreign military agencies and prime contractors. TREX COMMUNICATIONS. On February 14, 2000, we acquired the assets of Trex Communication Corporation ("TrexCom") for $50.2 million in cash plus expenses, subject to adjustment based on closing date net worth, as defined. TrexCom provides antennas and complete tracking for Telemery, Tracking and Control (TT&C) for receiving high rate imagery data, flight termination systems, up and down converters for C, X, Ku and Ka- band, military fixed and portable command and control ground stations, portable commercial satellite news gathering uplinks and satellite components. Their customers include major telecommunications companies, broadcast organizations, government agencies and military customers. In March 2000, we completed the sale of L-3 Network Security, a majority owned subsidiary of L-3 Communications, to Symantec Corporation for a one-time cash payment of $20.0 million. HISTORY Holdings was formed in April 1997 by Mr. Frank C. Lanza, the former President and Chief Operating Officer of Loral Corporation ("Loral"), Mr. Robert V. LaPenta, the former Senior Vice President and Controller of Loral, Lehman Brothers Capital Partners III, L.P. and its affiliates ("the Lehman Partnership") and Lockheed Martin to acquire the Predecessor Company from Lockheed Martin pursuant to the L-3 Acquisition. 4 PRODUCTS AND SERVICES The systems and products of the Company's two reportable segments as of December 31, 1999 (excluding the Company's recent acquisitions completed in February 2000) are summarized in the tables below:
SECURE COMMUNICATION SYSTEMS SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES - - -------------------------------------- -------------------------------------- -------------------------------------- HIGH DATA RATE COMMUNICATIONS o Wideband data links and ground o High performance, wideband o Used on aircraft, naval ships, terminals secure communication links for unmanned aerial vehicles and interoperable tactical battlefield satellites for relaying of data communication and intelligence and reconnaissance reconnaissance information SATELLITE COMMUNICATION TERMINALS o Ground-based satellite o Interoperable, transportable o Provide remote personnel with communication terminals ground terminals for remote data communication links to distant and payloads links to distant segments via forces commercial or military satellites SPACE COMMUNICATION AND SATELLITE CONTROL o Satellite communication and o On-board satellite external o International Space Station; tracking system communications, video systems, Earth Observing Satellite; solid state recorders and ground Landsat-7; Space Shuttle; and support equipment National Oceanic and Atmospheric Administration weather satellites o Satellite command and control o Software integration, test and o Air Force satellite control sustainment and support maintenance support for Air network and Titan IV launch Force satellite control network; system engineering support for satellite launch system MILITARY COMMUNICATION o Shipboard communications o Internal and external o Shipboard voice communications systems communications (radio room) for systems for Aegis cruisers and ships and submarines destroyers and fully automated Integrated Radio Room (IRR) for ship-to-ship communications on Trident submarines o Digital battlefield o Communications on the move for o Communication systems for U.S. communications tactical battlefield Army C(2)V o Communication software support o Value-aded, critical software o ASAS, JSTARS, and services support for C(3)I GUARDRAIL INFORMATION SECURITY SYSTEMS o Secure Telephone Unit (STU o Secure and non-secure voice, o Office and battlefield secure and III)/Secure Terminal Equipment data and video communication non-secure communication for (STE) utilizing ISDN and ATM armed services, intelligence and commercial network technologies security agencies o Local management devise/key o Provides electronic key material o User authorization and processor (LMD/KP) accounting, system management recognition and message and audit support functions for encryption for secure secure data communication communication encryption o Information processing systems o Custom designed strategic and o Classified military and national tactical intelligence systems that agency intelligence efforts detect, collect, identify, analyze and disseminate information and related support contracts
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SPECIALIZED COMMUNICATION PRODUCTS SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES - - ------------------------------------------ ------------------------------------- -------------------------------------- MICROWAVE COMPONENTS (CATALOG) o Passive components, switches and o Radio transmission, switching o Broad-band and narrow-band wireless assemblies and conditioning, antenna and commercial applications (PCS, base station testing and cellular, SMR, and paging monitoring infrastructure) sold under the Narda brand name; and broadband military applications o Safety products o Radio frequency (RF) o Monitor cellular base station and monitoring and measurement for industrial RF emissions safety frequency moniroting o Semiconductors (diodes, o Radio frequency switches, o Various industrial and military capacitators) limiters, voltage control, end uses, including commercial oscillators, harmonic generators satellites, avionics and specialty communications products o Satellite and wireless components o Satellite transponder control, o China Sat, Pan AmSat, Telstar, (channel amplifiers, transceivers, channel and frequency seperation Sirius, Tempo, Tiros, Milstar, converters, filters and GPS and LandSat multiplexers) o Amplifiers and amplifier based o Automatic Test Equipment o LEO satellites, ground stations, components (amplifiers, up/down (ATE), military EW, ground and LMDS, MMDS, military EW and converters and Ka assemblies) space communications ATE AVIONICS AND OCEAN PRODUCTS Aviation Recorders o Solid state crash resistant cockpit o Voice recorders continuously o Installed on business and voice and flight data recorders record most recent 30-120 commercial aircraft and certain minutes of voice and sounds military transport aircraft; sold to from cockpit and aircraft both aircraft OEMs and airlines intercommunications. Flight data under the Fairchild brand name recorders record the last 25 hours of flight parameters. o Solid state video recorders o Reconnaissance platforms o New product Antenna Products o Ultra-wide frequency and o Surveillance; radar detection o F-15, F-16, F-18, E-2C, P-3, advanced radar antenna systems C-130, B-2, AWACS, Apache, and rotary joints Cobra, Mirage (France), Maritime Patrol (U.K.), and Tornado (U.K.) o Precision antenna systems serving o Antennas for high frequency, o Various military and commercial major military and commercial millimeter satellite customers frequencies, including Ka band communications programs and scientific astronomy o Ground based radomes o Protective shields for antennas o FAA, weather radar and military against weather applications Display Products o Cockpit and mission display o High performance, ruggedized o E-2C, V-22, F-14, F-117, EA-6B, systems and controls flat panel and cathode ray tube C-130, AWACS, JSTARS S-3, displays and processors AH-64, T-38, C-27J, C-130, SH-60J, U-2 and Bradley Ocean Products o Airborne dipping sonar systems o Submarine detection and o SH-60, SH-2/3, AB-212, EH-101 localization and Lynx Helicopters o Submarine and surface ship o Submarine and surface ship o SSN, SSBN, DDG-963 and towed arrays detection and localization FFG-7 o Torpedo defense systems o Torpedo detection and jamming o SSN, SSBN and DDG-963 o Mine countermeasure systems o Coastal and route survey o MCDV (Canada)
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SPECIALIZED COMMUNICATION PRODUCTS--CONTINUED SYSTEMS SELECTED APPLICATIONS SELECTED PLATFORMS/END USES - - --------------------------------------- ---------------------------------------- ------------------------------------ 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, Trident, 688, NSSN, DDG51, CG49, DD963 and Nimitz, class CVN o Commercial transfer switches, o Production and maintenance of o FAA, financial institutions and UPS systems and power products systems and high-speed switches rail transportation for power interruption prevention for computer systems o Shipboard communications and o Design, develop and manufacture o CVN, NSSN controls of ship control and interior communications equipment o Ship electrical repair and o Repair, installation, overhaul and o All naval combatants overhaul testing services for USN shipboard electrical, electronic and ordinance systems TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS Airborne, Ground and Space Telemetry o Aircraft, missile and satellite o Real time data acquisition, o Trident, JSF, F-15, F-18, F-22, telemetry and instrumentation measurement, processing, Comanche, Nimrod (U.K.), systems simulation, distribution, display Tactical Hellfire, Titan, EELV, and storage for flight testing A2100, ATHENA, ARTEMIS and ICO o Global Positioning Systems o Space navigation, Gyro's, o Hubble, RIFCA, EKV, CALCM, (GPS) receivers and navigation reaction wheels, star sensor MLRS, MFCS and ERGM systems and subsystems o Electronic safe and arm devices o Missiles o Hellfire, Longbow, Javelin o Training range telemetry systems o Training ranges and test ranges o Combat simulation and tests Space Products o Global satellite communications o Satellite transmission of voice, o Rural telephony or private systems video and data networks, direct to home uplinks, satellite news gathering and wideband applications
SECURE COMMUNICATION SYSTEMS L-3 is a leader in communication systems for high performance intelligence collection, imagery processing and ground, air, sea and satellite communications for the DoD and other government agencies. The Salt Lake City operation provides secure, high data rate, real-time communication systems for surveillance, reconnaissance and other intelligence collection systems. The Camden operation designs, develops, produces and integrates communication systems and support equipment for space, ground and naval applications. The Shrewsbury operation provides communication software support services to military and related government intelligence markets. Product lines of the Secure Communication Systems business include high data rate communications links, satellite communications ("SATCOM") terminals, Navy vessel communication systems, space communications and satellite control systems, signal intelligence information processing systems, information security systems, tactical battlefield sensor systems and commercial communication systems. o HIGH DATA RATE COMMUNICATIONS The Company is a technology leader in high data rate, covert, jam-resistant microwave communications in support of military and other national agency reconnaissance and surveillance applications. L-3's product line covers a full range of tactical and strategic secure point-to-point and relay data transmission systems, products and support services that conform to military and intelligence specifications. The Company's systems and products are capable of providing battlefield commanders with real time, secure surveillance and targeting information and were used extensively by U.S. armed forces in the Persian Gulf war. 7 During the 1980s, largely based on its prior experience with command and control guidance systems for remotely-piloted vehicles, L-3 developed its current family of strategic and tactical data links, including its Modular Interoperable Data Link ("MIDL") systems and Modular Interoperable Surface Terminals ("MIST"). MIDL and MIST technologies are considered virtual DoD standards in terms of data link hardware. The Company's primary focus is spread spectrum communication (based on CDMA technology), which involves transmitting a data signal with a high rate noise signal so as to make it difficult to detect by others, and then re-capturing the signal and removing the noise. The Company's data links are capable of providing information at over 200 Mb/s. L-3 provides these secure high band width products to the U.S. Air Force, Navy, Army and various U.S. government agencies, many through long-term sole source programs. The scope of these programs include air-to-ground, air-to-air, ground-to-air and satellite communications. U.S. government programs include: U-2 Support Program, Common High-Band Width Data Link ("CHBDL"), Battle Group Passive Horizon Extension System ("BGPHES"), Light Airborne Multi-Purpose System ("LAMPS"), TriBand SATCOM Subsystem ("TSS"), major unmanned aerial vehicle ("UAV") programs and Direct Air-Satellite Relay ("DASR"). o SATELLITE COMMUNICATION TERMINALS L-3 provides ground-to-satellite, high availability, real-time global communications capability through a family of transportable field terminals to communicate with commercial, military and international satellites. These terminals provide remote personnel with anywhere, anytime effective communication capability and provide communications links to distant forces. The Company's TriBand SATCOM Subsystem ("TSS") employs a 6.25 meter tactical dish with a single point feed that provides C, Ku and X band communication to support the U.S. Army. The Company also offers an 11.3 meter dish which is transportable on two C-130 aircraft. The SHF Portable Terminal System ("PTS") is a lightweight (28 lbs.), manportable terminal, which communicates through DSCS, NATO or SKYNET satellites and brings unprecedented connectivity to small military tactical units and mobile command posts. L-3 delivered 14 of these terminals for use by NATO forces in Bosnia. o SPACE COMMUNICATIONS AND SATELLITE CONTROL Continuing L-3's tradition of providing communications for every manned U.S. space flight since Mercury, the Company is currently designing and testing three communication subsystems for the International Space Station ("ISS"). These systems will control all ISS radio frequency ("RF") communications and external video activities. The Company also provides solid-state recorders and memory units for data capture, storage, transfer and retrieval for space applications. The standard NASA tape recorder, which was developed and produced by the Company, has completed over four million hours of service without a mission failure. Current programs include recorders for the National Oceanic & Atmospheric Administration ("NOAA") weather satellites, the Earth Observing Satellite ("EOS"), AM spacecraft and Landsat-7 Earth-monitoring spacecraft. The Company also provides space and satellite system simulation, satellite operations and computer system training, depot support, network engineering, resource scheduling, launch system engineering, support, software integration and test through cost-plus contracts with the U.S. Air Force. o MILITARY COMMUNICATIONS The Company provides integrated, computer controlled switching systems for the interior and exterior voice and data needs of today's Navy military vessels. The Company's products include Integrated Voice Communication Systems ("IVCS") for Aegis cruisers and destroyers and the Integrated Radio Room ("IRR") for Trident class submarines, the first computer controlled communications center in a submarine. These products integrate the intercom, tactical and administrative communications network into one system accessing various types of communication terminals throughout the ship. The Company's MarCom 2000 secure digital switching system is in development for the Los Angeles class attack submarine and provides an integrated approach to the specialized voice and data communications needs of a shipboard environment for internal and external communications, command and control and air 8 traffic control. The Company also offers on-board, high data rate communications systems which provide a data link for carrier battle groups which are interoperable with the U.S. Air Force's surveillance/ reconnaissance terminal platforms. The Company provides the US Army's Command and Control Vehicle ("C2V") Mission Module Systems ("MMS"). MMS provides the "communications on the move" capability needed for the digital battlefield by packaging advanced communications into a modified Bradley Fighting Vehicle. The Company is a proven supplier of superior technological expertise to the DoD, including its contractors and related government intelligence agencies. o INFORMATION SECURITY SYSTEMS The Company has produced more than 112,000 secure telephone units ("STU III") which are in use today by the U.S. armed forces to provide secure telephone capabilities for classified confidential communication over public commercial telephone networks. The Company has begun producing the next-generation digital, ISDN-compatible STE. STE provides clearer voice and thirteen-times faster data/fax transmission capabilities than the STU III. STE also supports secure conference calls and secure video teleconferencing. STE uses a CryptoCard security system which consists of a small, portable, cryptographic module mounted on a PCMCIA card holding the algorithms, keys and personalized credentials to identify its user for secure communications access. The Company also provides LMD/KP which is the workstation component of the U.S. government's Electronic Key Management System ("EKMS"), the next generation of information security systems. EKMS is the Government system to replace current "paper" secret keys used to secure government communications with "electronic" secret keys. LMD/KP is the component of the EKMS which produces and distributes the electronic keys. L-3 also develops specialized strategic and tactical SIGINT 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. SPECIALIZED COMMUNICATION PRODUCTS MICROWAVE AND WIRELESS COMPONENTS L-3 is the preeminent worldwide supplier of commercial off-the-shelf, high performance RF microwave components, assemblies and instruments supplying the wireless communications, industrial and military markets. The Company is also a leading provider of state-of-the-art space-qualified commercial satellite and strategic military RF products and millimeter amplifier based products. L-3 sells many of these components under the well-recognized Narda brand name and through a comprehensive catalog of standard, stocked hardware. L-3 also sells its 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. The Company operates from three principal sites, one in Hauppauge, New York ("Narda East") and two in Sacramento, California, ("Narda West" and "DBS"). Narda East represents approximately 56% of L-3's microwave sales volume, offering high performance microwave components, networks and instruments to the wireless, industrial and military communications markets. Narda East's products can be divided into three major categories: passive components, higher level wireless assemblies/monitoring systems and safety instruments. Passive components are generally purchased in narrow frequency configurations by wireless original equipment manufacturers and service providers. Similar components are purchased in wide frequency configurations by first-tier military equipment suppliers. Commercial applications for Narda components are primarily in cellular or PCS base stations. Narda also manufactures higher level assemblies for wireless base stations and the paging industry. These products include communication antenna test sets, devices that monitor reflected power to determine if a cellular base station antenna is working and whether the base station radios are operating at peak power levels. Military applications include general procurement 9 for test equipment or electronic surveillance and countermeasure systems. Safety products are instru-ments which are used to measure the level of non-ionizing radiation in a given area, i.e., from an antenna, test set or other emitting source, and determine whether human exposure limits are within federal standards. Narda West designs and manufactures state-of-the-art space-qualified and wireless components. Space qualified components include channel amplifiers, linearizers and diplexers/multiplexers, which are used to separate various signals and direct them to the appropriate other sections of the payload. Narda West's primary areas of focus are communications satellite payload products. Channel amplifiers and linearizers constitute Narda West's main satellite products. Channel amplifiers amplify the weak signals received from earth stations by a factor of 1 million, and then drive the power amplifier tubes that broadcast the signal back to earth. These products are sold to satellite manufacturers and offer lower cost, lower weight and improved performance as compared to in-house alternatives. On a typical satellite, for which there are 20 to 50 channel amplifiers, Narda West's channel amplifiers offer cost savings of up to 60% (up to $1 million per satellite) and decrease launch weight by up to 25 kilograms. 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 ("TWT") for amplification. This pre-distortion is exactly the opposite of the distortion created at peak power by the TWT and, consequently has a cancellation effect that keeps the signal linear over a much larger power band of the tube. This significantly increases the useful output power of the TWT and consequent terrestrial coverage from the satellite. Narda West products include wireless microwave components for cellular and PCS base station applications. These products include filters used to transmit and receive channel separation as well as ferrite components which isolate certain microwave functions, thereby preventing undesired signal interaction. Other products include a wide variety of high reliability power splitters, combiners and filters for spacecraft and launch vehicles, such as LLV, Tiros, THAAD, Mars Surveyor, Peacekeeper, Galileo, Skynet, Cassini, Milstar, Space Shuttle, LandSat, FltSatCom, GPS, GPS Block IIR, IUS, ACE, SMEX and certain classified programs. The balance of the operation's business involves wideband filters used for electronic warfare applications. DBS designs and manufactures both broad and narrow band amplifiers and amplifier-based products in the microwave and millimeter wave frequencies. These amplifiers are used as low-noise, high-gain components in defense and communications applications. These devices can be narrow band for communication needs or broadband for electronic warfare. DBS has an extensive offering of amplifier designs allowing it to rapidly respond to unique requirements from its marketplace. DBS offers standard packaged amplifiers for use in various automated test equipment and system applications. It is also developing higher-level assemblies for specific military applications in which the amplifier serves as the cornerstone component. For future growth, DBS is at the forefront of technology in both the design and manufacturing of millimeter range ((is greater than or equal to) 20GHz) amplifier products for use in emerging communication applications such as back haul radios, LMDS and ground terminals for LEOS. Further, DBS is starting to penetrate the space qualified communications market with designs applicable to many LEO communication satellite needs. AVIONICS AND OCEAN PRODUCTS o AVIATION RECORDERS L-3 manufactures commercial solid-state crash-protected aviation recorders ("black boxes") under the Fairchild brand name, and has delivered over 47,000 flight recorders to airplane manufacturers and airlines around the world. Recorders are mandated and regulated by various worldwide agencies for commercial airlines and a large portion of business aviation aircraft. Management anticipates growth opportunities in Aviation Recorders as a result of the current high level of orders for new commercial aircraft. Expansion into the military market shows continued growth opportunities. L-3 recorders were recently selected for installation on the fleet of the Royal Australian Air Force and Royal Australian Army transport aircraft and are currently being installed on the U.S. Navy C-9 aircraft. There are two 10 types of recorders: (i) the Cockpit Voice Recorder ("CVR") which records the last 30 to 120 minutes of crew conversation and ambient sounds from the cockpit and (ii) the Flight Data Recorder ("FDR") which records the last 25 hours of aircraft flight parameters such as speed, altitude, acceleration, thrust from each engine and direction of the flight in its final moments. Recorders are highly ruggedized instruments, designed to absorb the shock equivalent to that of an object traveling at 268 knots stopping in 18 inches, fire resistant to 1,100 degrees centigrade and pressure resistant to 20,000 feet undersea for 30 days. Management believes that the Company has the leading worldwide market position for CVR's and FDR's. o ANTENNA PRODUCTS Under the Randtron brand name, L-3 produces high performance antennas designed for surveillance, high-resolution, ultra-wide frequency bands, detection of low radar cross section ("LRCS") targets, LRCS installations, severe environmental applications and polarization diversity. L-3's main antenna product is a sophisticated 24-foot diameter antenna operational on all E-2C aircraft. This airborne antenna consists of a 24-foot rotating aerodynamic radome containing a UHF surveillance radar antenna, IFF antenna and forward and aft auxiliary antennas. Production of this antenna began in the early 1980s, and production is planned beyond 2000 for the E-2C, P-3 and C-130 AEW aircraft. The replacement for this antenna is a very adaptive radar currently under development for introduction early in the next decade. L-3 also produces broad-band antennas for a variety of tactical aircraft and rotary joints for the AWAC's and E-2C's antenna. Randtron has delivered over 2,000 aircraft sets of antennas and has a current backlog through 1999. L-3 is a leading supplier of ground-based radomes. Radomes are designed to enclose an antenna system as a protective shield against the environment as well as to accentuate the performance of an antenna system. Radomes are used to enclose antenna systems used for air traffic control, weather radar, defense and scientific purposes. o DISPLAY PRODUCTS L-3 specializes in the design, development and manufacture of ruggedized display system solutions for military and high-end commercial applications. L-3's current product lines include cathode ray tubes ("CRTs"), the Actiview family of active matrix liquid crystal displays ("AMLCD"), and a family of high performance Display Processing systems. L-3 manufactures flat-panel displays that are used on platforms such as E-2C, F-117, and the LCAC (Landing Craft Air Cushion) vehicle. Recent new contracts for flat-panel displays include the SH-60J helicopter and the C-130 Senior Scout. L-3 also manufactures CRT displays for the E-2C Hawkeye, V-22 Osprey, F-14 Tomcat, T-38, Bradley and U-2 and electronics used in aircraft anti-lock braking systems. o OCEAN PRODUCTS The Company is one of the world's leading suppliers of acoustic undersea warfare systems, having designed, manufactured and supported a broad range of compact, lightweight, high performance acoustic systems for navies around the world for over forty years. This experience spans a wide range of platforms, including helicopters, submarines and surface ships, that employ the Company's sonar systems and countermeasures. SPD is the world's leading provider of state-of-the-art, mission-critical electronics and electrical power delivery products, systems and subsystems, as well as communications and control systems for the U.S. Navy and many domestic and international customers. In addition, SPD provides communications subsystems and electrical products for transportation and utilities businesses. SPD's four business units are: SPD Electrical Systems, which is the leading U.S. manufacturer of military power delivery systems and components focused on switching, distribution and protection providing engineering design and development, manufacturing and overhaul and repair services; Power Paragon, which is one of the world's leading providers of high technology electrical power distribution, control and conversion systems focused on frequency and voltage conversion for military and commercial applications; Henschel, which is the leading designer, developer, and manufacturer of ship control and interior communications equipment; and Pac Ord, which is the only combat systems overhaul and repair contractor, which services the U.S. Naval Fleet on a national basis with locations in San Diego, Norfolk and Jacksonville. 11 o TELEMETRY, INSTRUMENTATION AND SPACE PRODUCTS The Company is a leader in 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 from these platforms, its transmission to ground stations for analysis, and its further dissemination or transportation to another platform. A principal use of this telemetry data is to measure as many as 1,000 different parameters of the platform's operation (in much the same way as a flight data recorder on an airplane measures various flight parameters) and transmit this data to the ground. Additionally, for satellite platforms, the equipment also acquires the command uplink that controls the satellite and transmits the necessary data for ground processing. In these applications, high reliability of components is crucial because of the high cost of satellite repair and the length of uninterrupted service required. Telemetry also provides the data to terminate the flight of missiles and rockets under errant conditions and/or at the end of a mission. Telemetry and command/control products are currently provided on missile programs such as AMRAAM, ASRAAM, AIM-9X, JASSM, JDAM, FOTT, ATACMS and PAC-3, as well as satellite programs such as GPS BLK IIF, GLOBALSTAR, EARTHWATCH, SBIRS, LUNAR PROSPECTOR, MTSAT, ARTEMIS and Hughes ICO. o AIRBORNE, GROUND AND SPACE TELEMETRY The Company provides airborne equipment and data link systems to gather critical information and to process, format and transmit it to the ground through communication data links from a communications satellite, spacecraft, aircraft and/or missile. These products are available in both COTS and custom configurations and include software and software engineering services. Major customers are the major defense contractors who manufacture aircraft, missiles, warheads, launch vehicles, munitions and bombs. Ground instrumentation activity occurs at the ground station where the serial stream of combined data is received and decoded in real-time, as it is received from the airborne platform. Data can be encrypted and decrypted during this process, an additional expertise that the Company offers. The company is a leader in digital GPS receiver technology for high performance military applications. These GPS receivers are currently in use on multiple aircraft, cruise missiles and precision guided bombs providing highly accurate positioning and navigational information. Additionally, the company provides navigation systems for high performance weapon pointing and positioning systems for critical and strategically important national defense programs like MLRS (Multiple Launch Rocket System) and MFCS (Mortar Fire Control System). o SPACE PRODUCTS L-3 offers value-added solutions that require complex product integration, rich software content and comprehensive support to its customers. The Company focuses on the following niches within the satellite ground segment equipment market: telephony, video broadcasting and multimedia. The Company's customers include foreign PTT's, domestic and international prime communications infrastructure contractors, telecommunications or satellite service providers, broadcasters and media-related companies. The company also provides space products for advanced guidance and control systems. These products include gyroscopes, controlled momentum devices and star sensors for a wide range of space and military applications for commercial and civil customers. These products are used on satellites, launch vehicles, the Hubble telescope, the space shuttle and the International Space Station. EMERGING COMMERCIAL PRODUCTS o MEDICAL SIMULATION SYSTEMS The Company has approximately a one-third equity ownership interest in Medical Education Technologies, Inc. ("METI"). METI is a medical technology company engaged in the development, manufacture and sale of Human Patient Simulators ("HPS"). The HPS is a computerized system with a life-like mannequin that reacts to medical treatments and interventions similar to a human being. 12 Originally oriented to the anesthesiology training and education domain, METI has expanded into cardiology, critical care, trauma care, allied health care, military medicine and continuing medical education. METI's target customers for its HPS include medical schools throughout the world, colleges with registered nursing programs, community colleges and state, local and volunteer emergency medical service organizations. o WIRELESS LOOP TELECOMMUNICATIONS EQUIPMENT The Company is applying its wireless communication expertise to introduce local wireless loop telecommunications equipment using a synchronous Code Division Multiple Access technology ("CDMA") supporting terrestrial and space based, fixed and mobile communication services. The system's principal targeted customer base is emerging market countries and rural areas where existing telecommunications infrastructure is inadequate or non-existent. The Company's system will have the potential to interface with low earth orbit ("LEO") PCS systems such as Globalstar, Iridium and/or any local public telephone network. The Company expects to manufacture for sale certain of the infrastructure equipment. The Company intends to pursue joint ventures with third parties for service and distribution capabilities. This same technology is also being introduced into the Ellipso "big LEO" program to provide the key communications capability in the ground and user segments. In this program, the Company will provide the CDMA processing equipment in the Ground Control Segment and the Ellipso user terminals, both fixed and mobile. o AIRPORT SECURITY EQUIPMENT The FAA has awarded the Company a development contract for next generation airport security equipment for explosive detection. L-3 has teamed with Analogic Corporation and GE to design and produce an explosive detection system ("EDS") utilizing a dual energy computer tomography ("CT") X-ray system. L-3's EDS system, the eXaminer 3DXTM 6000, will analyze the contents of checked baggage at airports for a wide-range of explosive material as specified by the FAA. On November 23, 1998, L-3 received FAA certification for its eXaminer 3DXTM 6000 system which is the only second-generation system to receive certification and the only system to generate full, three-dimensional images of all objects in a piece of baggage. The eXaminer 3DXTM 6000 has been certified at 500 bags per hour but eventually will be capable of inspecting baggage at an average of 675 bags per hour, which will allow screening of passenger-checked baggage for a large body aircraft, such as a Boeing 747, in approximately 40 minutes. It can be installed as a stand-alone unit in a conveyor system or in a mobile van. CONTRACTS A significant portion of L-3's sales are derived from high-priority, long-term programs and from programs for which L-3 has been the incumbent supplier, and in many cases acted as the sole provider for many years. Approximately 56% of L-3's 1999 sales of $1,405.5 million were generated from sole source contracts. L-3's customer satisfaction and excellent performance record are evidenced by its performance-based award fees exceeding 90% on average over the past two years. Management believes prime contractors will increasingly award long-term, sole source, outsourcing contracts to the merchant supplier they believe is most capable on the basis of quality, responsiveness, design, engineering and program management support as well as cost. As a consequence of L-3's strong competitive position, the Company has experienced a contract award win rate for 1999 in excess of 58% on new competitively bid contracts and in excess of 90% on contracts for which L-3 was the incumbent. The Company enjoys a diverse business mix with a limited exposure to any single program, a favorable balance of cost reimbursible and fixed price contracts, a significant sole source follow-on business and an attractive customer profile. See "Customers" below. L-3's sales mix of contracts for 1999 was 30% cost plus and 70% fixed price, providing the Company with a favorable mix of predictable profitability (cost plus) and higher margin (fixed price) business. Under firm fixed price contracts the Company agrees to perform for a predetermined contract price. Although the Company's fixed price contracts generally permit the Company to keep profits if costs are 13 less than projected, the Company does bear the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contracts. Generally, firm fixed price contracts offer higher margin than cost plus type contracts. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls and standard provisions for termination at the convenience of the U.S. government. Upon termination, other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and an allowance for profit. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the government. To date, no significant fixed price contract of the Company has been terminated. Companies supplying defense-related equipment to the U.S. government are subject to certain additional business risks peculiar to that industry. Among these risks are the ability of the U.S. government to unilaterally suspend the Company from new contracts pending resolution of alleged violations of procurement laws or regulations. Other risks include a dependence on appropriations by the U.S. government, changes in the U.S. government's procurement policies (such as greater emphasis on competitive procurements) and the need to bid on programs in advance of design completion. A reduction in expenditures by the U.S. government for products and services of the type manufactured and provided by the Company, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to the Company or substantial cost overruns could have an adverse effect on the Company. BACKLOG The Company's backlog as of December 31, 1999 amounted to $1,003.7 million, of which $332.9 million was for the Secure Communication Systems segment and $670.8 million for the Specialized Communication Products segment. This backlog provides management with a useful tool to project sales and plan its business on an on-going basis; however, no assurance can be given that the Company's backlog will become revenues in any particular period or at all. Funded backlog does not include the total contract value of multi-year, cost-plus reimbursable contracts, which are funded as costs are incurred by the Company. Funded backlog also does not include unexercised contract options which represent the amount of revenue which would be recognized from the performance of contract options that may be exercised by customers under existing contracts and from purchase orders to be issued under indefinite quantity contracts or basic ordering agreements. Overall, approximately 77% of the December 31, 1999 funded backlog is expected to be shipped over the next twelve-month period. CUSTOMERS L-3 enjoys an attractive customer mix of defense and commercial business, with DoD related sales accounting for 62% and commercial, U.S. government (non-DOD) and foreign government sales accounting for approximately 38% of 1999 sales of $1,405.5 million. The Company intends to leverage this favorable business profile to expand its merchant supplier business base. The Company's sales are predominantly derived from contracts with agencies of, and prime contractors to, the U.S. government. Various U.S. government agencies and contracting entities exercise independent purchasing decisions. Therefore, sales to the U.S. government generally are not regarded as constituting sales to one customer. Instead, each contracting entity is considered to be a separate customer. For 1999 the Company had approximately 365 contracts with a value exceeding $1.0 million. Sales to the U.S. government for 1999, including sales through prime contractors, were $924.0 million or approximately 66%. The Company's largest program is a long-term, sole source cost plus support contract for the U-2 program which contributed approximately 7.7% of 1999 sales. No other program represented more than 4% of 1999 sales. COMPETITION The Company's ability to compete for defense contracts depends to a large extent on the effectiveness and innovativeness of its research and development programs, its ability to offer better program performance than its competitors at a lower cost to the Government customer, and its readiness in facilities, equipment and personnel to undertake the programs for which it competes. In some instances, 14 programs are sole source or work directed by the Government to a single supplier. In such cases, there may be other suppliers who have the capability to compete for the programs involved, but they can only enter or reenter the market if the Government should choose to reopen the particular program to competition. Approximately 44% of the Company's $1,405.5 million sales for 1999 were related to competitive contracts. The Company experiences competition from industrial firms and U.S. government agencies, some of which have substantially greater resources than the Company. These competitors include: AlliedSignal, Inc. ("AlliedSignal"), Cubic Corporation, Eaton Corporation, Globecomm Systems Inc., Harris Corporation, Hughes, Motorola, Scientific-Atlanta, Inc., Thomson Marconi Sonar Ltd., Titan Corporation and TRW Inc. A majority of the sales of the Company is derived from contracts with the Government and its prime contractors, and such contracts are awarded on the basis of negotiations or competitive bids. Management does not believe any one competitor or a small number of competitors is dominant in any of the business areas of the Company. Management believes the Company will continue to be able to compete successfully based upon the quality and cost competitiveness of its products and services. RESEARCH AND DEVELOPMENT The Company employs scientific, engineering and other personnel to improve its existing product lines and to develop new products and technologies in the same or related fields. As of December 31, 1999, the Company employed approximately 3,900 engineers (of whom 17% hold advanced degrees). The amounts of research and development performed under customer-funded contracts and Company-sponsored research projects including bid and proposal costs for 1999 were $302.4 million. PATENTS AND LICENSES Although the Company owns some patents and has filed applications for additional patents, it does not believe that its operations depend upon its patents. In addition, the Company's U.S. government contracts generally license it to use patents owned by others. Similar provisions in the U.S. government contracts awarded to other companies make it impossible for the Company to prevent the use by other companies of its patents in most domestic work. GEOGRAPHIC REGION SALES 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. ENVIRONMENTAL MATTERS The Company's operations are subject to various federal, state and local environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of certain materials, substances and wastes used in its operations. The Company continually assesses its obligations and compliance with respect to these requirements. Management believes that the Company's current operations are in substantial compliance with all existing applicable environmental laws and permits. The Company does not currently project the need for any material unbudgeted expenditures to remain in compliance with applicable environmental laws and regulations. In conjunction with various manufacturing facilities of the Company's acquired businesses, the Company has assessed the risk of environmental contamination thereon and, where appropriate, has obtained indemnification, either from the respective sellers of those acquired businesses or through Pollution Liability Insurance. The Company does not project any material, non-indemnified environmental remediation expenses for such manufacturing facilities. PENSION PLANS In connection with the L-3 Acquisition, Holdings and L-3 Communications Corporation assumed certain liabilities relating to defined benefit pension plans for present and former employees and retirees 15 of certain businesses which were transferred from Lockheed Martin to Holdings and L-3 Communications. Prior to the consummation of the L-3 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. These assumptions result in a larger liability for accrued benefits than the assumptions used for financial reporting under Statement of Financial Accounting Standards No. 87. The PBGC underfunding is related to the Communication Systems -- West and Aviation Recorders pension plans (the "Subject Plans"). With respect to the Subject Plans, Lockheed Martin entered into an agreement (the "Lockheed Martin Commitment") among Lockheed Martin, L-3 Communications and the PBGC dated as of April 30, 1997. The material terms and conditions of the Lockheed Martin Commitment include a commitment by Lockheed Martin to the PBGC to, under certain circumstances, assume sponsorship of the Subject Plans or provide another form of financial support for the Subject Plans. The Lockheed Martin Commitment will continue with respect to any Subject Plan until such time as such Subject Plan is no longer underfunded on a PBGC basis for two consecutive years or, at any time after May 31, 2002, the Company achieves investment grade credit ratings. Pursuant to the Lockheed Martin Commitment, the PBGC agreed that it would take no further action in connection with the L-3 Acquisition. Upon the occurrence of certain events, Lockheed Martin, at its option, has the right to decide whether to cause the Company to transfer sponsorship of any or all of the Subject Plans to Lockheed Martin, even if the PBGC has not sought to terminate the Subject Plans. Such a triggering event occurred in 1998, that 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. The Company notified Lockheed Martin the 1998 triggering event, and in February 1999, Lockheed Martin informed the Company that it had no present intention to exercise its right to cause the Company to transfer sponsorship of the Subject Plans. If Lockheed Martin did assume sponsorship of these plans, it would be primarily liable for the costs associated with funding the Subject Plans or any costs associated with the termination of the Subject Plans but L-3 Communications would be required to reimburse Lockheed Martin for these costs. To date, the impact on pension expense and funding requirements resulting from this arrangement has not been significant. However, should Lockheed Martin assume sponsorship of the Subject Plans or if these plans were terminated, the impact of any increased pension expenses or funding requirements could be material to the Company. The Company has performed its obligations under the letter agreement with Lockheed Martin and the Lockheed Martin Commitment and has not received any communications from the PBGC concerning actions which the PBGC contemplates taking in respect of the Subject Plans. EMPLOYEES As of December 31, 1999, the Company employed approximately 10,200 full-time and part-time employees. The Company believes that its relations with its employees are good. Approximately 540 of the Company's employees at its Communication Systems--East operation in Camden, New Jersey are represented by four unions, the Association of Scientists and Professional Engineering Personnel, the International Federation of Professional and Technical Engineers, the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers and an affiliate of the International Brotherhood of Teamsters. The collective bargaining agreements for these four unions were successfully renegotiated in mid-1998 without any disruptions to operations. Three of the collective bargaining agreements will expire in 2002, and the other agreement will expire in 2001. Approximately 200 employees of Ocean Systems are represented by the United Auto Workers. The collective bargaining agreement for this union was successfully renegotiated in the third quarter, 1999 without any disruptions to operations. The new collective bargaining agreement will expire in 2003. Approximately 140 of the employees at Ocean Systems' ELAC subsidiary in Kiel, Germany are represented by the Metal Trade Industrial Workers of the Hamburg Region and ELAC is represented by the Association of Metal Industry Employers for Schleswig-Holstein. 16 Approximately 290 of SPD's employees located in Philadelphia, Pennsylvania are represented by the United Automobile Aerospace and Agricultural Implement Workers of America, Local 1612 Amalgamated. The four collective bargaining agreements covering these employees were successfully renegotiated in April, 1999 without any disruptions to operations. The new collective bargaining agreements expire in 2004. Approximately 36 of SPD's employees located in National City, California are represented by the International Brotherhood of Electrical Workers, Local 569, whose collective bargaining agreement expires in late May 2000. While the Company has not yet initiated discussions with representatives of the union, management believes that it will be able to negotiate without material disruption to its business, a satisfactory new collective bargaining agreement. However, there can be no assurance that a satisfactory agreement will be reached with the covered employees or that a material disruption to the Company's National City operations will not occur. Approximately 28 of SPD's employees located in National City, California are represented by the International Association of Machinists and Aerospace Workers, Local 389. The collective bargaining agreement for the union was successfully renegotiated in February 2000 without any disruptions to operations. The new collective bargaining agreement expires in 2003. Approximately 125 of Electrodynamics' employees located in Rolling Meadows, Illinois are represented by the International Brotherhood of Electrical Workers. The collective bargaining agreement expires in the last quarter of 2000. While the Company has not yet initiated discussions with representatives of the union, management believes it will be able to negotiate, without material disruptions to its business, a satisfactory new collective bargaining agreement. However there can be no assurance that a satisfactory agreement will be reached with the covered employees or that a material disruption to the Company's Rolling Meadows operations will not occur. Approximately 120 of Telemetry East's employees located in Newtown, Pennsylvania are represented by the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers. The collective bargaining agreement for this union was successfully renegotiated in December, 1999 without any disruptions to operations. The new collective bargaining agreement expires in 2004. 17 ITEM 2. PROPERTIES The table below sets forth certain information with respect to significant facilities and properties of the Company as of December 31, 1999.
LOCATION OWNED LEASED - - -------------------------------------------------- ---------- --------- (thousands of square feet) L-3 Headquarters, NY ............................. -- 35.3 L-3 Washington Operations, Arlington, VA ......... -- 4.6 SECURE COMMUNICATION SYSTEMS: Camden, NJ ...................................... -- 580.6 Salt Lake City, UT .............................. -- 487.7 SPECIALIZED COMMUNICATION PRODUCTS: Anaheim, CA ..................................... 293.6 165.3 Folsom, CA ...................................... -- 57.5 Menlo Park, CA .................................. -- 93.1 San Diego, CA ................................... 196.0 68.9 Sylmar, CA ...................................... -- 253.0 Ocala, FL ....................................... 112.0 -- Sarasota, FL .................................... -- 143.7 Alpharetta, GA .................................. 93.0 -- Concord, MA ..................................... -- 60.0 Lowell, MA ...................................... -- 47.0 Newburyport, MA ................................. -- 81.2 Teterboro, NJ ................................... -- 250.0 Hauppauge, NY ................................... 240.1 -- Philadelphia, PA ................................ -- 230.0 Newton, PA ...................................... 78.0 13.5 Kiel, Germany ................................... -- 302.7 Leer, Germany ................................... -- 26.5
In total, the Company owns approximately 1,150,000 square feet and leases approximately 3.3 million square feet of manufacturing facilities and properties. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is involved in legal proceedings arising in the ordinary course of its business. Management believes it is adequately reserved for these liabilities and that there is no litigation pending that could have a material adverse effect on the Company's results of operations and financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The common stock of Holdings is traded on the New York Stock Exchange (the "NYSE") under the symbol "LLL". The following table sets forth, for each of the quarterly periods indicated since the IPO, the high and low closing price of the common stock as reported on the NYSE.
COMMON STOCK MARKET PRICE ------------------------- 1999 HIGH LOW - - ---- ----------- ----------- Fourth quarter ................................... $ 45.13 $ 34.81 Third quarter .................................... 48.44 36.38 Second quarter ................................... 52.88 44.31 First quarter .................................... 47.88 39.38 1998 - - ---- Fourth quarter ................................... $ 48.19 $ 34.94 Third quarter .................................... 39.69 31.19 Second quarter (commencing May 19, 1998) ......... 32.50 26.63
On March 28, 2000, the closing price of Holdings common stock, as reported by the NYSE, was $46.00 per share. As of March 28, 2000, there were 174 stockholders of record of Holdings' common stock, not including the stockholders for whom shares are held in a "nominee" or "street" name. L-3 Communications is a wholly owned subsidiary of Holdings. DIVIDEND POLICY Since its inception, effective April 1, 1997, Holdings has paid no cash dividends on its common stock. Holdings currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on its common stock in the foreseeable future. Any determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of Holdings and its subsidiaries and such other facts as the Board of Directors of Holdings may consider, including any contractual or statutory restrictions on Holdings' ability to pay dividends. Moreover, Holdings is a holding company and its ability to pay dividends is dependent upon receipt of dividends, distributions, advances, loans or other cash transfers from L-3 Communications. Certain outstanding debt instruments of L-3 Communications limit its ability to pay dividends or other distributions on its common stock or to make advances, loans or other cash transfers to Holdings. 19 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated (combined) financial data have been derived from the audited financial statements for the respective periods and should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Consolidated (Combined) Financial Statements of the Company (Predecessor Company) included elsewhere herein.
COMPANY PREDECESSOR COMPANY -------------------------------------------- ---------------------------------- THREE YEAR ENDED NINE MONTHS MONTHS DECEMBER 31, ENDED ENDED YEAR ENDED DECEMBER 31, --------------------------- DECEMBER 31, MARCH 31, ----------------------- 1999 1998 1997(1) 1997 1996(2) 1995(2) ------------- ------------- ---------------- ---------- ----------- ----------- (in millions, except per share data) STATEMENT OF OPERATIONS DATA: Sales ........................................ $ 1,405.5 $ 1,037.0 $ 546.5 $ 158.9 $ 543.1 $ 166.8 Operating income ............................. 150.5 100.3 51.5(3) 7.9 43.7 4.7 Interest expense, net ........................ 55.1 46.9 28.5 8.4 24.2 4.5 Provision (benefit) for income taxes ......... 36.7 20.9 10.7 (0.2) 7.8 1.2 Net income (loss) ............................ 58.7 32.6 12.3(3) (0.3) 11.7 (1.0) Earnings per common share: Basic ....................................... $ 1.83 $ 1.32 $ 0.62(3) Diluted ..................................... 1.75 1.26 0.61(3) Weighted average common shares outstanding: Basic ....................................... 32.1 24.7 20.0 Diluted ..................................... 33.5 25.9 20.0 BALANCE SHEET DATA (AT PERIOD END): Working capital .............................. $ 249.4 $ 157.8 $ 143.2 $ 98.8 $ 21.1 Total assets ................................. 1,633.8 1,285.4 697.0 590.6 228.5 Long-term debt ............................... 605.0 605.0 392.0 Invested equity .............................. 473.6 194.7 Shareholders' equity ......................... 583.2 300.0 113.7
- - ---------- (1) Reflects the L-3 Acquisition effective April 1, 1997. (2) Reflects the Predecessor company's ownership of nine business units acquired by Lockheed Martin Corporation from Loral effective April 1, 1996. Prior to April 1, 1996, the Predecessor Company was comprised only of Communications Systems -- East. (3) Includes a nonrecurring, noncash compensation charge of $4.4 million ($0.22 per share) related to the initial capitalization of the Company, which was recorded effective April 1, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The Company is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The Company's customers include the DoD, certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. The Secure Communication Systems segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. These 20 operations are principally performed under cost plus, sole source contracts supporting long-term programs for the U.S. armed forces and classified customers. The Secure Communication Systems segment also supplies communication software support services to military and related government intelligence markets. The Specialized Communication Products segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. All domestic government contracts and subcontracts of the Company are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. government. Multi-year U.S. government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contracts generally include comparable provisions relating to termination for the convenience of the relevant foreign government. ACQUISITION HISTORY In April 1997 the Company completed the L-3 Acquisition and acquired the Predecessor Company which was comprised of nine business units that Lockheed Martin acquired from Loral in April 1996 and one business unit purchased by Lockheed Martin as part of its acquisition of the aerospace business of General Electric in April 1993. On February 5, 1998, March 4, 1998 and March 30, 1998 the Company purchased the assets of the Satellite Transmission Systems division ("STS") of California Microwave, Inc., ILEX Systems ("ILEX") and Ocean Systems business ("Ocean Systems") of the former AlliedSignal Inc. for cash of $26.1 million, $54.3 million and $68.8 million, respectively. On August 13, 1998, the Company purchased all of the outstanding stock of SPD Technologies, Inc. ("SPD") for $238.3 million of cash, including expenses, net of cash acquired. SPD, STS, ILEX and Ocean Systems collectively comprise the "1998 Acquisitions". Additionally, during 1998 the Company purchased several other operations and product lines, which individually and in the aggregate were not material to the results of operations or financial position of the Company. In August 1999, the Company issued 150,955 shares of common stock of Holdings valued at $6.4 million as additional consideration for the ILEX acquisition based on the 1998 financial performance of ILEX. At December 31, 1999, the Company recorded an other current liability of $6.1 million for shares of common stock to be issued in 2000 as additional consideration for the ILEX acquisition based on the 1999 financial performance of ILEX. The remaining contingent consideration for the ILEX acquisition, payable in 2001, will be based on ILEX's 2000 financial performance. On January 8, 1999, the Company acquired all of the outstanding common stock of Microdyne Corporation ("Microdyne") for $94.2 million in cash, including expenses and the repayment of assumed debt, net of cash acquired. On April 16, 1999, the Company acquired all of the outstanding common stock of Aydin Corporation ("Aydin") for $60.0 million, in cash, including expenses, net of cash acquired. On June 30, 1999, the Company acquired all of the outstanding common stock of Interstate Electronics Corporation ("IEC") of Scott Technologies Inc. for $40.6 million in cash, including expenses. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions". See pro forma disclosures in Note 4 to the financial statements. On December 31, 1999, the Company completed its acquisition of the assets of the Space and Navigation business ("Space & Nav") from Honeywell, for $55.0 million in cash plus expenses, subject to adjustment based on closing date net assets, as defined. On February 10, 2000, the Company acquired the assets of the TDTS business of Raytheon for $160.0 million in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition the Company changed the name of TDTS to Link Simulation and Training. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. On February 14, 2000, the Company acquired the assets of TrexCom for $50.2 million in cash, plus expenses, subject to adjustment based on closing date net worth, as defined. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. 21 On February 10, 2000, the Company entered into an asset purchase agreement to acquire the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $225.0 million in cash, subject to adjustment based on closing date net assets, as defined. In addition, on February 25, 2000 the Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 will purchase the assets of TCAS from Honeywell, create a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets to TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final purchase price paid by the Company for TCAS (collectively, the "TCAS LLC Transaction"). L-3 will maintain operating management of the TCAS LLC and expects to consolidate it. The MOA will terminate if the TCAS LLC Transaction is not consummated by May 31, 2000. L-3 expects to finance the TCAS acquisition with borrowings under the Company's existing credit facilities and a new revolving 364 day senior credit facility for $250.0 million. The TCAS acquisition and the TCAS LLC Transaction are subject to regulatory approval by United States agencies and the European Union Commission. All of the acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their respective effective dates. RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated (Combined) Financial Statements, which reflect the Company's results of operations from the effective date of the L-3 Acquisition, April 1, 1997. The financial statements also reflect the results of operations of the Predecessor Company for the three months ended March 31, 1997. The results of operations for the periods presented are significantly affected by the timing of the Company's acquisitions. The results of operations of the Predecessor Company include certain costs and expenses allocated to it by Lockheed Martin for corporate office and certain other expenses primarily using an allocation methodology prescribed by U.S. government regulations for government contractors. Pension and postretirement benefit costs were allocated based on employee headcount. Interest expense was allocated to the Predecessor Company based on Lockheed Martin's actual weighted average consolidated interest rate applied to the portion of the beginning of the year invested equity deemed to be financed by consolidated debt based on Lockheed Martin's debt to equity ratio on such date. The provision (benefit) for income taxes was prepared on a separate taxpayer basis, calculated by applying statutory rates to reported pre-tax income after considering items that do not enter into the determination of taxable income and tax credits related to the Predecessor Company. Accordingly, the results of operations of the Predecessor Company may not be the same as would have occurred had the Predecessor Company been an independent entity. The following table provides selected income statement data for the Company for the years ended December 31, 1999 ("1999") and 1998 ("1998") and the nine-month period ended December 31, 1997 and for the Predecessor Company for the three-month period ended March 31, 1997. For purposes of the discussion of the results of operations, results for the year ended December 31, 1997 ("1997") were prepared by combining, without adjustment, the results of operations of the Company for the nine-month period ended December 31, 1997 with those of the Predecessor Company for the three-month period ended March 31, 1997. Prior year reported segment information has been restated to conform to the 1999 presentation of the Company's reportable segments. 22
YEAR ENDED DECEMBER 31, 1997 -------------------------------------------- PREDECESSOR COMPANY COMPANY COMPANY --------------------------- -------------- ------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED --------------------------- DECEMBER 31, MARCH 31, 1997 1999 1998 1997 1997 COMBINED ------------ ------------ -------------- ------------- ----------- Sales(1): Secure Communication Systems ..................... $ 542.9 $ 483.5 $ 307.6 $ 84.9 $ 392.5 Specialized Communication Products .................... 862.6 553.5 238.9 74.0 312.9 --------- --------- -------- ------- -------- Total .................... $ 1,405.5 $ 1,037.0 $ 546.5 $ 158.9 $ 705.4 ========= ========= ======== ======= ======== Operating income before noncash compensation charge: Secure Communication Systems ................... $ 47.0 $ 39.9 $ 25.8 $ 0.1 $ 25.9 Specialized Communication Products .................. 103.5 60.4 30.0 7.8 37.8 --------- --------- -------- ------- -------- Total .................... 150.5 100.3 55.8 7.9 63.7 Noncash compensation charge(2) -- -- ( 4.4) -- ( 4.4) --------- --------- -------- ------- -------- Operating income ............. $ 150.5 $ 100.3 $ 51.4 $ 7.9 $ 59.3 ========= ========= ======== ======= ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems ................... $ 18.4 $ 17.3 $ 12.9 $ 5.2 $ 18.1 Specialized Communication Products .................. 35.3 23.1 9.3 2.6 11.9 Noncash compensation charge .................... -- -- 4.4 -- 4.4 --------- --------- -------- ------- -------- Total .................... $ 53.7 $ 40.4 $ 26.6 $ 7.8 $ 34.4 ========= ========= ======== ======= ======== EBITDA(3) Secure Communication Systems ................... $ 65.4 $ 57.2 $ 38.7 $ 5.3 $ 44.0 Specialized Communication Products .................. 138.8 83.5 39.3 10.4 49.7 --------- --------- -------- ------- -------- Total .................... $ 204.2 $ 140.7 $ 78.0 $ 15.7 $ 93.7 ========= ========= ======== ======= ========
- - ---------- (1) Sales are after intersegment eliminations. See Note 17 to the Consolidated (Combined) Financial Statements. (2) The Company did not include the 1997 noncash compensation charge of $4.4 million in its internal measure of reportable segment profitability because that charge was not related to the operations of the segments. (3) EBITDA is defined as operating income plus depreciation expense and amortization expense (excluding the amortization of debt issuance costs) and the 1997 nonrecurring, noncash compensation charge of $4.4 million. EBITDA is not a substitute for operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity. EBITDA is presented as additional information because the Company believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. 23 1999 COMPARED TO 1998. Sales increased $368.5 million to $1,405.5 million in 1999 and was comprised of growth in sales of $59.4 million for the Secure Communication Systems segment and $309.1 million for the Specialized Communication Products segment. Operating income increased $50.2 million to $150.5 million in 1999. Operating income as a percentage of sales ("operating margin") improved to 10.7% from 9.7%. Depreciation and amortization expenses increased $13.3 million to $53.7 million in 1999, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to capital expenditures and acquired businesses. EBITDA for 1999 increased $63.5 million to $204.2 million. EBITDA as a percentage of sales ("EBITDA margin") improved to 14.5% in 1999 from 13.6% in 1998. Basic earnings per common share ("EPS") and diluted EPS grew 38.6% to $1.83 and 38.9% to $1.75, respectively. Basic weighted-average common shares outstanding and diluted weighted-average common shares outstanding increased 30.1% and 29.4%, respectively, principally because of the timing of the issuance of 5.0 million shares of common stock in connection with Holding's February 1999 stock offering. Sales of the Secure Communication Systems segment increased $59.4 million or 12.3% to $542.9 million in 1999. Operating income increased $7.1 million to $47.0 million. Operating margin improved to 8.7% from 8.3%. The increase in sales was primarily attributable to greater sales on the U-2 Support Program, secure telephone equipment (STE) and airport security systems and the Microdyne acquisition. These sales gains were partially offset by lower sales on certain high data rate communication systems programs, communication subsystems for the International Space Station (ISS) and local management device/key processor (LMD/KP) units consistent with the scheduled phasedown of these programs. The improvement in operating margin was principally attributable to improved margins on military communication systems and high data rate communication systems arising from cost reductions and operating efficiencies and sales volume increases on STE, partially offset by lower margins from the Microdyne acquired businesses and costs incurred for network security systems. EBITDA increased $8.2 million to $65.4 million and EBITDA margin improved to 12.0% in 1999 from 11.8% in 1998. The increases in EBITDA and EBITDA margin were attributable to the items affecting the trends in operating income. Sales of the Specialized Communication Products segment increased $309.1 million or 55.8% to $862.6 million in 1999. Operating income increased $43.1 million to $103.5 million in 1999, and operating margin increased to 12.0% from 10.9%. The increase in sales was principally attributable to the timing of the Aydin and IEC acquisitions in 1999 and the SPD and Ocean Systems acquisitions in 1998, as well as volume increases on ocean products, primarily for power distribution, control and conversion systems for both military and commercial applications, commercial aviation recorders and space and satellite control products. These sales gains were partially offset by lower volume on microwave components and decreased shipments of displays and antenna products. The increase in operating margin was principally attributable to higher margins on ocean products and aviation recorders attributable to volume increases and cost reductions, higher margins from the SPD acquired business which was included in the results of operations in 1998 for six months, and improved margins in 1999 for the STS business acquired in February 1998. These operating margin improvements were partially offset by lower operating margins for the Aydin and IEC acquired businesses, and lower margins on microwave components and antenna products principally attributable to declines in sales. EBITDA increased $55.3 million to $138.8 million in 1999, and EBITDA margin increased to 16.1% from 15.1% in 1998. The changes in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Interest expense, net of interest and other income, increased $8.2 million to $55.1 million in 1999 and reflects the higher average outstanding debt during 1999 compared with 1998 principally because of the $200.0 million of senior subordinated notes sold by the Company in December 1998. Interest and other income for 1999 includes $0.4 million for a gain on the sale of a business. The income tax provision for 1999 reflects the Company's effective income tax rate for 1999 of 38.5%, compared with the effective tax rate of 39.1% for 1998. 1998 COMPARED TO 1997. Sales increased $331.6 million to $1,037.0 million in 1998. Operating income increased $41.0 million to $100.3 million in 1998. Operating income for 1997 includes a non-recurring noncash compensation charge of $4.4 million ($0.22 per share) recorded effective April 1, 1997 related to the initial capitalization of the Company. Excluding this charge, operating margin for 1997 24 would have been 9.0%. Excluding the 1997 noncash compensation charge, 1998 depreciation and amortization expenses increased $10.4 million to $40.4 million in 1998, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to capital expenditures. EBITDA for 1998 increased $47.0 million to $140.7 million. EBITDA margin improved to 13.6% from 13.3%. Sales of the Secure Communication Systems segment increased $91.0 million or 23.2% to $483.5 million in 1998. Operating income increased $14.0 million to $39.9 million. Operating margin improved to 8.3% from 6.6%. The increase in sales was primarily attributable to the ILEX acquired business and increased production and shipments of the CHBDL and Raptor high data rate communications systems, UAV programs, and STE, partially offset by a decline in sales on the ISS program. The increase in operating income was principally attributable to acquisitions and improved margins on space communication systems, military communication systems and space control systems, the 1998 sales growth and the negative impact on prior year operating income resulting from $3.3 million of costs related to certification efforts for the explosive detection system ("EDS"). EBITDA increased $13.2 million to $57.2 million in 1998 and EBITDA margin improved to 11.8% in 1998 from 11.2% in 1997. The increases in EBITDA and EBITDA margin were attributable to the items affecting the trends in operating income. Sales of the Specialized Communication Products segment increased $240.6 million or 76.9% to $553.5 million in 1998. Operating income increased $22.6 million to $60.4 million in 1998, while operating margin decreased to 10.9% from 12.1%. The increase in sales was principally attributable to the Ocean Systems, STS and SPD acquired businesses and volume increases in aviation recorders, display products on the E2C and V-22 platforms and microwave components for RF safety and monitoring, partially offset by lower sales volume on commercial telecommunications products. Sales for 1997 also included $1.8 million from a business which was sold in 1997. The decrease in operating margin for 1998 is principally attributable to the lower margins from the STS acquired business, partially offset by improved margins on aviation recorders, display products and microwave monitoring components. EBITDA increased $33.8 million to $83.5 million in 1998, while EBITDA margin declined to 15.1% in 1998 from 15.9% in 1997. The changes in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Interest expense, net increased $10.0 million to $46.9 million in 1998 and was primarily attributable to higher average outstanding debt balances during 1998. The effective income tax rate for 1998 was 39.1% compared with 46.4% for 1997, which reflected the Company's $4.4 million non-recurring, noncash compensation charge and the Predecessor Company's amortization expense for costs in excess of net assets acquired, both of which were not deductible for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Contracts in process increased $133.1 million in 1999, of which $104.3 million of the balance at December 31, 1999 was related to businesses acquired during 1999. The remaining increase was principally from (i) increases in unbilled contract receivables arising from an increase in programs entering the production phase wherein unbilled costs and profits generally exceed progress payments received from the customers until contract shipments are completed and (ii) increases in inventory for production on certain commercial programs and products. The increases in property, plant and equipment, intangibles, accounts payable, accrued expenses and other current liabilities were principally related to acquired businesses. 25 STATEMENT OF CASH FLOWS The following table provides cash flow statement data for the Company and the Predecessor Company:
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------- PREDECESSOR COMPANY COMPANY COMPANY ----------- -------------- ------------ THREE NINE MONTHS MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------ DECEMBER 31, MARCH 31, 1997 1999 1998 1997 1997 COMBINED ---------- ----------- -------------- ------------ ----------- Net cash from (used in) operating activities ......... $ 99.0 $ 85.1 $ 73.9 $ (16.3) $ 57.6 Net cash (used in) investing activities ................... (284.8) (472.9) (457.8) ( 4.3) (462.1) Net cash from financing activities ................... 202.4 336.4 461.4 20.6 482.0
OPERATING ACTIVITIES During 1999, L-3 generated $99.0 million in cash from operating activities, an increase of $13.9 million over 1998. Earnings plus noncash costs and expenses and the deferred portion of the income tax provision increased $55.6 million to $151.8 million in 1999 from $96.2 million in 1998 because of growth in the Company's level of operations. During 1999 cash invested in operating assets and liabilities increased $52.8 million compared with $11.1 million for 1998. The increase was principally related to the greater working capital requirements primarily in contracts in process. Operating activities are a principal source of L-3's cash flows. Over the past three years cash generated from operating activities was $241.7 million which was partially used to fund capital expenditures and acquisitions. INVESTING ACTIVITIES Since L-3's formation in April 1997, the Company has actively pursued its acquisition strategy. In 1999 the Company invested $272.2 million in acquisitions primarily for the 1999 Acquisitions and Space & Nav. In 1998 cash invested in acquisitions was $448.0 million including $389.7 million for the 1998 Acquisitions and $58.3 million for the purchase of other operations and product lines. The Company's capital expenditures typically relate primarily to improvement of manufacturing facilities and equipment. The Company expects that its capital expenditures for 2000 will be approximately $40.0 million, including those of the TrexCom and Link Simulation and Training businesses acquired in February 2000. FINANCING ACTIVITIES On February 4, 1999, Holdings sold 5.0 million shares of common stock in a public offering for $42.00 per share (the "February 1999 Common Stock Offering"); the net proceeds of $201.5 million were contributed to the Company and partially used to repay borrowings made in January 1999 under the Senior Credit Facilities to finance the Microdyne acquisition. In addition, 6.5 million shares were sold in the February 1999 Common Stock Offering by the Lehman Partnership and Lockheed Martin. In October 1999, Lockheed Martin sold its remaining ownership interest in Holdings' common stock in a private transaction. In December 1999, the Lehman Partnership distributed approximately 3.8 million shares of its common stock of Holdings to its partners. At December 31, 1999 the Lehman Partnership owned approximately 16.8% and Lockheed Martin owned none of the outstanding shares of Holdings' common stock. During 1999, the Senior Credit Facilities were amended to increase the Company's revolving credit facilities by $15.0 million to $400.0 million. At December 31, 1999, available borrowings under the revolving credit facilities were $309.3 million after reductions for outstanding letters of credit of $90.7 million. In February 2000, the Company financed its acquisitions of TrexCom and Link Simulation and Training with $210.2 million of borrowings under the revolving credit facilities. 26 On May 19, 1998, Holdings sold 6.9 million shares of its common stock in an initial public offering (the "IPO") for $22.00 per share; the net proceeds of $139.5 million were contributed to the Company. In April 1997, May 1998 and December 1998, the Company sold $225.0 million of 10 3/8% senior subordinated notes due 2007, $180.0 million of 8 1/2% senior subordinated notes, and $200.0 million of 8% senior subordinated notes, respectively (collectively, the "Senior Subordinated Notes"), whose net proceeds amounted to $209.4 million, $173.8 million and $192.8 million, respectively, after debt issuance costs. The Senior Credit Facilities and the Senior Subordinated Notes contain financial covenants which remain in effect so long as any amount is owed or any commitment to lend exists thereunder by L-3 Communications. As of December 31, 1999, L-3 Communications had been in compliance with these covenants at all times. The borrowings under the Senior Credit Facilities are guaranteed by Holdings and by substantially all of the Company's subsidiaries. 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 substantially all of the Company's subsidiaries, all of which are wholly owned subsidiaries. See Note 7 to Consolidated (Combined) Financial Statements for a description of the Company's debt and related financial covenants at December 31, 1999. Based upon the current level of operations, management believes that the Company's cash from operating activities, together with available borrowings under the Senior Credit Facilities, will be adequate to meet its anticipated requirements for working capital, capital expenditures, research and development expenditures, program and other discretionary investments, and interest payments for the foreseeable future including at least the next three years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company's ability to make scheduled principal payments, to pay interest on or to refinance its indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond its control. There can be no assurance that sufficient funds will be available to enable the Company to service its indebtedness, or make necessary capital expenditures and program and discretionary investments. MARKET RISKS All of the Company's market risk sensitive instruments are entered into for purposes other than trading. Interest Rate Risk. The Company's financial instruments that are sensitive to changes in interest rates include borrowings under the Senior Credit Facilities and purchased interest rate cap contracts and written interest rate floor contracts, all of which are denominated in U.S. dollars. The interest rates on the Senior Subordinated Notes are fixed-rate, and therefore, are not affected by changes in interest rates. To mitigate risks associated with changing interest rates on borrowings under the Senior Credit Facilities which bear interest at variable rates the Company entered into interest rate cap and floor contracts (the "interest rate agreements"). The purchased interest rate cap provides protection against increases in interest rates on borrowings to the extent (i) those borrowings are less than or equal to the notional amount of the cap contract and (ii) the interest rate paid on the borrowings rises above the cap reference rate plus the Company's applicable borrowing spread. Conversely, the written interest rate floor limits the ability of the Company to enjoy decreases in interest rates on its borrowings to the extent (i) those borrowings are less than or equal to the notional amount of the floor contract and (ii) the interest rate paid on those borrowings falls below the floor reference rate plus the Company's applicable borrowing spread. The Company manages exposure to counterparty credit risk by entering into the interest rate agreements only with major financial institutions that are expected to perform fully under the terms of such agreements. Cash payments between the Company and the counterparties are made (received) at the end of each quarter to the extent due under the terms of the interest rate agreements. Such payments 27 (amounts received) are recorded as adjustments to interest expense and were not material to interest expense or cash flows for 1999, 1998 or for the nine-month period ended December 31, 1997. Additional data on the Company's debt obligations, its applicable borrowing spreads included in the interest rates it pays on borrowings under the Senior Credit Facilities and interest rate agreements are provided in Notes 7 and 8 to the Consolidated (Combined) Financial Statements. The weighted average interest rate on the Senior Subordinated Notes is 9.03%. The Senior Subordinated Notes mature in 2007 and 2008 and there are no scheduled principal payments before their maturity dates. There were no borrowings outstanding under the Senior Credit Facilities at the end of 1999. For the interest rate agreements, the table below presents significant contract terms and fair values at December 31, 1999.
CAPS FLOORS ------------------ ------------------ ($ in millions) Notional amount ................. $100.0 $50.00 Cap/floor interest rate ......... 7.50% 5.50% Reference rate .................. LIBOR LIBOR Designated maturity ............. Quarterly Quarterly Expiration date ................. March 28, 2002 March 28, 2002 Fair value ...................... $0.4 $0.0
Foreign Currency Exchange Risk. The Company conducts certain of its operations outside the U.S. in functional currencies other than the U.S. dollar. The Company's exposure to foreign currency exchange risk related to these foreign operations is not material to the Company's results of operations, cash flows or financial position. Equity Price Risk. The Company's investments in common equities are subject to equity price risks. Both the carrying values and estimated fair values of such instruments amounted to $12.1 million at the end of 1999. BACKLOG The Company's funded backlog at December 31, 1999, 1998 and 1997 was $1,003.7 million, $855.9 million and $516.9 million, respectively. Funded orders for the Company for 1999, 1998 and 1997 were $1,423.1 million, $1,057.0 million and $709.6 million, respectively. It is expected that approximately 77% of the backlog at December 31, 1999 will be recorded as sales during the year ending December 31, 2000. However, there can be no assurance that the Company's backlog will become revenues in any particular period, if at all. Approximately 64% of the total backlog at December 31, 1999 was directly or indirectly for defense contracts for end use by the U.S. government. Approximately $857.8 million of total backlog at December 31, 1999 was directly or indirectly for U.S. and foreign government defense contracts, and approximately $31.6 million of the backlog was directly or indirectly for U.S. and foreign government non-defense contracts. Foreign customers accounted for approximately $263.8 million of the backlog. RESEARCH AND DEVELOPMENT Research and development costs including bid and proposal costs ("R&D costs") sponsored by the Company for 1999, 1998 and for the nine-month period ended December 31, 1997 were $76.1 million, $59.9 million and $28.9 million, respectively. Customer-funded research and development for 1999, 1998 and the nine-month period ended December 31, 1997 were $226.3 million, $181.4 million and $83.7 million, respectively. R&D costs sponsored by the Predecessor Company and customer-funded research and development were $12.0 million and $33.4 million, respectively, for the three-month period ended March 31, 1997. The decrease in customer-funded research and development in 1997 was primarily attributable to the transition of research and development programs into production. CONTINGENCIES See Note 13 to the Consolidated (Combined) Financial Statements. 28 RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS In September 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is currently evaluating the impact, if any, of SFAS 133 which is effective for all quarters of fiscal years beginning after September 15, 2000. In September 1999, the FASB issued a proposed new accounting standard for business combinations that, among other things, would change the accounting for and display of goodwill and other intangibles recorded in business acquisitions for transactions after January 1, 2001. An important aspect of the proposal is that goodwill amortization would be displayed as a separate element in the Statement of Operations, net of applicable income tax benefits, and related earnings per share effects could be displayed. On the basis presented in the proposed accounting standard, L-3 estimates that it would have reported diluted earnings per share before amortization of goodwill of $2.29 in 1999, $1.70 in 1998, and $0.83 for the nine-month period ended December 31, 1997. There can be no assurance that this proposed accounting standard will be issued. INFLATION The effect of inflation on the Company's sales and earnings has not been significant. Although a majority of the Company's sales are made under long-term contracts, the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to be incurred in these future periods. In addition, some contracts provide for price adjustments through escalation clauses. YEAR 2000 The Company has not experienced any impact to its business since the Year 2000 roll-over either internally or from its customers and infrastructure suppliers. The planned phases of the Year 2000 efforts have been completed with total cost for all the efforts of $18.7 million which included $6.2 million of capitalized costs. Because the Company's business units operate autonomously, each business unit had undertaken efforts to identify and mitigate Year 2000 issues related to their information systems, products, facilities, suppliers and customers; such effects were coordinated through a Company wide program instituted to oversee, guide and track each business unit's Year 2000 efforts. Additionally, contingency plans for suppliers, customers, critical systems and utilities impacted by Year 2000 issues were developed. A scaled down organizational structure for the program will remain in place through the end of the first quarter 2000 to address any unanticipated occurrences that arise. Although the Company has experienced no failures in infrastructure systems and in the customer and supply chains since the Year 2000 roll-over, the likelihood and effect of such failure cannot be estimated, but such a failure could potentially result in a material adverse impact on results of operations, liquidity or financial position of the Company. The Year 2000 effort costs reflected above could change in the event of any unknown Year 2000 related occurrence during the remainder of the year ending December 31, 2000. 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 29 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 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; 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; the ability to obtain or the timing of obtaining future government contracts; the availability of government funding and customer requirements; economic conditions, competitive environment, international business and political conditions, timing of international awards and contracts; our extensive use of fixed price contracts as compared to cost plus contracts; our ability to identify future acquisition candidates or to integrate acquired operations; the rapid change of technology in the communication equipment industry; the high level of competition in the communications equipment industry; our introduction of new products into commercial markets or our investments in commercial products or companies; the significant amount of our debt and the restrictions contained in our debt agreements; Year 2000 issues; collective bargaining labor disputes; pension, environmental or legal matters or proceedings and various other market, competition and industry factors, many of which are beyond our control. Investors are cautioned that any such 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 nature of projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes or circumstances or changes in expectations or the occurrence of anticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Data regarding quantitative and qualitative disclosures related to the Company's market risk sensitive financial instruments are presented in "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources -- Market Risks" included herein under Item 7 and in Note 8 to the consolidated (combined) Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides information concerning the directors and executive officers of the Registrant as of March 7, 2000.
NAME AGE POSITION - - --------------------------------- ----- --------------------------------------------------- Frank C. Lanza .................. 68 Chairman, Chief Executive Officer and Director Robert V. LaPenta ............... 54 President, Chief Financial Officer and Director Michael T. Strianese ............ 44 Vice President -- Finance and Controller Christopher C. Cambria .......... 41 Vice President -- General Counsel and Secretary Robert F. Mehmel ................ 37 Vice President -- Planning and Assistant Secretary Lawrence W. O'Brien ............. 50 Vice President -- Treasurer Joseph S. Paresi ................ 44 Vice President -- Product Development Lawrence H. Schwartz ............ 62 Vice President -- Business Development Jimmie V. Adams ................. 63 Vice President -- Washington D.C. Operations Robert Riscassi ................. 63 Vice President -- Washington D.C. Operations David J. Brand .................. 38 Director Thomas A. Corcoran .............. 55 Director Alberto M. Finali ............... 45 Director Robert B. Millard ............... 49 Director John E. Montague ................ 45 Director John M. Shalikashvili ........... 63 Director Alan M. Washkowitz .............. 59 Director
All Executive Officers serve at the discretion of the Board of Directors. The remaining information called for by Item 10 is incorporated herein by reference to the definitive proxy statement relating to Holdings' Annual Meeting of Shareholders to be held on April 25, 2000. Holdings will file such definitive proxy statement with the Securities and Exchange Commission pursuant to regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated herein by reference to the definitive proxy statement referred to above in Item 10. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is incorporated herein by reference to the definitive proxy statement referred to above in Item 10. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Item 13 is incorporated herein by reference to the definitive proxy statement referred to above in Item 10. 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) 1. FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:
PAGE NUMBER ------- Report of Independent Auditors ....................................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998 ............ F-3 Consolidated (Combined) Statements of Operations for the years ended December 31, 1999 and 1998, nine months ended December 31, 1997 and three months ended March 31, 1997 ...................................................................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999 and 1998, and nine months ended December 31, 1997 ................................... F-5 Consolidated (Combined) Statements of Cash Flows for the years ended December 31, 1999 and 1998, nine months ended December 31, 1997, and three months ended March 31, 1997 ................................................................................ F-6 Notes to Consolidated (Combined) Financial Statements ................................ F-7
(A) 2. FINANCIAL STATEMENT SCHEDULES Not applicable (B) REPORTS FILED ON 8-K. None (C) EXHIBITS Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference to such previous filings.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - - ----------------- ----------------------------------------------------------------- 3.1 Certificate of Incorporation of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement of Form S-1 No. 333-46975). 3.2 By laws of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 No. 333-46975) 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.1 Amended and Restated Credit Agreement, dated as of August 13, 1998 among L-3 Communications Corporation and lenders named therein (incorporated by reference to Exhibit 99.1 to L-3 Communication Corporation's Quarterly Report On Form 10-Q for the quarterly period ended September 30, 1998.) 10.2 364 Day Credit Agreement, dated August 13, 1998 among L-3 Communications and lenders named therein (incorporated by reference to exhibit 99.2 to L-3 Communications Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998). 10.3 Indenture dated as of April 30, 1997 between L-3 Communications Corporation and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to L-3 Communications Corporation's Registration Statement on Form S-4 No. 333-31649). 10.31 Indenture dated as of May 22, 1998 between L-3 Communications and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.6 to L-3 Communications Corporation's Registration Statement on Form S-4 No. 333-70199). 10.32 Indenture dated as of December 11, 1998 among L-3 Communications Corporation, the Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.32 to Registrant's Registration Statement on Form S-1, No. 333-70125). 10.4 Stockholders Agreement dated as of April 30, 1997 among L-3 Communications Holdings, Inc. and the stockholders parties thereto (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.5 Transaction Agreement dated as of March 28, 1997, as amended, among Lockheed Martin Corporation, Lehman Brothers Capital Partners III, L.P., Frank C. Lanza, Robert V. LaPenta and L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 10.4) 10.6 Employment Agreement dated April 30, 1997 between Frank C. Lanza and L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.7 Employment Agreement dated April 30, 1997 between Robert V. LaPenta and L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 10.51 to the Registrant Statement on Form S-1 No. 333-46975). 10.8 Limited Noncompetition Agreement dated April 30, 1997 Lockheed Martin Corporation and L-3 Communications Corporation (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.9 Asset Purchase Agreement dated as of December 19, 1997 between L-3 Communications Corporation and California Microwave, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.91 Asset Purchase Agreement dated as of February 10, 1998 between FAP Trust and L-3 Communications Corporation (incorporated by reference to Exhibit 10.81 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.92 Asset Purchase Agreement dated as of March 30, 1998 among AlliedSignal Inc., AlliedSignal Technologies, Inc., AlliedSignal Deutschland GMBH and L-3 Communications Corporation (incorporated by reference to Exhibit 10.82 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.93 Agreement and Plan of Merger dated as of December 3, 1998 among L-3 Communications, LM Acquisition Corporation and Microdyne Corporation (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on December 9, 1998). 10.10 Form of Stock Option Agreement of Employee Options (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 No. 333-46975). 10.11 1997 Stock Option Plan for Key Employees (incorporated by reference to Exhibit 10.11 to Registrant's Registration Statement on Form S-1, No. 333-70125). 10.12 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3 Communications Holdings, Inc. and Frank C. Lanza (incorporated by reference to Exhibit 10.12 to Registrant" Registration Statement on Form S-1, No. 333-70125). 10.13 Non-Qualified Stock Option Agreement dated as of April 30, 1997 by and between L-3 Communications Holdings, Inc. and Robert V. LaPenta (incorporated by reference to Exhibit 10.13 to Registrant's Registration Statement on Form S-1, No. 333-70125). 10.14 Amended and Restated Agreement and Plan of Merger dated as of August 13, 1998 by and among L-3 Communications Corporation, SPD Merger Co., SPD Technologies, Inc. and Midmark Capital L.P. (incorporated by reference to Exhibit 2 to L-3 Communications Corporation's Current Report on Form 8-K filed on October 27, 1998). 10.15 Option Plan for Non-Employee Directors of L-3 Communication's Holdings, Inc. (incorporated by reference to Exhibit 10.15 to Registrant's annual report on Form 10-K filed on March 31, 1999) 10.20 L-3 Communications Corporation Pension Plan (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 No. 333-46975). **10.16 1999 Long Term Performance Plan dated as of April 27, 1999. 10.33 Agreement and Plan of Merger, dated as of March 1, 1999, by and among L-3 Communications Corporation, Angel Acquisition Corporation and Aydin Corporation (incorporated herein by reference to Exhibit (2) of the Form 8-K filed on March 1, 1999). *11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Share. **21 Subsidiaries of the Registrant. **23.1 Consent of PricewaterhouseCoopers LLP, independent auditors. **27 Financial Data Schedule
- - ---------- * The information required in this exhibit is presented on Note 10 to the Unaudited Condensed Consolidated Financial Statements as of December 31, 1999 in accordance with the provisions of SFAS No. 128, Earnings Per Share. ** Filed herewith 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized, on March 29, 2000. L-3 COMMUNICATIONS HOLDINGS, INC. L-3 COMMUNICATIONS CORPORATION By: /s/ Robert V. LaPenta -------------------------------------------- Name: Robert V. LaPenta Title: President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrants on March 29, 2000 and in the capacities indicated.
SIGNATURE TITLE - - ----------------------------------- -------------------------------------------------------- /s/ Frank C. Lanza Chairman, Chief Executive Officer (Principal - - --------------------------------- Frank C. Lanza Executive Officer) and Director /s/ Robert V. LaPenta President, Chief Financial Officer (Principal Financial - - --------------------------------- Robert V. LaPenta Officer) and Director /s/ Michael T. Strianese Vice President -- Finance and Controller (Principal - - --------------------------------- Michael T. Strianese Accounting Officer) /s/ David J. Brand Director - - --------------------------------- David J. Brand /s/ Thomas A. Corcoran Director - - --------------------------------- Thomas A. Corcoran /s/ Alberto M. Finali Director - - --------------------------------- Alberto M. Finali /s/ Robert B. Millard Director - - --------------------------------- Robert B. Millard Director - - --------------------------------- John E. Montague Director - - --------------------------------- John M. Shalikashvili Director - - --------------------------------- Alan H. Washkowitz
35 INDEX TO FINANCIAL STATEMENTS Consolidated (Combined) Financial Statements as of December 31, 1999 and 1998, and for the years ended December 31, 1999 and 1998, nine months ended December 31, 1997, and three months ended March 31, 1997. Report of Independent Auditors ...................................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998 ........... F-3 Consolidated (Combined) Statements of Operations for the years ended December 31, 1999 and 1998, nine months ended December 31, 1997 and three months ended March 31, 1997 ..................................................................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999 and 1998, and nine months ended December 31, 1997 .................................. F-5 Consolidated (Combined) Statements of Cash Flows for the years ended December 31, 1999 and 1998, nine months ended December 31, 1997, and three months ended March 31, 1997 ..................................................................... F-6 Notes to Consolidated (Combined) Financial Statements ............................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of L-3 Communications Holdings, Inc. We have audited the accompanying consolidated balance sheets of L-3 Communications Holdings, Inc. and L-3 Communications Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the two years ended December 31, 1999 and the nine months ended December 31, 1997 and the combined statements of operations and cash flows of the Predecessor Company, as defined in Note 1 to the Company's financial statements for the three months ended March 31, 1997. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1999 and 1998, their consolidated results of operations and cash flows for the two years ended December 31, 1999 and the nine months ended December 31, 1997, and the combined results of operations and cash flows of the Predecessor Company for the three months ended March 31, 1997 in conformity with accounting principles generally accepted in the United States of America. /s/ PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York February 2, 2000 F-2 L-3 COMMUNICATIONS HOLDINGS , INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ----------------------------- 1999 1998 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ......................................... $ 42,788 $ 26,130 Contracts in process .............................................. 484,173 351,049 Deferred income taxes ............................................. 32,985 16,591 Other current assets .............................................. 7,761 11,597 ---------- ---------- Total current assets ............................................ 567,707 405,367 ---------- ---------- Property, plant and equipment, net ................................. 140,971 123,155 Intangibles, primarily cost in excess of net assets acquired, net of amortization ...................................................... 821,552 669,362 Deferred income taxes .............................................. 56,858 39,139 Other assets ....................................................... 46,683 48,373 ---------- ---------- Total assets .................................................... $1,633,771 $1,285,396 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade ........................................... $ 98,693 $ 81,826 Accrued employment costs .......................................... 70,618 58,380 Accrued expenses .................................................. 27,931 17,474 Customer advances ................................................. 56,738 45,874 Accrued interest .................................................. 12,683 6,698 Income taxes ...................................................... 2,715 767 Other current liabilities ......................................... 48,928 36,515 ---------- ---------- Total current liabilities ....................................... 318,306 247,534 ---------- ---------- Pension and postretirement benefits ................................ 110,262 114,293 Other liabilities .................................................. 17,028 18,595 Long-term debt ..................................................... 605,000 605,000 Commitments and contingencies ...................................... Shareholders' equity : Common stock $.01 par value; authorized 100,000,000 shares, issued and outstanding 32,794,547 and 27,402,429 shares ......... 483,694 264,769 Retained earnings ................................................. 103,545 44,856 Unearned compensation ............................................. (1,661) -- Accumulated other comprehensive loss .............................. (2,403) (9,651) ---------- ---------- Total shareholders' equity ......................................... 583,175 299,974 ---------- ---------- Total liabilities and shareholders' equity ...................... $1,633,771 $1,285,396 ========== ==========
See notes to consolidated (combined) financial statements F-3 L-3 COMMUNICATIONS HOLDINGS , INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR COMPANY COMPANY CONSOLIDATED COMBINED ------------------------------------------------------ --------------- YEAR ENDED DECEMBER 31, NINE MONTHS THREE MONTHS --------------------------------- ENDED ENDED 1999 1998 DECEMBER 31, 1997 MARCH 31, 1997 --------------- --------------- ------------------ --------------- Sales ................................ $ 1,405,462 $ 1,037,045 $ 546,525 $ 158,873 Costs and expenses ................... 1,254,976 936,696 495,079 150,937 ----------- ----------- --------- --------- Operating income ..................... 150,486 100,349 51,446 7,936 Interest and other income ............ 5,534 2,659 1,430 -- Interest expense ..................... 60,590 49,558 29,884 8,441 ----------- ----------- --------- --------- Income (loss) before income taxes..... 95,430 53,450 22,992 (505) Provision (benefit) for income taxes ............................... 36,741 20,899 10,687 (247) ----------- ----------- --------- --------- Net income (loss) .................... $ 58,689 $ 32,551 $ 12,305 $ (258) =========== =========== ========= ========= Earnings per common share: Basic ............................... $ 1.83 $ 1.32 $ 0.62 =========== =========== ========= Diluted ............................. $ 1.75 $ 1.26 $ 0.61 =========== =========== ========= Weighted average common shares outstanding: Basic ............................... 32,107 24,679 20,000 =========== =========== ========= Diluted ............................. 33,516 25,900 20,012 =========== =========== =========
See notes to consolidated (combined) financial statements. F-4 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND NINE MONTHS ENDED DECEMBER 31, 1997 (IN THOUSANDS)
COMMON STOCK ACCUMULATED ---------------- ADDITIONAL OTHER SHARES PAR PAID-IN RETAINED UNEARNED COMPREHENSIVE ISSUED VALUE CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL -------- ------- ------------ ---------- -------------- -------------- ----------- Net income ........................ $ 12,305 $ 12,305 -------- Comprehensive income .............. 12,305 Shares issued ..................... 17,056 $171 $110,191 110,362 Deemed distribution ............... (9,000) (9,000) -------- ------- --------- --------- ---------- --------- -------- Balance December 31, 1997 ......... 17,056 171 101,191 12,305 113,667 Net income ........................ 32,551 32,551 Minimum pension liability adjustment ....................... $(9,514) (9,514) Foreign currency translation adjustment ....................... (137) (137) -------- Comprehensive income .............. 22,900 Shares issued: Sale of common stock ............. 6,900 69 139,431 139,500 Exercise of stock options and related tax benefits ........ 480 5 3,887 3,892 Employee benefit plans ........... 22 -- 967 967 Conversion of common stock subject to repurchase agreement ............ 2,944 29 19,019 19,048 -------- ------- --------- --------- ---------- --------- -------- Balance December 31, 1998 ......... 27,402 274 264,495 44,856 (9,651) 299,974 Net income ........................ 58,689 58,689 Minimum pension liability adjustment ....................... 9,443 9,443 Unrealized loss on securities ..... (970) (970) Foreign currency translation adjustment ....................... (1,225) (1,225) -------- Comprehensive income .............. 65,937 Shares issued: Sale of common stock ............. 5,000 50 201,763 201,813 Employee benefit plans ........... 163 2 6,991 6,993 Earnout under acquisition agreement ....................... 151 2 6,432 6,434 Exercise of stock options and related tax benefits ........ 79 -- 1,764 1,764 Grant under restricted stock agreement ........................ 1,921 $ (1,921) -- Amortization of unearned compensation ..................... 260 260 -------- ------- --------- --------- ---------- --------- -------- Balance December 31, 1999 ......... 32,795 $328 $483,366 $103,545 $ (1,661) $(2,403) $583,175 ======== ======= ========= ========= ========== ========= ========
See notes to consolidated (combined) financial statements. F-5 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR COMPANY COMPANY CONSOLIDATED COMBINED ------------------------------------------------ --------------- YEAR ENDED DECEMBER 31, NINE MONTHS THREE MONTHS ---------------------------- ENDED ENDED 1999 1998 DECEMBER 31, 1997 MARCH 31, 1997 ------------- ------------- ------------------ --------------- OPERATING ACTIVITIES: Net income (loss) ................................ $ 58,689 $ 32,551 $ 12,305 $ (258) Depreciation and amortization .................... 53,718 40,355 22,190 7,790 Noncash compensation charge ...................... -- -- 4,410 -- Amortization of deferred debt issue costs ........ 3,904 2,564 1,517 -- Deferred income tax provision .................... 28,831 19,786 9,991 -- Other noncash items .............................. 6,617 967 -- -- Changes in operating assets and liabilities, net of amounts acquired: Contracts in process ............................ (61,670) (23,807) 20,266 (17,857) Other current assets ............................ (70) 48 (275) (481) Other assets .................................... 552 (376) 2,141 (765) Accounts payable ................................ 2,896 23,480 (6,146) (207) Accrued employment costs ........................ 2,052 8,653 6,786 (625) Accrued expenses ................................ (6,280) (90) 2,789 523 Customer advances ............................... 5,766 (12,132) (611) 1,146 Accrued interest ................................ 5,985 2,279 4,419 -- Income taxes .................................... 3,917 331 436 -- Other current liabilities ....................... (7,435) (12,281) (11,894) (5,045) Pension and postretirement benefits ............. 1,788 18 4,284 -- Other liabilities ............................... 983 2,873 1,252 (500) All other operating activities .................. (1,225) (137) -- -- ---------- ---------- ---------- --------- Net cash from (used in) operating activities ..... 99,018 85,082 73,860 (16,279) ---------- ---------- ---------- --------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ........................................ (272,195) (447,988) (466,317) -- Net cash from assets held for sale ............... -- -- 3,179 -- Proceeds from net assets held for sale ........... -- 6,653 9,458 -- Proceeds from assumption of contract obligation ...................................... -- -- 12,176 -- Capital expenditures ............................. (23,456) (23,429) (11,934) (4,300) Disposition of property, plant and equipment ....................................... 6,713 970 771 -- Other investing activities ....................... 4,136 (9,069) (5,113) -- ---------- ---------- ---------- --------- Net cash (used in) investing activities .......... (284,802) (472,863) (457,780) (4,300) ---------- ---------- ---------- --------- FINANCING ACTIVITIES: Borrowings under term loan facilities ............ -- -- 175,000 -- Repayment of borrowings under term loan facilities ...................................... -- (172,000) (3,000) -- Borrowings under revolving credit facility ....... 74,700 367,000 -- -- Repayment of borrowings under revolving credit facility ................................. (74,700) (367,000) -- -- Proceeds from sale of senior subordinated notes ........................................... -- 380,000 225,000 -- Proceeds from sale of common stock, net .......... 201,582 139,500 80,000 -- Debt issuance costs .............................. (323) (14,173) (15,606) -- Proceeds from exercise of stock options .......... 658 3,110 -- -- Other financing activities ....................... 525 -- -- -- Advances from Lockheed Martin .................... -- -- -- 20,579 ---------- ---------- ---------- --------- Net cash from financing activities ............... 202,442 336,437 461,394 20,579 ---------- ---------- ---------- --------- Net increase (decrease) in cash .................. 16,658 (51,344) 77,474 -- Cash and cash equivalents, beginning of period .......................................... 26,130 77,474 -- -- ---------- ---------- ---------- --------- Cash and cash equivalents, end of period ......... $ 42,788 $ 26,130 $ 77,474 $ -- ========== ========== ========== =========
See notes to consolidated (combined) financial statements. F-6 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION L-3 Communications Holdings, Inc. ("Holdings", and together with its subsidiaries, "L-3" or "the Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The Company's customers include the U.S. department of defense (the "DoD"), certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. Secure Communication Systems. This segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. These operations are principally performed under cost plus, sole source contracts supporting long-term programs for the U.S. armed forces and classified customers. Major secure communications programs and systems include: secure data links for airborne, satellite, ground-and sea-based remote platforms for information collection, command and control and dissemination to users in real-time; strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information and related support contracts for military and intelligence efforts; secure telephone, fax and network equipment and encryption management; communication software support services to military and related government intelligence markets; and communications systems for surface and undersea platforms and manned space flights. Specialized Communication Products. This segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. Microwave Components includes commercial off-the-shelf, high-performance microwave components and frequency monitoring equipment. Avionics and Ocean Products include aviation recorders, display products, antenna products, acoustic undersea warfare systems and naval power distribution, conditioning, switching and protection equipment for naval ships and submarines. Telemetry, Instrumentation and Space Products include commercial off-the-shelf real-time data collection and transmission products and components for missile, aircraft and space-based electronic systems. The Specialized Communication Products segment provides products, systems and services used in the satellite transmission of voice, video and data through earth stations for uplink and downlink terminals. This segment also provides commercial off-the-shelf satellite control software, telemetry, tracking and control, mission processors and software engineering services to the worldwide military, civilian and commercial satellite markets. All domestic government contracts and subcontracts of the Company are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. government. Multi-year government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contracts generally include comparable provisions relating to termination for the convenience of the relevant foreign government. The accompanying consolidated financial statements are those of the Company for the years ended December 31, 1999 and 1998 and for the nine-month period ended December 31, 1997. Prior to April 1, 1997, the combined financial statements comprised the results of operations and cash flows of the ten initial business units (the "Predecessor Company") purchased by the Company in April 1997 (the "L-3 Acquisition") from Lockheed Martin Corporation ("Lockheed Martin"). Holdings is the successor company of the Predecessor Company following the change in ownership which was effective April 1, 1997. Holdings has no other assets or liabilities and conducts no other operations other than through its wholly-owned subsidiary, L-3 Communications Corporation ("L-3 Communications"). Therefore, the F-7 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) consolidated financial statements of Holdings and L-3 Communications reflect the same results of operations, cash flows, assets, liabilities and shareholders' equity. L-3 Communications common stock consists of 100 shares authorized and outstanding of $0.01 par value. The combined financial statements of the Predecessor Company reflect results of operations and cash flows included in Lockheed Martin's historical financial statements. Intercompany accounts between Lockheed Martin and the Predecessor Company have been included in invested equity. Significant intercompany and inter-business transactions and balances have been eliminated. 2. L-3 ACQUISITION L-3 was formed in April 1997 by Mr. Frank C. Lanza, the former President and Chief Operating Officer of Loral, Mr. Robert V. LaPenta, the former Senior Vice President and Controller of Loral (collectively, the "Equity Executives"), Lehman Brothers Capital Partners III, L.P. and its affiliates ("the Lehman Partnership") and Lockheed Martin to acquire the Predecessor Company. On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, L-3 and Lockheed Martin entered into a Transaction Agreement (the "L-3 Acquisition Agreement") pursuant to which Holdings acquired the Predecessor Company from Lockheed Martin (the "L-3 Acquisition") for $511,779, comprised of $466,779 in cash including expenses of $8,000 and $45,000 of common equity, representing a 34.9% interest in Holdings initially retained by Lockheed Martin. As of December 31, 1999, Lockheed Martin owns no interest in Holdings. The L-3 Acquisition has been accounted for as a purchase business combination effective as of April 1, 1997. The assets and liabilities recorded in connection with the purchase price allocation were $664,800 and $164,400, respectively. The Company valued acquired contracts in process at contract price, less the estimated costs to complete and an allowance for normal profit on the Company's effort to complete such contracts. The excess of the purchase cost over the fair value of net assets acquired of $280,918 was recorded as goodwill, and is being amortized over a period of 40 years. As a result of the 34.9% ownership interest initially retained by Lockheed Martin, a deemed distribution of $9,000 was recognized in the purchase price allocation. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS: Cash equivalents consist of highly liquid investments with a maturity of three months or less at time of purchase. REVENUE RECOGNITION: Sales on production-type contracts are recorded as units are shipped and profits applicable to such shipments are recorded pro rata based upon estimated total profit at completion of the contract. Sales and profits on cost reimbursable contracts are recognized as costs are incurred. Sales and estimated profits under other long-term contracts are recognized under the percentage of completion method of accounting using the cost-to-cost method. Amounts representing contract change orders or claims are included in sales only when they can be reliably estimated and their realization is reasonably assured. Losses on contracts are recognized when determined. The impact of revisions in profit estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. CONTRACTS IN PROCESS: Costs accumulated on contracts in process include direct costs and manufacturing overhead costs, and for U.S. government contracts and contracts with prime contractors or subcontractors of the U.S. government, general and administrative costs, independent research and development costs and bid and proposal costs. Contracts in process contain amounts relating to contracts and programs with long performance cycles, a portion of which may not be realized within one year. Unbilled contract receivables represent accumulated recoverable costs and earned profits on contracts in F-8 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) process that have been recorded as sales, but have not yet been billed to customers. Inventoried costs include recoverable costs incurred on contracts in process, as well as costs of other product inventories that are stated at the lower of cost or estimated net realizable value primarily using the average cost method. Under the contractual arrangements on certain contracts with the U.S. government, the Company receives progress payments as it incurs costs. The U.S. government has a security interest in the unbilled contract receivables and inventoried costs to which progress payments have been applied, and such progress payments are reflected as an offset against the related unbilled contract receivables and inventoried costs. Other customer advances are classified as current liabilities. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is computed by applying principally the straight-line method to the estimated useful lives of the related assets. Useful lives range substantially from 10 to 40 years for buildings and improvements and 3 to 10 years for machinery, equipment, furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. DEBT ISSUANCE COSTS: Costs incurred to issue debt are deferred and amortized as interest expense over the terms of the related debt using a method that approximates the effective interest method. INTANGIBLES: Intangibles consist primarily of the excess of the purchase cost of acquired businesses over the fair value of net assets acquired (goodwill) and are amortized on a straight-line basis over periods ranging from 10 to 40 years. Goodwill amortization expense was $20,607 for 1999, $13,799 for 1998 and $5,741 for the nine-month period ended December 31, 1997. Accumulated goodwill amortization was $40,147, and $19,540, respectively, at December 31, 1999 and 1998. The carrying amount of cost in excess of net assets acquired is evaluated on a recurring basis. Current and estimated future profitability and undiscounted cash flows excluding financing costs of the acquired businesses are the primary indicators used to assess the recoverability of goodwill. For 1999 and 1998, there were no reductions to the carrying amounts of goodwill resulting from these evaluations. INCOME TAXES: The Company provides for income taxes using the liability method prescribed by the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under the liability method, deferred income tax assets and liabilities reflect tax carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes, as determined under enacted tax laws and rates. The effect of changes in tax laws or rates is accounted for in the period of enactment. RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the Company and the Predecessor Company include bid and proposal costs related to government products and services. These costs generally are allocated among all contracts and programs in progress under U.S. government contractual arrangements. Customer-sponsored research and development costs incurred pursuant to contracts are accounted for as direct contract costs. STOCK OPTIONS: In accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations, compensation expense for stock options is recognized in income based on the excess, if any, of 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. The exercise price for stock options granted to employees equals or exceeds the fair value of the Holdings common stock at the date of grant, thereby resulting in no recognition of compensation expense by the Company. The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-9 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs and expenses during the reporting period. The most significant of these estimates and assumptions relate to contract estimates of sales and costs, estimates of pension and postretirement benefit obligations, allocations of costs and expenses from Lockheed Martin to the Predecessor Company, recoverability of recorded amounts of fixed assets and cost in excess of net assets acquired, income taxes, litigation and environmental obligations. Actual results could differ from these estimates. RECENTLY ISSUED ACCOUNTING STANDARDS: In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all quarters of fiscal years beginning after September 15, 2000. The Company does not expect SFAS 133 to have a material impact on its financial position. RECLASSIFICATIONS: Certain reclassifications have been made to conform prior-year amounts to the current-year presentation. 4. ACQUISITIONS On January 8, 1999 the Company acquired all of the outstanding common stock of Microdyne Corporation ("Microdyne") for $94,228 in cash including expenses and the repayment of assumed debt, net of cash acquired. On April 16, 1999 the Company acquired all of the outstanding common stock of Aydin Corporation ("Aydin") for $60,034 in cash, including expenses net of cash acquired. On June 30, 1999 the Company acquired all the outstanding common stock of Interstate Electronics Corporation ("IEC") from Scott Technologies Inc. for $40,610 in cash including expenses. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions". On December 31, 1999, the Company acquired the assets of the Space and Navigation Systems business ("Space & Nav") of Honeywell International Inc. ("Honeywell") for $55,000 in cash, plus expenses, subject to adjustment based on closing date net assets, as defined. On February 5, 1998, March 4, 1998 and March 30, 1998 the Company purchased the assets of the Satellite Transmission Systems division ("STS") of California Microwave, Inc., ILEX Systems ("ILEX") and Ocean Systems business ("Ocean Systems") of AlliedSignal Inc. for cash, including expenses, of $26,079, $54,304 and $68,822, respectively. On August 13, 1998, the Company purchased all of the outstanding stock of SPD Technologies, Inc. ("SPD") for $238,337 of cash, including expenses, net of cash acquired. SPD, STS, ILEX and Ocean Systems, collectively comprise the "1998 Acquisitions". During 1998, the Company also purchased several other operations and product lines for an aggregate purchase price of $57,700 of cash before expenses and certain adjustments based on closing date net assets, as defined, and certain additional consideration based on post-acquisition performance. These other acquisitions, both individually and in the aggregate, were not material to the results of operations or financial position of the Company. In August 1999, the Company issued 150,955 shares of Holdings' common stock valued at $6,434 as additional consideration for the ILEX acquisition that was based on the 1998 financial performance of ILEX. At December 31, 1999, the Company recorded an other current liability of $6,119 for shares of common stock to be issued in 2000 as additional consideration for the ILEX acquisition based on 1999 financial performance of ILEX. The remaining contingent consideration for the ILEX acquisition, payable in 2001, will be based on ILEX's 2000 financial performance. All of the acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their effective dates. The assets and liabilities recorded in F-10 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) connection with the acquisition of Space & Nav are based upon preliminary estimates of fair values. Actual amounts will be based on the final purchase price, the audited closing date balance sheet and the final appraisals and other analyses of fair values which are in process. Management does not expect that differences between the preliminary and final purchase price allocations will have a material impact on the Company's financial position or results of operations. The assets and liabilities recorded in connection with the acquisitions of Microdyne, Aydin, IEC, Space & Nav, SPD, Ocean Systems, ILEX and STS were $114,967 and $19,254, $92,929 and $17,851, $50,428 and $9,818, $66,085 and $13,893, $319,701 and $77,964, $142,423 and $72,801, $71,614 and $10,909, and $35,559 and $7,909, respectively. The Company has valued certain acquired contracts in process at contract price, less the estimated costs to complete and an allowance for normal profit on the Company's effort to complete such contracts. The excess of purchase price over the fair value of net assets acquired is being amortized on a straight-line basis over periods of 40 years for Aydin, Microdyne, IEC, SPD, Ocean Systems and ILEX and 15 years for STS. Had the 1999 Acquisitions and 1998 Acquisitions and the related financing transactions occurred on January 1, 1998, the unaudited pro forma sales, net income and diluted earnings per share would have been $1,457,400, $61,000 and $1.82, respectively, for 1999 and $1,370,700, $19,300 and $0.57, respectively, for 1998. The pro forma results are based on various assumptions and are not necessarily indicative of the result of operations that would have occurred had the acquisitions and the related financing transactions occurred on January 1, 1998. In February 2000, the Company expects to acquire the assets of the Training Devices and Training Services ("TDTS") business of Raytheon Company for $160,000 in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition the Company will change the name of TDTS to L-3 Communications Link Simulation and Training ("Link Simulation and Training"). The acquisition is expected to be financed using borrowings under the Company's Senior Credit Facilities. In February 2000, the Company expects to acquire the assets of Trex Communications Corporation, ("TrexCom"), for $50,210 in cash, plus expenses, subject to adjustment based on closing date net worth, as defined. The acquisition is expected to be financed using borrowings under the Company's Senior Credit Facilities. In February 2000, the Company expects to enter into an asset purchase agreement to acquire the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $255,000 in cash subject to adjustment based on closing date net assets, as defined. In addition, in February 2000, the Company expects to enter into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 will purchase the assets of TCAS from Honeywell, create a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets to TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final purchase price paid by the Company for TCAS (collectively, the "TCAS LLC Transaction"). L-3 expects to maintain operating management of the TCAS LLC and to consolidate it. The MOA is expected to terminate if the TCAS LLC Transaction is not consummated by May 31, 2000. L-3 expects to finance the TCAS acquisition with borrowings under the Company's existing credit facilities and a new revolving 364 day senior credit facility for $250,000. The TCAS acquisition and the TCAS LLC Transaction will be subject to regulatory approval by United States agencies and the European Union Commission. F-11 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 5. CONTRACTS IN PROCESS The components of contracts in process are presented in the table below. The unbilled contract receivables, inventoried costs and progress payments are principally related to contracts with the U.S. government and prime contractors or subcontractors of the U.S. government.
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Billed receivables ........................... $ 258,054 $ 177,165 --------- --------- Unbilled contract receivables, gross ......... 125,652 72,883 Less: unliquidated progress payments ......... (10,351) (166) --------- --------- Unbilled contract receivables, net .......... 115,301 72,717 --------- --------- Inventoried costs, gross ..................... 130,091 130,350 Less: unliquidated progress payments ......... (19,273) (29,183) --------- --------- Inventoried costs, net ...................... 110,818 101,167 --------- --------- Total contracts in process .................. $ 484,173 $ 351,049 ========= =========
The Company believes that approximately $102,000 of the unbilled contract receivables at December 31, 1999 will be billed and collected within one year. The following data have been used in the determination of the costs and expenses presented on the statements of operations:
PREDECESSOR COMPANY COMPANY -------------------------------------------- ------------- YEAR YEAR NINE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1999 1998 1997 1997 -------------- -------------- -------------- ------------- Selling, general and administrative ("SG&A") costs included in inventoried costs ........ $ 23,637 $ 16,550 $15,379 $14,536 SG&A incurred costs ......................... 265,136 189,507 88,527 28,449 Independent research and development, including bid and proposal costs included in SG&A incurred costs ........................ 74,917 59,897 28,893 12,024
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Land .................................................... $ 9,658 $ 9,145 Buildings and improvements .............................. 30,071 28,168 Machinery, equipment, furniture and fixtures ............ 137,665 105,569 Leasehold improvements .................................. 14,015 12,830 -------- -------- Gross property, plant and equipment .................... 191,409 155,712 Less: accumulated depreciation and amortization ......... 50,438 32,557 -------- -------- Property, plant and equipment, net ..................... $140,971 $123,155 ======== ========
F-12 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Depreciation and amortization expense for property, plant and equipment was $29,554 for 1999, $22,463 for 1998, $13,320 for the nine-month period ended December 31, 1997 and $4,529 for the three-month period ended March 31, 1997. 7. DEBT The Company's long-term debt consists of:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Senior Credit Facilities ........................... $ -- $ -- 10 3/8% Senior Subordinated Notes due 2007 ......... 225,000 225,000 8 1/2% Senior Subordinated Notes due 2008 .......... 180,000 180,000 8% Senior Subordinated Notes due 2008 .............. 200,000 200,000 -------- -------- Total debt ........................................ 605,000 605,000 Less current portion ............................... -- -- -------- -------- Total long-term debt .............................. $605,000 $605,000 ======== ========
In connection with the L-3 Acquisition, the Company entered into credit facilities (the "Senior Credit Facilities") with a syndicate of banks and financial institutions led by Bank of America National Trust & Savings Association ("Bank of America"), as administrative agent, originally consisting of $175,000 of term loans (the "Term Loan Facilities") and a $100,000 revolving credit facility (the "Revolving Credit Facility"). In 1998, the Company prepaid all of the outstanding borrowings under the Term Loan Facilities. In 1999 and 1998 the Company amended the Senior Credit Facilities to increase the Revolving Credit Facility to $200,000 which expires on March 31, 2003 and to add a revolving 364 day credit facility for $200,000 (the "Revolving 364 Day Credit Facility"), which was renewed in July 1999 for an additional 364 days and will expire on August 10, 2000 at which time the Company may exercise an option to convert any or all of the borrowings outstanding thereunder into term loans which amortize over a two year period beginning March 31, 2001. Available borrowings under the Revolving Credit Facility and the Revolving 364 Day Credit Facility at December 31, 1999 were $109,312 and $200,000 respectively, after reductions for outstanding letters of credit of $90,688. 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 0.0% to 0.875% per annum depending on L-3 Communications' ratio of debt to EBITDA, as defined (the "Debt to EBITDA Ratio") at the time of determination or (ii) a "LIBOR rate" (as defined) plus a spread ranging from 0.625% to 1.875% per annum depending on L-3 Communications' Debt to EBITDA Ratio at the time of determination. L-3 Communications pays commitment fees calculated on the daily amounts of the available unused commitments under the Revolving Credit Facility at a rate ranging from 0.25% to 0.50% per annum and under the Revolving 364 Day Facility at a rate ranging from 0.125% to 0.30% per annum, in each case depending on L-3 Communications' Debt to EBITDA Ratio in effect. L-3 Communications pays letter of credit fees calculated at a rate ranging from 0.3125% to 0.9375% per annum for performance letters of credit and 0.625% to 1.875% for all other letters of credit, in each case depending on L-3 Communications' Debt to EBITDA Ratio at the time of determination. In January 2000, the Senior Credit Facilities were amended to change the spreads on borrowings, commitment fees and letter of credit fees thereunder, as follows: on "base rate" borrowings, ranging from 0.375% to 1.25%; on "LIBOR rate" borrowings and financial letters of credit, ranging from 1.00% to F-13 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2.25%; on commitment fees, ranging from 0.20% to 0.50%; and, on performance letters of credit, ranging from 0.50% to 1.125%, in each case, depending on L-3 Communications' Debt to EBITDA Ratio at the time of determination. In April 1997, L-3 Communications sold $225,000 of 10 3/8% senior subordinated notes (the "1997 Notes") due May 1, 2007 with interest payable semi-annually on May 1 and November 1 of each year commencing November 1, 1997. In May 1998, L-3 Communications sold $180,000 of 8 1/2 % senior subordinated notes (the "May 1998 Notes") due May 15, 2008 with interest payable semi-annually on May 15 and November 15 of each year commencing November 15, 1998. In December 1998, L-3 Communications sold $200,000 of 8% senior subordinated notes (the "December 1998 Notes") due August 1, 2008 with interest payable semi-annually on February 1 and August 1 of each year commencing February 1, 1999. Collectively, the 1997 Notes, May 1998 Notes and December 1998 Notes comprise the "Senior Subordinated Notes". The Senior Subordinated Notes mature $225,000 in 2007 and $380,000 in 2008. The 1997 Notes, May 1998 Notes and December 1998 Notes are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 2002, August 1, 2003, and August 1, 2003, respectively, at various redemption prices plus accrued and unpaid interest to the applicable redemption date. In addition, prior to May 1, 2000, May 15, 2001, and December 11, 2001, the Company may redeem up to 35% of the aggregate principal amount of the 1997 Notes, May 1998 Notes and December 1998 Notes, respectively, at redemption prices of 109.375%, 108.500%, and 108.00% of the principal amount thereof, plus accrued and unpaid interest to the applicable redemption date with the net cash proceeds of one or more equity offerings by Holdings that are contributed to L-3 Communications as common equity capital. The Senior Credit Facilities and Senior Subordinated Notes agreements contain financial and other restrictive covenants that limit, among other things, the ability of the Company to borrow additional funds, dispose of assets, or pay cash dividends. The Senior Credit Facilities contain financial covenants which require that (i) the Company's Debt to EBITDA Ratio be less than or equal to 4.75 for the quarter ended December 31, 1999, and that the maximum allowable debt ratio, as defined, thereafter decline over time to less than or equal to 3.25 for the quarters ending September 30, 2002 and thereafter, and (ii) the Company's interest coverage ratio, as defined, be greater than or equal to 2.25 for the quarter ended December 31, 1999, and that the minimum allowable interest coverage ratio, as defined, thereafter increase over time to greater than or equal to at least 3.00 for the quarters ending September 30, 2002 and thereafter. Through December 31, 1999 the Company was in compliance with these covenants at all times. In connection with the Senior Credit Facilities, the Company has granted the lenders a first priority lien on the stock of L-3 Communications and substantially all of its domestic subsidiaries. The borrowings under the Senior Credit Facilities are guaranteed by Holdings and by substantially all of the Company's subsidiaries. The payment of principal and premium, if any, and interest on the Senior Subordinated Notes is unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by substantially all of the Company's domestic subsidiaries, all of which are wholly owned. 8. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments. The Company's financial instruments consist primarily of cash and cash equivalents, billed contract receivables, other billed receivables (principally commercial and affiliates), investments, trade accounts payable, customer advances, Senior Subordinated Notes (see Note 7), and interest rate cap and interest rate floor contracts. The carrying amounts of cash and cash equivalents, billed contract receivables, other billed receivables, trade accounts payable and customer advances are representative of their respective fair values because of the short-term maturities or expected settlement dates of these instruments. The fair value of the Company's investments are based on quoted market prices, as available, and historical costs which approximate fair value. The Senior F-14 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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 interest rate caps and floor contracts were estimated by discounting expected cash flows using quoted market interest rates. The carrying amounts and estimated fair value of the Company's financial instruments are as follows:
DECEMBER 31, ---------------------------------------------- 1999 1998 ----------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ------------ ---------- ----------- Investments ....................... $ 12,068 $ 12,068 $ 11,446 $ 12,274 Senior Subordinated Notes ......... 605,000 582,000 605,000 633,830 Interest rate caps ................ 800 435 1,170 236 Interest rate floor ............... (137) (49) (200) (1,094)
Interest Rate Risk Management. To mitigate risks associated with changing interest rates on borrowings under the Senior Credit Facilities, the Company entered into interest rate caps and interest rate floors (collectively, the "interest rate agreements"). The interest rate agreements are denominated in U.S. dollars and have designated maturities which occur every three months until the interest rate agreements expire in March 2002. Cash payments are received from (paid to) the counterparties on the interest rate caps (floors) contracts by the amount that the reference interest rates are greater than (less than) the cap (floor) contract rates on the designated maturity dates, multiplied by the notional amounts underlying the respective interest rate agreements. Cash payments between the Company and counterparties are recorded as a component of interest expense. The initial cost (receipt) of these arrangements are deferred and amortized as interest expense over the term of the interest rate agreement. The Company manages exposure to counterparty credit risk by entering into the interest rate agreements only with major financial institutions that are expected to fully perform under the terms of such agreements. The notional amounts are used to measure the volume of these agreements and do not represent exposure to credit loss. The impact of the interest rate agreements was not material to interest expense or cash flows for 1999, 1998 and for the nine-month period ended December 31, 1997. Information with respect to the interest rate cap and floor contracts is as follows:
DECEMBER 31, ------------------------------------------------------------ 1999 1998 ----------------------------- ---------------------------- NOTIONAL UNREALIZED NOTIONAL UNREALIZED AMOUNT GAINS (LOSSES) AMOUNT GAINS (LOSSES) ---------- ---------------- ---------- --------------- Interest rate caps .......... $100,000 $ (365) $100,000 $ (934) Interest rate floor ......... 50,000 88 50,000 (894)
9. COMMON STOCK On February 4, 1999, Holdings sold 5.0 million shares of common stock in a public offering for $42.00 per share (the "February 1999 Common Stock Offering"); the net proceeds amounted to $201.5 million and were contributed by Holdings to L-3 Communications. In addition, 6.5 million shares were also sold in the February 1999 Common Stock Offering by the Lehman Partnership and Lockheed Martin. In October 1999, Lockheed Martin sold its remaining interest in Holdings' common stock. In December 1999, the Lehman Partnership distributed approximately 3.8 million shares of its common stock of Holdings to its partners. At December 31, 1999 the Lehman Partnership owned approximately 16.8% and Lockheed Martin owned none of the outstanding shares of Holdings' common stock. On May 19, 1998, Holdings sold 6.9 million shares of its common stock in an initial public offering ("IPO"); the net proceeds amounted to $139,500 and were contributed by Holdings to L-3 Communica- F-15 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) tions. Prior to the IPO, the Company's common stock consisted of three classes Class A, Class B, and Class C common stock. Immediately prior to the IPO, each authorized share of Holdings Class A common stock, Class B common stock and Class C common stock was converted into one class of common stock and the authorized Holdings common stock was increased to 100 million shares. In connection with the initial capitalization of L-3 in April 1997, the Class A common stock and Class B common stock were issued at per share prices of $6.47 and $5.00, respectively. The aggregate difference in issuance prices of $4,410 was recorded as a noncash compensation charge effective April 1, 1997. 10. EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share ("EPS") follows (in thousands, except per share amounts):
NINE MONTHS ENDED DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------- Basic: Net income ......................................... $ 58,689 $ 32,551 $ 12,305 Weighted average common shares outstanding ......... 32,107 24,679 20,000 --------- --------- --------- Basic earnings per share ........................... $ 1.83 $ 1.32 $ 0.62 ========= ========= ========= Diluted: Net income ......................................... $ 58,689 $ 32,551 $ 12,305 --------- --------- --------- Common and potential shares: Weighted average common shares outstanding ......... 32,107 24,679 20,000 Assumed exercise of stock options .................. 3,376 2,824 2,482 Assumed purchase of common shares for treasury ..... (1,967) (1,603) (2,470) --------- --------- --------- Common and potential common shares .................. 33,516 25,900 20,012 ========= ========= ========= Diluted earnings per share .......................... $ 1.75 $ 1.26 $ 0.61 ========= ========= =========
11. INCOME TAXES Pretax income of the Company was $95,430 for 1999, $53,450 for 1998 and $22,992 for the nine-month period ended December 31, 1997, substantially all of which was derived from domestic operations. The components of the Company's provision for income taxes were:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED --------------------- DECEMBER 31, 1999 1998 1997 --------- --------- ------------- Current income tax provision, primarily federal . ......... $ 7,910 $ 1,113 $ 696 Deferred income tax provision: Federal .................................................. 27,881 18,203 8,635 State and local .......................................... 950 1,583 1,356 ------- ------- ------- Subtotal ............................................... 28,831 19,786 9,991 ------- ------- ------- Total provision for income taxes .......................... $36,741 $20,899 $10,687 ======= ======= =======
F-16 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) A reconciliation of the statutory federal income tax rate to the effective income tax rate of the Company follows:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ----------------------- DECEMBER 31, 1999 1998 1997 ---------- ---------- ------------- Statutory federal income tax rate ....................... 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit ............................................ 4.6 4.7 5.8 Noncash compensation charge ............................. -- -- 6.8 Nondeductible goodwill amortization and other expenses ............................................... 5.2 4.6 3.1 Research and experimentation and other tax credits ...... (7.1) (6.8) (5.5) Other, net .............................................. 0.8 1.6 1.3 ---- ---- ---- Effective income tax rate ............................... 38.5% 39.1% 46.5% ==== ==== ====
The provision for income taxes excludes current tax benefits related to the exercise of stock options credited directly to shareholders' equity of $1,011 and $782 for 1999 and 1998, respectively. The significant components of the Company's net deferred tax assets and liabilities are:
DECEMBER 31, -------------------------- 1999 1998 ------------ ----------- Deferred tax assets: Inventoried costs ...................................... $ 11,033 $ 8,243 Compensation and benefits .............................. 1,873 -- Pension and postretirement benefits .................... 31,768 25,597 Property, plant and equipment .......................... 17,149 7,748 Income recognition on long-term contracts .............. 8,617 436 Accrued warranty costs ................................. 2,401 5,268 Net operating loss carryforwards ....................... 12,749 8,112 Tax credit carryforwards ............................... 16,576 4,320 Other, net ............................................. 4,492 475 --------- -------- Total deferred tax assets ............................ 106,658 60,199 --------- -------- Deferred tax liabilities: Cost in excess of net assets acquired .................. (9,656) (3,348) Compensation and benefits .............................. -- (378) Other, net ............................................. (7,159) (743) --------- -------- Total deferred tax liabilities ....................... (16,815) (4,469) --------- -------- Net deferred tax assets ............................. $ 89,843 $ 55,730 ========= ======== The net deferred tax assets are classified as follows: Current deferred tax assets ............................. $ 32,985 $ 16,591 Long-term deferred tax assets ........................... 56,858 39,139 --------- -------- Total net deferred tax assets ........................ $ 89,843 $ 55,730 ========= ========
F-17 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) At December 31, 1999 the Company had $29,325 of tax carryforwards primarily related to U.S. federal net operating losses, alternative minimum tax credits, research and experimentation tax credits, and various state and local tax credits which primarily will expire, subject to various limitations and restrictions, if unused beginning in 2011. The Company believes that these carryforwards will be available to reduce future income tax liabilities and has recorded these carryforwards as non-current deferred tax assets. 12. STOCK OPTIONS On April 27, 1999 the Company adopted the 1999 Long Term Performance Plan which reserved 1,000,000 shares of Holdings' common stock which may be awarded to employees of the Company in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock or other incentive awards. On May 19, 1999, the Company awarded 40,339 shares of restricted stock of Holdings to employees which vest January 1, 2004. As of December 31, 1999 the Company had 900,994 shares of Holdings' common stock available for awards under the 1999 Long Term Performance Plan and 2,355 shares of Holdings' common stock available for option grants under the 1997 option plan. On April 5, 1999, the Company amended the performance options, which were granted to the Equity Executives on April 30, 1997 to purchase at $6.47, 1,142,857 shares of Holdings' common stock, to eliminate the performance target acceleration provisions and to provide that the unvested portion of the performance options which aggregated 914,286 options at April 5, 1999 will vest and become exercisable as of April 30, 2000, if their employment continues through and including such date. Such performance options would have originally vested nine years after the grant date, but could have become exercisable with respect to 25% of the shares subject to such performance options on each of April 30, 1999, 2000, 2001 and 2002, to the extent certain targets for the Company's EBITDA were achieved. The following table presents the Company's stock option activity:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE ------------ --------- (IN THOUSANDS) Balance at April 1, 1997 ............. -- $ -- Options granted ..................... 2,975 6.47 Options exercised ................... -- -- Options canceled .................... (4) 6.47 ------ Balance at December 31, 1997 ......... 2,971 6.47 Options granted ..................... 425 25.60 Options exercised ................... (481) 6.47 Options canceled .................... (37) 8.19 ------ Balance at December 31, 1998 ......... 2,878 9.27 Options granted ..................... 1,004 39.10 Options exercised ................... (79) 8.37 Options canceled .................... (43) 29.99 ------ Balance at December 31, 1999 ......... 3,760 $ 17.02 ======
F-18 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes information about stock options outstanding at December 31, 1999.
OUTSTANDING EXERCISABLE ------------------------------------------ ----------------------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED RANGE OF REMAINING AVERAGE REMAINING AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE PRICES OF OPTIONS LIFE (YEARS) PRICE OF OPTIONS LIFE (YEARS) PRICE - - ------------------------- ------------ -------------- ---------- ------------ -------------- --------- $6.47 ................... 2,379 7.4 $ 6.47 593 7.4 $ 6.47 $22.00 .................. 263 8.3 $ 22.00 48 8.3 $ 22.00 $32.75 - $39.99 ......... 724 9.6 $ 37.08 45 8.7 $ 32.83 $40.00 - $45.00 ......... 394 9.0 $ 40.53 -- -- ----- --- Total .................. 3,760 8.0 $ 17.02 686 7.6 $ 9.31 ===== ===
The weighted average fair values of stock options at their grant date during 1999 and 1998, where the exercise price equaled the market price (estimated fair value) on the grant date were $14.04 and $8.86, respectively. In accordance with APB 25, no compensation expense was recognized. The following table reflects pro forma net income and EPS had the Company elected to adopt the fair value approach of SFAS 123:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED --------------------------- DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------- Net income: As reported ......... $ 58,689 $ 32,551 $ 12,305 Pro forma ........... 54,625 31,246 11,751 Basic EPS: As reported ......... $ 1.83 $ 1.32 $ 0.62 Pro forma ........... 1.70 1.27 0.59 Diluted EPS: As reported ......... $ 1.75 $ 1.26 $ 0.61 Pro forma ........... 1.63 1.21 0.59
The estimated fair values of each option granted in 1999 and 1998 were calculated using the Black-Scholes option-pricing model. The estimated fair value of each option granted in 1997 was calculated using the minimum value method under SFAS 123 because Holdings common stock was not publicly traded prior to its IPO. See Note 9. The weighted average assumptions used in the valuation models were as follows:
1999 1998 1997 -------- -------- -------- Expected option term ............. 4.8 4.1 5.5 Expected volatility .............. 31.0% 31.0% n.a. Expected dividend yield .......... -- -- -- Risk-free interest rate .......... 4.7% 5.6% 6.3%
F-19 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 13. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and equipment under agreements expiring at various dates through 2018. At December 31, 1999, future minimum payments under noncancellable operating leases with initial or remaining terms in excess of one year were:
OPERATING LEASES ---------------------------------------- REAL ESTATE EQUIPMENT TOTAL ------------- ----------- ---------- 2000 ............... $ 21,337 $3,519 $ 24,856 2001 ............... 19,679 2,685 22,364 2002 ............... 17,427 1,369 18,796 2003 ............... 11,540 645 12,185 2004 ............... 9,493 183 9,676 Thereafter ......... 132,518 73 132,591 -------- ------ -------- Total ............. $211,994 $8,474 $220,468 ======== ====== ========
Real estate lease commitments have been reduced by minimum sublease rental income of $4,873 due in the future under noncancellable subleases. Leases covering major items of real estate and equipment contain renewal and or purchase options. Rent expense, net of sublease income was $22,452 for 1999, $15,290 for 1998, $7,330 for the nine-month period ended December 31, 1997, and $2,553 for the three-month period ended March 31, 1997. On March 30, 1998 and June 30, 1999, the Company entered into two separate real estate lease agreements, as lessee, with unrelated lessors which expire on March 30, 2001 and June 30, 2002, respectively, and are accounted for as operating leases. On or before each lease expiration date, the Company can exercise options under each lease agreement to either renew the lease, purchase the subject properties for $12,500 and $15,500, respectively, or sell the property on behalf of the lessor (the "Sale Option"). If the Company exercises the Sale Option, the Company must pay the lessor a residual guarantee amount of $10,894 and $13,524, respectively, on or before the lease expiration date, and at the time the property is sold, the Company must pay the lessor a supplemental rent in the amount of $1,606 and $1,976, respectively, to the extent that the sales proceeds exceeds the respective residual guarantee amount by the supplemental rent amounts. In the event that the sales proceeds are less than the sum of the residual guarantee amount and the supplemental rent, the Company is required to pay a supplemental rent to the extent that the reduction in the fair value of the property is demonstrated by an independent appraisal to have been caused by the Company's failure to properly maintain the property. Accordingly, the aggregate residual guarantee amounts of $24,418 have been included in the noncancellable real estate operating lease payments relating to the expiration of such leases. The Company is engaged in providing products and services under contracts with the U.S. government and to a lesser degree, under foreign government contracts, some of which are funded by the U.S. government. All such contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. government investigate whether such contracts were and are being conducted in accordance with these requirements. Under government procurement regulations, an indictment of the Company by a federal grand jury could result in the Company being suspended for a period of time from eligibility for awards of new government contracts. A conviction could result in debarment from contracting with the federal government for a specified term. 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. F-20 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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 results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has been 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 financial position or results of operations of the Company. 14. PENSIONS AND OTHER EMPLOYEE BENEFITS The Company maintains a number of pension plans, both contributory and noncontributory, covering employees of 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 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.
POSTRETIREMENT PENSION PLANS BENEFIT PLANS ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ------------ ---------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year ......... $ 340,483 $ 198,431 $ 75,262 $ 18,880 Service cost .................................... 13,513 10,717 1,595 1,288 Interest cost ................................... 23,092 17,996 4,175 2,933 Participants' contributions ..................... 20 -- -- -- Amendments ...................................... 3,564 -- (1,429) -- Actuarial loss (gain) ........................... (41,372) 18,590 (11,201) 1,547 Acquisitions .................................... -- 105,072 753 52,435 Benefits paid ................................... (10,759) (10,323) (3,601) (1,821) --------- --------- --------- -------- Benefit obligation at end of year ............... $ 328,541 $ 340,483 $ 65,554 $ 75,262 --------- --------- --------- --------
F-21 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POSTRETIREMENT PENSION PLANS BENEFIT PLANS ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year ........................................ $ 288,502 $ 173,450 $ -- $ -- Actual return on plan assets ................. 81,800 22,059 -- -- Acquisitions ................................. -- 93,822 -- -- Employer contributions ....................... 7,888 9,494 3,601 1,821 Participants contributions ................... 20 -- -- -- Benefits paid ................................ (10,759) (10,323) (3,601) (1,821) --------- --------- --------- --------- Fair value of plan assets at end of year ..... $ 367,451 $ 288,502 $ -- $ -- --------- --------- --------- --------- FUNDED STATUS OF THE PLANS ................... $ 38,910 $ (51,981) $ (65,554) $ (75,262) Unrecognized actuarial loss (gain) ........... (76,592) 20,299 (8,924) 2,165 Unrecognized prior service cost .............. 3,275 -- (1,306) -- --------- --------- --------- --------- Net amount recognized ........................ $ (34,407) $ (31,682) $ (75,784) $ (73,097) ========= ========= ========= ========= AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF: Accrued benefit liability .................... $ (34,478) $ (41,196) $ (75,784) $ (73,097) Accumulated other comprehensive income........ 71 9,514 -- -- --------- --------- --------- --------- Net amount recognized ........................ $ (34,407) $ (31,682) $ (75,784) $ (73,097) ========= ========= ========= ========= RATE ASSUMPTIONS: Discount rate ................................ 7.75% 6.75% 7.75% 6.75% Rate of return on plan assets ................ 9.50% 9.00% n.a. n.a. Salary increases ............................. 4.50% 4.50% 4.50% 4.50% Annual increase in cost of benefits .......... n.a. n.a. 6.50% 6.50%
The annual increase in cost of benefits ("health care cost trend rate") is assumed to decrease gradually to a rate of 4.5% by the year 2001. Assumed health care cost trend rates have a significant effect on amounts reported for postretirement medical benefit plans. A one percentage point decrease in the assumed health care cost trend rates would have the effect of decreasing the aggregate service and interest cost components and the postretirement medical obligations by $636 and $4,776, respectively. A one percentage point increase in the assumed health care cost trend rate would have the effect of increasing the aggregate service and interest cost components and the postretirement medical obligations by $777 and $5,680, respectively. The following table summarizes the components of net periodic pension and postretirement medical costs.
POSTRETIREMENT PENSION PLANS PENSION PLANS --------------------------- --------------------- 1999 1998 1999 1998 ------------ ------------ --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost ............................... $ 13,513 $ 10,717 $1,595 $1,288 Interest cost .............................. 23,092 17,996 4,175 2,933 Amortization of prior service cost ......... 289 -- (123) -- Expected return on plan assets ............. (26,251) (19,938) -- -- Recognized actuarial (gain) loss ........... (30) (25) (112) 7 Recognition due to settlement .............. -- (376) -- -- --------- --------- ------ ------ Net periodic benefit cost ................. $ 10,613 $ 8,374 $5,535 $4,228 ========= ========= ====== ======
F-22 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $4,459, $5,307 and $893 respectively, as of December 31, 1999, and $271,411, $251,228, and $228,856, respectively, as of December 31, 1998. In connection with the Company's assumption of certain plan obligations pursuant to the L-3 Acquisition, Lockheed Martin has provided the Pension Benefit Guaranty Corporation ("PBGC") with commitments to assume sponsorship or other forms of financial support under certain circumstances of the Company's pension plans for Communication Systems -- West and Aviation Recorders (the "Subject Plans"). Upon the occurrence of certain events, Lockheed Martin, at its option, has the right to decide whether to cause the Company to transfer sponsorship of any or all of the Subject Plans to Lockheed Martin, even if the PBGC has not sought to terminate the Subject Plans. Such a triggering event occurred in 1998, that 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. 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. 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 Holdings common stock or cash, for 1999 and 1998 and nine-month period ended December 31, 1997 were $8,798, $6,366 and $3,742, respectively. 15. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ----------------------- DECEMBER 31, 1999 1998 1997 ---------- ---------- ------------- Interest paid ......................................... $50,532 $42,908 $21,245 Income taxes paid ..................................... 6,317 496 109 Noncash transactions: Common stock issued related to acquisition ........... 6,434 -- 45,000 Contribution in common stock to savings plan ......... 6,993 967 --
16. TRANSACTIONS WITH LOCKHEED MARTIN The Company sells products to Lockheed Martin and its affiliates. Net sales to Lockheed Martin amounted to $65,776, $70,401 and $60,402, respectively, for the years ended December 31, 1999 and 1998, and the nine-month period ended December 31, 1997. The net sales of the Predecessor Company to Lockheed Martin for the three-month period ended March 31, 1997 was $21,171. Lockheed Martin provides the Company information systems and other services and previously provided similar services to the Predecessor Company for which the Company and the Predecessor Company were charged $12,095, F-23 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) $13,690, and $4,210 for the year ended December 31, 1998, the nine-month period ended December 31, 1997, and the three-month period ended March 31, 1997 respectively. On October 25, 1999, Lockheed Martin sold its remaining shares of Holdings common stock through a private transaction, and as of such date, Lockheed Martin is no longer an affiliate or a related party of the Company. The Predecessor Company relied on Lockheed Martin for certain services, including treasury, cash management, employee benefits, taxes, risk management, internal audit, financial reporting, contract administration and general corporate services. Although expenses of $5,208 for the three-month period ended March 31, 1997 related to these services have been allocated to the Predecessor Company, the combined results of operations and cash flows of the Predecessor Company would not be the same had it been an independent entity. The allocation was estimated based primarily on an allocation methodology prescribed by government regulations pertaining to government contractors. Interest expense was allocated to the Predecessor Company by applying Lockheed Martin's weighted average consolidated interest rate to the portion of the beginning of period invested equity account deemed to be financed by consolidated debt, which was determined based on Lockheed Martin's debt to equity ratio on such date, except that the acquisition of the Loral Acquired Businesses was assumed to be fully financed by debt. Interest expense of the Predecessor Company was calculated using an invested equity balance of $473,609 and an interest rate of 7.1%. The benefit for income taxes for the Predecessor Company was calculated by applying statutory tax rates to the reported income before income taxes after considering items that do not enter into the determination of taxable income and tax credits reflected in the consolidated provision of Lockheed Martin which are related to the Predecessor Company. The changes in invested equity of the Predecessor Company for the three-month period ended March 31, 1997 were comprised of a net loss of $258 and advances from Lockheed Martin of $20,579. 17. SEGMENT INFORMATION The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products, which are described in Note 1. The prior year reportable segment information has been restated to conform to the 1999 presentation of the Company's reportable segments. The Company evaluates the performance of its operating divisions and reportable segments based on sales and operating income. All corporate expenses are allocated to the Company's divisions using an allocation methodology prescribed by U.S. government regulations for government contractors. Accordingly, all costs and expenses are included in the Company's measure of segment profitability.
SECURE SPECIALIZED ELIMINATION OF CONSOLIDATED COMMUNICATION COMMUNICATION INTERSEGMENT (COMBINED) SYSTEMS PRODUCTS CORPORATE SALES TOTAL --------------- --------------- ----------- ---------------- ------------- COMPANY 1999 - - ---- Sales ............................... $544,418 $ 867,495 $ (6,451) $1,405,462 Operating income .................... 46,955 103,531 150,486 Total assets ........................ 381,699 1,123,487 $128,585 1,633,771 Capital expenditures . .............. 6,980 16,476 23,456 Depreciation and amortization ....... 18,451 35,267 53,718 1998 - - ---- Sales ............................... $493,188 $ 561,393 $ (17,536) $1,037,045 Operating income .................... 39,885 60,464 100,349 Total assets ........................ 368,891 797,469 $119,036 1,285,396 Capital expenditures . .............. 5,755 17,674 23,429 Depreciation and amortization ....... 17,325 23,030 40,355
F-24 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SECURE SPECIALIZED ELIMINATION OF CONSOLIDATED COMMUNICATION COMMUNICATION INTERSEGMENT (COMBINED) SYSTEMS PRODUCTS CORPORATE SALES TOTAL --------------- --------------- ----------- ---------------- ------------- Nine Months Ended December 31, 1997 - - --------------------------------------- Sales ................................. $309,143 $244,497 $ (7,115) $546,525 Operating income (loss) ............... 25,800 30,056 $ (4,410) 51,446 Total assets .......................... 265,959 290,244 140,779 696,982 Capital expenditures .................. 5,534 6,400 11,934 Depreciation and amortization ......... 12,878 9,312 22,190 PREDECESSOR COMPANY Three Months Ended March 31, 1997 - - ---------------------------------------- Sales ................................. $ 84,862 $ 74,399 $ (388) $158,873 Operating income ...................... 127 7,809 7,936 Total assets .......................... 402,867 203,345 606,212 Capital expenditures . ................ 1,263 3,037 4,300 Depreciation and amortization ......... 5,095 2,695 7,790
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. Corporate operating loss for the nine-month period ended December 31, 1997 represents the nonrecurring noncash charge recorded in April, 1997 related to the initial capitalization of the Company. 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:
PREDECESSOR COMPANY COMPANY ---------------------------------------------- ------------ NINE THREE YEAR ENDED MONTHS MONTHS DECEMBER 31, ENDED ENDED ----------------------------- DECEMBER 31, MARCH 31, 1999 1998 1997 1997 ------------- ------------- -------------- ------------ U.S. government agencies . .................. $ 924,006 $ 716,234 $434,020 $128,505 Foreign governments ......................... 127,637 100,911 12,090 2,017 Commercial export . ......................... 144,274 85,331 32,743 11,595 Other (principally U.S. commercial) ......... 209,545 134,569 67,672 16,756 ---------- ---------- -------- -------- $1,405,462 $1,037,045 $546,525 $158,873 ========== ========== ======== ========
18. UNAUDITED QUARTERLY FINANCIAL DATA Unaudited summarized financial data by quarter for the years ended December 31, 1999 and 1998 is presented below.
COMPANY ------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------- -------------- ------------ 1999 Sales .................... $ 275,562 $ 314,432 $ 382,356 $ 433,112 Operating income ......... 26,167 31,149 42,840 50,330 Net income ............... 7,199 11,086 17,349 23,055 Basic EPS . .............. $ 0.24 $ 0.34 $ 0.53 $ 0.70 Diluted EPS .............. $ 0.23 $ 0.33 $ 0.51 $ 0.68
F-25 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPANY ------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------- -------------- ------------ 1998 Sales .................... $ 186,564 $ 230,424 $ 291,312 $ 328,745 Operating income ......... 14,093 19,458 30,068 36,730 Net income ............... 2,613 5,610 10,467 13,861 Basic EPS . .............. $ 0.13 $ 0.24 $ 0.38 $ 0.51 Diluted EPS .............. $ 0.13 $ 0.23 $ 0.37 $ 0.48
19. FINANCIAL INFORMATION OF L-3 COMMUNICATIONS SUBSIDIARY GUARANTORS L-3 Communications is a wholly-owned subsidiary of Holdings. The debt of L-3 Communications, including the Senior Subordinated Notes and borrowings under and 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 7. 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 statement based on the Company's understanding of the interpretation and application of Rule 3-10 of SEC Regulation S-X and SEC Staff Accounting Bulletin No. 53. The Company does not believe that separate financial statements of the Guarantor Subsidiaries are material to users of the financial statements. Therefore, separate financial statements of the Guarantor Subsidiaries are not presented. The following condensed combining financial information present the results of operations, financial position and cash flows of (i) L-3 Communications excluding its consolidated subsidiaries (the "Parent") (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries and (iv) the eliminations to arrive at the information for L-3 Communications on a consolidated basis. F-26 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS ------------- -------------- --------------- -------------- ------------------- CONDENSED COMBINING BALANCE SHEETS: - - ----------------------------------------------- AS OF DECEMBER 31, 1999: - - ----------------------------------------------- Current assets: Cash and cash equivalents $ 34,037 $ 5,164 $ 3,587 $ -- $ 42,788 Contracts in process 264,658 162,088 57,427 -- 484,173 Other current assets 24,616 10,455 5,675 -- 40,746 ---------- -------- --------- ---------- ---------- Total current assets 323,311 177,707 66,689 -- 567,707 ---------- -------- --------- ---------- ---------- Property, plant and equipment, net 104,087 25,005 11,879 -- 140,971 Intangibles, net 399,746 377,177 44,629 -- 821,552 Other assets 67,820 10,337 25,384 -- 103,541 Investment in and amounts due to and from consolidated subsidiaries 644,560 23,591 (25,423) (642,728) -- ---------- -------- --------- ---------- ---------- Total assets $1,539,524 613,817 $ 123,158 $ (642,728) $1,633,771 ========== ======== ========= ========== ========== Current liabilities: Accounts payable and accrued expenses $ 135,709 $ 57,924 $ 19,007 $ -- $ 212,640 Customer advances 53,345 543 2,850 -- 56,738 Other current liabilities 24,798 17,230 6,900 -- 48,928 ---------- -------- --------- ---------- ---------- Total current liabilities 213,852 75,697 28,757 -- 318,306 ---------- -------- --------- ---------- ---------- Other liabilities 79,234 47,961 95 -- 127,290 Long-term debt 605,000 -- -- -- 605,000 Shareholders' equity 641,438 490,159 94,306 (642,728) 583,175 ---------- -------- --------- ---------- ---------- Total liabilities and shareholders' equity $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771 ========== ======== ========= ========== ========== AS OF DECEMBER 31, 1998: - - ----------------------------------------------- Current assets: Cash and cash equivalents $ 23,737 $ 459 $ 1,934 $ -- $ 26,130 Contracts in process 230,940 82,822 37,287 -- 351,049 Other current assets 16,752 10,802 634 -- 28,188 ---------- -------- --------- ---------- ---------- Total current assets 271,429 94,083 39,855 -- 405,367 ---------- -------- --------- ---------- ---------- Property, plant and equipment, net 101,532 15,105 6,518 -- 123,155 Intangibles, net 367,647 282,972 18,743 -- 669,362 Other assets 55,306 14,612 17,594 -- 87,512 Investment in and amounts due from (to) consolidated subsidiaries 388,846 6,166 (18,085) (376,927) -- ---------- -------- --------- ---------- ---------- Total assets $1,184,760 $412,938 $ 64,625 $ (376,927) $1,285,396 ========== ======== ========= ========== ========== Current liabilities: Accounts payable and accrued expenses $ 120,679 $ 32,637 $ 11,829 $ -- $ 165,145 Customer advances 43,312 699 1,863 -- 45,874 Other current liabilities 29,947 5,678 890 -- 36,515 ---------- -------- --------- ---------- ---------- Total current liabilities 193,938 39,014 14,582 -- 247,534 ---------- -------- --------- ---------- ---------- Other liabilities 85,848 46,892 148 -- 132,888 Long-term debt 605,000 -- -- -- 605,000 Shareholders' equity 299,974 327,032 49,895 (376,927) 299,974 ---------- -------- --------- ---------- ---------- Total liabilities and shareholders' equity $1,184,760 $412,938 $ 64,625 $ (376,927) $1,285,396 ========== ======== ========= ========== ==========
F-27 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS ----------- -------------- --------------- -------------- ------------------- CONDENSED COMBINING STATEMENTS OF - - -------------------------------------- OPERATIONS: - - -------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1999: - - -------------------------------------- Sales $837,924 $440,160 $130,122 $ (2,744) $1,405,462 -------- -------- -------- --------- ---------- Operating income (loss) 103,753 52,016 (5,283) -- 150,486 Interest and other income 4,738 469 327 -- 5,534 Interest expense 60,307 -- 283 -- 60,590 Provision (benefit) for income taxes 18,238 20,091 (1,588) -- 36,741 Equity in net income (loss) of consolidated subsidiaries 28,743 -- -- (28,743) -- -------- -------- -------- --------- ---------- Net income (loss) $ 58,689 $ 32,394 $ (3,651) $ (28,743) $ 58,689 ======== ======== ======== ========= ========== FOR THE YEAR ENDED DECEMBER 31, 1998: - - -------------------------------------- Sales $833,471 $172,333 $ 33,777 $ (2,536) $1,037,045 -------- -------- -------- --------- ---------- Operating income 82,852 16,137 1,360 -- 100,349 Interest and other income 2,546 422 -- (309) 2,659 Interest expense 49,503 -- 364 (309) 49,558 Provision for income taxes 14,158 6,375 366 -- 20,899 Equity in net income of consolidated subsidiaries 10,814 -- -- (10,814) -- -------- -------- -------- --------- ---------- Net income $ 32,551 $ 10,184 $ 630 $ (10,814) $ 32,551 ======== ======== ======== ========= ==========
F-28 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED (COMBINED) FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ------------- -------------- --------------- CONDENSED COMBINING STATEMENTS OF CASH FLOWS: - - ------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1999: - - ------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ 29,946 $ 32,394 $ (3,651) Depreciation, amortization, deferred taxes and noncash items 57,147 32,703 3,220 Equity in net (income) loss of consolidated subsidiaries (28,743) -- Changes in operating assets and liabilities (11,356) (33,782) (7,603) ----------- -------- -------- Net cash from (used in) operating activities 46,994 31,315 (8,034) ----------- -------- -------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (58,864) (156,196) (57,135) Investment in consolidated subsidiaries (213,331) -- -- Capital expenditures, net of dispositions (12,572) (1,686) (2,485) Other investing activities 4,649 2,275 (2,788) ----------- -------- -------- Net cash (used in) investing activities (280,118) (155,607) (62,408) ----------- -------- -------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net -- -- -- Contribution from Holdings 201,582 -- -- Intercompany financing activities, net 41,738 130,330 70,006 Other financing activities 104 (1,333) 2,089 ----------- -------- -------- Net cash from (used in) financing activities 243,424 128,997 72,095 ----------- -------- -------- Net increase (decrease) in cash 10,300 4,705 1,653 Cash and cash equivalents, beginning of period 23,737 459 1,934 ----------- -------- -------- Cash and cash equivalents, end of period $ 34,037 $ 5,164 $ 3,587 =========== ======== ======== FOR THE YEAR ENDED DECEMBER 31, 1998: - - ------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 21,737 $ 10,184 $ 630 Depreciation, amortization, deferred taxes and noncash items 50,372 12,273 1,027 Equity in net (income) loss of consolidated subsidiaries (10,814) -- -- Changes in operating assets and liabilities 4,861 (13,026) (2,976) ----------- -------- -------- Net cash from (used in) operating activities 66,156 9,431 (1,319) ----------- -------- -------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (82,704) (320,218) (45,066) Investment in consolidated subsidiaries (365,284) -- -- Capital expenditures, net of dispositions (19,003) (2,806) (650) Other investing activities 6,653 -- (9,069) ----------- -------- -------- Net cash (used in) investing activities (460,338) (323,024) (54,785) ----------- -------- -------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net (172,000) -- -- Proceeds from sale of senior subordinated notes 380,000 -- -- Contribution from Holdings 139,500 -- -- Intercompany financing activities, net 4,008 314,052 58,038 Other financing activities (11,063) -- -- ----------- -------- -------- Net cash from (used in) financing activities 346,445 314,052 58,038 ----------- -------- -------- Net increase (decrease) in cash (53,737) 459 1,934 Cash and cash equivalents, beginning of period 77,474 -- -- ----------- -------- -------- Cash and cash equivalents, end of period $ 23,737 $ 459 $ 1,934 =========== ======== ======== CONSOLIDATED ELIMINATIONS L-3 COMMUNICATIONS -------------- ------------------- CONDENSED COMBINING STATEMENTS OF CASH FLOWS: - - ------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1999: - - ------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) -- $ 58,689 Depreciation, amortization, deferred taxes and noncash items -- 93,070 Equity in net (income) loss of consolidated subsidiaries 28,743 -- Changes in operating assets and liabilities -- (52,741) ----------- ----------- Net cash from (used in) operating activities 28,743 99,018 ----------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired -- (272,195) Investment in consolidated subsidiaries 213,331 -- Capital expenditures, net of dispositions -- (16,743) Other investing activities -- 4,136 ----------- ----------- Net cash (used in) investing activities 213,331 (284,802) ----------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net -- -- Contribution from Holdings -- 201,582 Intercompany financing activities, net (242,074) -- Other financing activities -- 860 ----------- ----------- Net cash from (used in) financing activities (242,074) 202,442 ----------- ----------- Net increase in cash -- 16,658 Cash and cash equivalents, beginning of period -- 26,130 ----------- ----------- Cash and cash equivalents, end of period -- $ 42,788 =========== =========== FOR THE YEAR ENDED DECEMBER 31, 1998: - - ------------------------------------------------------------- OPERATING ACTIVITIES: Net income -- $ 32,551 Depreciation, amortization, deferred taxes and noncash items -- 63,672 Equity in net (income) loss of consolidated subsidiaries 10,814 -- Changes in operating assets and liabilities -- (11,141) ----------- ----------- Net cash from (used in) operating activities 10,814 85,082 ----------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired -- (447,988) Investment in consolidated subsidiaries 365,284 -- Capital expenditures, net of dispositions -- (22,459) Other investing activities -- (2,416) ----------- ----------- Net cash (used in) investing activities 365,284 (472,863) ----------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net -- (172,000) Proceeds from sale of senior subordinated notes -- 380,000 Contribution from Holdings -- 139,500 Intercompany financing activities, net (376,098) -- Other financing activities -- (11,063) ----------- ----------- Net cash from (used in) financing activities (376,098) 336,437 ----------- ----------- Net increase (decrease) in cash -- (51,344) Cash and cash equivalents, beginning of period -- 77,474 ----------- ----------- Cash and cash equivalents, end of period -- $ 26,130 =========== ===========
F-29 EX-10.16 2 ANNEX A ANNEX A L-3 COMMUNICATIONS HOLDINGS, INC. 1999 LONG TERM PERFORMANCE PLAN TABLE OF CONTENTS
PAGE ----- SECTION 1. Purpose ....................................................... A-2 SECTION 2. Definitions; Rules of Construction ............................ A-2 SECTION 3. Eligibility ................................................... A-3 SECTION 4. Awards ........................................................ A-4 SECTION 5. Shares of Stock and Share Units Available Under Plan .......... A-6 SECTION 6. Award Agreements .............................................. A-7 SECTION 7. Adjustments; Change in Control; Acquisitions .................. A-8 SECTION 8. Administration ................................................ A-10 SECTION 9. Amendment and Termination of this Plan ........................ A-11 SECTION 10. Miscellaneous ................................................. A-11
A-1 L-3 COMMUNICATIONS HOLDINGS, INC. 1999 LONG TERM PERFORMANCE PLAN SECTION 1. PURPOSE. The purpose of this Plan is to benefit the Corporation's stockholders by encouraging high levels of performance by individuals who contribute to the success of the Corporation and its Subsidiaries and to enable the Corporation and its Subsidiaries to attract, motivate, retain and reward talented and experienced individuals. This purpose is to be accomplished by providing eligible individuals with an opportunity to obtain or increase a proprietary interest in the Corporation and/or by providing eligible individuals with additional incentives to join or remain with the Corporation and its Subsidiaries. SECTION 2. DEFINITIONS; RULES OF CONSTRUCTION. (a) Defined Terms. The terms defined in this Section shall have the following meanings for purposes of this Plan: "Award" means an award granted pursuant to Section 4. "Award Agreement" means an agreement described in Section 6 entered into between the Corporation and a Participant, setting forth the terms and conditions of an Award granted to a Participant. "Beneficiary" means a person or persons (including a trust or trusts) validly designated by a Participant or, in the absence of a valid designation, entitled by will or the laws of descent and distribution, to receive the benefits specified in the Award Agreement and under this Plan in the event of a Participant's death. "Board of Directors" or "Board" means the Board of Directors of the Corporation. "Cash Flow" means cash and cash equivalents derived from either (i) net cash flow from operations or (ii) net cash flow from operations, financings and investing activities, as determined by the Committee at the time an Award is granted. "Change in Control" means change in control as defined in Section 7(c). "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Committee described in Section 8(a). "Corporation" means L-3 Communications Holdings, Inc. "Employee" means any person, including an officer (whether or not also a director) in the regular full-time employment of the Corporation or any of its Subsidiaries who, in the opinion of the Committee is, or is expected to be, primarily responsible for the management, growth or protection of some part or all of the business of the Corporation or any of its Subsidiaries, but excludes, in the case of an Incentive Stock Option, an Employee of any Subsidiary that is not a "subsidiary corporation" of the Corporation as defined in Code Section 424(f). "EPS" means earnings per common share on a fully diluted basis determined by dividing (a) net earnings, less dividends on preferred stock of the Corporation by (b) the weighted average number of common shares and common share equivalents outstanding. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Executive Officer" means executive officer as defined in Rule 3b-7 under the Exchange Act. If the Board has designated the executive officers of the Corporation for purposes of reporting under the Exchange Act, the designation shall be conclusive for purposes of this Plan. "Fair Market Value" means the closing price of the relevant security as reported on the composite tape of New York Stock Exchange issues (or if, at the date of determination, the security A-2 is not so listed or if the principal market on which it is traded is not the New York Stock Exchange, such other reporting system as shall be selected by the Committee) on the relevant date, or, if no sale of the security is reported for that date, the next preceding day for which there is a reported sale. The Committee shall determine the Fair Market Value of any security that is not publicly traded, using criteria as it shall determine, in its sole direction, to be appropriate for the valuation. "Insider" means any person who is subject to Section 16(b) of the Exchange Act. "Option" means a Nonqualified Stock Option or an Incentive Stock Option as described in Section 4(a)(1) or (2). "Participant" means a person who is granted an Award, pursuant to this Plan, that remains outstanding. "Performance-Based Awards" is defined in Section 4(b). "Performance Goal" means EPS or ROE or Cash Flow or Total Stockholder Return or such other Performance Goal or Goals that the Committee in its sole discretion establishes in accordance with the requirements of Section 162(m) of the Code for which applicable shareholder approval requirements are met, and "Performance Goals" means any combination thereof. "ROE" means consolidated net income of the Corporation (less preferred dividends), divided by the average consolidated common stockholders' equity. "Rule 16b-3" means Rule 16b-3 under Section 16 of the Exchange Act, as amended from time to time. "Share Units" means the number of units under an Award that is payable solely in cash or is actually paid in cash, determined by reference to the number of shares of Stock by which the Award is measured. "Stock" means shares of Common Stock of the Corporation, par value $0.01 per share, subject to adjustments made under Section 7 or by operation of law. "Subsidiary" means, as to any person, any corporation, association, partnership, joint venture or other business entity of which 50% or more of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof. "Total Stockholder Return" means with respect to the Corporation or other entities (if measured on a relative basis), the (1) change in the market price of its common stock (as quoted in the principal market on which it is traded as of the beginning and ending of the period) plus dividends and other distributions paid, divided by (ii) the beginning quoted market price, all of which is adjusted for any changes in equity structure, including but not limited to stock splits and stock dividends. (b) Financial and Accounting Terms. Except as otherwise expressly provided or the context otherwise requires, financial and accounting terms, including terms defined herein as Performance Goals, are used as defined for purposes of, and shall be determined in accordance with, generally accepted accounting principles and as derived from the audited consolidated financial statements of the Corporation, prepared in the ordinary course of business. (c) Rules of Construction. For purposes of this Plan and the Award Agreements, unless otherwise expressly provided or the context otherwise requires, the terms defined in this Plan include the plural and the singular, and pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms. SECTION 3. ELIGIBILITY. Any one or more Awards may be granted to any Employee, or any non-Employee who provides services to or on behalf of the Corporation or any of its Subsidiaries, who is designated by the Committee to receive an Award. A-3 SECTION 4. AWARDS. (a) Type of Awards. The Committee may from time to time grant any of the following types of Awards, either singly, in tandem or in combination with other Awards: (1) Nonqualified Stock Options. A Nonqualified Stock Option is an Award in the form of an option to purchase Stock that is not intended to comply with the requirements of Code Section 422. The exercise price of each Nonqualified Stock Option granted under this Plan shall be not less than the Fair Market Value of the Stock on the date that the Option is granted. All Nonqualified Stock Options granted in accordance with this clause (1) shall be treated as Performance-Based Awards subject to the applicable restrictions of Section 4(b). (2) Incentive Stock Options. An Incentive Stock Option is an Award in the form of an option to purchase Stock that is intended to comply with the requirements of Code Section 422 or any successor section of the Code. The exercise price of each Incentive Stock Option granted under this Plan shall be not less than the Fair Market Value of the Stock on the date the Option is granted. If a Participant on the date an Incentive Stock Option is granted owns, directly or indirectly within the meaning of Section 424(d) of the Code, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation, the exercise price per share of the Incentive Stock Option shall not be less than one hundred and ten percent (110%) of the Fair Market Value per share of the Stock at the time of grant, and such Incentive Stock Option shall not be exercisable after the expiration of five (5) years from the date such Incentive Stock Option is granted. To the extent that the aggregate "fair market value" of Stock with respect to which one or more incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Corporation or of other entities referenced in Code Section 422(d)(1), the options shall be treated as Nonqualified Stock Options. For this purpose, the "fair market value" of the Stock subject to options shall be determined as of the date the Options were awarded. All Incentive Stock Options granted in accordance with this clause (2) shall be treated as Performance-Based Awards subject to the applicable restrictions of Section 4(b). (3) Stock Appreciation Rights. A Stock Appreciation Right is an Award in the form of a right to receive, upon surrender of the right, but without other payment, an amount based on appreciation in the value of Stock over a base price established in the Award, payable in cash, Stock or such other form or combination of forms of payout, at times and upon conditions (which may include a Change in Control), as may be approved by the Committee. The minimum base price of a Stock Appreciation Right granted under this Plan shall be not less than the Fair Market Value of the underlying Stock on the date the Stock Appreciation Right is granted or, in the case of a Stock Appreciation Right related to an Option (whether already outstanding or concurrently granted), the exercise price of the related Option. All Stock Appreciation Rights granted in accordance with this clause (3) shall be treated as Performance-Based Awards subject to the applicable restrictions under Section 4(b). (4) Restricted Stock. Restricted Stock is an Award of shares of Stock of the Corporation that are issued, but subject to restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine. Restricted Stock Awards to Executive Officers that are either granted or vest upon attainment of one or more of the Performance Goals shall only be granted as Performance-Based Awards under Section 4(b). (5) Other Share-Based Awards. The Committee may from time to time grant Awards under this Plan that provide the Participants with Stock or the right to purchase Stock, or provide other incentive Awards (including, but not limited to phantom stock or units, performance stock or units, bonus stock, dividend equivalent units, or similar securities or rights) that have a value derived from the value of, or an exercise or conversion privilege at a price related to, or that are otherwise payable in shares of Stock. The Awards shall be in a form determined by the Committee, provided that the Awards shall not be inconsistent with the other express terms of this Plan. Awards under this Section 4(a)(5) to Executive Officers that are either granted or become vested, exercisable or payable based on attainment of one or more of the Performance Goals shall only be granted as Performance-Based Awards under Section 4(b). A-4 (b) Special Performance-Based Awards. Without limiting the generality of the foregoing, any of the type of Awards listed in Section 4(a) may be granted as awards that satisfy the requirements for "performance-based compensation" within the meaning of Code Section 162(m) ("Performance-Based Awards"), the grant, vesting, exercisability or payment of which depends on the degree of achievement of the Performance Goals relative to preestablished targeted levels for the Corporation or any of its Subsidiaries, divisions or other business units. Notwithstanding anything contained in this Section 4(b) to the contrary, any Option or Stock Appreciation Right granted in accordance with paragraph (a) shall be subject only to the requirements of clauses (1) and (3)(A) below in order for such Awards to satisfy the requirements for Performance-Based Awards under this Section 4(b) (with such Awards hereinafter referred to as a "Qualifying Option" or a "Qualifying Stock Appreciation Right", respectively). With the exception of any Qualifying Option or Qualifying Stock Appreciation Right, an Award that is intended to satisfy the requirements of this Section 4(b) shall be designated as a Performance-Based Award at the time of grant. (1) Eligible Class. The eligible class of persons for Awards under this Section 4(b) shall be all Employees. (2) Performance Goals. The performance goals for any Awards under this Section 4(b) (other than Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on an absolute or relative basis, one or more of the Performance Goals. The specific performance target(s) with respect to Performance Goal(s) must be established by the Committee in advance of the deadlines applicable under Code Section 162(m) and while the performance relating to the Performance Goal(s) remains substantially uncertain. (3) Individual Limits. Subject to adjustment as provided in Section 7, (A) the maximum number of shares of Stock with respect to which Options and Stock Appreciation Rights may be granted to any employee in any fiscal year shall be 500,000 and (B) the maximum number of shares of Stock with respect to which Performance-Based Awards (other than Qualifying Options and Qualifying Stock Appreciation Rights) may be granted to any Employee in any fiscal year shall be 500,000 or, in the event such Performance-Based Award is paid in cash, the equivalent cash value thereof as of the date of payment of such Performance-Based Award. Awards that are cancelled or repriced during the year shall be counted against this limit to the extent required by Code Section 162(m). (4) Committee Certification. Before any Performance-Based Award under this Section 4(b) (other than Qualifying Options and Qualifying Stock Appreciation Rights) is paid, the Committee must certify in writing (by resolution or otherwise) that the applicable Performance Goal(s) and any other material terms of the Performance-Based Award were satisfied; provided, however, that a Performance-Based Award may be paid without regard to the satisfaction of the applicable Performance Goal in the event of a Change in Control as provided in Section 7(b). (5) Terms and Conditions of Awards; Committee Discretion to Reduce Performance Awards. The Committee shall have discretion to determine the conditions, restrictions or other limitations, in accordance with the terms of this Plan and Code Section 162(m), on the payment of individual Performance-Based Awards under this Section 4(b). To the extent set forth in an Award Agreement, the Committee may reserve the right to reduce the amount payable in accordance with any standards or on any other basis (including the Committee's discretion), as the Committee may impose. (6) Adjustments for Material Changes. In the event of (i) a change in corporate capitalization, a corporate transaction or a complete or partial corporate liquidation, or (ii) any extraordinary gain or loss or other event that is treated for accounting purposes as an extraordinary item under generally accepted accounting principles, or (iii) any material change in accounting policies or practices affecting the Corporation and/or the Performance Goals or targets, then, to the extent any of the foregoing events (or a material effect thereof) was not anticipated at the time the targets were set, the Committee may make adjustments to the Performance Goals and/or targets, applied as of the date of the event, and based solely on objective criteria, so as to neutralize, in the Committee's judgment, the effect of the event on the applicable Performance-Based Award. A-5 (7) Interpretation. Except as specifically provided in this Section 4(b), the provisions of this Section 4(b) shall be interpreted and administered by the Committee in a manner consistent with the requirements for exemption of Performance-Based Awards granted to Executive Officers as "performance-based compensation" under Code Section 162(m) and regulations and other interpretations issued by the Internal Revenue Service thereunder. (8) Maximum Term of Awards. No Award that contemplates exercise or conversion may be exercised or converted to any extent, and no other Award that defers vesting, shall remain outstanding and unexercised, unconverted or unvested more than ten years after the date the Award was initially granted. SECTION 5. SHARES OF STOCK AND SHARE UNITS AVAILABLE UNDER PLAN. (a) Aggregate Share Limit. The maximum number of shares of Stock that may be issued pursuant to all Awards (including Incentive Stock Options) is 1,000,000, subject to adjustment as provided in this Section 5 or Section 7. Any Restricted Stock grant may not exceed, in aggregate with all other Restricted Stock grants under this Plan, two percent of the shares of Stock outstanding at the time of grant. (b) Aggregate Share Unit Limit. The maximum number of Share Units that may be paid pursuant to all Awards shall not be more than 750,000, subject to adjustment as provided in this Section 5 or Section 7. Notwithstanding the foregoing, if an Award paid or payable in Units satisfies the requirements for an exclusion from the definition of a derivative security under Rule 16a-l(c) that does not require that the Award be made under a Rule 16b-3 plan, the Share Units that may be paid under the Award shall not be counted against the Share Unit limit of this Section 5(b). (c) Reissue of Shares and Share Units. Any unexercised, unconverted or undistributed portion of any expired, cancelled, terminated or forfeited Award, or any alternative form of consideration under an Award that is not paid in connection with the settlement of an Award or any portion of an Award, shall again be available for Award under Section 5(a) or 5(b), as applicable, whether or not the Participant has received benefits of ownership (such as dividends or dividend equivalents or voting rights) during the period in which the Participant's ownership was restricted or otherwise not vested. Shares of Stock that are issued pursuant to Awards and subsequently reacquired by the Corporation pursuant to the terms and conditions of the Awards shall be available for reissuance under the Plan. (d) Interpretive Issues. Additional rules for determining the number of shares of Stock or Share Units authorized under this Plan may be adopted by the Committee, as it deems necessary or appropriate. (e) Treasury Shares; No Fractional Shares. The Stock which may be issued (which term includes Stock reissued or otherwise delivered) pursuant to an Award under this Plan may be treasury or authorized but unissued Stock or Stock acquired, subsequently or in anticipation of a transaction under this Plan, in the open market or in privately negotiated transactions to satisfy the requirements of this Plan. No fractional shares shall be issued but fractional interests may be accumulated. (f) Consideration. The Stock issued under this Plan maybe issued (subject to Section 10(d)) for any lawful form of consideration, the value of which equals the par value of the Stock or such greater or lesser value as the Committee, consistent with Sections 10(d) and 4(a)(1), (2) and (3), may require. (g) Purchase or Exercise Price; Withholding. The exercise or purchase price (if any) of the Stock issuable pursuant to any Award and any withholding obligation under applicable tax laws shall be paid in cash or, subject to the Committee's express authorization and the restrictions, conditions and procedures as the Committee may impose, any one or combination of (i) cash, (ii) the delivery of shares of Stock, (iii) a reduction in the amount of Stock or other amounts otherwise issuable or payable pursuant to such Award, or (iv) the delivery of a promissory note, or other obligation for the future payment in money, the terms and conditions of which shall be determined (subject to Section 10(d)) by the Committee. In the case of a payment by the means described in clause (ii) or (iii) above, the Stock to be so delivered or offset shall be determined by reference to the Fair Market Value of the Stock on the date as of which the payment or offset is made. A-6 (h) Cashless Exercise. The Committee may permit the exercise of the Award and payment of any applicable withholding tax in respect of an Award by delivery of written notice, subject to the Corporation's receipt of a third party payment in full in cash for the exercise price and the applicable withholding prior to issuance of Stock, in the manner and subject to the procedures as may be established by the Committee. SECTION 6. AWARD AGREEMENTS. Each Award under this Plan shall be evidenced by an Award Agreement in a form approved by the Committee setting forth the number of shares of Stock or Share Units, as applicable, subject to the Award, and the price (if any) and term of the Award and, in the case of Performance-Based Awards, the applicable Performance Goals. The Award Agreement shall also set forth (or incorporate by reference) other material terms and conditions applicable to the Award as determined by the Committee consistent with the limitations of this Plan. (a) Incorporated Provisions. Award Agreements shall be subject to the terms of this Plan and shall be deemed to include the following terms, unless the Committee in the Award Agreement otherwise (consistent with applicable legal considerations) provides: (1) Transferability: An Award shall not be assignable nor transferable, except by will or by the laws of descent and distribution, and during the lifetime of a Participant the Award shall be exercised only by such Participant or by his or her guardian or legal representative, except that Awards other than Incentive Stock Options may be transferred to and exercised by a family member or family members of a Participant, or transferred to an irrevocable trust or trusts established for the benefit of a Participant's family members, during the Participant's lifetime. The designation of a Beneficiary hereunder shall not constitute a transfer prohibited by the foregoing provisions. (2) Rights as Stockholder: A Participant shall have no rights as a holder of Stock with respect to any unissued securities covered by an Award until the date the Participant becomes the holder of record of these securities. Except as provided in Section 7, no adjustment or other provision shall be made for dividends or other stockholder rights, except to the extent that the Award Agreement provides for dividend equivalents or similar economic benefits. (3) Withholding: The Participant shall be responsible for payment of any taxes or similar charges required by law to be withheld from an Award or an amount paid in satisfaction of an Award and these obligations shall be paid by the Participant on or prior to the payment of the Award. In the case of an Award payable in cash, the withholding obligation shall be satisfied by withholding the applicable amount and paying the net amount in cash to the Participant. In the case of an Award paid in shares of Stock, a Participant shall satisfy the withholding obligation as provided in Section 5(g). (4) Option Holding Period: Subject to the authority of the Committee under Section 7, a minimum six-month period shall elapse between the date of initial grant of any Option and the sale of the underlying shares of Stock, and the Corporation may impose legend and other restrictions on the Stock issued on exercise of the Options to enforce this requirement. (b) Other Provisions. Award Agreements may include other terms and conditions as the Committee shall approve, including but not limited to the following: (1) Termination of Employment: A provision describing the treatment of an Award in the event of the retirement, disability, death or other termination of a Participant's employment with or services to the Company, including any provisions relating to the vesting, exercisability, forfeiture or cancellation of the Award in these circumstances, subject, in the case of Performance-Based Awards, to the requirements for "performance-based compensation" under Code Section 162(m). (2) Vesting; Effect of Termination; Change in Control: Any other terms consistent with the terms of this Plan as are necessary and appropriate to effect the Award to the Participant, including but not limited to the vesting provisions, any requirements for continued employment, any other restrictions or conditions (including performance requirements) of the Award, and the method by which (consistent with Section 7) the restrictions or conditions lapse, and the effect on the Award of a Change in Control. A-7 (3) Replacement and Substitution: Any provisions permitting or requiring the surrender of outstanding Awards or securities held by the Participant in whole or in part in order to exercise or realize rights under or as a condition precedent to other Awards, or in exchange for the grant of new or amended Awards under similar or different terms. (4) Reloading: Any provisions for successive or replenished Awards, including but not limited to reload Options. (c) Contract Rights, Forms and Signatures. Any obligation of the Corporation to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan and an Award Agreement. No Award shall be enforceable until the Award Agreement or a receipt has been signed by the Participant and on behalf of the Corporation by an Executive Officer (other than the recipient) or his or her delegate. By executing the Award Agreement or receipt, a Participant shall be deemed to have accepted and consented to the terms of this Plan and any action taken in good faith under this Plan by and within the discretion of the Committee, the Board of Directors or their delegates. Unless the Award Agreement otherwise expressly provides, there shall be no third party beneficiaries of the obligations of the Corporation to the Participant under the Award Agreement. SECTION 7. ADJUSTMENTS; CHANGE IN CONTROL; ACQUISITIONS. (a) Adjustments. If there shall occur any recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, merger, combination, consolidation, or other reorganization or any extraordinary dividend or other extraordinary distribution in respect of the Stock (whether in the form of cash, Stock or other property), or any split-up, spin-off, extraordinary redemption, or exchange of outstanding Stock, or there shall occur any other similar corporate transaction or event in respect of the Stock, or a sale of substantially all the assets of the Corporation as an entirety, then the Committee shall, in the manner and to the extent, if any, as it deems appropriate and equitable to the Participants and consistent with the terms of this Plan, and taking into consideration the effect of the event on the holders of the Stock: (1) proportionately adjust any or all of (A) the number and type of shares of Stock and Share Units which thereafter may be made the subject of Awards (including the specific maxima and numbers of shares of Stock or Share Units set forth elsewhere in this Plan), (B) the number and type of shares of Stock, other property, Share Units or cash subject to any or all outstanding Awards, (C) the grant, purchase or exercise price, or conversion ratio of any or all outstanding Awards, or of the Stock, other property or Share Units underlying the Awards, (D) the securities, cash or other property deliverable upon exercise or conversion of any or all outstanding Awards, (E) subject to Section 4(b), the performance targets or standards appropriate to any outstanding Performance-Based Awards, or (F) any other terms as are affected by the event; and (2) subject to any applicable limitations in the case of a transaction to be accounted for as a pooling of interests under generally accepted accounting principles, provide for (A) an appropriate and proportionate cash settlement or distribution, or (B) the substitution or exchange of any or all outstanding Awards, or the cash, securities or property deliverable on exercise, conversion or vesting of the Awards. Notwithstanding the foregoing, in the case of an Incentive Stock Option, no adjustment shall be made which would cause this Plan to violate Section 424(a) of the Code or any successor provisions thereto, without the written consent of the Participant adversely affected thereby. The Committee may act prior A-8 to an event described in this paragraph (a) (including at the time of an Award by means of more specific provisions in the Award Agreement) if deemed necessary or appropriate to permit the Participant to realize the benefits intended to be conveyed by an Award in respect of the Stock in the case of an event described in paragraph (a). (b) Change in Control. The Committee may, in the Award Agreement, provide for the effect of a Change in Control on an Award. Such provisions may include, but are not limited to any one or more of the following with respect to any or all Awards: (i) the specific consequences of a Change in Control on the Awards; (ii) a reservation of the Committee's right to determine in its discretion at any time that there shall be full acceleration or no acceleration of benefits under the Awards; (iii) that only certain or limited benefits under the Awards shall be accelerated; (iv) that the Awards shall be accelerated for a limited time only; or (v) that acceleration of the Awards shall be subject to additional conditions precedent (such as a termination of employment following a Change in Control). In addition to any action required or authorized by the terms of an Award, the Committee may take any other action it deems appropriate to ensure the equitable treatment of Participants in the event of or in anticipation of a Change in Control, including but not limited to any one or more of the following with respect to any or all Awards: (i) the acceleration or extension of time periods for purposes of exercising, vesting in, or realizing gain from, the Awards; (ii) the waiver of conditions on the Awards that were imposed for the benefit of the Corporation, (iii) provision for the cash settlement of the Awards for their equivalent cash value, as determined by the Committee, as of the date of the Change in Control; or (iv) such other modification or adjustment to the Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants upon or following the Change in Control. The Committee also may accord any Participant a right to refuse any acceleration of exercisability, vesting or benefits, whether pursuant to the Award Agreement or otherwise, in such circumstances as the Committee may approve. Notwithstanding the foregoing provisions of this Section 7(b) or any provision in an Award Agreement to the contrary, (i) in no event shall the Committee be deemed to have discretion to accelerate or not accelerate or make other changes in or to any or all Awards, in respect of a transaction, if such action or inaction would be inconsistent with or would otherwise frustrate the intended accounting for a proposed transaction as a pooling of interests under generally accepted accounting principles; and (ii) if any Award to any Insider is accelerated to a date that is less than six months after the date of the Award, the Committee may prohibit a sale of the underlying Stock (other than a sale by operation or law in exchange for or through conversion into other securities), and the Corporation may impose legend and other restrictions on the Stock to enforce this prohibition. (c) Change in Control Definition. For purposes of this Plan, with respect to any Award other than an Award issued pursuant to an Award Agreement that separately defines the term "change of control," a change of control shall include and be deemed to occur upon the following events: (1) The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, other than the Corporation or any of its Subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 51 percent or more of the combined voting power of the Corporation's then outstanding voting securities, other than by any employee benefit plan maintained by the Corporation; (2) The sale of all or substantially all of the assets of the Corporation or of L-3 Communications Corporation or any successor thereto; or (3) The election, including the filling of vacancies, during any period of 24 months or less, of 50 percent or more, of the members of the Board, without the approval of Continuing Directors, as constituted at the beginning of such period. "Continuing Directors" shall mean any director of the Company who either (i) is a member of the Board on the date of grant of the relevant Award, or (ii) is nominated for election to the Board by a majority of the Board which is comprised of Directors who were, at the time of such nomination, Continuing directors. A-9 (d) Business Acquisitions. Awards may be granted under this Plan on the terms and conditions as the Committee considers appropriate, which may differ from those otherwise required by this Plan to the extent necessary to reflect a substitution for or assumption of stock incentive awards held by employees of other entities who become employees of the Corporation or a Subsidiary as the result of a merger of the employing entity with, or the acquisition of the property or stock of the employing entity by, the Corporation or a Subsidiary, directly or indirectly. SECTION 8. ADMINISTRATION. (a) Committee Authority and Structure. This Plan and all Awards granted under this Plan shall be administered by the Compensation Committee of the Board or such other committee of the Board or subcommittee of the Compensation Committee as may be designated by the Board and constituted so as to permit this Plan to comply with the disinterested administration requirements of Rule 16b-3 under the Exchange Act and the "outside director" requirement of Code Section 162(m). The members of the Committee shall be designated by the Board. A majority of the members of the Committee (but not fewer than two) shall constitute a quorum. The vote of a majority of a quorum or the unanimous written consent of the Committee shall constitute action by the Committee. (b) Selection and Grant. The Committee shall have the authority to determine the individuals (if any) to whom Awards will be granted under this Plan, the type of Award or Awards to be made, and the nature, amount, pricing, timing, and other terms of Awards to be made to any one or more of these individuals, subject to the terms of this Plan. (c) Construction and Interpretation. The Committee shall have the power to interpret and administer this Plan and Award Agreements, and to adopt, amend and rescind related rules and procedures. All questions of interpretation and determinations with respect to this Plan, the number of shares of Stock, Stock Appreciation Rights, or units or other Awards granted, and the terms of any Award Agreements, the adjustments required or permitted by Section 7, and other determinations hereunder shall be made by the Committee and its determination shall be final and conclusive upon all parties in interest. In the event of any conflict between an Award Agreement and any non-discretionary provisions of this Plan, the terms of this Plan shall govern. (d) Express Authority to Change Terms of Awards. The Committee may at any time alter or amend any or all Award Agreements under this Plan in any manner that would be authorized for a new Award under this Plan, including but not limited to any manner set forth in Section 8(d) (subject to any applicable limitations thereunder) except that no amendment may reduce the exercise price or base price of an Award to a price less than Fair Market Value on the date of the amendment. Without limiting the Committee's authority under this Plan (including Sections 7 and 9), but subject to any express limitations of this Plan (including under Sections 7 and 9), the Committee shall have the authority to accelerate the exercisability or vesting of an Award, to extend the term or waive early termination provisions of an Award (subject to the maximum ten-year term under Section 4(b)), to waive the Corporation's rights with respect to an Award or restrictive conditions of an Award (including forfeiture conditions), and, except as set forth above, to reduce by amendment the exercise or purchase price of an outstanding Award, with or without adjusting any holding period or other terms of the Award, in any case in such circumstances as the Committee deems appropriate. (e) Rule 16b-3 Conditions; Bifurcation of Plan. It is the intent of the Corporation that this Plan and Awards hereunder satisfy and be interpreted in a manner, that, in the case of Participants who are or may be Insiders, satisfies any applicable requirements of Rule 16b-3, so that these persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 under the Exchange Act and will not be subjected to avoidable liability thereunder as to Awards intended to be entitled to the benefits of Rule 16b-3. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed in this Section 8(e), that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict. To the extent of any remaining irreconcilable conflict with this intent, the provision shall be deemed disregarded as to Awards intended as Rule 16b-3 exempt Awards. Notwithstanding anything to the contrary in this Plan, the provisions of this Plan may at any time be bifurcated by the Board or the Committee in any manner so that certain provisions of this Plan or any A-10 Award Agreement intended (or required in order) to satisfy the applicable requirements of Rule 16b-3 are only applicable to Insiders and to those Awards to Insiders intended to satisfy the requirements of Rule 16b-3. (f) Delegation and Reliance. The Committee may delegate to the officers or employees of the Corporation the authority to execute and deliver those instruments and documents, to do all acts and things, and to take all other steps deemed necessary, advisable or convenient for the effective administration of this Plan in accordance with its terms and purpose, except that the Committee may not delegate any discretionary authority to grant or amend an award or with respect to substantive decisions or functions regarding this Plan or Awards as these relate to the material terms of Performance-Based Awards to Executive Officers or to the timing, eligibility, pricing, amount or other material terms of Awards to Insiders. In making any determination or in taking or not taking any action under this Plan, the Board and the Committee may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director, officer, employee or agent of the Corporation shall be liable for any such action or determination taken or made or omitted in good faith. (g) Exculpation and Indemnity. Neither the Corporation nor any member of the Board of Directors or of the Committee, nor any other person participating in any determination of any question under this Plan, or in the interpretation, administration or application of this Plan, shall have any liability to any party for any action taken or not taken in good faith under this Plan or for the failure of an Award (or action in respect of an Award) to satisfy Code requirements as to incentive stock options or to realize other intended tax consequences, to qualify for exemption or relief under Rule 16b-3 or to comply with any other law, compliance with which is not required on the part of the Corporation. SECTION 9. AMENDMENT AND TERMINATION OF THIS PLAN. The Board of Directors may at any time amend, suspend or discontinue this Plan, subject to any stockholder approval that may be required under applicable law. Notwithstanding the foregoing, no such action by the Board or the Committee shall, in any manner adverse to a Participant other than as expressly permitted by the terms of an Award Agreement, affect any Award then outstanding and evidenced by an Award Agreement without the consent in writing of the Participant or a Beneficiary, a Participant's family member or a trust established for the benefit of a Participant's family member entitled to an Award. SECTION 10. MISCELLANEOUS. (a) Unfunded Plans. This Plan shall be unfunded. Neither the Corporation nor the Board of Directors nor the Committee shall be required to segregate any assets that may at any time be represented by Awards made pursuant to this Plan. Neither the Corporation, the Committee, nor the Board of Directors shall be deemed to be a trustee of any amounts to be paid or securities to be issued under this Plan. (b) Rights of Employees. (1) No Right to an Award. Status as an Employee shall not be construed as a commitment that any one or more Awards will be made under this Plan to an Employee or to Employees generally. Status as a Participant shall not entitle the Participant to any additional Award. (2) No Assurance of Employment. Nothing contained in this Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Employee or Participant any right to continue in the employ or other service of the Corporation or any Subsidiary or constitute any contract (of employment or otherwise) or limit in any way the right of the Corporation or any Subsidiary to change a person's compensation or other benefits or to terminate the employment of a person with or without cause. (c) Effective Date; Duration. This Plan has been adopted by the Board of Directors of the Corporation. This Plan shall become effective upon and shall be subject to the approval of the stockholders the Corporation. This Plan shall remain in effect until any and all Awards under this Plan A-11 have been exercised, converted or terminated under the terms of this Plan and applicable Award Agreements. Notwithstanding the foregoing, no Award may be granted under this Plan after April 27, 2009. Notwithstanding the foregoing, any Award granted prior to such date may be amended after such date in any manner that would have been permitted prior to such date, except that no such amendment shall increase the number of shares subject to, comprising or referenced in such Award. (d) Compliance with Laws. This Plan, Award Agreements, and the grant, exercise, conversion, operation and vesting of Awards, and the issuance and delivery of shares of Stock and/or other securities or property or the payment of cash under this Plan, Awards or Award Agreements, are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal insider trading, registration, reporting and other securities laws and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions (and the person acquiring such securities shall, if requested by the Corporation, provide such evidence, assurance and representations to the Corporation as to compliance with any thereof) as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. (e) Applicable Law. This Plan, Award Agreements and any related documents and matters shall be governed in accordance with the laws of the State of New York, except as to matters of Federal law. (f) Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Corporation, the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Stock, under any other plan or authority. A-12 EX-21 3 LIST OF SUBSIDIARIES L-3 COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1999 L-3 Communications Holdings, Inc. Delaware L-3 Communications Corporation Delaware C3-ilex, LLC California Cardiovascular Computer Systems, Ltd. (85%) Wisconsin Delsub, Inc. Delaware Digital Technics, L.L.C. Delaware Digital Technics, L.P. (25%) Delaware Electrodynamics, Inc. Arizona Hygienetics Environmental Services, Inc. Delaware Interstate Electronics Corporation California L3 Communications Australia Proprietary Limited Australia L-3 Communications Aydin Corporation Delaware Aydin Europe Ltd United Kingdom Aydin Foreign Sales Limited Guam Aydin Investments, Inc. Delaware Aydin S.A. (19%) Argentina Aydin Yazilim ve Elektronik Sanayi A.S. Turkey L-3 Communications DBS Microwave, Inc. California L-3 Communications ESSCO, Inc. Delaware Electronic Space Systems International Corp. U.S. Virgin Islands Electronic Space Systems (UK) Limited (90%) United Kingdom ESSCO Collins Limited (99.99%) Republic of Ireland ESSCO Satellite Systems Corp. Delaware L-3 Communications Holding GmbH Federal Republic of Germany L-3 Communications ELAC Nautik GmbH Federal Republic of Germany Arbeitsmedizinische Betreungsgesellschaft Kieler Bertriebe mbH (50%) Federal Republic of Germany ELAC Nautik Unterstutzungska(beta)e GmbH Federal Republic of Germany Power Paragon (Deutschland) Holding GmbH (99% +1%) Federal Republic of Germany EuroAtlas Gesellschaft fur Leistungselektronik mbH Federal Republic of Germany JovyAtlas Elektrische Umformtechnik GmbH Federal Republic of Germany Astrid Energy Enterprises S.R.L. (10%) Italy L-3 Communications ILEX Systems, Inc. Delaware L-3 Communications Secure Information Technology, Inc. Delaware L-3 Communications Network Security Systems, LLC (63.9535%) Delaware L-3 Communications Network Security Systems (Europe) United Kingdom L-3 Communications Security Systems Corporation Delaware L-3 Communications SPD Technologies Inc. Delaware SPD Holdings, Inc. Delaware Henschel Inc. Delaware Pac Ord Inc. Delaware Power Paragon, Inc. Delaware SPD Electrical Systems, Inc. Delaware SPD Switchgear Inc. Delaware L-3 Communications Storm Control Systems, Inc. California L-3 Communications U.K. Ltd. United Kingdom Storm Control Systems Limited United Kingdom L-3 Management Corp. Delaware L-3 Microdyne Holdings Corporation Maryland Medical Education Technologies, Inc. (33.3%) Delaware Microdyne Corporation Maryland Microdyne Communications Technologies Incorporated Maryland MCTI Acquisition Corporation Maryland Apcom, Inc. Maryland Celerity Systems Incorporated California Microdyne Ltd. U.S. Virgin Islands Microdyne Outsourcing Incorporated Maryland Microdyne U.K., Inc. Delaware Southern California Microwave, Inc. California SpaceTel Communications Corp. Delaware
EX-23.1 4 CONSENT OF PRICE WATERHOUSE COOPERS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements of L-3 Communications Holdings, Inc. subsidiaries (the "Company") on Forms S-8 (File No.'s 333-59281 and 333-64389) of our report dated February 2, 2000 on our audits of the consolidated financial statements of the Company as of December 31, 1999 and 1998, and for the two years ended December 31, 1999 and the nine months ended December 31, 1997, and the combined financial statements of the Predecessor Company for the three months ended March 31, 1997, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York March 29, 2000 EX-27 5 FDS
5 0001056239 L-3 COMMUNICATIONS HOLDINGS, INC. 1,000 12-MOS DEC-31-1999 DEC-31-1999 42,788 0 387,288 (13,933) 110,818 567,707 191,409 50,438 1,633,771 318,306 605,000 0 0 483,694 99,481 1,633,771 0 1,405,462 0 1,254,976 0 0 60,590 95,430 36,741 58,689 0 0 0 58,689 1.83 1.75
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